Spread Betting Week 46
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The regular Spread Trading Update from Simon Denham of Capital Spreads.
For today's update >> Spread Trading.
Spread Trading 14 Nov 08
Yesterday all was grimness and doom today the light is shining brightly.
The FTSE 100 is called 150 points up the Dow had a 900 bounce from the lows, Oil and Gold have bounced and really the only thing that is still up ‘up the creek’ is the Pound.
The Sterling / Euro spread is now at €1.1649-€1.1653. That means that against our major trading partner, whose currency has also dropped alarmingly, we are over 20% off from the average levels from prior to 2008.
As mentioned the FTSE is opening some 150 points to the good and Financial Spreads clients are counting the shekels as they were buying into any weakness yesterday. The huge Dow rally came as something of a relief to many. The only problem with the move higher is that it appears to have been built on fear of what the G20 are going to do this weekend rather than on any fundamental change. Indeed the numbers out yesterday were actually worse than forecast.
This might make the current levels just a temporary relief and, indeed, in early action we have seen a general surge toward the exit signs. I feel that cash might be the place to be for the time being.
Hopefully we might have a quieter day as traders try to guess which way everyone will jump on Monday after the great and the good have their little shindig. Next week also has the natural break of the US Thanksgiving holiday (Thursday and Friday) which generally takes two days out of the trading month for the whole globe.
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Spread Trading 13 Nov 08
Walking in this morning it is difficult to think of anything apart from doom and despair. Companies are releasing ever larger numbers of staff, the pound looks like I might be using fivers to wallpaper my bathroom anytime soon, and oil, gold, bonds, shares etc are all a sea of red on my monitors. And worse, I read this morning that the value of fine wines has dropped by up to 65% “quelle horreur”, things must be really bad.
My musings earlier in the week about the effect of low Oil prices on Russia’s financial viability was not meant as an imminent warning, just as a thought on what might be in store. The news over the past few days has put this ‘possible’ into the ‘probable’ pigeon hole. This might not be seen as having much impact on the UK but it is an indication of what is going on across the globe.
Britain is not the biggest exporter on the planet but we are still sizeable. Slowing demand on this scale means that the gains for industry from the crumbling pound are not being realised on order books and so all we will do is, once again, start to import possible inflationary pressure.
Not only this but with virtually every white goods, clothing, electrical and furniture retailer on the block importing its merchandise the outlook for margins on the high street just get worse and worse. Falling demand from an economic slowdown is part of every businesses road map in tough times. However, adding the huge increase in acquiring the produce to sell, with no way of passing it on to buyers, is not. I fear that the recent bounce in retail stocks might be about to run aground.
The FTSE 100 is reacting to the fall in the US and in the Far East overnight with an opening quote of around 4080 down 100 on yesterdays close but we are seeing strong initial buying from clients who (as mentioned yesterday) seem to be willing to buy into any weakness at the moment. With the pound so weak, and the fact that 70% of the FTSE 100 business is non-UK, equities do look to be good value on a global scale.
The problem is, will they be even better value tomorrow? As I have stated, ad-nauseam, sitting on your hands continues to be the best policy. If you must trade make sure that the reward potential is commensurate with the current risk level.
BT’s numbers were much better than feared and rather begs the question as to why they felt it necessary to make such a bearish statement a couple of weeks ago. In a poor market the stock is trading up more than 10% and our Capital Spreads clients are very pleased indeed having bought into the stock whenever it approached 115p.
Oil is now very close to $50 with December Brent Crude Spread trading at $51.00 - $51.05, a far cry from the $147 bucks of spring. As feared in yesterday mornings comment the acceleration to the downside seems to be getting worse. Since the start of the month oil has fallen over $14 dollars or 22%. Whilst we might cheer from the sidelines as the pressure on our wallets decreases this is, in the long run, another possible indication that global growth is not just slowing but actually putting the emergency brakes on as well.
