TODAY’S FAYRE – THE MELTDOWN

TODAY’S FAYRE – Sunday, 23rd August 2015

 

 

 

“It must be borne in mind that the tragedy of life doesn’t lie in not reaching your goal.

The tragedy lies in having no goal to reach.

It is not a calamity to die with dreams unfulfilled.

But it is a calamity not to dream.

It is not a disaster to be unable to capture your ideal,

But it is a disaster to no ideal to capture.

It is not a disgrace not to reach the stars.

But it is a disgrace not to have stars to reach for.

Not failure, but low aim is a sin.

 

 

Dr Benjamin Elijah Mays – poet & sociologist – 1894-1984

  

In response to Australia’s 481 on a fair cricket wicket that offered few demons, England’s response of 107 for 8 was a pathetic effort on Friday. The sun was high on the yardarm, the ball moved around only moderately and the front-line English batsmen played Nathan Lyon as if he were Jim Laker bowling on a real ‘turner’ at Old Trafford back in 1956, when he took 19 wickets in the match. Lyon is a splendid journeyman of his trade, but he was hardly lethal on that track. Had Alistair Cook played forward to the good length ball he received he would have been fine. Basic schoolboy stuff! In fairness to the Australians all their bowlers used the conditions far more effectively that Broad, Wood, Finn, Stokes and Ali. This Ashes series certainly has been ‘topsy-turvy’ affair!

 

Global equities have experienced a very toxic, unpleasant journey in recent weeks, full of financial potholes and economic traffic hazards. Uncertainty over the robustness of China’s economy and the fact that the authorities have clearly been economic with the truth over growth targets, has been blamed for the measurable correction markets are currently undergoing. The prevailing uncertainty has had a ‘Svengali-styled’ influence on sentiment, which has turned very negative, triggering a collapse in value of the Shanghai Composite, down 34% since June – and more significantly the misleading unreliability of China’s economic data has inflicted major damage on global stock markets and the dangerous path the world seems to be heading towards deflation.

 

It’s amazing but no matter the length of their experience market protagonists have never been able to cope with uncertainty in the same manner as they cope with good and bad news. Uncertainty breeds fear in spades resulting in markets over- exaggerating their need for remedial action.

 

China has not helped its cause with copious stimulus packages being introduced with monotonous regularity to keep its economic show on the road. It could be monetary policy, fiscal means, bank liquidity as well as property. More recently it has been stock market intervention, forcing brokers, banks and insurance companies to buy stocks, as well as restricting ‘short selling.’ What a disaster that course of action has proved to be. Yes, the Shanghai Composite had rallied by about 150% from June 2014 to June 2015. So, considering that the economy is ‘off the boil’ it is hardly surprising that about 34% has been surrendered in the past 2 months and 11% last. Yesterday’s 4% drop was the result of the latest piece of dispiriting economic data – Chinese PMI for July, coming in at lowest level since 2011. The fact that Nymex dropped below the $40 a barrel Plimsoll line for the first time since 2008, with Brent dropping to $45.46 exacerbated the situation. The attempt to devalue the Yuan against the Greenback last week was handled in the most ‘ham-fisted’ manner. Any Government-led support of its currency rarely has long-term positive effects. They are short-lived.

With such terrifying trade imbalances involving Japan, Germany and China against the rest of the world, this problem puts markets in a parlours position. Who knows when this ‘drip-drip’ sell off will be finished.  It is hard to see where the good news is coming from. The problem the world has is that it is heading for a deflationary period. It seems that the service sector is holding most economies together, but without inflation, recession in some countries may be close at hand. The vibes in the UK for its economy are really upbeat and not bad in the US, but unfettered progress cannot be made indefinitely if the rest of the world is not contributing. China is a real problem and Japan’s Abenomics are starting to be held in derision. They palpably do not work

 

So looking at the ‘nuts & bolts’ than emanated last week, the S&P 500 eased by 3.2% and by 7.7% since its May ‘high’ and the DOW by 10.3% in the same period. Last week the FTSE fell by 5.5% and by 11% since April – 9 consecutive days of losses wiping £135 billion in terms of value in the last 10 trading sessions. The FTSE 100 has lost 5.8% this year. European stocks fell by an average of 6.6% last week. The DAX is now only up 4% on the year and the CAC 11%. We must hope that when people come back from their annual leave at the beginning of September, some sort of calm will return. However between now and then markets have every chance of continuing to behave in a vituperative manner. I have been very impressed how much earlier than most Simon French of Panmure Gordon and Mike Ingram of BGC flagged up their concerns about China. They have been very much on top of this issue. I also found it fascinating that the Greek ‘bail-out’ came and went last week, without sending the slightest wave of concern across markets. Of course it was a political decision and not a financial or an economic problem. Had it been the latter, the proposal of an extra E86 billion to be added to the existing E240 billion ‘bail-out loan’ would have been kicked in to the long grass as insanity personified.

