Betfair Official Blog

Still no sign of a turnaround any time soon

Daily View - 3rd July 2008

And the pain continues. M&S and Taylor Wimpey produced a real shocker yesterday morning but initially, somehow, the FTSE actually managed to shrug off the disastrous news and at one point was trading 80 pips up on Tuesday's close. It was not until the US joined the fray that a bit of sense seemed to drift into proceedings and down we came once more to close 53 lower. This morning the opening level is forecast to be another 30 points lower at around 5390 having been as low as 5365 in late Futures trading last night.

Taylor Wimpey's inability to get a fund raiser off the ground really hit the market as we have become used to stock holder routinely stumping up the cash for emergency capital requirements. It is always a shock to discover that there is a limit to what shell shocked investors will stomach. With the property 'slump' only about six months old it was obvious that investors would rather see the stock crumble than throw good money after bad. If all the developers are in this much trouble already when a recession is still (just) not actually here what the hell does the future hold in six to twelve months time. The lending banks are unlikely to put themselves further into hock over the Builders expensively acquired Landbanks and we now have the very real possibility that many of the major developers will go to the wall. If so many people are willing to sell their holdings in Taylor Wimpey at 28p to 33p it is because a lot of people think that zero is the final destination. The lenders and bond holders will end up owning the various Landbanks, the share holders will have lost all and the builders will become yet another name plaque on the 'Marconi' wall of fame.

M&S is a slightly different matter in that they are not burdened with debt and a long term investor can see (through a strong telescope) the possibility of hope on the horizon. The 20pc plus fall in the stock added to the falls already in place now mean that the price is 67% off the highs and is now around the lows of the pre Sir Stuart era. Given that there was also a share consolidation in the intervening years the company is actually worth considerably less than it was under the 'mismanagement' of the previous administration.

This is slightly unreasonable as overall sales for the UK (not 'like for like') were actually flat which would indicate that although times are tough the company is likely to hold onto market share which will stand it in good stead when things get better.

To add to all the pain we get two pieces of data today which will probably add to the burden. The ECB is expected to raise interest rates to fight inflation and over in the States we will get the big number of the month, the Non Farm Payroll (NFP) figures. Neither of these events are likely to add to growth prospects although if it means a weaker pound (on the terms of interest rate differentials) then exporters might have something of a boost. Unfortunately the effects of higher interest rates are likely to slow the Euro economy even more which will make exporting to it rather academic.

The NFP is forecast to come in down 60K which some might think is a tad optimistic given the oil, energy, base materials and food price impact on businesses in recent months. If even Starbucks is planning to close 600 outlets you have to believe things are tough over the pond.

Markets
Oil hit a new all time high last night and is higher again this morning with Brent trading at around 146 bucks. The 150 level is within a single trading days range but we may pause for breathe before we take the leap. Remember the delay at the $100 level where the market continually rejected the psychological three digit number before breaking decisively through it. Coal had a big down day yesterday to add to the previous session and the price has fallen from $180 a tonne to $150. Whilst Oil is not Coal they do not both act in a vacuum to the other as energy is energy from whatever source.

The weak dollar is causing much of the recent commodity spike and the laissez faire attitude of the US administration to the value of the Greenback is coming back to haunt them in the shape of higher dollar based commodity prices. Interest rates at 2% when the economies of the Union are performing no worse than most other Western nations tell their own story in the Feds policy on the dollar no matter what Treasury Secretary Paulson says to the contrary.

As mentioned the markets are expected to drift again today on the open and, to be honest, it is difficult to see a major turnaround any time soon. Alistair Darlings' statement a few months ago that the UK was 'uniquely' positioned to weather the economic global storms shows that his grasp of fundamentals, and presumably those of the Treasury who brief him, are sadly lacking. Although the Mandarins would no doubt claim that the usage of the word 'uniquely' has a double meaning. His appearance of slightly startled amiability is beginning to wear thin and the sight of him reading pre-prepared statements which he seems to hardly understand a word of is not encouraging.

UK debt markets are now in danger of coming under very serious pressure which will drive up longer term borrowing rates even further which will put even more stress on indebted companies and individuals. It cannot be long now before the employment numbers begin to show the strain. On a brutal thesis if a company like M&S is seeing like for like sales down 5% then presumably they can dispense with a similar percentage of staff (plus a bit more to demonstrate belt tightening in difficult times). M&S are not alone other retailers are in the same boat, builders stand in danger of imploding completely and the financial sector is already retrenching.

A serious slowdown is now almost a certainty.

On a lighter note, do you all remember the May retail sales number a few weeks ago? Apparently sales were up the most in living memory. Where do they get their data from?