Week Twenty-Eight....

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Another week with the usual element of predictable news – BAE Systems wins more defence contracts, and there’s more gloomy news about the UK economy….

BAE Systems….
BAE secured two government deals, one with UK Ministry of Defence and the other with the US army, worth just under $1 billion in total. There is a $347 million five-year contract to provide US army soldiers with hand-held laser target locators that can be used in daylight or at night, and a 10-year deal worth £369.5 million with the Royal Navy and the Royal Air Force to maintain and develop their Spearfish and Sting Ray torpedoes.

On the US contract, BAE Systems is to produce, maintain, and provide logistical support for up to 200 laser target locator modules per month. The system will allow users to recognise targets more than three miles away in daylight and more than half a mile in total darkness. Deliveries are scheduled to begin this year, the company said. Under the UK deal, BAE Systems will cover in-service support for the torpedoes through to 2019, as well as providing development and upgrade of the Spearfish torpedo.

BAE really is at the leading edge in its field, and as mentioned last week, the underlying performance of the company is strong – despite a lowly PE rating. Given that the share price is effectively a multiple of EPS (earnings per share) and the ‘rating’ given by the market (the PE ratio) it’s easy to see why there has been a constant stream of brokers recommending BAE as a ‘buy’.

Purely as an example, Lockheed Martin presently trade on a PE of around 10 times earnings and General Dynamics around 9 times earnings. If BAE were to trade at a similar level to these two ‘competitors’ then it is easy to see how (currently on a PE of less than 7.5 times) the price could move ahead by as much as 25%.

UK Economy….
The Bank of England has warned that the UK economy still has some way to go before it recovers from the effects of the financial crisis, and that any recovery in 2010 will be ‘fragile’. The report was bad news for the chancellor, who has predicted that the UK will rebound sharply in the future. If it does not, then his record budget deficit of £175 billion will be even bigger, with a greater need for spending cuts.

The outlook for inflation is for the number to remain low, which means that, unless something changes, interest rates could stay at 0.5% until well into 2011. Also, the Bank's forecast is for the economy to contract by about 4.4% this year, rather than the 3.9% predicted in May - after sharper declines in both of the first two quarters - but the full-year 2010 projection has been raised to about 1.8% from 1.1% in May.

Trading….
I suggested last week that I felt that the market (FTSE 100 Index) was high enough in the short term, after a 35% rise since early March. Over the first two days of the week the Index declined by 0.2% and then by 1.1%. Rising by 1.0% on Wednesday, it rose by a further 0.8% on Thursday - though fell back by an identical amount on Friday. It still looks more likely that prices may fall back in the short term, after what has been a very strong run. The chart below covers the last six months….

Conversely BAE Systems managed its eight successive daily rise on Thursday - closing at 332.8 – and taking the gain over those eight sessions to just over 6.5%. I took the opportunity during Thursday morning to sell between a quarter and a third of my holding at a price of 334.65. The chart below covers the week, including Friday's decline.

It remains my largest holding, and again after what has been a strong rise, I took the view that it was wise to take some profits. Either what I have remaining goes higher (in which case I was wrong to sell) or the price declines further (which means that I can buy back cheaper). I am comfortable with either event in the short term – longer term I am confident it will go higher.

And as before, I shall hold the stakes I have in both oil companies, as well as National Grid and United Utilities for now.

Current positions (last week’s position in brackets)…..

BAE Systems………………62.01% ……(69.79%)

Royal Dutch Shell…… .12.65%......(10.05%)

United Utilities………… .10.75%.......(8.55%)

National Grid………… ….…7.73% . … (6.08%)

BP………………………………..6.85% .… (5.53%)


Performance figures to Friday 14th August are as follows:-

Rolling Performance........1 Year.......6 Months.....3 Months.....1 Month

My Spreadbet Account . +81.94% .. +71.87% ..... +5.37% .....-0.11%

FTSE 100 Index ......... . -14.25% ... +12.52% ..... +8.05% ….+11.24%

M&G Recovery ....... ... . -0.99% .....+22.82% ... ..+8.07% .....+13.00%

Inv. Perp. Income ..... .. -10.05% …...-0.33% . .. . +2.37% …...+4.89%

As before, the performance of the M&G and Invesco funds are included as a comparision between two highly successful UK equity managed funds.

