“Total outstanding government debt in the UK has risen to a record £799bn, or 56.6% of UK GDP – the highest since records began in 1974.”

“Britain’s economy contracted in the second quarter, marking a full year of decline sharper than any since the 1930s barring that of second world war and its aftermath.”

“Sales on the UK High Street fell faster than expected in the year to July, a survey has shown, but at a slower pace than in the year to June. The CBI survey said 47% of retailers reported lower sales in the year to July. 32% said sales were up. The resulting balance of -15% was up from June’s -17%. However analysts had predicted a balance of -12%. “

“The Office for National Statistics said this month that UK unemployment rose by a record 281,000 to 2.38 million in the three months to May. The jobless rate now stands at 7.6 percent and the number of people claiming unemployment benefit increased by 23,800 in June to 1.56 million.”

“LONDON — U.K. industrial production and manufacturing output shrank in May, taking both indexes to their lowest level since 1992 and highlighting the challenges still facing the U.K. economy.”

“US: Consumer confidence worsens further in July  – Conference Board’s consumer confidence dropped sharper than expected in July. The headline index fell from 49.3 to 46.6, while a figure of 49.0 was expected. Both the present situation (23.4 from 25.0) and expectations (62.0 from 65.5) deterio-rated and also labour market conditions worsened (-44.5 from -40.3) in July. The re-cent decline in consumer sentiment is primarily caused by the worsening labour mar-ket conditions and pessimistic income expectations.”

I could go on but you get the idea. It seems leading and trailing indicators around the world are still  showing the same thing. There is little to no recovery yet, all we’ve really seen is a slowing in the decline. There are a few pockets of hope but who who wants to buy hope? Bear markets tend to end in exhaustion once all fear has been spent, with very low valuations and also tend to overshoot on the downside. None of these criteria has been satisfied yet (see charts below) -

Still want to buy stocks for the long term?

 Sources -

http://www.marketwatch.com/story/boe-uk-consumer-lending-slowed-further-in-june-2009-07-29
http://news.bbc.co.uk/1/hi/business/8160614.stm
http://www.ft.com/cms/s/0/bb6b9d4e-77b8-11de-9713-00144feabdc0.html
http://news.bbc.co.uk/1/hi/business/8172676.stm
http://axisoflogic.com/artman/publish/Article_56423.shtml
http://online.wsj.com/article/SB124695663445404881.html
http://www.fxstreet.com/fundamental/analysis-reports/kbc-news-picks/2009-07-29.html
http://dshort.com/

Shorting the dow with £2pp at 8460.

As far as British Airways is concerned, a more serious crisis could obviously decimate the company’s business globally, but i’m not going to sell into what seems like an overreaction currently, so will keep my long trade for now and monitor events.

As a response to this post  by nattsang and the increased chatter about protectionism in the world media due to the America first clause in the recent stimulus package, I thought I’d try and add a few thoughts by rebutting the idea that protectionism can ever be a good idea.

To briefly summarise, hopefully correctly, Nats post argues that buying local goods is indeed protectionist but that in this instance it is in fact the right thing to do, as so many costs are hidden from prices that we pay on overseas goods no one can make an informed decision on what they currently buy.

To make this point, she asks us to “Consider this: can a packet of green beans grown and picked in Kenya, flown under refrigeration to China to be washed and trimmed, then flown under refrigeration to the UK to be packaged and distributed to supermarkets really be cheaper than a packet grown, washed, trimmed and packed in the UK, when you factor in the costs of the flights, the air fuel and petrol and the carbon emissions from all that travel? Of course it cannot..”

Although on the face of it this might seem to be obviously the case, it may not actually be quite so clear cut. Assuming that the hidden costs mentioned refer to environmental, social and capital outlays over the longer term caused by the damage of buying global, is it really the case that any of these costs are higher if you go the globalisation route and buy goods produced from wherever it costs the least to do so from an economic stand point?

So is buying local food better for the environment? Surely this is a no brainer as Nat states. However, as usual in the chaotic economic system we inhabit, what seems intuitive and common sense in theory rarely ends up being the whole story in practice. A report carried out by Lincoln Uni in NZ found that producing dairy products, lamb, apples and onions in that country and shipping them to Britain used less energy overall than producing them in Britain. Another study,  at Cranfield University, which examined whether it was greener for Britons to buy roses from the Netherlands than ones air freighted from Kenya found that the carbon footprint of the Dutch roses to be six times as large because they had to be grown in heated greenhouses.

