The inside word from the City

Canines on parade

Tue, 13 May 2008 10:25:18 GMT

Much to the chagrin of Tiddles, Cityblogger spent a sweltering Sunday perusing the stalls at a local dog show. As he wandered about enjoying a 99 (one has to when it costs an extortionate £2!), Cityblogger’s eyes were drawn to a ridiculous spectacle – a pink skinned hairless little creature strutting along in a bright pink collar and lead and adorned in a wet tea towel. And it was this image which Cityblogger recalled this morning as he examined Alliance & Leicester’s howler of a trading statement.

Stock market underachievers - ‘dogs’, as they are known in City parlance - are ten a penny in the banking sector. But A&L has grabbed the limelight after it became the latest bank to unveil hefty write-downs from the credit crunch. The credit squeeze cost the company £192m in write-downs on treasury and credit assets in the first four months of the year, and A&L is taking a further £199m post-tax asset write-down - higher than expected by analysts. What’s more, funding costs are also expected to rise to £150m this year. Unsurprisingly, the shares dipped by 7 per cent to 473.75p and are down a painful 60 per cent on the year. Ouch! Analyst James Hamilton at broker Numis described the trading statement as “terrible – as expected” and reduced his target price on the shares to 485p, stating that there is “better value elsewhere”. At least there’s no mention – as yet – of a rights issue…

Another canine on show was Enterprise Inns, which unveiled half-year figures. Shares in the pub operator are already down 34 per cent on the year, and fell another 4 per cent today after pre-tax profits dipped by 33 per cent. Yet chief executive Ted Tuppen said this was a “solid” performance given the tough trading environment right now. And Richard Carter, analyst at broker Numis, reckons the company is holding up better than many of its peers as consumer cut back on leisure spending.

A strong performance from European travel company TUI boosted the FTSE100 initially this morning, but worries about high UK inflation figures have pushed it back below the 6200 mark to 6144. Our Merv could soon have to put pen to paper and explain to Gordon Brown why inflation is so high.

But commentators say market falls below 6200 – as also seen on Monday - are unlikely to be serious. “Like other recent forays below this psychological level, so far this has proved to be short lived,” says David Jones, chief market strategist at IG Index. “Recent slides back towards the 6150/6180 area have brought the buyers back out in droves – and for now it looks like only a prolonged move below here would suggest that the positive sentiment is starting to fade.”

Here’s hoping!

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Cold comfort

Fri, 09 May 2008 08:42:01 GMT

It’s not always an exact science to try to second guess the Bank of England’s Monetary Policy Committee decisions. But on this occasion, as Cityblogger’s contacts had predicted, the MPC left rates on hold yesterday at 5 per cent, despite some last minute rumours that it could cut them by a quarter of a per cent.

So, sadly Cityblogger’s ‘gift’ to the MPC of used fivers didn’t pay off. But let’s not be too despondent. After all, Edward Menashy, chief economist at broker Charles Stanley, reckons investors should actually take heart from the MPC’s lack of action because he thinks it means the UK economy is not in such a “parlous condition” that it requires “back to back” rate cuts. “The bears of the economy believe that the UK is heading into recession and that base rates are heading to 3.5 per cent by the end of 2008,” he says. “Recent Bank of England statements have been positive regarding both the UK economy overcoming the worst of the credit crunch and the state of the housing market. This view goes a long way to suggest that despite enduring sweat, blood, toil and tears to secure a livelihood, the UK can emerge out of the morass without sustaining a recession.”

Comforting words! Meanwhile, although the FTSE100 has dipped around one per cent this morning following a weak performance from the banks due to continued worries about the mortgage market, on the bright side the index remains comfortably above the 6,000 level at 6215 this morning. For now at least!

Cityblogger wishes you a good weekend.

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Holding our interest

Thu, 08 May 2008 10:13:14 GMT

All eyes are on the Bank of England’s Monetary Policy Committee this afternoon to see if its boffins will deign once again to get out their big scissors and cut interest rates to prop up the economy. But Cityblogger isn’t holding out much hope that he’ll see a drop in his mortgage payments, despite the fistful of used fivers he sent to the Old Lady of Threadneedle Street yesterday, strapped to Tiddles with a begging note….Er…only kidding! There are, of course, few spare used fivers in the Cityblogger household anyway…!

