ZAK WAS THE WEEK THAT WAS: ENDING AUGUST 2nd 2013: A Straightforward Banker

It is probably just as well that I remain gripped by the UK banking sector, a state of affair which has existed ever since the fall of Northern Rock and which continued with the appointment of a new CEO of part nationalised ‘zombie’ institution RBS – the bank that “can’t find my credit card payment.” In fact, what with the Anti-Christ characteristics of the former big 5 bank’s CEO’s, we appear now to be looking at a complete sea change in the type of personality with the new kid on the block.

Indeed, it seems Ross McEwan he is so lacking in personality that he makes former PM John Major appear like Russell Brand in comparison! Even after hearing his name at least 100 times I had to look him up on Google and for which the most interesting thing I could unearth is that he is a man who, like most of us, will have to make do with no bonus this year and next. In fact, it would appear that as no one of sane mind would have wanted the poison chalice of this job, RBS chose someone from a retail background in order to be a safe pair of hands. Well, good luck with that..!

The “poisoned chalice” moniker is certainly appropriate given the £121bn banking sector black hole that the UK’s top 25 banks now find themselves in as a consequence of the new “Prudential” Regulation Authority rules. They are continually being kneecapped by regulators over capital adequacy and I doubt that this will change in the near term given our friends at the PRA clear statement that “well capitalised and resilient firms are crucial for ensuring financial stability and supporting UK growth.” In plain English, the consequence of this is the PRA will squeeze the banks until the pips of the shareholders and retail customers come out in order that it is not made a monkey of, as its predecessor the FSA was  years ago. But that’s another story…

It is not too surprising that Barclays (BARC) unveiled a £5.8bn share issue now that it has to live without the fat chequebooks of Abu Dhabi. Interestingly enough, just under 10% of this figure is the £511m due to be paid out in bonuses, executive salaries etc. On this basis, one could ask why the bank was not forced to ask just for £5.3bn – for instance by its regulator?  

Of course, the past week was not all about rights issues and faceless CEO’s. There was the usual excitement over the latest Non Farm Payrolls from the U.S. which came in at a lower than expected 162,000 (183,000 was forecast), and with the jobless rate for July at 7.4%. This week I saw a chart of the NFP data over the past three years and it consists of a random squiggle between 100,000 and 200,000. The sooner the markets stop looking at this indicator as the most important one on the calendar the better.

Finally, I would like to thank Nikki at Presschoice.com who has, at my asking, brought forward the publication of “Next Week’s News Today” so I do not have to visit a dozen different websites in order to find out what is going on over the next few days!

KEY MARKET DRIVING NEWS:

U.S. July Non Farm Payrolls came in less than the forecast 183,000 expected by the market, and weak enough to allay fears of QE having to be tapered any time soon. That said, the unemployment rate slipped to 7.4%  versus the 7.5% expectation – leaving an overall effect that was no worse than neutral on sentiment and going some way to explaining the U.S. stocks recovery after the news.

Nationwide reported that UK house prices are rising at their fastest rate in 3 years, with a 3.9% rise for the year to July. Initiatives such as Help To Buy were said to have been a positive factor as prices pick up to remain around 12% above the worst levels seen at the time of the financial crisis 5 years ago

July’s U.S. ISM Manufacturing Index was reported as having hit a two year high – the best since June 2011. The reading of 55.4 was well above the 50.9 reading for June and attributed to a spike in new orders. The data was in sharp contrast to the bearish picture and a sub 50 reading as recently as May.

In contrast, it could very well be that even though QE and low interest rates are supposed to remain around indefinitely, rising money market rates could make this pledge somewhat irrelevant. This point was underlined by the 0.4% decline in Pending Home Sales, although the figure was not as bad as the -1.1% fall analysts had been looking for.

German Retail Sales took a sharp dive both on the monthly and yearly timeframes, with a 1.5% fall over the month versus expectations of a flat reading and a 2.8% decline versus a 0.4% rise that had been forecast. Ironically, this comes at a time when data has been showing the first signs of meaningful recovery in PIIGS nations.

