UK Spread Betting Update

The Financial Markets - 10 December 09

• Overnight in Japan, core private-sector machinery orders fall 4.5% in October, in line with forecasts. This follows a 10.5% increase in the previous month. While wholesale prices in November, as measured by the corporate goods price index, fall 4.9% YoY. This compares to forecasts of a 5.1% decline.
  
  
• Foreclosure filings in the US will reach a record for the second consecutive year with 3.9 million notices sent to homeowners in default, RealtyTrac said. This year’s filings will surpass 2008’s total of 3.2 million as record unemployment and price erosion batter the housing market. “We are a long way from a recovery,” John Quigley, economics professor at the University of California, Berkeley, said. “You can’t start to see improvement in the housing market until after unemployment peaks.”
  
  
• A weak labour market and tight credit are “formidable headwinds” for the economy, Ben Bernanke said in a speech in Washington. The 7.2 million jobs lost since the recession began in December 2007 are the most of any postwar economic slump. Unemployment, at 10% last month, won’t peak until the first quarter.
  
  
• US Shoppers were out in force during the week of Black Friday, but price cuts brought in less revenue than last year’s recession-mired sales, according to NPD Group. More than $2.7 billion was spent on TVs, PCs, video game consoles, cameras, and more in the first burst of holiday shopping, but it represented a 1.2% decline compared to the same period a year ago. Still, it’s better than the previous year’s 3.4% decline. Retailers will have to blame their discounting practices, since actual unit sales were way up in many categories. But while retailers so far appear to be having a ho-hum season revenue-wise, there’s still several weeks to go before the end of the quarter. And the biggest sellers, like Wal-Mart and Amazon, say that while Black Friday and Cyber Monday are important to their bottom line, their biggest sales days typically come mid-December.
  
  
• Executives from 12 banks, including Citigroup, Goldman Sachs and JPMorgan Chase, will participate in a December 14 White House meeting with President Obama to discuss his proposals to boost small- business lending and overhaul industry regulations. Also represented will be Bank of America, Wells Fargo, Capital ONE Financial and American Express. Rounding out the guest list are executives from Bank of New York Mellon, Morgan Stanley, PNC Financial Services, US Bancorp and State Street.
  
  
• Back in the Eurozone ECB President Jean-Claude Trichet said that “a strong USD vis-a-vis the large floating currencies is also in the interest of the stability and prosperity of the global economy.” He also said that (when asked about Greece) “given the severity of the situation, I am confident that the Greek government will take the necessary and courageous measures in the near future.”
  
  
• Closer to home, in what has been dubbed the most leaked Irish budget ever, yesterday’s budget provided few surprises. The Minister of Finance cut public spending by the €4bn he had pre-announced ahead of the budget. The Department of Finance’s forecasts that accompanied yesterday budget show that Ireland’s Debt/GDP ratio is forecast to hit 82.9% in 2011, below the EU average of 88.2% and peak at 83.9% in 2012. While the General Government Balance is estimated at -11.7% for 2009, it is forecast to fall to -11.6% in 2010 and below 3% by 2014, which is the agreed timeline with the European Commission. Notwithstanding the fact that there was no mention of potential cost of bank recapitalisation and that the Debt/GDP forecasts exclude NAMA, the fiscal situation in Ireland looks to be significantly better than 12-18 months ago. The Irish government bond market continues to trade as a “High Beta” name with Greece and widened dramatically yesterday in the wake of the continued selling pressure in Greece. I believe that the fiscal situation, although not fully resolved yet in Ireland, is at least on the right path to recovery which should positive for Irish bonds in 2010.
  
  

1. For the time being, the equity market is going to have to contend with more chatter of the Fed’s exit strategy.
   
   
2. The market also faces a new reality. While employment stabilising (maybe) is a good thing, it means the era of declining unit labour costs and margin expansion is behind us.
   
   
3. Market leadership is beginning to fade as is evident in the receding advance-decline line on the big board.
   
   
4. Market complacency is a worry with the VIX index back down to 21.25. The good news is that insurance against a correction is priced about as low as it can go. Protection is cheap.
   
   
5. The Wall Street Journal reports that not only have individual investors been selling into this last leg of the rally (then again, the S&P 500 has really done nothing for over six weeks), but pension funds have been rebalancing too.
   
   
6. Volume has declined markedly, surpassing 4.7bn shares on the NYSE just once in the past three weeks.
   
   
7. With the correlation between a weak Dollar and a positive stock market above 90% over the past eight months, versus zero over the past 30 years, a countertrend rally in the US Dollar would likely coincide with sputtering equity prices.
   
   
8. The Dow transports/utilities ratio has turned in a classic triple-top and this is a signpost to get defensive.
   
   
9. The latest Investors Intelligence poll shows the bull camp at 50%, and the bear share at a mere 16.7%. In other words, there are three bulls for every bear. This is negative from a contrary perspective.
   
   
10. Corporate Bond yields have stopped narrowing over the past three months and have actually recently shown modest signs of an upward bias.
    
    

• Alliance Boots is seeking overseas expansion in its wholesale business and in health and beauty retail says Executive Chairman Stefano Pessina. Boots may consider acquisitions, partnerships or selling its branded beauty products in other pharmacies; or it may choose organic growth.
  
  
• The announced car scrappage scheme in yesterday’s Irish Budget is a positive for FBD, with 50% of premiums derived from commercial and private motor lines. The scrappage scheme will target cars of ten years or older and will reduce the Vehicle Registration Tax by €1,500 on the purchase of new low-emissions vehicles when the old car is traded in. According to the Society of the Irish Motor Industry, there are potentially 600,000 cars eligible for the scheme. The replacement of older cars will boost car premiums as customers insure against a greater amount. But claims frequency should also be a beneficiary as older cars are replaced on the roads with newer, safer models.
  
  
• Staying in the Emerald Isle the excise duty on a pint of beer and cider has been reduced by 12c per pint (21c per litre), effective from midnight last night. The Minister stressed that it was important that the full benefit of this reduction was passed on to consumers. While there is no direct impact on C&C numbers, the move is undoubtedly positive in that it should support volumes in what remains a difficult consumer environment in Ireland. The main purpose of this measure is to curb the tax loss caused by cross-border shopping, and so the impact is likely to be seen in the off-trade. In the on-trade, it is likely that some of the reduction will stay with the wholesalers and publicans but nevertheless the reduction should still help C&C in getting the on-trade retail price of a pint bottle below the psychologically-important €5 mark.
  
  
• Deutsche Bank cut Marks & Spencer to Hold, from Buy & ups Kesa Electricals to a “buy”. Dutch bank ING was added to BofA Merrill Lynch’s “Europe 1” list, stock is up 6% today, Goldman Sachs are advising to buy Eastman Chemical in new coverage.