The widely held feeling in the City is very much that the MPC will keep rates on hold, with possibly a cut expected next month. Although some weak economic data out this week led to some traders holding out faint hope for a quarter per cent cut in the base rate. “The consensus is that interest rates are not moving,” Howard Wheeldon, senior strategist at BGC Partners, told Cityblogger this morning. “[Although] there was a bit of a wobble yesterday with the Pound that suggested more bad economic news [might lead to a cut]. I’d probably be very surprised if we don’t see a 25 per cent cut next month, however. There’ll be another month of economic data and 90 per cent is likely to be bad, so there’ll be pressure on the bank to react.”

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It might as well be snowing...

Tue, 06 May 2008 10:44:53 GMT

The sun may be shining as though the height of summer is upon us – Cityblogger already boasts some colour on his usually pasty-looking limbs - but in some City hearts it might as well be snowing. With the pleasant May bank holiday already a distant memory, UBS has set about once more with its axe. The Swiss banking giant says it is to trim another 2,600 jobs by next year due to heavy losses sustained in the US subprime mortgage debacle. The bank made a $11bn loss in the first quarter and has been one of the biggest casualties of subprime, swallowing write-downs of $19bn and planning to shed a total of around 5,500 jobs. Merrill Lynch and Citigroup also announced major job cuts last month and no doubt this is the tip of the iceberg for City workers. The boffins at the Centre for Economic Research expect 11,000 job cuts this year and another 9,000 in 2009. Razor blades, anyone?

More gloom was forthcoming from Bovis Homes, too, as the housing market continues to deteriorate. Reservation levels at the housebuilder are down 30 per cent compared to the same period last year, and the company says half-year profits will now be significantly lower than analysts’ forecasts. However, Chris Millington, analyst at broker Numis, maintains his buy recommendation on the shares, pointing out that while Bovis is, like Persimmon, finding it tough out there, it still has strong operating margins and low debt levels compared to some of its peers.

Meanwhile, over the weekend Microsoft dramatically pulled out of takeover talks with Yahoo and is now thought to be cosying up to AOL already. How heartless! Some Yahoo shareholders are said to be unimpressed by chief executive Jerry Yang’s failure to cement a deal with Microsoft, with some commentators wondering if Microsoft’s action is deliberately designed to galvanise shareholders into action to rekindle the deal. “Yahoo!’s shareholders will be furious, forcing Jerry Yang’s team to think again, or return $4 billion to shareholders,” says one. Yahoo shares fell 15 per cent on Monday.

On the bright side, after faltering initially, the FTSE is up almost 2 per cent ahead of lunchtime, with oil stocks boosted by record crude prices and news that Tullow has stuck oil in Ghana.

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FTSE steams ahead

Fri, 02 May 2008 10:59:23 GMT

As Cityblogger’s thoughts turn to pretty maidens, grown men dancing with sticks and other peculiarly English eccentricities ahead of the May bank holiday, poor Mr Brown no doubt wallows in abject misery at the mauling he took at the polls last night. But perhaps he can take comfort from the fact the FTSE100 is steaming ahead, up 43 points to 6130, following a lacklustre day yesterday. The index has received a shot in the arm from talk of possible consolidation in the mining and insurance sectors.

Meanwhile, all eyes will be on the US non-farm payroll numbers out today which some economists believe will show that another 80,000 American jobs were lost in April, as in March. But Anthony Grech, market analyst at IG Index, reckons that it will take a particularly lousy showing to hurt equity markets.

“Investors have developed something of a tougher skin for less than positive news over the past few weeks, so it would probably take a reading quite a way below expectations to have any significant negative impact on the markets,” he says. “There is a feeling that stock markets at least may well have already priced in further economic slowdown in the US, limiting any real downside in the short-term.”

However, Mr Grech adds that it’s difficult to see where the catalyst for big market gains will come from and he expects markets to remain range-bound for now.

Perhaps another interest rate cut from the Bank of England’s monetary policy committee, which meets next week, could help matters? Cityblogger will have to see. But in the meantime, enjoy the May bank holiday.

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FTSE in a whirl

Wed, 30 Apr 2008 11:02:47 GMT

Cityblogger’s poor head is still spinning from the merry-go-round that is the FTSE100 this week. In his ignorance he dared to hope for a second that the worst of the credit crunch was over yesterday morning as the index steamed ahead, gaining 39 points to reach a stunning 6,130. Shell and BP’s stellar first quarter results boosted the FTSE100, at least for the early part of the day, with shares in both companies up strongly yesterday.