Gold made a new closing low for the year last night at around $710.0 but has been down at $680 intraday back in October. There seems to be buying support below $710 but the rallies of late October and Early November all seemed to peter out at successively lower levels. The support from the 2007 $690 resistance level must be seen as critical and any close below here may well indicate a further shift down to the $635-$640 2007 support.
Once again it is time to put the tin hat on and hunker down. Come out in Spring!
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Spread Trading 12 Nov 08
3% off yesterday, 2% up on the open this morning leaves the FTSE 100 looking a tad undecided just at the moment.
Traders with us are long from last night lows in virtually every asset class. This is becoming a feature of intra-day trading. Every pull back is becoming a buying opportunity and every rally a selling one. Since the middle of October the FTSE has had six 500 point or more moves which is creating great short term play prospects. The entire high/low range for the whole of 2004, 2005 and 2006 was less than that of the last two months. It is this profit potential that is driving much of the dealing activity at the moment.
As mentioned in yesterday morning’s comment the continued weakness in Oil is playing havoc across the commodity exporting nations. Russia’s emergency measures announced late yesterday rather swiftly served to back up the arguments.
With memories of Russia’s effective wiping out of state debt back in 1998 very much to the fore the chances of anyone other than Supra-Nationals coming to their aid is slim. The same can be said for Venezuela, Argentina, Iran etc.
Crude Oil is now pushing to new traded lows for the year and (if anything) the outlook looks ever more painful. Not only this but Airlines and others who ‘hedged’ their fuel costs earlier this year at $100, $120 or even higher will now be asked for cash margin on these forward purchased contracts. In the current poor economic situation who would lend to an airline to make a margin call? This will probably lead to enforced liquidation (if indeed this has not already happened to some) which many well drive the markets much lower. This is not a prospect that leads to a happy prognosis on individual state security.
On the currency front traders are taking a breather on buying the dollar this morning and Cable has pulled back up to the current GBP / USD spread of $1.5435 - $1.5438.
However the charts still show strong trend momentum to the downside for Sterling. Having lost 25% since July it can hardly be expected to show anything else, of course. The lows of October at $1.5265 might seem to be a target for sellers but the precipitous nature of the falls is tempting in buyers looking for a bigger short term bounce. It is difficult to remain continuously negative on the ‘good old pound’ but the economic situation prevailing in UK plc does not exactly make me optimistic.
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Spread Trading 11 Nov 08
Markets continue their yo-yo performance with traders reversing (and more) the 150 point gains of early yesterday by the close.
This morning we are looking at an opening level of around 4320, off 85 points. The trigger for this has to some extent been outside influences from the US and the Far East with both the Dow Jones and the Nikkei 225 failing to hold on to gains in late trade last night and early action this morning.
However it must be said that announced results this morning will not exactly help as Vodafone miss targets and Taylor Wimpey indicate that orders are 40% off last year (we were already entering the ‘le crunch’ by then).
Sitting on a debt burden of £1.9bn (the numbers just trip off the tongue by now), with a capitalisation of just £170m and presumably making a loss on every unit sale is not exactly a situation that would fill many with confidence. The only thing holding Taylor Wimpey up appears to be the fact that the banks do not want to ‘call in’ the loans as this would just add another huge slug to their bad debt books.
A bit tongue in cheek I know but share holders should beware a late liquidation when the economy begins to turn and the banks might feel they can make more of a return with the assets than with the loan.
It is not just the fact that Vodaphone has missed targets that will be worrying investors in a host of related (and unrelated) stock. It is also the downbeat assessment from the board. Sales targets for the next six months have been cut yet again and the company is looking for cost savings.
Mind you I do love accounting policy in the UK. Vodafone’s 1H ‘Net’ is 2.14bn, Operating Profit is 5.77bn, Pre-Tax is 3.31bn and EBITDA is 7.24bn. So which is the ‘real’ number? The dark arts seem to be weaving quite a web.