Our current supermarket system, when governments don’t interefere, is based on extremely efficient supply chain management systems, centralised depots and transportation in huge bulk which may it seems give us the best environmental (non) bang for our buck. There may even be enviromental economies of scale, to bastardise an economic phrase, when the market decides where something should be produced. This isn’t to say that the market is always right and that there shouldnt be some regulation with regard to emission, worker rights etc but to assume that what amounts to a luddite socalist idea is somehow going to save the planet just seems rather naive.

Similar problems exist within the world of organic food and fair trade as well.  To take the former, how can the claim that organic food is better for the environment have taken such hold in the minds of the general public when organic food production is extensive, limits pesticides and bans the use of GM crops, all of which lowers crop yields? Surely the less space used the better for our agriculatural needs (and therefore more space for things such as rainforests), as long as care is taken not to damage the land, or surrounding lands/sea (which isnt something that is beyond farming). Fair trade, which is another protectionist idea wrapped up in an ethical solution, tries to help farmers get a fair price for their goods so that they can make a profit. Although a laudable idea in theory, it ignores the basic problem which is that too much of a commodity is being produced. Indeed, there is also evidence that by offering a guaranteed price, it not only stops farmers from realising this but also attracts other producers into that market, thereby distrupting the demand supply inbalance even further.  This then lowers the price of  the non fairtrade commodity even further, thereby making the non fair trade producers poorer still. A far better use of pressure groups time would be to attack developed countries subsidies of their own agriculural produce (think CAP in France and the cotton/corn subsidies in the US) or their dumping tactics, which can often be what causes the inbalances in the first place. The freer we make trade and the more interconnected we get as societies, the better off we will all be in the long term.

One final point. A DEFRA report in 2005 examining the supply of food in Britain, showed that half the food vehicle miles associated with food is by the public travelling to and from the shops. Also, it showed that a shift to a local based system away from the supermarket model could actually increase the number of food vehicle miles as produce would be moving around a lot more in less efficient vehicles (not to mention the fact that consumers would have to make more trips to get the same amount of goods).

So if you want to save the planet,  get off your arse and walk to your local Tescos. Once you get there buy local or buy foreign, but don’t make the assumption that by doing the former you are making the planet a better place.

On the back of news that RIMM had raised revenue and profit guidance last night, I felt compelled to jump in on the long side for a trade. The market seemed somewhat unimpressed by the news after hours and in pre market trade, with the shares only slightly up and even for a while trading lower (possibly due to an analyst downgrade at cowen & co). Ignoring his comments and the longer term pressure on RIMM due to competition from Apples 3G iPhone, I decided that from a technical and fundamental perspective the reward was now very much with the long side and the risk would be living firmly with the bears.

In reference to the bearish view of RIMM, Matt Hoffman at Cowen, who downgraded the stock this morning, commented that “At 13 times our Street-low [fiscal 2010] EPS of $3.00, the multiple still looks too rich, given that margin erosion and our negative outlook on the sustainability of RIM’s competitive advantages.”.  Since when did a company forecasting to grow its revenues at 70 to 80% trade at a P/E of 13? While i agree with their comments that RIMM may face some problems sustaining their competitive advantage, those issues may be overblown for the moment with the strong initial uptake of the Storm and Bold products. Indeed, according to an user research expert I’ve asked, the iPhones keyboard still leaves much to be desired when attempting to write an email.

Returning to the technical case for being long, the shares have finally managed to stop the series of lower lows that have been occuring for the last six months since the peak back in July and also have managed a new higher high. As well as this, the share price now has the company guidance issued yesterday to prop it up and removes some doubt and fear that have been dogging it for the last six months.  It may even get the bulls dreaming of better than expected times ahead.

Although this is just a trade and i doubt RIM has bottomed in this economic cycle, the shares are priced attractively for the medium term and the momentum appears to be shifting the bulls way.  I’m adding a Mental stop at breakeven around $39.80 and just below the support at $40.

As usual, not advice, just what im doing. thoughts to follow.

From the portfolio point of view, the previously noted thesis of Airline consolidation being somewhat ahead of the overall economic situation, due to previous high oil prices forcing them to get their acts together, thereby leading to a recovery before the overall economy seems to be gaining some traction. I’ll remain long for the moment and see how this plays out with a mental stop around breakeven at 118p.

