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Tuesday November 4 - morning update
The London stock market was shaping up for its sixth consecutive day of gains as one of the City's big-hitters turned bullish after being almost 18 months out in the cold.
As Americans voters were due at the polls and with the prospect of cheaper money on the way this week in the UK, Morgan Stanley has turned from seller to buyer of European stock markets.
It has moved from a “full house sell signal” in June 2007 to a “full house buy signal” as of 31 October 2008. It says: “We have now come full circle. Our market timing indicators are giving us a full house buy signal”.
So it was today urging clients not to be caught short, and to start buying. The broker has based its decision on four main indicators — valuation, capitulation, risk and fundamentals.
Cynics may say Morgan Stanley has jumped the gun although, with interest rates in the UK set to fall by at least half a point, there is arguably plenty of value to be had among equities. The unanswered question is — how deep will the recession be and how long will it last?
Shares today rallied from opening falls amid signs of a massive bear squeeze. The news today may have been bad but at least it wasn't disastrous, and that was the signal for stock-market bears to head for the exit.
As a result, the FTSE 100 index of leading shares climbed 115.9 points to 4559.1 while among second-liners the squeeze was even more ferocious with the FTSE 250 index ahead by 293 points at 6736.7. Turnover among leading shares was just over a billion.
A drop in same-store sales and profits from Marks & Spencer could have been a lot worse, and the share price rallied 21½p to 243p. Even Royal Bank of Scotland was putting a positive slant on a profits warning, but the shares retreated 4.5p to 60.7p. That means its £20 billion share placing and open offer, which has been underwritten by the Government, is now under water.
One company drawing encouragement from the M&S results was Premier Foods, up 12½p at 41p. It is a big supplier of food products to M&S, and has been savaged by the bears this year. They are now trying to shut down any remaining open positions, which is driving up the price, along with share-buying by some of the directors. Managing director Will Carter has bought 26,579 shares at 27½p each, and group sales director Ian York last week acquired 21,087 at 23½p.
Investors are taking an increasingly bearish view of the big miners, based on a rapid decline in commodity prices. This reflects China's expected slow-down in economic growth — the main driver to the sector in recent years.
Collins Stewart believes the market is being overly bearish, especially when bearing in mind that significant portions of production are unprofitable and cutbacks are inevitable. As a result, it says, the sector is well-positioned for a rebound. The majors have been oversold and are being valued at current spot levels through to 2009, an unlikely scenario.
Collins Stewart says those most likely to benefit from any rebound are BHP Billiton, 12p at 1087p, Anglo American, 42p dearer at 1484p, Xstrata, 71p cheaper at 1135p, and Rio Tinto, off 26p at 2874p.
Premier Farnell firmed 4¼p to 135¼p despite Deutsche Bank cutting its rating from buy to hold in the face of challenging conditions. Deutsche says its economists are forecasting a deep recession, with western European economies and the US expected to show just over 1% economic shrinkage into 2009 and growth from emerging markets also a lot slower. It has slashed its target price for the industrial materials supplier to 133p from 225p.
Citigroup continues to rate 3i, up 29p at 601p, a buy but has slashed its target for the venture-capital provider to 100p from 120p to reflect the increase in real yields and the de-rating of its peers.