On the other hand investors in Vodafone in particular will be pleased that income remains solid in a challenging market and there was no skeleton in the cupboard to scare us off. The call is for the shares to come in a few pence up at around 111p. No mean feat in a generally weak opening environment.
Trading in virtually every instrument is getting very jumpy again as ‘bottom pickers’ fight it out with ‘trend continuation’ merchants. We are seeing increased willingness from punters to come in on the buy side for Oil, Sterling and Equities as the sense that just possibly we are near to a low percolates through confidence levels.
The problem is that this is what always happens in extended bear market conditions. Hope for the future coupled with fear of ‘missing out’ on any long term rally tempts investors in to what turns out to be just a bear market bounce. The trick, of course, is to spot which is which.
In all honesty there are precious few reasons to indicate that the bottom has been reached. The corporate news is getting steadily worse and in some sectors is actually accelerating to the downside. Virtually every developed and emerging nation on earth is still in the process of trying to stimulate growth. Also, whilst we all hope that this has the desired effect, sentiment has yet to give that ‘final’ signal where the majority fear that the entire project will fail. Nearly all bear markets have this ‘moment’ where the worst seems to be about to happen and then ‘doesn’t’.
Lloyds TSB are slipping again as the prospect of picking up HBOS either ‘on the cheap’ or as a ‘disastrously risky acquisition’ sways back to the second of these two prognoses. In reality boards would not normally take quite such a cavalier attitude to their own businesses long term outlook but these are not normal times. Mandelson has indicated that Lloyds will only get its Treasury money if it agrees to the tie in which effectively means that the Government is playing Russian roulette with Lloyds’ shareholders money. If the gamble pays off we will end up with a company that is so locally dominant that it will probably be forced to split up again in 4 or 5 years time.
Sterling seems to be forming a short term ‘flag’ formation with the price range contracting to a point. Resistance to the upside is at around $1.5770 and Support is between $1.5525 to $1.5540. With the GBP / USD spread currently at $1.5633-$1.5636 we are neatly in the middle so traders should be aware of the opportunities and perils of either one or the other being breached.
Oil has also given up the rally of Monday morning and we a perilously close to a new closing low for the December contract. With the Brent Crude Oil spread at $57.14-$57.19 we are under the previous end of day settlement at $57.42 but still well above intraday lows of $56.16.
There seems to be a surplus of the black stuff around at the moment and, for all of OPEC’s calls for production cuts, precious little evidence that ‘high words’ will translate into dirty action. Most of the nation states outside of the Middle East (and many of those within it) desperately need the revenue flows to balance Public Sector books. Action from local administrators (Venezuela and Russia for example) in the recent past has meant that there is almost no outside financial help to be had when times get tough.
If dealers drive oil even lower, and it remains there, then the consequences could be quite severe. Economists make much of the fact that the emerging markets will take up any slack in western demand. However with fuel efficiencies getting ever greater the increased demand from economic growth must be considerable just to keep up with reducing requirements.
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Spread Trading 10 Nov 08
Now we have to ask ourselves the million dollar question. Is this the turn of the markets or is it just a bear market bounce?
We are 850 points (fully 23%) from the lows of two weeks ago but somehow it does not feel particularly joyous just at the moment.
With the global position worsening by the day the UK looks to be in a perilous position with the Public Sector overdraft projected to reach truly astronomical numbers.
And here I am not including the propping up of the banks. Unusual in the extreme, at least the State is getting something for its money with the recapitalisation of the financial sector. At least they are not actually having to write off large sums as other nation states are doing. At the moment the new money going in is likely to be repaid (with 12% interest) which, given that the Treasury can issue gilts at around 3 to 4%, makes high street lending margins appear genuinely generous.
As the prop to our service sector of ever cheaper, consumer goods and loans gets weaker. This just as the economic ‘miracle’ of ‘Our Gordon’ is finally revealed to be just so much star dust the resultant growth expectations get ever more pessimistic.
