Shorting Leveraged Companies and the Economy
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There is now some in-depth research going on with analysts looking for stocks with higher than normal borrowing requirements. The ‘dodgy’ gearing up of balance sheets over the past decade may come back to haunt many companies.
Financial engineering looked very good in the era of the ‘death of inflation’. However in the cold dawn of high costs, high wage demands, rising taxation levels and high interest payments there are likely to be some red faced Finance Directors.
As anyone spread betting on the FTSE 100 knows, the UK Leading share index is struggling to maintain any rallies. Adding 4-5% inflation is not making trading any easier.
Simon Denham of Capital Spreads recently commented, “On the face of it Sterling’s decline and the prospect of high interest rates for longer will drag on returns and clients are settling in with some solid shorts”.
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The global situation does not exactly look rosy as capital destruction continues in the Far East, the Chinese stock market is now down over 60% and they are still trading on a P/E of over 18 with inflation over 8%. Europe and the UK are on a more normal P/E of around 12 with inflation at 4-5%. The dash for growth in the emerging markets has led to many companies operating on miniscule margins with no room for manoeuvre. A small set back could lead to disaster for a huge block of export driven manufacturers.
The fact is that the macro economic situation is not moving in the UK’s favour. Government profligacy over the past decade (even on a high tax base) has left Captain Darling sitting around with a dazed expression as Our Gordon’s poisoned legacy is handed over.
Everywhere we look we see huge reductions in revenue income. Much as we all hated the banks they paid monumental cheques into the exchequer (not much hope of that this year). In fact, with the UK’s method of payment in arrears the Treasury will probably have to be paying back over the next few quarters. The £6bn Housing Stamp Duty will be lucky to be just half this total and the ever rising level of unemployment means an increase in outflow AND a decrease in income tax revenue. On the plus side there will be a huge increase in Oil tax inflows (remember that most of the price we all suffer at the pumps is nothing to do with the actual cost of the black stuff). Having said that crude oil prices are steadily dropping.
Much of Europe will be better insulated against these problems and the US, for all of the Sub Prime problems, is actually operating on a low(ish) tax level giving the President a good store of ammunition to kick start growth.
"Shorting Leveraged Companies and the Economy" last update by RThomas, 28-Oct-2008
Warning: Financial spread betting carries a high level of risk. You can lose more than your initial investment or stake. Financial spread betting may not be suitable for all investors. Only trade with money that you can afford to lose. Make sure you fully understand the risk involved. If necessary, seek independent financial advice.
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