MAJOR MARKETS ACTION:

The S&P 500 closed above 1,700 for the first time ahead of the July Non Farm Payrolls report on Friday, and pressed home its advantage to close the week at 1,709 despite the lower than expected Payrolls number of 162,000.

Gold subjected traders to a gyration either side of the key $1,300 level, with the low point just before the worse than expected U.S. jobs data, falling to around $1284/oz. Earlier in the week, the metal had been helped by the FOMC promise that the end of QE is contingent on a recovery in the jobs market.

Sterling / Dollar had its week split in half by the approach of the Bank of England Interest Rate announcement, initially enduring losses towards the key $1.50 level. However, no change here and the approach of next week’s Inflation Report and Carney speech caused some short covering to end the week back towards the $1.53 handle – helped by the weak U.S. jobs report.

The Japanese Yen spiked modestly following last week’s bull call, but bumper Q2 results and a profits guidance hike from Toyota seemed to convince the market that this kind of corporate improvement which the new administration was hoping to deliver by QE, will lead to even more Yen weakening.

Crude Oil backed off the 16 month resistance zone in the wake of the worse than expected July jobs data, as well news that June U.S. factory orders were up 1.5% – less than the consensus 2.3% rise call. At this stage, it could be said that the zone towards $110 factors in not only the latest economic data, but also the present level of turmoil in the Middle East – unless the latest U.S. terror alert proves to be correct.

MAIN STOCKS ACTION:

Shares of Barclays (BARC) fell back below 300p after the group confirmed a £5.8bn share issue, rather more than the £4bn the market was expecting. The bank blamed the need for the cash call on a lack of stability or consistency over capital requirements by the regulators.

Lloyds Banking (LLOY) shares soared above 70p – more than 10p above the Government’s 61.2p breakeven level as speculation grew of an imminent re-privatisation of the HBOS blighted lender after a spike in profits to over £2bn.

It would appear that engineering / technology firm Smiths Group (SMIN) is really determined to tread its own path – despite the approaches made periodically for its businesses. The latest example of this comes from an end of week rebuff of an approach for the Group’s Medical Division, with the sharp share price drop indicating that many in the market had been counting on a deal going ahead.

Former RBS (RBS) unit Direct Line Insurance (DLG) could point to the heavens as part of the explanation as far as its H1 profits surge to nearly £210m  is concerned, and compared to £106.5m last time. Apart from better weather reducing claims, there was also the positive effects of cost cutting. Given that RBS still owns nearly half the group one could regard this as one of the banks few strategic move that has so far paid off handsomely.

A £100m share buyback was perhaps the logical consequence of record results from car dealer Inchcape (INCH).  Growth in the Far East to which the UK group is now heavily weighted has underpinned results here. But even so, domestic sales did rise by more than 5% in H1.

Given the challenges faced by the main airline flag carriers in the battle with the no frills competition, one could say that the marriage between British Airways and Iberia to create International Consolidated Airlines (IAG) was one made in hell. But it would appear that with the latest swing to profitability and ongoing share price recovery, that copying the discount group’s business model may turn out to be the best way forward. As they say, if you can’t beat ‘em, join em!

KEY POINTERS FOR NEXT WEEK:

The UK macroeconomic scene is well represented as far as next week’s calendar is concerned, with NIESR’s call on the monthly GDP, as well as the Bank of England’s Inflation report of which some may be hoping there will be a little more light shed on what the new BoE regime may do, if anything, as far as stimulating economic growth is concerned. There will also be the latest from the British Retail Consortium – an area which is currently of interest given the unusually warm summer weather and which may have been a positive factor for the High St and so boost Q2 GDP growth to 0.6%.

However, it may be that the big number to watch is actually from abroad this week, emanating from China whose data splurge includes Producer Price Index for July – called to fall 2.2% versus a 2.7% fall last time. Wednesday witnesses a Monetary Policy Statement from the Bank Of Japan.

As far as UK companies reporting are concerned, we are, if anything, heavy on the insurers front, with Aviva (AV.), Legal & General (LGEN) and Standard Life (SL.) leading the way. If the lead provided by Direct Line (DLG) last week is to be followed we could be set for a decent set of reports from this sector.

