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Weekly review 25 April 2008

Banks and housebuilders spiral down, but the FTSE index is kept up by oil.

Weekly review 24th April 2008

Banks and housebuilders spiral down but oil keeps the index up

In terms of overall movements it has been fairly quiet and the FTSE 100 index has gone nowhere this week, but our portfolios have enjoyed an excellent performance.  We have seen good gains amongst many of our long and short positions, pushing the total returns on portfolio number three to a new high (55%), so it continues to show that CFD profits can be made in any market conditions. 

In term of where we go next, the pattern on the FTSE 100 index looks mixed in the short term, and there are also divergent technical signs appearing in our US analysis, so overall it could be more of the same for a week or two.  The main point to make is that the big hitting sectors are showing completely different movements in the UK, with the oils and miners having been very strong, the financials weak and the drug majors rather non-committal. 

Once we have more uniform action we’ll then know which way the Footsie is going, but outside these sectors there is plenty of M&A action for the longs and no doubt more profit warnings to seek out for the shorts.  This week though we look at two majors in the bank and housebuilding sector.

A big drink at the funding trough from RBS

The big story of the week of course is the RBS rights issue, a mammoth effort which, if followed up by other banks, threatens to swamp the market with new sector stock.  No wonder we are seeing big falls across the board, and for those who haven’t much experience of playing rights issues, what normally happens is this.  As this is a hefty issue it means that existing shareholders have to stump up a lot of cash if they want the new ‘discounted’ shares, not to mention the fact that they will be getting their next RBS dividend in stock rather than cash.  There will therefore be plenty of ‘old’ stock that needs to be sold unless if course investors stump up the full £12bn which looks unlikely. 

That means market makers will want the price to be as low as possible to get in cheap stock before the ex-rights day.  Given that many of these players will also be underwriters, there will be a lot of stock sloshing around, and that’s why the rights price was pitched so cheap.  For the existing shareholders and management of RBS, it’s a bit of a disaster, but in a couple of months there may be some very cheap stock going in what is normally a quality outfit, and what is still the UK’s second biggest bank.  Short term sell, long term look to buy – you can do both with CFDs.

New lows all round in the housebuilders

Over in the housing market, conditions are clearly dire with a terrible statement today from Persimmon, the UK’s biggest sector stock by market capitalisation.  Not only have sales dropped by 24% since the start of 2008 but the group makes no bones about the market becoming more challenging as the year progresses.  We live in different times from the last recession, and newsflow via the internet is instant these days, so the housing juggernaut is now on power steering.  Persimmon said that just over the last three weeks the tightening in the mortgage market had caused a further deterioration, leading to lower sales volumes and increased cancellation rates.  It has postponed the start of new sites until the mortgage market improves, so whether or not this is a veiled threat to government to lower interest rates, the speed of the downturn is unprecedented.

It adds up to the following in our opinion:  Highly leveraged housebuilders may be going bust very quickly, because this sector (unlike commercial construction and contracting) requires high working capital requirements, and that is why Barratt Developments is down 14% today.  Unemployment will rise with on-site and marketing layoffs, not to mention brickies, plumbers and suppliers.  Third, consumer spending will be under more pressure, not helped by record oil prices.

The bottom line as always is this:  if shares are going to new lows, which has been the case across the sector today, don’t be afraid to still short them, and that applies to the relevant retailers, hotel stocks, pub companies and building material suppliers.  They may not move the Footsie much because of their low weighting, but they sure can make you money in the CFD market.

CONTRACTS FOR DIFFERENCE (CFD) TRADES TO WATCH NEXT WEEK