£100 Billion UK infrastructure spending, which companies will benefit?

Yesterday was a day of cuts to Government spending, today was like a party for infrastructure spending. After yesterday's announcement of around £11.5 billion of further public spending cuts, some might be asking where does the Government find £100 billion for infrastructure spending in a time of austerity? Well, I suppose in a way it comes down to accountancy trickery, in that as capital expenditure it won't show up in the budget for current spending, so a lot of it is off balance sheet.

Anyway, most would probably argue that if the Government is going to spend more money then better to do it on something useful like infrastructure projects, roads, buildings, new energy sources, etc.

Plans for a £100bn modernisation of the UK's infrastructure, including new homes, road repairs and improved flood protection, have been announced.

The package, of which £50bn will come in 2015-16, is also aimed at boosting new sources of energy like shale gas.

Treasury Minister Danny Alexander said the plans put "long-term priorities before short-term political pressures"

http://www.bbc.co.uk/news/uk-politics-23074245

Question is, which companies are likely to benefit from all this additional investment? House building construction companies have already felt the benefit of Government intervention in the housing market with the Help to Buy scheme announced at the last budget, now the wider construction and energy industry get their turn.

Already companies like Drax and Speedy Hire have seen a price rise today which may be down to the extra business this spending may send their way. However, in what has been a good day for the UK market after recent falls, the response to the announcement has been a little muted. It could be worth spending some time looking for companies that will benefit, after all, the £100 billion will spent.

When bad news is good, at least for the market

Markets often work in strange ways and a lot of the time it is pointless trying to be rational or apply logic to their behaviour, because they turn the news to suit their sentiment and hopes. Yesterday was a good example of this.  After a month or so of fears that QE tapering by the Fed and possibly other Central Banks was on the agenda, markets had been falling, yet there was clearly something wrong here.  After all, tapering, which would be data dependent, was only likely to happen if the economy was in recovery mode. In other words, isn't a recovering economy supposed to be good for stock market quoted companies, surely that's what they want? A recovery?

Yesterday however, was another example of this strange market sentiment. The US GDP numbers came in lower than expected and markets went up. Sure, a bounce was due, but they went up because this "bad news" is actually good for what the markets seem to want - more QE.

The advances followed an upbeat finish on Wall Street overnight after U.S. first-quarter GDP growth was revised down to 1.8%, from an earlier estimate of 2.4%.

“The concerns of the market that prompted a selloff in recent weeks appear to have subsided,” said CMC Markets sales trader Miguel Audencial.

“The first-quarter U.S. gross domestic product figures increased [by less] than forecast, which the market read as a signal that the U.S. Fed is likely to step on the brakes at a later date than previously feared,” Audencial said.

http://www.marketwatch.com/story/korean-stocks-lead-asia-gains-amid-fed-hopes-2013-06-26

Sooner or later QE of this magnitude has to come to an end and perhaps we will see for possibly the first time in history economies recovering and bullish and stock markets crashing all over the world because the free money game of QE is coming to an end. Who knows, but don't try to apply logic to it.

FTSE250, worst performers, dominated by the mining sector

It's been pretty bad for quite some while for anyone invested in UK mining shares. Given that the main markets have been fairly bullish for some time, the sell off in mining stocks has been severe. Here are the worst performers.

1 year

African Barrick Gold  -72.45%
Hochschild Mining  -63.27%
Kazakhmys  -62.35%  Recently relegated from FTSE100.
Evraz  -61.04%  Recently relegated from FTSE100.
Centamin  -57.18%

6 Months

African Barrick Gold  -75.89%
Kazakhmys  -66.68%
Hochschild Mining  -65.84%
Evraz -60.74%
Polymetal International  -58.88%

Even in the last 30 day's with the market correction, mining shares have been hit hardest, only Man Group tops them.

Man Group  - 32.03%
Hochschild Mining  -31.82%
Evraz  -31.37%
Polymetal International  -26.18%
Centamin  -23.39%

Looking at the weekly UK mining sector chart suggests that there is still no let up or bottom in site as of yet. Not a good chart for mining investors.

Chart:

Video market round up for the week ending Friday, 21st June 2013

A week ending round up of the markets from Steve Briggs YouTube channel.

