Citigroup sounding alert on supermarkets as prices fall

Citigroup today told its clients to sell all three of the big UK food retailers; Sainsbury's, Tesco and Wm Morrison on the basis that what has happened over there is about to be repeated over here.

In January US analysts were confident of decent earnings growth from the supermarket sector. Now, analysts think market leader Safeway will be down by 21%, while rival Supervalu is looking at a fall of 29% and best-in-class Kroger will be up by just 4%. Together these three big supermarkets will see earnings shrink by 14% this year and next.

In the UK, August food prices were 1.2% below May's peak and Citi reckons September will show a significant fall. It warns that year-on-year inflation, which stood at 11.4% in February, will turn negative by December. Cheaper food may be good news for purse-conscious consumers but it will eat away at supermarket margins. Consequently Citi says the current consensus predictions for next year's earnings are too high.

Wm Morrison, 3.9p lower at 273.83p, is Citi's favourite due to its "virtue of self-help, trading momentum and scope for store growth", but it still warrants a sell. It sees slowing like-for-like growth at Sainsbury's, down 4p at 319p and also a sell, ditto Tesco, off 8p at 385p, where UK sales performance remains "uninspiring".

The recent rally looked to be in severe danger of a permanent reversal as sellers pushed the FTSE back down towards the 5000 mark. Just a handful of blue-chips were in positive territory with the miners heading the losers. The FTSE 100 was down 29 points at 5018.81, while the FTSE 250 gave up 125.05 points to 8939.23.

Stockbroker Singer is advising clients to jump into bed with Dunelm, the out-of-town retail outfit that specialises in cheap and cheerful sheets, curtains and other home furnishings. Dunelm, down 3.5p at 303.5p, does not command a large presence in the capital so you could be forgiven for not noticing it on your weekend shopping jaunts. This though, says Singer, is why it is a good bet. With just 85 superstores and many areas of the UK not covered "Dunelm has significant room for expansion". This marks it out from most of its retail peers and "is the core driver behind the investment case". Singer says Dunelm has a well-invested infrastructure and scalable warehousing, "all the key building blocks" to accelerate growth.

It has pencilled in a 12% rise in profits to £59 million this year on the assumption another 12 superstores are opened. Next year shareholders should see 9% growth in profits on the basis that 10 more stores are opened but it could be significantly more.

The demand for Dunelm's duvet sets could see at least 15 shops opened in each of the next three years and the risk to the shares is all on the upside.

Aim-listed insolvency specialist Begbies Traynor, unchanged at 107.16p, has, unsurprisingly, had a good year. In his AGM statement chairman Ric Traynor said trading for the insolvency arm, which counts for 80% of turnover, was "significantly ahead of last year." Overnight on Wall Street the US rally came to a halt as the latest crop of statistics reflected poorly on the fragile economic recovery.

According to government figures another 551,000 Americans joined the dole queue last week, worse than expected and an ominous message to those waiting for the influential non-farm payrolls out later today. Furthermore, manufacturing output appeared to be growing less rapidly than previously thought. The Institute for Supply Management's index dropped to 52.6 from 52.9 in August, a big disappointment to the market, which had been anticipating a rise to 54.

The Dow Jones plunged 203 points to 9509.28, a fall of more than 2% while the broader S&P 500 index gave up nearer to 3%, down 27.23 points at 1029.85. The question is whether or not this reflects a bout of profit-taking by investors otherwise comfortable with the general direction of stock markets or a more serious check on the rally.

News of the retirement of Ken Lewis, bank of America's chief executive, apparently before a successor has been anointed knocked the stuffing out of the banking sector, with Lewis's bank down 4.2%.

In China, investors were also selling and Hong Kong's Hang Seng was down 485.96 at 20,469.29, while Tokyo's Nikkei 225 shed 242.80 to 9735.84.