The love/hate affair with the city has generally disguised the fact that (as a whole) the small square mile of tower blocks has been, for many, many years, the UK’s only world class industry attracting top class recruits from across the globe. The woes of the banking industry as a whole (not just the UK’s banks) have overshadowed the huge input to the countries finances that the City has made. Most countries have very large ‘invisibles’ outflows but here in Britain this is reversed. The Trade figures are truly dreadful but without the financial services sector they would be even worse.
Anyway...the week ahead. This week is a heavy reporting one and we may well see quite a few deviations from expectation, both up and down.
Tuesday
Today sees Vodaphone step up to the plate and the numbers are expected to be robust with forecasts of rising revenues and an increased profit to around £5.6bn. Two weeks ago the stock reached 96p which gave a yield of around 8% for a company with a massive revenue stream and a growing (albeit more slowly) market footprint. We subsequently bounced to 120p but have slid in recent sessions to the current 108p on fears over these numbers. The fact is that a mobile phone (plus bits and pieces) has become, effectively a utility in the west and will probably do the same across the globe. Unless another ridiculous G3 extravaganza takes place the revenue flows look far more stable that most.
Aveva come with a trading update and the company is suffering from being one of the most negatively analysed companies in the FTSE 350. With the stock having more than halved it is still on a p/e of over 14 last years earnings and on a sub 1% yield. In these days of finding secure places for your funds the stock has not exactly shone out.
Dairy Crest is also due to release interims but seems to have done a ‘pre-release’ this morning (Monday) saying the world is grim and numbers will be weak. Profits are expected to be 10% below forecasts and the stock is suffering. On a day when the FTSE 250 has rallied some 250 points the stock is 60p lower at 270p. We are probably going to have to get used to this effect where the general view is hopeful but the specific numbers are grim.
Wednesday
Land Securities will be releasing data and the hope will be that the numbers will not be as bad as feared. The stock is now back at 2004 levels which probably reflects valuations but, back then, we were in a growth period which would have been represented in the stock. Now we are looking at continued contraction for several quarters, the stock is below asset value at the moment (which should be good) but this will depend on security of income and it is here that the jury is still out. The huge falls of the last 20 months (this stock started falling well before the credit crunch emerged) seem to be tempting, especially in such a solidly run operation but fear is still the master over greed just for the moment.
Sainsburys are expected to bring H1 profits of around £270m. Revenue numbers in previous announcements have shown to be robust but the general confusion over the stock remains. Without the Dubai interest the company would appear to be heavily overvalued in comparison to other Supermarkets and the Divvy policy is very generous in relation to its peers. At 288p this morning the price is back at the highs since the early October fallout, when Robert Tchenguis was being forced out. 300p looks a tempting target but also an obvious barrier.
At 09.30 we will also get the latest unemployment data and this is expected to be grim. On the plus side we are seeing a change in the way markets are looking at ‘bad’ numbers in that they are trying to see the positive rather than the negative.
Thursday
BT actually give some flesh to the bad trading statement of a couple of weeks ago. The company is in danger of becoming merely a trading unit of a pension fund as the liabilities run out of control. The Dividend is looking under pressure as the demands from elsewhere increase and a significant slice of the profit flows are likely to be diverted for the foreseeable future. The stock seems to be irresistibly attracted to the 115p level at the moment and the steady stream of down-grading comments from analysts are not exactly likely to attract big buyers.
Ladbrokes are likely to test the hypothesis that bookies do reasonably well in bad times. Unfortunately for the high street ‘turf accountants’ much of the betting is now online which is not an easy audience to either acquire or to keep. Off shore outlets (who do not have to pay the ridiculous 15% Gaming tax) are running rings around the odds available to UK based operations. Debt, slow growth and poor results have cut into the stock in recent times so investors will be hoping for something good.
Friday
With no major news maybe this week will close on the quiet side (for once). Very soon we will be into the wailing and gnashing of teeth that is the annual ‘doom fest’ over the Christmas retail sales rollercoaster.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
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'Spread Betting Week 46' edited by SD, updated 16-Nov-08
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