Betfair Official Blog

Is building employment vulnerability the sign of things to come?

Daily View - 10th July 2008

The battle at these low levels has become quite ferocious as the FTSE 100 tries to decide which direction it wants to go in. In the last six trading days the market has rallied strongly four times and been battered heavily lower four times, making for eight 100 point plus moves. And yet we open this morning at pretty much the same point as this time last week.

The overnight falls in the Dow and S&P will weigh on our opening sentiment but the Far East pretty much ignored the worst trading session in S&P 500 financial stock for six years so the impact might not be as bad as was being indicated late last night.

The opening call on the FTSE is for a drop of some 80 points at around 5445 still well above recent lows in the mid 5300's but a disappointment after the strong performance yesterday when many of the banking and builder stocks picked up after a torrid few days. It is getting very difficult to call one day after another as sentiment on trading floors seems to turning on a six pence with very little rhyme or reason to explain the moves. The fact that the BOE will be announcing its latest interest rate decision will also make trading a touch dangerous for the early session.

Bovis and Redrow have announced huge staffing cuts of 40%. Whilst this is just a headline to most of us readers might like to ponder as they look around their own workplaces as to what a similar action might do to their own companies. 4 in 10 staff is a monumental action and will probably make a recovery after the current woes are over a more difficult proposition. In taking this type of action the builders are hoping to avoid problems over their banking covenants many of which are coming up for consideration. Bovis has also announced a halt to new speculative builds for the time being which means that they will be sitting on those expensively acquired Land Bank assets for some time to come. Lending costs are unlikely to fall so the company runs the risk of interest charges on bank lending swamping the revenue from existing project sales. If house prices continue to weaken for some considerable time (rather than experience a short sharp drop) the likelihood is that there will be a considerable period of building hiatus as buyers continue to stay away.

The action of halting development is a very courageous one (even if slightly forced) as income streams will dry up almost completely. There is always the hope that if other builders take the same decision then the sudden contraction in housing supply will help to stabalise prices but this rather depends on the rest of the economy holding steady. If the general economic situation deteriorates (as it seems to be doing at the moment) then we could be seeing some big, distressed, land sales towards the end of 2008 as banks force builders into reducing their borrowing exposures.

The BOE is almost certainly going to leave rates on hold but both the doves and the hawks are becoming more entrenched with one side fearing for growth and the other worrying about inflationary pressure. The Fed has gone down the route of 'easy' money as the solution to the current problems whilst the ECB has, on the one hand, made a stand against rising prices but, on the other, continues to pump billions into the ailing banking sector in an attempt to freeze up the credit crisis. The BOE has rather sat on the fence over all of this preferring to 'wait and see' rather than rush in with either a stimulus or a liquidity package. Unfortunately the Government is in something of a cleft stick here in that, in Europe, the ECB can lend vast sums to the banks with big collateral packages pledged in reply because the ECB is not seen as a sovereign state using public funds to help 'greedy' bankers. In the UK every time any package is put forward the press immediately focuses on the headline number and states "50 billion of public money wasted" etc. When in reality the money is just lent against assets. Headlines make for better reading than facts.

With fears over a wage spiral beginning to ruin any inflationary squeeze the BOE might look to easing the pressure on house holds. The rising cost of basic commodities twinned with increases in mortgage payments is likely to make for belligerence on the wage front. If relief can be found on one of these fronts then the wage negotiations might go slightly more smoothly. Asking people to fight the inflation battle with their own pay packet is pretty much doomed. Nobody wants to see a reduction in their own personal standard of living and with food and fuel moving into double digit price rises the Unions are likely to be asking for rather more than in recent times, especially if the BOE is seen to be tightening the screw on borrowing levels.