Included in this video is a look at the fall in the UK mining sector, including Fresnillo and Randgold Resources.

Links:

Steve's YouTube site http://www.youtube.com/user/sjb5555.

Useful charts and analysis can also be found at http://www.flickr.com/photos/stevebriggspics/

The Onion's take on the financial world, almost like reading the FT

Financial Sector Thinks It’s About Ready To Ruin World Again.

“It’s been about five or six years since we last crippled every major market on the planet, so it seems like the time is right for us to get back out there and start ruining the lives of billions of people again,” said Goldman Sachs CEO Lloyd Blankfein. “We gave it some time and let everyone get a little comfortable, and now we’re looking to get back on the old horse, shatter some consumer confidence, and flat-out kill any optimism for a stable global economy for years to come.”

“People are beginning to feel at ease spending money and investing in their futures again,” Blankfein continued. “That’s the perfect time to step in and do what we do best: rip the heart right out of the world’s economy.”

Surely bankers don't really think and behave like this....I mean, they are really nice guys at heart.

“The other day I actually overheard someone on the sidewalk utter the words ‘I’m saving up for retirement,’ and right away I thought to myself, ‘Well, time to get down to work,’” said Morgan Stanley chairman James P. Gorman, adding that the increasing number of individuals entertaining ideas of starting their own businesses or buying houses was the financial sector’s cue to set off another devastating global recession. “We’re definitely thinking on a huge scale again, because we all really enjoy toying with the livelihoods of millions of people overseas and forcing them to wonder why reckless, split-second decisions made thousands of miles away dictate their whole country’s socioeconomic future.”

“Plus, it’ll be nice to finally wipe out the Euro once and for all this time,” Gorman added.

http://www.theonion.com/articles/financial-sector-thinks-its-about-ready-to-ruin-wo,32865/ 

FTSE100, worst performers.

Fear appears to be back in the market whether it is QE tapering, China growth, China banking system, there's always something to give the markets the excuse to fall once sentiment has changed. It would seem sentiment has changed in the last month or two which is hardly a surprise given the bull run before. Whether this is just a correction that will see markets revert later in the year to their usual seasonal bullishness cycle remains to be seen.

For now, it is worth having a look at the FTSE100 worst performers because despite all the bullishness about some companies and sectors have seen crash level falls.

6 months

Fresnillo  -53%
Antofagasta  -39%
Randgold Resources  -33%
Anglo American  -31%
Rio Tinto  -26%

3 months

Fresnillo  -35%
Randgold Resources  -26%
Anglo American  -24%
Glencore  -24%
G4S  -20%

30 Days

Aberdeen Asset Management  -27%
Arm Holdings  -23%
Severn Trent  -21%
Old Mutual  -20%
Vedanta Resources  -20%

Bernanke speaks, market overreacts, what's new?

Fed Chairman Ben Bernanke just about said everything that he could say to sooth market fears yesterday, but as usual the market reacted in its knee-jerk way with a little sell off, the excuse being that he probably wasn't as certain with his response as they would like him to be and there is still this remarkable fear that tapering will come sooner than the market wants.

However, given the great unknown experiment that is going on with QE and the monthly bond buying, how could he be certain than to say that it is data dependent?

The Fed has said it would keep rates close to zero so long as the jobless rate, now at 7.6%, was above its 6.5% threshold.

And the Fed chairman stressed the bank won't start to hike rates even once its economic targets are met. He said the bank has to be convinced the economic recovery is on a solid upward path before it starts to pull back.

“Our policy is in no way predetermined,” Bernanke said. “Our policies are tied to what’s going on in the economy.”

Indeed, 14 of the 15 Fed members don’t expect the first rate hike until 2015, according to the bank statement.