As at the end of the week leverage stands at just less than 0.96, which means that the total sum of exposed positions is slightly less than capital held in the account.

Over the week, my account rose by 2.56% compared to the FTSE 100 Index which declined by 0.38% over the same period. Since 1st January 2008, my account shows a gain of 127.14% compared to a decline in the FTSE 100 Index of 26.54%.

Thoughts For Next Week?
I shall be away, so I doubt that much will happen – I am though happy to hold what I have for the time being.
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14th August 2009

Week Twenty-Seven....

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On Thursday the FTSE 100 Index reached 4690 – the highest since 3rd October last year, yet the same day the Bank of England had announced that in addition to keeping the Base Rate at 0.5% (fully expected) that they would be buying an additional £50 billion worth of gilts (very unexpected).
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So possibly the Bank knows something we don’t – maybe the economy is in much worse shape than thought, or maybe this printing this extra money to buy further gilts (thereby putting pressure on longer term interest rates to remain low) is aimed at preventing another banking crisis which might be brewing. Clearly the £125 billion the Bank has already spent (of our money) hasn’t worked.

The Bank of England usually issues gilts to raise money to fund government spending – yet the Bank now owns one fifth of all issued gilts. The Bank’s actions have pushed the price of gilts up to artificially high levels – why anyone would want to own gilts (or even worse, buy more) today is anyone’s guess. Clearly there is not thought to be much danger of inflation – yet – but when the Bank tries to ‘reverse’ its actions, the cost of money must surely rise. Inflation ahead - though maybe not this year or next….

If a gilt is priced over ‘par’ it means that the purchase price to secure a given level of income involves a guaranteed loss of capital over the period to maturity. Yet there is only one gilt maturing in the next ten years which stands below par – Treasury 2.25% 2014. So 2.25% fixed for five years is ‘fair value’. To make the point further, Treasury 4.5% 2019 stands 'over par' at £105.70. Invest, and you’ll be 'rewarded' with 4.5% gross income (3.6% net) – and you’ll lose 5% of your capital along the way.

There are forty-six stocks in the FTSE 100 Index which presently yield at least as much as this 2019 gilt, and sixteen have their dividend presently ‘covered’ (affordable) at least twice.

So over a ten year period, you could either hold a gilt paying 3.6% net (and guarantee yourself a capital loss in the process) or invest in any of the following for an immediate higher income with a good well covered yield - and the figures shown are net of basic rate tax....

BP……….......... …6.6%........ .2.5 times

Shell…..........… .6.51%...... .2.8 times

AstraZeneca…..5.00%...... .2.7 times

Vodafone….......6.14%..... . .2.2 times

Four examples – obviously dividends can be cut, and profits which fund them can fall, which is the risk. Actually I’d add in BAE Systems as well with a yield of 4.8% and covered 3.5 times….

If you're not happy picking individual shares, the Newton Higher Income Fund currently yields 7.68% net - its largest five equity stakes are BP, Glaxo, Vodafone, British American Tobacco and AstraZeneca

A curious week – the FTSE 100 Index ended ahead by 2.66%, whereas my account was up 4.83%. It seemed though as if I hadn’t achieved much, which in part was true – the only trade placed was a long order to cancel out the short position I held in Barclays. By lunchtime on Friday I was wondering whether I’d done the right thing, as the price headed south – by the close it was well ahead. I still think that there’s some bad news out there, but I’m not going to bet against the market on this one.

Indeed the banks were responsible for a large part of the gain in the FTSE 100 Index over the week – both Barclays and Lloyds were up 20% and even RBS managed a slight recovery – it’s now down less than 80% over the year….

Try as he might, Stephen Hester – replacement for the disastrous Fred Goodwin – couldn’t make RBS’ 27% increase in income sound good, since at the same time he admitted that the net loss for the first half was £1 billion, and that bad debts were up by 400%.

If he can just get the share price back to 70p, he’ll be able to collect his £9,600,000 payout - but he’s only got three years to achieve it….

Three more bombed out stocks had a good week – a fortnight ago the worth three performing stocks in the FTSE 100 Index over a three month period were British Airways (98th), Tui Travel (99th) and Thomas Cook (100th) – this week they were the 2nd, 4th and 7th best performers respectively.

