TODAY’S FAYRE – Friday 11th July 2014

TODAY’S FAYRE – Friday, 11th July 2014

“The last of last words spoken is, Good-bye –
The last dismantled flower in the weed-grown hedge,
The last thin rumour of a feeble bell far ringing,
The last blind rat to spurn the mildewed rye.

A hardening darkness glasses the haunted eye,
Shines into nothing the watcher’s burnt-out candle,
Wreathes into scentless nothing the wasting incense,
Faints in the outer silence the hunting-cry.

Love of its muted music breathes no sigh,
Thought in her ivory tower gropes in her spinning,
Toss on in vain the whispering trees of Eden,
Last of all last words spoken is, Good-bye.”

Walter de la Mare – author & poet – 1873-1956

Forgive the brevity of this note! Off to Stoke-on-Trent to make a small presentation!

In the past ten days equities have experienced this unpleasant “drip! Drip!’ syndrome as they surrender value across the world. The change in sentiment away from the upbeat mood that prevails in the US and the UK in regard to growth, has gathered a little more momentum this week. Since hitting their peak record levels, the FTSE 100 excluded, indices in the US have surrendered about 2% and their European brothers about 4%. Many believe that this pull-back could continue with equity markets correcting by about 10%. We have not had a 10% pull back for over 2 years. Perhaps it would be healthy. We shall know more next week, when the Q2 earnings floodgates open, with banks at the head of affairs. Wells Fargo reports today. Expect banking profits to drop sharply.

Why has all this happened and why have investors been reluctant to accept the logic? Valuations are beginning to look very rich, oil prices won’t go down; geopolitical problems are potentially dangerous; the halcyon days of Chinese growth may now be an historical illusion – 7% rather than 9%. Chuck in the fact that credit in China is growing at 15% per annum against growth of 7%; that is a terrifying statistic and cannot be sustained. However and most important of all it has been convenient for investors and observers to point the finger of suspicion at Portugal’s debt repayment issues and the parlous state of Espirito Santo, the country’s largest bank for the current shortcomings of the EU. The bank’s shares were suspended, having lost 17.2% yesterday. Frankly this tricky problem is just an excuse. The ECB will not doubt bail it out with tough conditions. The EU is the problem; The region is drowning in debt; unemployment is in double digits with Spain still about 24%. EU banks need serious injections of capital in places. It is interesting to note that 10-year bond yields have been creeping back up in Portugal – 3.99%, Greece – 6.17%, Spain – 2.82% and Italy 2.94%. I hasten to add that these yields are ridiculously and unrealistically low any way. However whilst Marshall Draghi remains in town, chill out Pilgrim! The EU would have us believe that ‘Boot Hill’ does not beckon! Portugal is but an endemic pimple on the financial map of the EU – no more than a wake-up call to tell us that all is not well in the camp. To date, Chancellor Merkel, who is not only the voice but the backbone of the EU, will not countenance the introduction of QE by the ECB. If the EU’s economy fails to come back on the bridle, then Chancellor Merkel may have to reconsider.

The Street of Dreams experienced a very sharp sell-off initially. By the end of the session their losses were paired back, as Portugal just highlighted the EU problem and may not represent Armageddon. At the end of the day the Wall Street eased by -0.4% and the NASDAQ by 0.6%. However the Russell index for small companies remained in the doldrums.

The FTSE 100 eased again by 45 points to 6672, leaving it 260 points short of its records. Burberry posted a 12% increase in sales for the last quarter though CEO Chris Bailey’s £27 million remuneration demands have taken shareholders’ breaths away. AB Foods illustrated how reliant it is on Primark, whose sales were up 19% last quarter. The Tour de France has stimulated Halfords’ sales by 7.9%. Jaguar Land Rover sold 240k vehicles in the first 6 months of the year. Imperial Tobacco is in early talks to buy Lorillard & Reynolds brands. Finally Kate Swann formerly of WH Smith was in neon lights again yesterday, when she took SSP public. Shares were issued at 210p and ended the session at 224p. SSP owns brands like ‘Upper Crust’ and ‘Café Ritazza.’ So the news was not all bad!

These are David Buik personal views

Twitter – @truemagic68

David Buik

Market Commentator

D +44 (0)20 7886 2775
Panmure Gordon & Co
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