“The Fed is in no hurry to remove monetary accommodation, but as the downside risk to the U.S. economy and labor market diminish, the rationale for maintaining emergency quantitative-easing measures becomes harder to justify,” said Scott Anderson, chief economist of Bank of the West.

http://www.marketwatch.com/story/fed-much-more-upbeat-about-outlook-2013-06-19

So, basically this gives the market what they wanted. If the economy does improve then QE cannot go on as the risks for real inflation become deeper. Surely the market wants an improved economy? Or does it just want an endless supply of newly printed money every month because that is easier? Fair enough the market had gone up in the 2 previous sessions, so the sell off was probably an excuse for quick profit taking. Sometimes any excuse will do, but sooner or later the market will have to learn to live without the Central Banks intervening in this way and if the economy is supposedly improving then what is the problem for the market?

In the meantime, with the markets going down it doesn't alter the fact that many companies are still producing good results.

FTSE100, oversold bounce due?

The big news this week will probably come when the Fed meets and concludes on Wednesday. Much of the current uncertainty came about when Ben Bernanke talked about the tapering of QE and that it could possibly end sooner as against later. The market seemed to take this as a signal that it would end quickly, all in one go and that it was as good an excuse as any to sell off. If anything the sell off in equities has been stronger outside the US, the UK getting to around 6900 before the latest fall to 6300. It's believed that Bernanke will basically say the same as before, but for the benefit of the trader panic types, it will be made a little clearer on what is likely to happen.

“We suspect that this week Bernanke will continue to say tapering will happen at some point, could happen this year but will be data-dependent, and that we are still a long way off from removing the very easy policy stance the Fed has in place,” said Jim Reid, strategist at Deutsche Bank.

“We still think that the Fed will struggle to taper very much and very early, but the debate is now going to be around for a while,” said Reid.

http://www.marketwatch.com/story/stock-futures-up-sharply-on-fed-clarity-hopes-2013-06-17?link=MW_popular

In other words, same as before, data dependent and nothing likely to happen until the "recovery" is fully in place. Even then it likely will be a slow winding down, gradual, over time. What they will not do is turn it off totally on a specific date.

Whether this relaxes the markets is anyone's guess, but the FTSE100 is showing that it is ready for a bounce after the recent fall. The Daily chart looks set to retrace some of the lost ground of the last month, but would probably need to go through 6600 and then use that as support if recent highs are to be challenged again. If it fails to get to 6600 and it becomes resistance then we could see a second wave down that confirms a downtrend.  The 20dma is just touching the 50dma to a potential downside crossover on daily chart. Weekly chart is also weaker, but the monthly still gives hope to the bull case.

Charts below;

June, the numbers suggest not a good month for equities

Looking at the falls so far in June, especially deep in emerging markets, Japan, Europe and the UK, you would be forgiven for thinking that "Sell in May" is in full swing, but as usual it might not be as simple as that (sell in May, stock market myth or reality). Sell off for June may be more appropriate.

In the last 22 years the FTSE100 has fallen in June 73% of the time, the average performance being -1.4%.

http://www.cityindex.co.uk/market-analysis/trade-statistics/11787652013/ftse-june-infographic/

But as can be seen by some of the "Sell in May" stats, a bad June doesn't always follow through.

June does have a habit of being a bad month for equities though and this year after such an unrelenting bullish start to the year, the pace of which couldn't be maintained, there had to be a sell off at some point. It's almost as if the market was gearing itself up for a correction and June seems to be a good time for it.

The interesting thing about this sell off is that from a news standpoint we have not been going through a particularly bad period of news. If anything the news is mixed, not overly good or bad, but the market sentiment has changed in the last month, so that any good story is now largely ignored, or it's not good enough. Of course, when the market's going up any bad news story gets the same treatment, ignored. However, the "fear" word does appear to be back, even if the fears seem to be more imaginary than having any basis in fact.

I've long taken the view that the stock market is no more than a sentiment market, which will often use fundamentals, or the lack of, news - good or bad, to justify whatever the prevailing sentiment majority opinion in the market happens to be at that moment in time. I've never seen stock markets as particularly efficient either, they always seem to be too bullish or bearish, rarely is a happy medium ever achieved.

It is almost pointless trying to apply logical or rational thinking to why the market behaves the way it does, yet this is what investors are essentially trying to do when picking companies to invest in. We try to come up with systems, analysis, a way of doing things that will pick us a winner, yet the market itself is largely about sentiment. How to balance these? No easy answer to that one.

Severn Trent, bid fails, so is it now cheap?