Away from the insurers and a recent M&A speculation stock in which no doubt quite a few of the hot money brigade got burned on comes in the form of Eurasian Natural Resources (ENRC). At the very least, one would expect more on the troubled miner’s delisting plan. Fellow miner Rio Tinto (RIO) is to reveal its half year results, with the last we heard at the end of last month being that it had disposed of its controlling stake in the Northparkes copper-gold mine in New South Wales in an effort to preserve its single-A credit rating.

Gaming group Ladbrokes (LAD) could also be worth following in the aftermath of rival William Hill’s (WMH)  bumper results offering last week.

STANDOUT  SITUATION:  SELL WILLIAM HILL DOWN TO 385p STOP LOSS 500p

RECOMMENDATION  SUMMARY 

At the start of the last decade when the great hope for the stock market was the internet and the revolution it seemed set to bring (which it did, eventually), there were many guesses as to which sectors and companies would benefit most. In fact, as things have turned out, the online revolution has probably been a more broad based one that might have been expected, a point underlined by the way that gaming group William Hill seems to be at the cutting edge of the digital revolution not only in the form of its online and mobile channels, but also in the way that sporting events are now broadcast from around the world 24 hours a day.

This means that one can fully understand the zeal with which the group is expanding and how it is correct that this process should continue. Nevertheless, one would be looking for a period of share price consolidation now after the strong outperformance – hence the near term sell recommendation.

The charting position for this gaming group is no less than spectacular in the medium term, with the share price having more than doubled from below 200p at the end of 2011. While of course there is nothing to prevent an ongoing positive re-rating over many years, in the near term, it does appear that a retracement is due. This may in fact be something which fans of the stock will appreciate as a chance to go long at less rich levels.

Indeed, last week’s 494p intraday peak was the top of a rising trend channel from November last year from which the stock has now tumbled 7% to end last week. This is hardly surprising given the negative divergence in the RSI window which has been in place since the May intraday peak of 455p. The expectation now is that at least while there is no end of day close back above 500p that we risk a near term test for support over August / September towards the present level of the 200 day moving average at 381p – hence the 385p technical target.

SIGNIFICANT NEWS

August 2^nd FTSE 100 gaming group William Hill reported a sharp rise in revenues to £751.6m for H1 2013.That said, pre-tax profits held steady at £143.6m due to the impact of acquisition costs. On a like for like basis, excluding positive contributions from acquisitions and gaming duty, revenues were up 8% while group operating profit was up 6%.

August 2^nd Even Canaccord Genuity, which labelled the figures as “strong”, kept its ‘hold’ recommendation and 438p target price for the shares, highlighting headwinds for the company in 2015. Growth is set to remain strong this year and 2014 will be helped by the World Cup, but 2015 “represents a bigger challenge in the form of UK point of consumption tax, which we forecast will result in FY15 earnings being in line with FY13.”

April 19^th William Hill saw growth rates moderate in the first quarter, although the Grand National after the quarter-end was a ‘major success’. Group net revenue grew by 15% in the three months to April 2nd, a slowdown from the 20% growth seen in the first seven weeks of the financial year .  William Hill completed two significant transactions during the period: the company spent a combined £900m on Sportingbet’s Australian operations and buying the 29% minority interest in William Hill Online (WHO).

FUNDAMENTALS   

As if to prove that when the going gets tough for the consumer, as it has done since the onset of the financial crisis, the consumer likes nothing better than a punt; we have seen the share price of gaming group William Hill more than double over the past couple of years, and be transformed first by the online gaming revolution of recent years and more recently the arrive of mobile gaming. This, along with the company’s aggressive expansion / acquisition strategy of the past, perhaps on a longer term basis makes to stock one to get on the long side of but in the short term, we think the stock is at best a hold and technically a sell. 

However, it could very well be the case that even for the group’s fans – both brokers and investors, the aftermath of Friday’s update is a reminder that at least for the near term, the stock market valuation of this new FTSE 100  entrant would appear to be a little on the overcooked side. Indeed, at this stage, one would probably like to see the acquisition program run its course and a period of consolidation take place before the buy button is pressed again.