Financials / Simon Denham / 03 November 2008 / Leave a comment

Daily View - 3rd October 2008

There might be some hope that we might soon be able to move away from the banking side of the economy to start focussing on the bits that actually employ the vast majority of people.

Whilst the two are inextricably entwined it has become rather galling to continually be concentrating on the woes of Barclays and RBS when describing the share price movements of M&S and Rio Tinto.

The situation is no doubt pretty dire but at some point (everyone acknowledges) we reach that moment of "last man standing" as stock holders finally give up the ghost and pile out of positions in fear of something worse just around the corner. The action around price activity on the 24th and 27th October might (possibly) be just such a moment. The market, from the dire position at the close of last Monday, has managed four up days in a row (not seen since the short lived recovery from the last sell off in mid July) and the 700 point bounce from the lows in just 96 hours is pretty terrific in anyone's language. Unfortunately bear markets tend to have these huge short lived rallies, we had an 800 point bounce in January, a 900 one between March and May, 600 in the July recovery and two 500 plus point leaps in September. That makes for over 3400 'high to low' point reversals so far this year but the market is still 2000 points off year-to-date!

What I am trying to indicate here is that whilst the current bullish euphoria might (hopefully) be an indication that the violent volatility of the last month has been the cathartic reaction required it would be inadvisable to leap in with both feet just yet. Maybe a toe or two.

This week will be dominated by MPC deliberations on Thursday but readers of this column will already know my opinion of that august body so more of that later.

Tuesday brings ABF and Punch to the table with Finals and more importantly for actual new information M&S, BG and Balfour Beatty will reveal interims and/or Trading updates.
ABF has ploughed a reasonably steady course through the shallows but the stock has suffered as you would expect with a company based heavily in the retail arena. Like-for-like sales were announced as being up 2pc (very neat in such a tight environment) but investors will be hoping for more up to date trading information along with in depth analysis of last years numbers.

Punch Taverns is forecast to show profits around 260 to 270m down from last years £302 but the stock has been absolutely massacred and is trading 80 pc from its highs. The board might well be tempted to 'pass' on the dividend and use the money to pay down debt on the basis that the share price can hardly do worse and it will make next years numbers that much better (and easier to attain).

The weekend saw some 'grinning and bearing it' from the retail knights as Sir Stuart and Sir Phillip popped round to Westfield to promote their latest respective store launches but no amount of cheerfulness will get around the fact that the M&S brand seems once again to be returning to schizophrenia. For years the attempt has been to move to a 'younger audience' for the clothes and to build a quality food unit. It now seems that the store is moving back to the 35 plus age group and the food unit is going more mainstream. I have always maintained that the weekly shop cannot take place in M&S because they do not stock 'brand names'. If I want Coke I will not 'make do' with M&S Cola, ditto Persil, Dettol and any number of branded food makes. The company now has a sizable debt pile and, with the next two years probably being 'difficult'. Sir Phillips' 400p a share offer will remain the Albatross around Sir Stuart's neck.

After M&S we get 'Next' on Wednesday. The company would appear to be in the worst of all positions if the downturn becomes really nasty. Quasi fashion is always difficult as spotting (or driving) next years must have can lead to expensive mistakes even in good times. When the going gets tough the temptation for customers will be to head for the cheaper end of Top Shop, Primark or (in extremis) Matalan as the Next brand is seen as just that bit more pricey. Results are expected to show like for like sales down some 6 to 7 pc and it must be mentioned that this is before the pips have even remotely started to squeak. Times are tough but not yet grim.

Thursday will be dominated by the MPC rate decision and readers will know that I have been (for over a year) crying out over the emphasis placed by the BOE on imported and currency created inflation and the fact that bunging up the rates for the pound are hardly going to make much difference to the price of fuel. The squeeze on businesses is becoming ever more obvious even to the gilded economists inhabiting Threadneedle Street and the fact that UK rates are now four and a half times the US and nine times Japan (countries with whom our companies must compete) must surely have filtered through into their consciousness.

Friday sees BA giving interims and Ryanair's numbers this morning will be giving hope that the doom mongers might be wrong. Ryanair have increased revenue by some 20pc in the last quarter but higher fuel costs wiped out most of this. Unfortunately Mr O'Leary hedged much of the fuel costs for the next six months at substantially higher levels than are currently 'pertaining' but the increased turnover might last longer than the short term cost increases. BA remains very well placed to not just survive the current turmoil but pick up wounded competitors as well. On a long term play the stock looks a 'player' but the problem is how long is 'long term' and how far could it fall in the meantime.

Rentokil will also update on the never ending saga of integration woes and being nasty to them sometimes feels like you are kicking a man when he's down. The stock is around 75pc off the levels of 2004, the highs were way back then, which actually makes them no worse than many other high-to-low moves. Again this is a company with a solid revenue stream which (when a handle is finally got a grip on) should come down solidly in to he bottom line. The problem, as with many companies at the moment, is that the trading environment is not one that is affording managers much leeway for any further errors.

The Tradefair Spread Betting Team