One of the interesting things about following a bid story is what happens in the immediate aftermath when the bid is turned down and the potential buyers withdraw their offer and walk away. 

The short back-and-forth battle between Severn Trent and LongRiver Partners has come to an abrupt end, with the consortium announcing the withdrawal of its bidding interest for the water group late on Tuesday night.

The result was a sharp drop in Severn Trent's share price on Wednesday morning, down as much as 8.0% early on.

The stock surged to multi-year highs last month after the consortium - comprising Canadian investment group Borealis, the Kuwait Investment Office and Universities Superannuation Scheme Limited - first announced its intention to take over the company, the latest UK utility group to attract the attention of foreign investors.

http://www.digitallook.com/cgi-bin/dlmedia/security.cgi?csi=10090&action=news&story_id=20958376

The bid had been increased to 2200p a share which at the current price of around 1760p means that it is now some way off what the bidders were prepared to pay, and even further away from what Severn Trent themselves seemed to think was fair value. Difficult to say what that figure is, but it looks like it must have been a number that was high enough to make the bidders walk.

However, is the company now worth around 450p less than that bid price? Leaving aside looking at the fundamentals, it is always interesting to see how the market gets hyped when there is a chance of a bid, price gets pushed up to what is thought to be as close to a sale value as possible, often higher, which makes you wonder why it was priced lower in the first place. Euphoria of the bid plays its part, bandwagon jumpers get in hoping for a quick profit, but if someone was prepared to pay 2200p now for Severn Trent does that mean it is a bargain at around 1750?

Things aren't as simple as that as quite often the bidding company over values and pays too much. A few years back, a private bidder was prepared to offer over 200p a share for HMV, a company that in stock market terms went bust and is now privately held, the recent buyer getting it and all its potential future problems on the cheap. Severn Trent isn't HMV. As a utility stock it clearly has a premium value to longer term investors.

Next week the company goes ex-dividend, so anyone buying before the ex-div date will pick up 45.5p a share. By then, given the failed bid and the current state of the markets in general, the share could fall even further. Therein lies the problem, at least in the short term Severn Trent is in a down trend and anyone buying in for the dividend may well see further falls until the dust settles and market sentiment decides it's looking cheap again and their must be other potential bidders out there. One might assume that at some stage in the future, further bids, not necessarily from the same consortium, are likely to be made in what is an attractive sector for takeovers and you have to wonder if 2200p is now the minimum benchmark for anyone interested in Severn Trent.

FTSE shuffle time, Russian miners out, builders to get promoted?

It is perhaps a sign of the times that the quarterly FTSE100 reshuffle due to be announced this week could see a couple of under performing miners drop out, replaced by companies from the bullish construction sector.

Both Evraz, the steelmaker and iron ore producer in which Chelsea FC-owner Roman Abramovich has a major stake, and precious metals miner Polymetal International are expected to be relegated from the main board at this week's FTSE Group quarterly index review.

Buoyed by signs of a recovery in the housing market, which has stoked demand for their shares, analysts say Travis and Persimmon are in line to take their places.

http://www.telegraph.co.uk/finance/markets/10108670/Persimmon-and-Travis-Perkins-head-for-the-FTSE-100.html

Travis shares are up 40%, Persimmon 50% this year, in part driven by the Help to Buy intervention of the UK Government, widely seen as a potentially dangerous prop to the housing market, but the type of policy typically undertaken by the politicians when house prices stop going up.

"The wider construction market obviously remains under pressure but housebuilding is an important component of what Travis does," said Andrew Nussey, an analyst at Peel Hunt. He said the Government's Help to Buy scheme had aided homebuilders, Travis' "principal customer base". and "more activity from the housebuilders translates into more business for Travis".

http://www.telegraph.co.uk/finance/markets/10108670/Persimmon-and-Travis-Perkins-head-for-the-FTSE-100.html

Persimmon currently trades on a P/E of over 20, Travis 16.1, so both have generous valuations, but are clearly in a sector that should benefit for the next 2 to 3 years from Government intervention.

Meanwhile, despite the bullish stock market move since the new year, Evraz is down almost 50% in that time, Polymetal around 35%.

