Bets in the City / Simon Denham / 01 December 2008 / Leave a comment

Daily View - 1st December 2008

The old Keynesian saying that "when times get tough you should pay a man to dig a hole and then pay another to fill it in" makes for good press but the whole point about the little parable is that the hole no longer costs you money after it has been filled. The current spending plans from this government seem to be turning this on its head. The huge array of regulatory, testing, planning, box ticking, form filling, NHS, Education, Social Security infrastructure is now pretty much set in stone. This is now the hole in the public finances that will not just require filling in now but will have to be filled in again next year (plus inflation and pay and pension rises) and the year after ad nauseam. The Tory party remains completely in thrall to the idea that you only get elected in this country if you continue to back the public sector spending plans of 'New Labour', this is not helped by the fact that the leader of the Conservatives is an ex-PR man, a job which practically sums up the saying "Form over Substance".

The favourite pastime of virtually everyone these days is to blame the banks for just about everything. You can understand the Government doing this as if they repeat it often enough maybe they can fool the electorate one more time but commentators should beware hammering too much on this point. If I was lending my own money (as journalists forever say the banks are now propped up with 'our' money) would I lend to a company that was running into difficulties now? With another 12 months, probably, of a contracting economy (not flat but contracting) I would look with a pretty jaundiced eye at a small business that required money to survive right at the beginning of the down turn. I might ask "when times were good did you lay down funds to take you through the bad, or did you just pay it to yourself to fund that holiday in the Maldives"?

As many banks are indeed surviving on the back of "our money" then I want them to lend and invest those funds responsibly NOT just hand out to any sob story that comes in my door. This is what is meant by harsh business decisions. If banks prop up all failing businesses then, yes, some may survive but in the medium to long term they would endanger their own survival AND maintain the downturn for far longer than would otherwise be the case. Wounded businesses limping on with ever larger overdrafts would damage better run companies who would have to compete with basket cases on an even playing field. Recessions run their course and we come out of the other side with the weak and plain 'out of date' gone and the survivors leaner but better placed for growth.

Spending huge sums now on the mortally wounded is not good use of either the bank's or the public's money. Identify the walking wounded and fund them.

This week is a pretty quiet one by recent standards on the corporate front but there is a large swathe of economic data (especially US) to get our teeth into.

Tuesday

Greene King (brewers of my favourite pint, IPA) will report today and the hopes will be for a reasonably confident set of data. Revenue will be suffering from the general downturn in pub takings but the company did not really go in for the weird financial engineering favoured by some of its competitors. The dividend may well be held steady and this would make for a 6.6pc yield! In the longer term the company may be well placed to pick up some of the choicer pieces of the weakened opposition.

Game Group who had been one of the star performers up to as recently as May this year! Hitting 305p on the 8th of that month. Since then the overall economic situation has finally affected some of the gravity defying performance of the stock. The demise of Woolies may be a blessing as the game sales may now be up for grabs but this point might be over estimated. Any prospective purchaser of Woolworths would be well aware of the revenue enhancing portion that encompasses the software sales and some 2/3rds of the units are actually profitable anyway. If the administrator just slices out the losing outlets he could well have a tasty beast to sell. This might not be as good for Game as some are indicating. Sales are expected to be up (!) no mean feat in the current environment but not enough to justify the huge rating at 305p the current price at 150p might also appear strong but the company has a good track record in a tough market which has always justified its premium.

Thomas Cook the travel agent seems to have been able to not only reduce capacity but also to increase the price of what it offers. This rather flies in the face of the adage that the internet would enable more people to book direct to find the best deal. In the end most people would rather just buy the whole 'package' deal rather than search around and do the work themselves. Rather, it seems, Thomas Cook (and the other package holiday companies) are realising that trying to be the last man standing with ever tighter margins might not be the way to Eldorado. The acquisition of MyTravel appears to be going well which is very encouraging given the environment.

Tesco..what can you say...doom, disaster eerrr... sales up 'only' 1.9pc (expected)...sack the board! Times are tight, the High Street is under pressure and Tesco just about is "the retail sector" nowadays. The stock is now down around 40pc from the highs and in all truth this seems to be a tad overdone. Dividend cover is not troubled and with 3.8pc return the upside looks rather better than the down. Frankly I would nervously suggest that Tesco equity debt is probably rather better risk than Gilt Edged Soveriegn debt at this time!

Wednesday

Anglo Irish bank release numbers and the company is rather difficult to gauge. The stock price shows that the company is a proud member of the 90pc club and has, in fact, crept into the 95pc select member's enclosure. This is in spite of the 'protection' afforded by the short selling ban and the Irish Governments blanket guarantee over all deposits. In fact since the 18th September (the day before the Shorting ban and two weeks before the state guarantee) the stock has fallen 82pc! Like most in the Irish banking sector the finances appear to be holed below the water line and it must be only a matter of time before either the bank is nationalised or 'acquired' by a stronger competitor for a pittance. If they do survive there will be no payouts for some time and buying of the stock can probably take place at your leisure.

Stagecoach seem to be a big winner so far this year but with slowing expenditure and increasing job losses the strong growth has already started to slip. On the plus side fuel costs seem to be a fading worry but this has not helped the share price which has fallen pretty much in a straight line since the peak was reached on the 2nd of September this year! I know investors were crying out for a 'good' story but buying the stock up to new highs just as the rest of the market (Stagecoach does operate mainly in the UK) was saying 'the end is nigh' looks, with the benefit of hindsight, to have been a spectacular disaster. The shares have now halved since that date and suddenly look vulnerable to further economic weakness.

As the whole world slowly seems to turn to Sage the company continues to reap the benefits. Accounting software might appear to be a very boring area to operate in but if Sage can further confirm their status as the Microsoft or Google of their sector it will become ever more difficult for competition to blossom. The stock is now below 2005 levels and looks fair value but the world is full of stocks that seem cheap just now. Again, a good yield on a company not pressured on the divvy front, not a terrible one to add to the portfolio. Numbers are expected to be up around 5pc on an increased turnover of 6 to 7 pc.

Thursday see Morrison put their cards on the table a couple of days after the Tesco bun fight. Expectations are quite strong with a like for like growth forecast of over 7pc (Tesco remember at 1.9). This seems to be a good story all round. Dinner table comments from guests Chez Denham household were praising the quality of the Meats recently and I was feeling quite miffed that Chelmsford is over 12 miles (and around 40 Tesco/Sainsbury/Asda/Lidl etc) away from the nearest outlet. Surely a gap in the brand. The Safeway merger synergies seem to now be well under control and are flowing to the bottom line. The stock has slipped some 25pc from the start of the year but looks solid around the 250p region.

Friday gives us the walking wounded of Berkley Group, in a great position to profit from the possibly mortally injured Taylor Wimpey, Barratt and Bovis. Profits will naturally be lower but the big point here is that we are still using the word 'profits'. Since the start of 2008 the stock is, wait for it, down a monumental 18pc, reflecting the confidence investors have in the management. Stock continues to be picked up by our clients and we see no lack of supporters in the Spread Betting arena.

Marstons also come to the podium with their finals and it is hard not to feel sorry for the company. For years they suffered from being called Woolverhmptn n'Dudley and no sooner do the PR guys get them to change the name than the shares go into freefall. Almost from the date of the name change the stock has only gone one way and it now languishes 75pc lower at 101p, as of writing. The debt levels are not encouraging with LT liabilities some 4 times equity value and interest rate costs are becoming a nasty number. Coupled to this is a weakening income stream and this has led to fears for long term survival.

The Tradefair Spread Betting Team