“I find the general bullishness on this board deeply worrying (as i went long at 118p in october). The consensus seems to be overly bullish and i dont want to hear things like ‘always bounces from here’, ‘will be Xp by december’ and the like. The lack of bears on this board is making me think I might have made a mistake.

With regard to the last post about what the British Airways and the ftse 100 can and cannot do, what exactly is an historic low? Surely any new low is historic..

Does anyone have any good reasons why they are bullish as opposed to the fact that ‘it cant go any lower than this’?

Is nobody worried about the fact that the automakers might not get bailed out and enter chapter 11 and take JPM and MS with them, that the commercial mortgage market is about to collapse, that the CDS market remains an accident waiting to happen, that the euro might fall apart if the spread between Italian/greek debt and german debt is anything to go by, that Europe has lent way too much money to Eastern Europe and they might default, that Spain has lent way too much to Latin America and they might default, that Credit Default Swap premiums are at an all time high, that citigroup is down 45% in 2 days?

I could go on..

and on…

but where is the fear? ”

You’d expect joe the investor to be a bit less sanguine about the current situation by now but they seem to think they’ve seen this all before and although this period we are muddling through might not be unprecedented, its certainly not business as usual.

And if one more person asks me if it’s a good time to invest in the stock market, I think I might scream. The bottom for bear markets generally happen with exhaustion and utter disinterest from the general public, not gleeful and reckless bargain hunting. The same goes for the worlds housing markets.

Loathing.

Las Vegas.

Everywhere you look there are stories that in years past would have all been front page news. The above stories probably werent even the most important events of the day what with the car bail out started to stall and the commercial mortgage markets cracks growing ever larger.  In fact those two probably accounted for todays bloodbath in the tarnished banks group (think BoA, MS, GS and Citigroup) as expectations for new genres of crisis slowly come to fruition.

It looks like we might be about to start another leg down (possibly wave 5 according to the elliot wave theorists out there). The bright side of which could be a massive rally after one more sharp drop..

1) Many competitors are going bankrupt – You dont have to be a genius to notice that lots of airlines have gone bankrupt this year. Indeed, all the transatlantic business class only airlines which were trying to compete with BA for its lucrative premium customers over the pond have now gone under and in all likelihood only a few mega carriers will remain in europe once the downturn has ended (BA/Iberia, KLM/Air france and Lufthansa plus ryanair and easyjet). I realise that the airline industry is a lousy industry in the long term but its also cyclical and due an upturn in fortunes for the potentially stronger survivors of the current downturn. Shares are close to pricing in worst case scenarios and, at the moment at least, the bankruptcy of BA doesnt seem likely.

2) BA is BA – Terminal 5 might have started as a disaster and did some harm to BA’s reputation (as has the attempts of certain documentaries on UK tv) but its slowly starting to show its potential and BA is still a very strong worldwide brand. Added to this there are the potential synergies of the Iberia merger as well as the alliance with American.

3) The stock seems fundamentally cheap – With a trailing P/E of about 4 (although admittedly the forward P/E looks like it’ll be much higher for a bit) and a NAV (net asset value) around 238p, BA looks very cheap. Devt levels seem managable (as does the deficit for the moment) with cash levels remaining constant at £1.8 billion pounds from March to the end of September. The company has also recently slightly upped its revenues estimates and maintained guidance for Augusts load factor suggesting things arent quite as bad as had been feared.

4) Fear and bearish levels are high (on the whole) – With the VIX/VXO (which measures market volatiility and fear) still in the high 60s, the investment sentiment reports (AAII and investors intelligence) close to contrarian buy signals, it seems that the market is poised for a medium term rally (although another sharp fall and new lows before this occurs also seems possible).  One caveat to this is the HNSI (which measures bullish sentiment of newsletter investment writers) which continues to suggest that market participants are too bullish or at least not bearish enough.

5) Oil is getting cheaper which will lower fuel costs – As BA commented from their recent results -

“Finance director Keith Williams said the airline had hedged 40 percent of its fuel in 2009/2010, meaning that if the oil price stayed at $75 a barrel and the dollar at 1.65 to the pound the group’s bill would be 2.8 billion pounds.”

Oil is now $57 a barrel.

So there are the two cases, ive obviously decided that the risk/reward very much favours being long right now, we’ll see how this trade plays out but the share price action since going long has been very much as hoped for with a higher price even though the markets are flirting with new lows.