Video market round up for the week ending 7th June 2013 (up to 6th June)

A week ending round up of the markets from Steve Briggs YouTube channel.

Included in this video is a look at several FTSE100 and 250 stocks, potential trading tips, support and resistance points, etc. Stocks covered include Fresnillo, RPS Group, Royal Dutch Shell, Salamander Energy and Weir Group.

Links:

Steve's YouTube site http://www.youtube.com/user/sjb5555.

Useful charts and analysis can also be found at http://www.flickr.com/photos/stevebriggspics/

BATM profit warning - the dangers of swimming with the smaller company tiddlers

A while back I had a small position on tech company BATM Advanced Communications. It was a blue sky option, quite risky, but the news flow had been good and the trend was up, good things were expected. I actually closed that trade, in part out of the boredom of waiting, for a small profit.

Today, BATM reported to the market a profit warning and like all bad news, perhaps even more so when it comes from a smaller company, you can expect fireworks on the share price.

Networked telecoms group BATM Advanced Communications warned it expects first half revenue and profit to be materially below management expectations.

The group, which provides technologies for the networked telecoms and medical laboratory equipment markets, said components supplied by third parties failed to arrive during May as scheduled, and consequently it was unable to fulfil orders and was forced to postpone deliveries.

"However, the backlog remains substantial and, with certain components required to complete some orders having been received, the group is working towards clearing this in the second half of 2013," it explained.

http://www.digitallook.com/cgi-bin/dlmedia/security.cgi?csi=11175&action=news&story_id=20945622

Another smaller company that had been going well until recently was IDOX. It's recent report also disappointed and fell below expectations.

The Company is encouraged by the underlying progress made in all of its businesses during the first half and continues to be excited by the multiple growth opportunities available to it. However, in light of a slower than expected first half of the year, the Board now thinks it is prudent to anticipate full year EBITDA is likely to be no less than £18 million, which reflects uncertainty of timing as to when those opportunities will crystallise.

http://www.digitallook.com/news/rns/20926283-30992/IDOX-Trading_Statement_html

Both companies seem to be suggesting positive times ahead, that these failures may simply be a blip, but the lesson to investors is clear, the unexpected announcement will hit your shares hard and fast. So fast that if you are in and without a stop loss there is almost no chance of getting out quickly when the bad stuff hits the fan. Even if you have a stop loss, it would need to be guaranteed, otherwise the fall would go straight through it. The same can be true of the bigger companies of course, but smaller companies, especially those with stretched valuations on the back of momentum, can dive a lot quicker when things go wrong, or don't work out  as the market expects.

Charts below;

The QE conundrum, when will it end? Not anytime soon.

Current market sentiment has in part turned negative because of an interpretation of the last US Fed statement that seemed to suggest that QE would be tapered down at some stage in the months to come. Bernanke's statement was actually somewhat vague and didn't really say anything that should come as a surprise to the market.

From May 22;

...markets have focused on one thing he said in the Q&A session where he was asked directly whether the Fed could make a decision to wind down its bond-buying program before Labor Day. Bernanke’s response that the Fed could change course “in the next few [FOMC] meetings” depending on prevailing economic data caught markets a bit off-guard, and seemingly leaves a door open for some Fed tapering sooner than Bernanke’s prepared testimony would have indicated.

http://blogs.barrons.com/incomeinvesting/2013/05/22/bernanke-doesnt-rule-out-fed-taper-in-the-next-few-months/

Since then the markets have been falling fairly steadily, even on a Tuesday where after 20 consecutive up days, yesterday was negative in the US. So far there hasn't been that much damage to US markets by Bernanke's comments and in one sense, why would there be? The key words from the Fed are likely to be "depending on prevailing economic data", which is basically saying the same thing as before.

At some stage markets are going to have to find a way of doing business without QE, but until that happens, sell offs like the one in the last week or so are arguably not happening because of the fear of QE ending, that is merely the excuse. Surely those in the market know better than that?

If and when QE does end the most likely option taken by the Fed and other Central Banks will be a gradual winding down if and when economic recovery is supposedly under way and not until then. It is this balancing act that will probably be difficult to time because who really knows when that will be. Chances are the Central Banks don't know, but having started the game of QE they are the ones that have to live with it.