With the closure of the Barclays position – and that being the solitary trade for the week – the position in BAE Systems now represents an even larger percentage of those which remain. This week’s 4.4% rise was certainly assisted by last weekend’s comment in the Sunday Telegraph….

‘’Defence firm BAE Systems reported a jump in its pension deficit last week, causing shares to slide. Investors were spooked by the extra £1 billion in the deficit but this was caused by a fall in asset prices which should recover over time. The company does not think it will have to make a contribution soon and nervousness over the deficit has created a buying opportunity for new investors. Trading is holding up well and the firm is still attracting new orders. Shares are down 10% since their initial recommendation last November, but are still a buy at 307p’’

It has to be said though that the Sunday Telegraph doesn’t have a great reputation in getting recommendations right – let’s hope this is the exception to the rule. The stock ended the week at 320.5

Current positions (last week’s position in brackets)…..

BAE Systems………………69.79% …...(64.36%)

Royal Dutch Shell……….10.05%.......(9.74%)

United Utilities…………… .8.55%.......(8.47%)

National Grid………… ….…6.08% .......(5.84%)

BP…………………………………..5.53% ......(5.21%)

Certainly I am happy to hold BAE at the current level – as mentioned last week, the results were actually quite good – yet the stock languishes on a very low PE, certainly compared to its US peers. And I wouldn’t sell my oil stocks at the current level – nor the two utilities.

I’m not sure that there’s anything I’d want to buy though. And given that in a week I’ll be sitting on a beach, I want to be sure that I’m holding stocks I don’t have to worry about….

Performance figures to the close on Friday 7th August are as follows:-

Rolling Performance........1 Year.....6 Months....3 Months...1 Month

My Spreadbet Account . +78.8% ... +70.8% .... +2.2% ......+5.5%

FTSE 100 Index ......... . -13.6% ... +10.2% .... +7.5% …... +13.0%

That's it!

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Friday 7th August 2009

Week Twenty-Six....

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A very much shortened version this week due to time constraints….

The week was always going to be heavily influenced by BAE Systems’ half year results which were announced on Thursday.

The ‘bad news’ was that the company had seen its pension deficit widen sharply in the six months to 30th June - the post-tax deficit had increased from £2.1 billion at the end of last year to £3.1 billion. Analyst Nick Cunningham of Evolution explained the fall in shares: ‘It's down to the pension deficit... the mix of the results are a bit different to what was expected - very strong UK programmes but international margins are down’

The company reiterated comments made in May that it continues to expect good growth for 2009 despite a lower level of land vehicle sales, and despite reporting a first half loss of £44 million, from a £791 million profit last year, after taking non-cash hit relating to a previous acquisition and currency-related financial instruments.

The good news is that sales in the six months to 30th June were 28% up on the same period last year – and underlying earnings rose 19% as well. The company is also raising the interim dividend to 6.4p per share from 5.8p.

So whilst the share price was hit hard – in a week where the FTSE 100 Index advanced further – I am certainly not inclined to reduce the stake at this stage. The dividend yield was already good, and with the increase in payout, and the fall in the share price, the yield for investors becomes even more attractive, presently around 5%.

Current positions (last week’s position in brackets)…..

BAE Systems………………64.36% ....(62.21%)

Royal Dutch Shell……….9.74%.......(10.15%)

Barclays (short)………….6.38% . ...(6.82%)

National Grid………… .….5.84% .. .(6.08%)

BP……………………………….5.21% ... (5.51%)

United Utilities…………. .8.47%.......(9.23%)

In terms of the stocks that I hold at the moment, I am happy to hold where I am for the moment.

Performance figures to the close on Friday 31st July are as follows:-

Rolling Performance........1 Year......6 Months....3 Months....1 Month

My Spreadbet Account . +75.96% .. +70.38% ... +1.97% ....-5.06%

FTSE 100 Index ......... . -14.85% .. +11.05% ... +8.59% …...+8.45%

M&G Recovery ....... ... . -3.85% .....+20.66% ....+11.68% ...+7.90%

Inv. Perp. Income ..... .. -12.24% …..-2.52% . ... +4.00% …..+4.43%

Looking over the entire period since 1st January 2008 – nineteen months now – the graph below indicates comparative performance. On the start date the FTSE 100 Index stood at 6416 points compared to 4608 today – a decline of more than 28%, even after the rally of more than 1000 points since the first week of March.

