Market View - What's happening to the economy in 2009?


As we start the new year the only NEWS that is broadcast seems to be either confirmation of the global economic crisis and the continuing trouble in the middle east. Unfortunately the same NEWS is reported many times and this can cause severe pessimism within the country as a whole. You can either start looking at the glass half full or half empty. I for one always look at things half full but am prepared for the worst.

As somebody ones said that "you make your money when you buy and not when you sell"

This is probably one of the best times for the private investors to start taking advantage of the markets in the UK & abroad.


Stocks are priced very competitively and the dividends paid can equate to a lot more than any interest paid by the cash strapped banks. Additionally there are three and five year bonds that are considered safer investment vehicle for the private investor.



Interest Rates Lowered to 1.5%


Last week Bank of England lowered interest rates to 1.5%, the lowest level in the banks history.


The purpose is to encourage the banks to lend money to business and consumers. As written previously this will have little or no affect. The dangerous reality is that banks do not have the money to lend through way of deposits.


When the government bailed out the banks they simply helped to clear the banks debts, and the banks have had not time to gain sufficient cash reserves to create the liquidity that the country needs.


The simplest way to improve the money flow is for the tax payers money to be loaned through banks or directly by government to businesses and consumers. Unfortunately the government may have to go further into debt in order to kick start the economy.


Gordon Brown has announced that there will be increased funds made available for businesses to start employing people. During a minor correction or slowdown this would be an effective strategy. The current economic climate requires liquidity so business can buy & sell there services to customers and this measure is not addressing this.



UK Recession


At the end of January, the GDP figure will be announced for the last quarter and is likely to confirm that the UK is in Recession.


Government expects the UK economy to contract to -2.6% (http://www.hm-treasury.gov.uk/d/200812forcomp.pdf). This figure is worse than the recession of 1980/1981.


In 1980/1981 the banks were able to function, they had deposits and the money markets were not leveraged as they are now. A figure of -2.6 can seem optimistic and it is an unfortunate reality that a negative GDP of -4.0% may be reached.



FOREX


Forex is the largest instrument ($2.5-$3.0 trillion) that is traded and without doubt the most liquid. In this weeks posting we will look at the GBP/USD and USD/JPY. The USD has performed strongly against the GBP from middle of 2008 and well against the JPY from August.


GBP/USD


The GBP is heading further down against the USD. 1st Target will be the lows of December 2008, at 1.4371. The second target will be 1.3250 area. If the market were to turnaround and then the target for the bulls will be 1.6673 and 1.8640+.


I will be looking to short the GBP against the USD.





USD/JPY


The USD is very strong against the JPY. The targets are the lows of December 2008, 87.06 followed by a longer term target of 72.55 and an intermediate target of 80.60.


I will be looking to short the JPY against the USD.




Indexes


FTSE100
No change from last posting.



DJ30 & SP500
No change from last posting.

Market View - What can an investor do?

Economic Outlook

In December a number of well known businesses, i.e. Woolworths, MFI and Zavvi, have called in the administrators, this is a direct result of consumers beginning to tighten there spending. This is possibly the start of the economic contraction cycle. 2009 and possibly up to the end of 2010 we are likely to see increased unemployment, more businesses folding and further reduction of house prices.

House sales have dropped by 14% in November 2008, that’s a staggering 60% reduction from the same period in 2007. Unfortunately other economic indicators have also confirmed that by January 2009 UK Economy will officially be in recession. The cut in Interest Rates to stimulate the UK economy and encourage more house buying has not worked in the short term. It normally takes approximately 6 months before any interest rate cuts filters through to the consumers, sp realistically we may need to wait until April/May 2009 before we start seeing slightly increased lending to business and then to the consumer. The fundamental problem of trust between banks have to be addressed as this is having a far reaching impact on the economy and is significantly contributing to the economic slowdown. The recession of 1981 will seem be more like a party compared to what we will experience in 2009 to 2011.

Sir John Gieve, deputy governor of Bank of England highlighted that they were unable to set policies or legislate banks and a catastrophe that we are experiencing now could potentially happen again. It amazes me that the government are uninterested in this matter and are more concerned about speaking up the economy. During the monthly press conference, Gordon Brown pointed out the Monetary Committee, Bank of England and FSA are working effectively and there is no need for intervention, with such blinkered vision it is no wonder we are experiencing this unprecedented financial crisis.

What can an investor do?

The current climate means that savings are unlikely to yield good returns, especially with further cuts in interest rates. It is not all doom and gloom for the private investor as they are well placed to take advantage of the markets.

In this climate the risks have to be spread over long term (Bonds, Large Blue Chip Stocks, Fixed Instruments) and some value stocks that have potential for growth once the economy starts to change.


UK Market Outlook

FTSE 100

The FTSE100 is in a downtrend however since 24th November the market has moved from 3742 to 4430 (Santa Claus rally).

Due to the ever increasing uncertainty in the UK and global economy there has been increased volatility and reduced liquidity leading to very fast price movement of stocks and FTSE 100.

The FTSE is currently on a retracement and needs to break the 4894 (reached in November) and 5649 level to indicate a reversal of trend. This is very unlikely and the FTSE is more likely to make lower lows.

The downtrend is likely to continue and the FTSE is likely to hit first target at 3145 and if the recession continues it is likely to reach 2460.

