DESPAIR AT 3-DAY TRADING WEEK & IPO DISAPPOINTMENT

Ever since the credit crunch and the banking meltdown, equity markets have contracted in to a three-day week, unless there is momentous news on a Monday or Friday or a Non-Farm payroll piece of data which is totally out of kilter with expectation. Such are the restraints of regulation and balance sheet usage, the level of activity seems to have fallen by about 40%. It’s hard to prove with so many more screen based trading systems and ‘dark pools’ about, but that is the general consensus of opinion. Also somewhere around 40% of trades are programme trades and option based deals, which has little to do with dealer-decision-making-process.

The management in banks and brokers spend Mondays working out strategy for the week, if they have the ability or inclination to think beyond a few minutes. Tuesday, Wednesday and Thursday involve light dealing. Thursday night is the ‘big night out’ and Friday is spent getting over a self-induced hangover and waiting for the content of the weekend’s press, prior to deciding the next course of action.

No one either trading or observing markets need the brains of a rocket scientist to realise that QE has been the main contributor of the UK stock market’s rally – up 93% – the DOW in US is up 100.9% and the S&P is up 122.5%. US markets have breached all-time records and the FTSE flirted with its record of 6930, but is now about 180 points light.

Equities feel very heavy at present. Many would think they are heading for a fall, which would be normal, when volumes are so light, particularly against a background of geopolitical turmoil in Iraq and Ukraine, plus valuation concerns over earnings plus a fairly frothy oil price. However the great conundrum is why desert equities when other asset classes remain so unappetising. Interest rates are unlikely to climb until near the turn of the year and then probably only symbolically. This leaves bonds, unless you are a professional, an unattractive alternative. Most companies are paying 3-4% dividends and profits remain subject to CGT in places. So there has to be a good reason why. That reason may manifest itself in the autumn, when it becomes clear that the EU is not going to make a gargantuan recovery. Also China may be stalling and the US may not be economically on fire. The runes in the sand for the UK look really encouraging with confidence in business higher than it has been for 22 years. Let’s hope the UK is not dragged down by the level of incompetence in the EU.

We have also had a slew of IPOS, many of them rushed on to the market by private equity, desperate to take some profits. Expectations for success, I think, have underpinned markets. To date there is mild disappointment, but with Williams & Glyn to come plus others, the next few months will prove to be interesting. Investors are shrewder than they are given credit for. They are not in the mood to be rail-roaded as can be seen by the table set out below. There are some serious valuation problems – hence quite a few have disappointed – AO.com, BooHoo.com, Pets at Home and Saga. GoPro was a huge success in the US last week and the market waits with great expectations for Alibaba on 8th August when 12% of the company will be offered for sale hopefully raising $20 billion, valuing the company at $160 billion.

company Date issued Initial price Latest price Average change
AO.com Febuary 2014 440.00p 262.10p -40.97%
Bohoo.com March 2014 50.00p 44.00p -12%
Poundland March 2014 300p 309.60p +3.11%
Pets at home March 2014 245.25p 203.00p -17.23%
B & M retail June 12th 2014 270.00p 277.00p +2.60%
Saga May 2014 185.00p 172.75p -6.62%
TSB June 2014 260.00p 275.50p +5.97%
AA June 2014 250.00p 247.00p -1.2%
King digital March 2014 $21.36 $17.85 -16.43%
GoPro June 2014 $25.00 $35.76 +43.04%
Zoe’s kitchen June 2014 $15.00 $33.95 +126.34%

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These are David Buik’s personal views

Twitter – @truemagic68 David Buik

Market Commentator D +44 (0)20 7886 2775Panmure Gordon & Co
One New Change | London | EC4M 9AF | United Kingdom

http://www.panmure.com

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