But it was not to be. By the afternoon the index had begun to shed its gains, and finished up largely unchanged on the day. Banks and mining shares were hit, with HBOS shares down 2 per cent after it unveiled its £4bn rights issue, the worst kept secret in the City after it was widely leaked on Monday. The 2 for 5 issue went down as something of a damp squib, and HBOS shares are down a further 3.5 per cent this morning. Analysts have criticised the cut in the dividend, with some suggesting investors give the shares a wide berth. “We do not believe HBOS has adequately explained its rationale for raising £4bn of equity from its shareholders,” says Tom Rayner, analyst at Citigroup, who maintains a sell recommendation on the shares. “[And] we believe HBOS will be vulnerable to further evidence of property market weakness.” Investors are waited with baited breath to see which bank will be next with its cap in hand to shareholders.

And there’s little cheer about in the markets today. The FTSE100 is down just under half a per cent to 6054 – mercifully still above 6,000 - with mining companies on the run following a lacklustre production update from Kazakhmys and profit taking by investors. Oil and gas giant BG is one of the biggest fallers, with its shares down 5 per cent this morning following its unsolicited swoop for Origin, which values Australia’s utility company at $12bn.

And there is more doom and gloom on the house price front. According to a survey by Nationwide, house prices have suffered their first annual fall in 12 years and are down for the sixth consecutive month (April).

Pass the razor blades! On the bright side there's speculation the Bank of England could cut interest rates again soon.

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HBOS: rights issue on the cards?

Mon, 28 Apr 2008 09:16:28 GMT

More rights issues from the banks appear to be on the horizon, just as was predicted here on this blog only last week. And it doesn’t appear that investors will have to wait long for them. Doing the rounds on the rumour mill today is that HBOS could be only a day away from announcing a £4bn rights issue at its annual shareholders’ meeting tomorrow. The bank and mortgage lender’s finance director Mike Ellis has already told shareholders the outlook for the housing market looks grim. He also recently suggested banks could face further write-downs due to difficulties in the financial markets. And analysts are predicting that given the £6m asset write-downs taken by the Royal Bank of Scotland, which announced its own rights issue last week, HBOS could face similar issues, despite relatively modest write-downs taken by the bank up to now.

But David Buik at Cantor Index reckons HBOS would do better to hold their fire. “Andy Hornby, the CEO, would do well to wait until July or August,” he says. “The market is just digesting the RBS £12 billion rights issue and who knows Alliance & Leicester may be waiting in the wing to do the same... If HBOS wants to get its Tier One capital ratio up from 5.7% to 6%, perhaps a rights issue in the late summer would be advisable, but £4 billion may not be enough.”

Meanwhile, Mike Trippitt, banking analyst at Oriel Securities, rates the shares as a hold, warning that HBOS’ mortgage business will be under “some pressure” in 2008, while its corporate side will likely see “slow growth”.

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Tin hat time

Thu, 24 Apr 2008 11:21:21 GMT

It’s hard to remember it now, but time was that the banking sector was as safe as houses. Now the whole industry feels swathed in sand and fog. And there’s been little letup this week - today was another tough day for banking stocks, helping send the FTSE100 down over 100 points and back below the crucial 6,000 mark.

Credit Suisse kicked off the party by unveiling a SFr 5.3bn ($5.2bn) write-down on the back of leveraged finance losses. The Swiss might be known for their financial acumen, and certainly investors had thought the bank would emerge relatively unscathed from the credit crunch, but it appears they thought wrong. Credit Suisse made a $2.1bn loss in the first quarter with net revenues down a shocking 72 per cent. At least its chief executive Brady Dougan – an American – had the good grace to label the results “clearly unsatisfactory”!

And Cityblogger has watched the day progress further into the dog house. Royal Bank of Scotland already has egg on its face from the recent rights issue announcement, (particularly given that the need for it is partly due to its acquisition of ABN Amro debacle) but now Barclays has stepped up to the plate. Although it isn’t – yet – unveiled its own rights issue, the bank says first quarter profits will be down on last year’s due to disappointing trading at Barclays Capital and Barclays Global Investors.