 

In and out of the wreckage and carnage deals were still being concocted, tweaked or rejected. The Shire/Baxalta deal looks as though it is struggling to the finishing line, as its share price has dipped 6% since early August. Glencore posted unsatisfactory results which saw its shares fall 11% on the week and by 2/3rds in the last 4 years. Lonmin was up 9% on Friday and on Thursday Kaz Minerals rallied 17% on a currency variation. It should not be forgotten that emerging market currencies have been slaughtered at the hands of the Greenback in the wake of deflationary signs and the threat of higher rates in the US. I view of what has happened in the past week, I suspect that the FED will put next month’s symbolic rise of 0.25% on hold and the MPC can kiss goodbye pro-tem to their aspirations of putting rates up early in 2016. In the US Hewlett-Packard rose 5% as results appeared to be better than expected. Other points of interest concern the dissipating performance of some tech stocks during these troubled days. In the past month due to concerns expressed over Apple’s challenging outlook for sales in China the market has taken the world’s largest company’s share price down 19.8% since the beginning of July from $132 to $105.76 on Friday. Netflix, another market darling took some stick on Friday. Its shares fell 7.8%. The other troubled company is Twitter. Its share price fell below its November 2013 IPO issue price of $26 to $25.87 – down from a ‘high’ of $69 in December 2013.

 

 

There was some good news for the Government. Its borrowing was in surplus by £1.3bn in July, according to the ONS. That was the first July surplus since 2012, thanks largely to higher amounts of income tax receipts. The Treasury received £59.1bn in income in July 2015, which is about 4% higher than last year’s figure. Public sector net debt, excluding public sector banks, now stands at £1.5 trillion, which is 80.8% of gross domestic product (GDP).

 

 

The Cooperative Bank virtually tripled its losses in the first half of 2015, falling £204.2m into the red. Niall Booker the CEO said the bank’s losses were mainly due to non-core asset sales that were executed in order to streamline the company and to “improve the bank’s stressed capital resilience”. A high increase in transformational costs were also reported as the Co-op deals with a catalogue of historic strategic problems under the REV Paul Flowers and Peter Marks, before Richard Pym and Richard Pennycook climbed in to the saddle of the holding company. It may be another 5 years before this bank, now hugely influenced by its US hedge fund shareholders see the fruits of their labours.

 

Finally this weekend there was further confirmation that UK banks may be involved in private litigious claims for forex manipulation at a cost to them as maybe as much as £5 billion.

 

UK companies posting results – Monday – BUNZL, AMLIN, Tuesday – BHP BILLITON, REGUS, ANTOFAGASTA, PETROFAC, JAMES FISHER, Wednesday – STAGECOACH, WPP, HSS HIRE, CARILLION, PADDY POWER, ARP ENERGY,, JOHN LAING, CRH, ALDERMORE GROUP Thursday – AMEC, STV GROUP, EVRAZ, PLAYTECH, Friday – RESTAURANT GROUP, 888 HOLDINGS, BWIN PARTY, COMPUTACENTER, MARSHALLS, CHESNARA KENMARE, SOCO INTERNATIONAL.

 

 

US companies posting interim results – Tuesday – BEST BUY, TOLL BROTHERS, Wednesday – CHICO’S FAS, BROWN-FORMAN, ABERCROMBIE & FITCH, WILLIAMS SONOMA, Thursday – FRED’S, DOLLAR GENERAL, AEROPOSTALE, SMITH & WESSON, Friday – BIG LOTS.

 

Economic data – Tuesday – US CONSUMER CONFIDENCE, US NEW HOME SALES, UK BBA MORTGAGE APPLICATIONS, Thursday – US GDP & JOBLESS CLAIMS

 

 

David Buik – market commentator

 

Panmure Gordon & Co

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