Sectors/Industry

Sectors that are performing better than other sectors in the UK are:

• Electricity (Sub Index symbol NMX7530)
• Electronic & Electronic Equipment (Sub Index symbol NMX2730)
• Food & Drug Retailers (Sub Index symbol NMX5330)
• Gas Water & Utilities (Sub Index symbol NMX7570)
• Nonlife Insurance (Sub Index symbol NMX8530)
• Pharmaceuticals & Biotech (Sub Index symbol NMX4570)

Remember these sectors are constructed from leading shares to form the index value and enables you to analyse a sector very quickly. This s covered in Trading Made Simple course available from www.trademastery.co.uk


Stock Picks

Under the current economic climate focusing on stocks with strong fundamentals and are fairly priced is the best way to build the value of a portfolio.

The stocks are unlikely to make large moves however the dividends and potential growth are worth investigating.

Company Name	ISIN	Sub-Sector	Price (£)
Renishaw PLC	GB0007323586	Electronic Equipment	4.88
Petrofac Ltd	GB00B0H2K534	Oil Equipment & Services	3.44
London Capital Group Holdings PLC	GB00B0RHGY93	Specialty Finance	2.54
Xchanging PLC	GB00B1VK7X76	Business Support Services	2.41
Hamworthy PLC	GB00B01VFV79	Industrial Machinery	2.3
SDL PLC	GB0009376368	Software	2.29
New Britain Palm Oil Ltd	PG0009239032	Oil Equipment & Services	1.6
Eros International PLC	GB00B13JS954	Broadcasting & Entertainment	1.17
Bioquell PLC	GB0004992003	Medical Equipment	1.07
Kentz Corporation Ltd	JE00B28ZGP75	Heavy Construction	1
PV Crystalox Solar PLC	GB00B1WSL509	Electrical Components & Equipment	0.99
FDM Group PLC	GB00B06HK710	Computer Services	0.62
Advanced Medical Solutions Group PLC	GB0004536594	Medical Supplies	0.33
BATM Advanced Communications Ltd	IL0010849045	Telecommunications Equipment	0.3

US Market Outlook

Dow Jones Industrial Average (DJ30)

The DJIA is in a downtrend and the bears have control. If the bears continue to have control the 1st Target is 7450 (November Low) followed by 6995 and then 5850. The long term target can be as low as 4600 if there is a prolonged recession.

The key levels the bulls are after is 9000 followed by 9735 and to confirm a full reversal 10500 has to be reached, before this can happen the market needs to hold/trade above 7882.

Standard & Poors (S&P 500)

The S&P500 is in clear downtrend and the bears are in control. The target the bears are after is 672 and 587. The long term target can be as low as 463.

If the bulls are to take control then the targets the must overcome are 992, 1043 and 1313.

Sectors & Industries

There are several sectors/industries that seem to be showing small signs of recovery when using technical analysis.

• US Water & Utilities (Sub Index symbol DJUSWU)
• Gold/Precious Metals (Sub Index symbol GOX)
• Insurance (Sub Index symbol INSR)

Other sectors that have performed better than others are:

• Electricity Index (DJUSEU)
• Aerospace & Defence (DJUSAE)
• Biotechnology (DJUSBT)

The components for the above mentioned sectors can be found by visiting Yahoo Finance (http://finance.yahoo.com/)

Stock Picks

Using the Trading Made Simple fundamental formula the following stocks have been short listed.

Technical Analysis has also indicated a bullish trend. CIA, DV, HMSY, HRB & MYGN have high P/E ratio however this is only one of the criteria that is used for short listing the stocks below.

I recommend that further analysis is undertaken by the reader before investing.

Symbol	Company Name	Last ($)
AFAM	Almost Family Inc	44
BMY	Bristol-Myers Squibb Company	23
CBST	Cubist Pharmaceuticals	26
CIA	Citizens, Inc	9
DV	DeVry Inc	56
EBS	Emergent Biosolutions Inc	25
FDO	Family Dollar Stores, Inc	25
GTIV	Gentiva Health Services Inc	27
HMSY	Hms Hldgs Corp	29
HRB	H&R Block, Inc	22
MYGN	Myriad Genetics Inc	66
SF	Stifel Financial Corp	43
VRX	Valeant Pharmaceuticals Intl	22

Traders Tip

Investors make money when they buy not when they sell.

Focus on finding strong companies with low debt and good cash flow that will be resilient under current market conditions.

Market View

Economy

Interest Rates Down to 2%

Bank of England cutting interest rates to 2% inorder to stimulate the economy is a positive move however the underlying problems of lending is unlikely to be passed onto the borrower or SME's in the immdiate future mainly due to fallout from the irresponsible borrowing that the banks themselves approved.

Even though the banks are part nationalised there main objective will be to become profitable at the expense of the consumer and SME's and sadly the most effective way is to keep the difference between what the BoE have set and what they are willing to pass on.

What's next?

As Mervin King has already hinted, there needs to be legilation and policies that needs to be broght in by the goverment to forse banks to lend or the goverment in the short term have to act as the bank to small businesses and borrowers.

Unfortunately I dont have the answers but the only way for the lending to become more fluid is to let the banks allow the interest rates differential but forse the banks to lend and accept that the true victim as always will be joe public.

UK Stocks

Using the Fundamental Formula from the Trading Made Simple course the following stocks have been shortlisted. The stocks have strong fundamentals however the technicals are still weak due to the weakness and lack of liquidity of the markets.

UKStocks%205th%20Dec%2008.html


Other stocks that have a potential for growth and are good value are:


UKStocks%20Showing%20Potential%205th%20Dec%2008.html


As a Private Investor its always reccommened that you research the stock picks that we post and you make the investment decision.

To perform technical analysis without doubt the best free charting software is ProRealTime (www.prorealtime.com)



Next Posting 22nd December 2008