Drug giant AstraZeneca failed to inject any health into the markets either, with shares down 3 per cent following disappointing results. And Persimmon put the icing on the cake by announcing that it is to stop building new homes altogether due to higher cancellation rates and falling sales. The decision by mortgage lenders to tighten lending criteria and withdraw certain products from the market has put the squeeze on the house builder. The shares fell 8 per cent this morning and sent panic through the equities markets of further house price doom and gloom.

“It’s really strange, but the FTSE100 has spent a lot of energy going nowhere,” David Jones, chief market strategist at IG Index told Cityblogger. “There’s been quite a lot of bad news today and there’s no good news [on the horizon]. We all know this but the market seems to forget. It’s schizophrenic. Unfortunately I can’t see things getting any better in the near term. We’ve had RBS’ rights issue and there’s a feeling that it could start a bit of a trickle from the other banks.”

Tin hat, anyone?

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Never a dull moment

Tue, 22 Apr 2008 09:37:44 GMT

To the untrained eye, Cityblogger could appreciate how the City with its dusty old institutions might appear a dull sort of place inhabited by fat men in suits. But nothing could be further from the truth – well, with the exception of the rotund gentlemen, such as er…Cityblogger himself. Not a day goes by that the newspapers don’t feature a doom and gloom piece on the credit crunch. Perhaps the last time the City featured so heavily in the headlines was Black Monday.

And, luckily for these poor hacks, the credit crisis continues apace. Yesterday the Bank of England launched its latest attempt to patch up the gaping hole in banks’ finances and encourage them to lend to each other by allowing them to swap mortgage debt for government bonds, a scheme it says is worth £50bn.

But some commentators say the scheme is too costly for banks and doesn’t go far enough in preventing certain banks from ‘hoarding’ their cash and refusing to lend to others. “It seems that the initial reaction from financial markets and those that the scheme is designed to assist appeared somewhat diffident on the basis of cost in relation to risk,” explains Howard Wheeldon, senior strategist at BGC Partners. “That suggests to me that only the weakest banks may initially take up what is on offer from the Bank of England and that larger banks may stand aside for a while.”

Certainly the equity markets’ reaction was mute yesterday and the interbank lending rate LIBOR has, as yet, failed to drop significantly. What’s more, Mr Wheeldon believes further rights issues will be on the cards as banks bow to shareholder pressure to strengthen their balance sheets.

And another credit crunch victim - Royal Bank of Scotland - finally launched its much-rumoured £12bn rights issue today. The 11 shares for 18 rights issue at 200p will help cover a potential £5.9bn asset write-down. But the bank admits the timing of the takeover of ABN Amro’s wholesale business didn’t help. Previously highly respected chief executive Fred Goodwin, the sort of chap who appears in the top five of best CEO lists, admits that extending the bank’s exposure to the wholesale money markets last year was, in hindsight, not ideal.

Be assured, this probably won’t be the last banking rights issue this year.

Meanwhile Nomura is reportedly investigating an employee for suspected insider trading…On the bright side the FTSE100, while down slightly, remains past the 6,000 mark.

The City? Dull? I think not!

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Another brick in the wall

Thu, 17 Apr 2008 09:37:35 GMT

They may have made a small fortune from Cityblogger, flogging him a new build toy house with walls composed of papièr maché and barely room to swing a hamster, let alone Tiddles, but he can’t help but feel a pang of sympathy for construction companies today. Or at the least their long-suffering shareholders. If life wasn’t difficult enough for these blighters, many of whom have seen their shares drop like a bag of bricks over the past year, the Office of Fair Trading is girding its loins to go after them.

112 building companies including Balfour Beatty, Carillion, Crest Nicholson, Galliford Try and ROK, are accused of price fixing. The racket apparently involves companies deciding amongst themselves who will win a particular local authority bid by one company bidding at a high price, but the other companies coming in much higher, ensuring the first company wins. The OFT claims one local authority paid £500,000 over the odds for a new primary school because of so-called ‘cover pricing’. The winning companies also allegedly paid ‘compensation’ to the losers. A number of firms have already squealed to the OFT and been granted leniency.

OFT investigations, while no doubt crucial, are the bane of investors’ lives. They can drag on for years and all the while hanging over companies like a black cloud, holding back share price growth. Even if the OFT ultimately decides that competition rules were not broken! Past investigations have included the dairy industry – which hit shares in Robert Wiseman – and the veterinary drug industry – affecting Dechra Pharmaceuticals. Both companies were cleared of wrong-doing, although Robert Wiseman, along with a handful of supermarkets, is currently under investigation again.