Rebasing my account back to the same level nineteen months ago would – with a gain of 116.43% over the period – produce an equivalent level of 13,886 points. So whilst July ended with a loss, I have only had three losing months since the start of last year.

Last week was disappointing, but I am not going to change the systems that have worked so well until now on the back of one bad month. Better to have ridden the past year and a half as I have, than to have been in a tracker fund over the same period….

That's it....

31st July 2009

Week Twenty-Five....

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I have added two ‘Gordon Brown’ items to the left this week – one shows our individual share of the National Debt (updates every couple of minutes) and the other counts down to the election, when finally we get the chance to vote out someone who didn’t even get voted in…..

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Markets Generally….

Last week the FTSE 100 Index managed a whole week of daily rises – this week it did it again, extending the rally to ten straight sessions and putting on 10.8% over the period. The last time the FTSE 100 Index rallied for ten sessions in a row was in December 2003. This takes the Index to the highest level since the first week of January. The graph below shows the last two weeks....

So what’s behind the rise?

Two weeks ago the S&P 500 Index (a wider and more representative benchmark than the Dow Jones Industrial Average) dipped below 880 points to reach its lowest level since 1st May. The index was potentially threatening to test the lows for the year – yet on Thursday it closed within sight of the 1000 level – not seen since 4th November last year.

In part Goldman Sachs helped, with the increase in their year end target to 1060. However – there is much to suggest that this may be no more than a bear market rally. The rise in markets which started on Monday last week was certainly helped by ‘better than expected’ corporate news. S&P 500 companies forecast a year on year decline in earnings of 35.2%, which was ‘less bad’ than the expected decline of 35.7% a week earlier.

So that’s good news then – as is the fact that US unemployment is rising ‘less fast’ than previously. More good news.

And of course there’s CIT Group – who might have needed a US government rescue package, but survived – for now. What would have been the 5th largest US bankruptcy has been averted with a ‘restructuring’ which gets the company through the $1 billion bond maturity due next month.

So that’s OK then – hopefully they’ll be able to do the same when the next $1.2 billion maturity needs to be dealt with in the final quarter of 2009 – and then there’s the $8.5 billion which they will need to deal with next year….

And there’s Britain – our economy contracted in the 2nd quarter, marking a full year of decline sharper than any since the 1930’s barring that of Second World War and its aftermath. Economic output fell by 0.8% quarter-on-quarter in the three months to June - far sharper than the average 0.3% forecast - after a 2.4% decline in the first quarter.

There have now been five consecutive quarterly declines in UK output. The economy has now shrunk by 5.7% from peak to trough. ‘It just goes to show that there is no correlation between the performance of stock markets and their respective economies’ said David Buik at BCG Partners.

So we’ve had a big leap forward – both in the market and in hope for the future. Bear markets are like this. The rallies tend to be explosive and short-lived. Once a trend becomes apparent, it’s probably over, or will be very soon. The chart below shows the FTSE 100 Index at the top of the bollinger band, and RSI moving above the 80 line - stochastics also appear to have peaked.

That’s why the best long term strategy might be to stay on the sidelines – though there are day trading opportunities to be had. For the longer term, there will be plenty of opportunities when the real uptrend begins.

Trading This Week….

At the close of last week I had invested 1.4 times funds held (40% more invested than money in the account) which was slightly under half the figure for the previous week, when the ‘investment’ was not far short of three times the funds held with my spreadbet provider.

So considering that the recent rise might have run its course, over Monday and Tuesday I trimmed the positions further – all six ‘long’ positions were reduced by varying amounts. As it happens, I moved (at least!) three days too early….

I did though follow through the thought at the end of last week to ‘short’ Barclays. The first sale was made on Monday at 315.56, with a second smaller sale the following day at 312.52 – the average across both trades was 314.69.

Over Monday and Tuesday Barclays was the 95th ‘best’ performing stock in the FTSE 100 Index – closing Tuesday at 309.25. With Monday and Tuesday’s trades completed, leverage had reduced to a figure exactly equal to funds held – this means that I had reduced my total exposure by around 28% since the end of last week, and by just over 65% from the stake held a week earlier.

