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Possible turning point as US shares roll over this week

2nd May – Big rise in London reflects strong world equity movements There is a good feeling to equity markets right now on talk that the worst of the credit crunch is over and on hopes that M&A activity will reappear, especially from the private equity sector.

Some of the stocks hardest hit on the way down are the big winners so far with next up a hefty 5% and Alliance & Leicester not far behind. Barclays also up despite the widely reported departure of Paul Idzik, COOI and one of the key architects within the efforts by CE John Varley to overhaul the bank’s culture and management. In the same sector, RBS is rallying on a press report that private equity firm Texas Pacific Group is considering a bid for its insurance arm. Given all this potentially good news in the bank sector, the cynic might argue that we are close to a short term top, and we would have to agree.

At the bottom end, our view that gold would fall to $850 has worked well in the last two weeks, and the miners are weak again despite the strong market. We see no reason for this to change in the short term against the background of a strengthening dollar.

Another area to watch on the downside is property after Capital & Regional’s big fall yesterday on concerns that its flagship fund had breached its banking covenants. After the market closed it acknowledged the market concern around the capital structure of the Mall Fund, and despite an early bounce short positions should be considered here.


6th May – Footsie runs into early selling as strong oils offset by other sector problems

Shares in London stared brightly today but soon hit a wave of selling as strong oil stocks were offset by some poor news in other sectors. Tullow Oil was the market’s biggest riser as it said that its Mahogany-2 well offshore Ghana hit a significant column of light oil. Their view was that Jubilee is now a major discovery and is likely to lead to a material upgrade of current resource estimates, which suggests the shares will continue to be well supported, especially with crude oil prices hitting $120 per barrel. This should help another of our picks, Cairn Energy, which is also closing in on new high ground.

At the other end, housebuilders are under pressure on two pieces of news. Bovis Homes said today that housing market conditions had deteriorated sharply in the last two months and results for the first half of 2008 would be substantially lower than previously anticipated. There were also press reports that US private equity group Apollo was understood to have approached Barratt Developments to offer to buy a stake in it, which was rejected, and many analysts still believe that Barratts will require a fundraising exercise at some stage. That is certainly our view as the tide of bad news suggests that builders will see more sales falls in coming months.

One stock within the troubled bank sector that has been fairly resilient is Lloyds TSB which said write-downs in its Wholesale and International Banking had cost it £387m, but without that it achieved revenue growth in excess of cost growth, and a double-digit percentage increase in profit before tax in the first quarter of 2008. Again these are fairly solid numbers, and though we would pour cold water in the view that the credit crisis is over, there is certainly long term value in Lloyds although it could remain choppy in the short term.


7th May – Steady open with some decent moves in recovery stocks

Although volumes have been quiet so far, the FTSE 100 index has seen a small rise and for a change there has been some interesting activity in recovery stocks. Former high flyer Yell Group has followed up yesterday’s rise with another 8% rise as US sector peer Idearc rallied a huge 30% after announcing better than expected first quarter profits, and volume so far has been impressive, so we could see another attempt at the spike high seen two weeks ago at 206p here.

There has also been a decent rise in Taylor Wimpey, especially after yesterday’s very downbeat assessment of housebuilding conditions by Bovis Homes. We would be more sceptical here and there must be some expectation of a rights issue in the sector, especially for the higher geared players including TW and Barratt developments.

Elsewhere, another solid performance by British American Tobacco saw its Q1 profit up 18% to £807m on revenues up 14% to £2.54bn, boosted by the weak pound and good trading generally. With a confident statement, the rise of 3% here looks well justified and we could see higher prices in due course.
Easyjet as expected posted higher H1 losses of £48.4m although revenues were up 24% to £892.2m, the same rise as fuel costs. The group said its load factors remain robust and forward bookings were slightly ahead of this time last year, but with the price of crude spiralling higher, we feel there could be a lower share price before investors see real value in the company.


8th May – Fall in US stocks hits Footsie early on as traders await BoE rate decision

Shares in London’s top stocks opened lower ahead of the Bank of England’s monthly decision on interest rates later today, with the feeling that rates may be left unchanged but with the possibility of future drops. It was however last night’s fall on the Dow Jones Index that gave the early downside impetus to the FTSE 100 index despite some sharp moves on special situations.

Enterprise Inns saw some profit taking after yesterday’s stunning rise on news that it was eligible to convert to a REIT if an internal restructuring of the group was undertaken. Sector peer Punch Taverns saw some follow through buying on thoughts that it too might continues to consider the opportunity of a potential conversion to REIT status, but we feel these rises look overdone. There were similar moves last year in the commercial property sector, and if they marked a major sector top, so bulls should be very cautious here.

Another interesting story is developing at Carphone Warehouse where there have been rumours of a potential takeover bid for some time. It is now to sell a 50% stake in its retail business for £1.1bn to US consumer electronics retailer Best Buy and the two groups will form a new company. Again the shares have had a good run, and in the absence of an outright takeover we see short term lower prices for a short while.

At the top end of the market, Unilever is up a hefty 5% after another very solid statement showing a 7.2% rise in Q1 underlying sales, which was well ahead of forecasts. The shares have been dull for quite a while and this could be the catalysts for a renewed bout of outperformance.

Head of Research at Blue Index, specialists in trading CFDs
08/05/2008

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