Interesting that markets are down a little today in part because US job numbers came in lower than expected.

U.S. stocks declined on Wednesday, extending losses into a second day, as data found U.S. private-sector job growth and productivity below expectations. 

“More attention is being brought to the economic data, so everyone can play Nostradamus and guess what the Fed’s next move will be,” Mark Luschini, chief investment strategist at Janney Montgomery Scott, said of ongoing guessing as to when the Federal Reserve would begin tapering its $85 billion in monthly bond purchases.

http://www.marketwatch.com/story/us-stocks-extend-drop-into-second-day-2013-06-05

But hold on, surely the next move by the Fed after relatively weak numbers like this is fairly predictable? Chances are there will be no tapering and no change while the data is as up and down, some good, some bad, as it seems to be and you don't need to be Nostradamus to see that.

Tesco, up today, ready to disappoint tomorrow?

It was a surprise today to see Tesco on the rise.  Fair enough the market was up as often seems to be the case on Tuesday at the moment. A rise of 6p, 1.7% in the share price to a little over 364p might not seem much, but it comes on the eve of an IMS that is expected to disappoint. In fact, judging by what some are saying, Tesco could deliver a terrible set of figures tomorrow, a reminder of its UK profit warning back in January 2012.

Tesco’s first quarter results out Wednesday are likely to disappoint, according to Investec. 

The broker expects like-for-like sales to fall as much as 1.0% in the UK, 2.5% in Asia and 5.0% in Europe. It downgraded the stocks to a ‘sell’ rating and issued a target price of 295p. 

"The UK still lacks momentum and international is going from bad to worse," Investec analyst Dave McCarthy said. 

He said the international side of the business is a growing problem and after 15 years there is no sign of acceptable returns. 

The company’s latest results will come after the retailer last month reported its first annual profit decline in two decades. 

http://www.digitallook.com/news/20941271/Wednesday_preview_Tesco_to_report_first_quarter_results.html?username=&ac=

This analysis, especially on Tesco's international performance is a little unfair. 15 years of no sign of acceptable returns? That's pushing it considering they have been growing fairly strongly in most of their overseas markets for some time. You do wonder if Investec have a short on at the moment when they make silly statements like that.

But why the enthusiasm of the price rise today? Why would anyone be buying today if tomorrow is going to produce a bad result? Could it be that some in the know were selling today, the price being ramped up slightly to draw in as many eve of bad IMS statement mug punters as possible? In other words, the long term buy and hold retail buyers? Perhaps that is being too conspiratorial, but given the expectation of further bad news, the best Tesco shareholders can hope for in the morning is that things aren't as bad as predicted and the market reacts kindly. Chances are if the IMS is bad, Tesco could fall a lot more than the 6p it gained today. Let's see what happens in the morning.

FTSE100, bull run over or just pausing for breath?

So, we ended the week with it feeling a little like the old volatile times of not so long ago, a little complaceny being shaken off. The market seems to have turned its attention back to worry about macro issues and some old fears seemed to resurface. Does this mean the current bull run is over? A look at the charts would suggest no, at least not until some serious damage is done to the longer term weekly and monthly charts.

Below are the FTSE100 daily, weekly and monthly charts. The daily is bearish, the latest move down putting a dent in the previous bullish mood. However, one look at the weekly chart shows it still has a little way to go before the bullish trend can be said to be over. MACD is just turning negative, but is some way off the zero line, it could easily turn back up again. The Monthly chart is still positively bullish, MACD still looks quite strong. The monthly chart does give some hope to bears in that the latest candle with a long upper shadow is negative and bearish.

A long upper shadow indicates that the Bulls controlled the ball for part of the game, but lost control by the end and the Bears made an impressive comeback.

http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:introduction_to_candlesticks

Worth noting however, that price had been outside the rising Bollinger Band on the Monthly chart and has now fallen back within it. Price had effectively got ahead of itself and once this happens it is not unusual to see it fall back inside the band. The Bollinger Band is still positive.

All to play for next week, the FTSE currently called to be down around 50 when the markets open on Monday.

Daily, weekly and monthly charts below.