So investors will no doubt be beating their breasts. Tom Gidley-Kitchin, construction analyst at Charles Stanley, told Cityblogger he was taken aback by the extent of the price-fixing. “Call me naïve but I’m slightly shocked,” he admits. “I expected there was a certain amount of agreement [between companies] that clearly wasn’t acceptable. But the idea that firms were paying compensation to stay away from the bidding. I’m surprised. I hope there will be a clearing of the desks now.”

However, analysts at Numis Securities are more sanguine. Analyst Howard Seymour believes that because it will be companies’ regional divisions that are hit, fines are likely to be no more than £2-3m, rather than the tens of millions some press stories predict.

And Mr Gidley-Kitchin remains positive on the construction sector, despite problems in the house-building market. “There’s still huge demand for infrastructure, whatever happens in house building,” he says. He favours Balfour Beatty and Carillion because of their lower house-building exposure and exposure to PPP and international growth sectors.

And, on the bright side, the FTSE100 has made it through the 6,000 barrier once again this morning. Phew!

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Pain on the high street

Tue, 15 Apr 2008 09:39:43 GMT

The sun is shining, the sky is blue and, if Cityblogger ignores the airborne piglets flapping their way past his home office window, he could (almost) believe he is in the midst of a bull market. Tiddles is sunning his somewhat rotund belly on the shed roof without a care in the world. Well, true, nothing new there...

After a dismal day yesterday, the FTSE 100 is up just under one per cent, breaking through its five-session losing streak, oil prices have hit another high and, Tesco’s jolly full year results would have us believe that the retail sector is bouncing with health! The retail monster says underlying profits before tax were up 11.8 per cent last year to £2.8bn and that all important like-for-like sales (excluding petrol) rose 4 per cent in the first five weeks of the new financial year. As Nick Coulter, analyst at Numis Securities, quipped in his note to investors this morning, “some crisis!”

And yet sales figures from the British Retail Consortium paint a very different picture. The BRC says like-for-like retail sales fell in March for the first time since July 2005, dropping 1.6 per cent. Clothing and footwear sales were the worst for eight years but that food sales also fell. Comparisons with last year were made difficult because of the unseasonal cold weather and the change in school holidays, but worryingly the BRC warns that “consumer confidence has fallen to new lows” with shoppers unwilling to hand over cash for major ‘big ticket’ items. Sports retailer John David Group also reported healthy full year results today, but complained in its outlook statement that current trading conditions are tough.

But Tesco’s continued strong performance shouldn’t surprise anyone. The retailer is precisely the kind of place the stricken shopper, battered by rising energy costs, is likely to head in an economic slowdown. Similarly, the US discount retailer Walmart is also doing well right now and propping up America’s retail sales.

Meanwhile, Gordon Brown is meeting the heads of major banks and mortgage lenders to discuss what can be done to tackle the credit crunch. Let’s hope they can come up with something more substantial than the occasional cash injection into the money markets, and he can persuade them to start lending to each other again!

But hold onto your hats. With big US corporates set to report results this week, including Johnson & Johnson, JP Morgan and Capital One, City insiders expect more bad news to come – following US bank Wachovia’s losses yesterday. Oh joy!

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A distinct lack of interest

Fri, 11 Apr 2008 08:34:10 GMT

From the dull performance of the FTSE 100 yesterday, Cityblogger would have thought the Bank of England hadn't cut interest rates at all! Never was a rate cut greeted with such a lack of enthusiasm! The equity markets were muted as most investors had expected the 25 basis point cut to 5 per cent, although some had dared to dream of more. On the plus side, it looks increasingly likely that another one could soon be in the offing.

Grim news today from the High Street, though. Sir Philip Green's privately owned BHS says profits will fall this year, blaming clothing price inflation in China. And DSG, owner of Curry's and Dixons, has issued another profits warning, complaining of poor computer sales and customers being unwilling to pay top dollar for electronic goods. At least the bid interest for British Energy has provided some cheer and the FTSE 100 is up this morning just under 1 per cent to 5999. Will we see it push back through 6,000 and hold onto any gains, Cityblogger wonders? Fingers crossed.

Have a good weekend.

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