Wednesday – BAE Systems opened lower, and I took the opportunity to add to the stake in BAE. In essence I replaced the sale made earlier in the week at 341.99, with a purchase at 337.5.

Barclays ended Wednesday substantially down – over the first three days of the week it was the worst performing stock in the FTSE 100 Index. So on Wednesday I ‘bought back’ the smaller 2nd ‘short’, at a price of 299.77 - leaving the effective ‘net cost’ of the remaining stake at 320.66 – which is just as well since the stock rose over the last two days of the week to end at 315. The graph below shows Barclays over the first three days of the week.

According to JP Morgan, Barclays will need to find another £12.8bn in order to meet new capital rules under a reformed regulatory regime designed to protect against the higher risks of 'casino' banking. Barclays is currently only allocating £8.5bn of capital to Barclays Capital, compared with the £23.4bn of reserves JP Morgan estimates it would require.

With RSI declining and diverging from price, I still believe this one will head lower.

Two weeks ago I bought into United Utilities at an average cost of 484.86 – during the middle of this week I sold a third of the stake an average price of 499.27. Again, this proved a wise move (though I should have sold more) as the regulator’s announcement saw water stocks tumble. United Utilities closed the week at 476.25 as against an effective ‘net cost’ of the remaining stake of 477.65.
So over the week the FTSE 100 Index ended up 4.28%. Of the stocks held, United Utilities ended down 3.74%, and BP and Royal Dutch Shell ahead 3.2% and 2.8% respectively. Barclays ended the week pretty much where it began.

Vodafone had a much better week up more than 6% - particularly on Friday. Closing the week at 120.25, I sold the remaining position over Thursday and Friday at an average cost of 119.34. Vodafone though owes me nothing – I have traded this regularly, with the cost of purchases through July averaging just 112.45. It’s been an excellent stock to trade, though not as good to ‘buy and hold’. The graph covers the last three days of the week.

The big disappointment this week was BAE Systems – ending down 4.87% over the week, only two FTSE 100 Index stocks performed worse. However - over the past two weeks the quantity of stock I have bought and sold in BAE Systems has been identical – the purchases cost an average of 330.79 whilst the sales were at an average price of 338.54.

The holding remains my largest, and whilst ending the week at 322.25 (its lowest close for six weeks) it owes me nothing – like Vodafone, it’s been a good trading stock, and I have a large position in place to start next week – at what I consider to be a low price, with plenty of scope for a rise. Two week graph below....

This week’s news for BAE Systems was surprisingly good - they received an additional $216.5 million modification order under a previously awarded contract to provide Marine Corps Transparent Armor Gun Shield (MCTAGS) kits for multiple vehicles.

The MCTAGS provide crew protection from blast, fragmentation, and small arms fire while in the turret, and is a transparent armour (ballistic glass) that allows for continual observation and increased security on a range of vehicles, including the M1 Abrams tank.

Also, the Ministry of Defence is also quietly pressing ahead with a £16bn programme to acquire thousands of multi-purpose armoured vehicles to replace Britain's ageing fleet of Scimitars and Spartans, which have been used for vital reconnaissance and troop-carrying missions in Afghanistan but suffer from excess weight and an inability to fire on the move. In the next few days the MoD is likely to send out a final invitation to contractors BAE Systems and General Dynamics (UK) to bid for a chunk of the Future Rapid Effects System project, worth up to £2bn.

Current positions (last week’s position in brackets)…..

BAE Systems………………..62.21% .......(33.89%)

Royal Dutch Shell………...10.15%........(13.95%)

United Utilities……………. ..9.23% .......(13.48%)

Barclays (short)......... . .6.82% ........( nil )

National Grid ............... 6.08% ........(8.12%)

BP ........................ .... .5.51% .......(16.26%)

Vodafone ................. . ...nil ...........(10.11%)

Last week BAE Systems represented around 34% of positions – but that was with leverage at 1.4 times funds held. As a percentage the position has increased substantially (by 83%), but allowing for the reduction in leverage to 1.2 times funds held, the actual increase in the stake over the week is around 57%.

Performance figures to the close on Friday 24th July are as follows:-

Rolling Performance.....1 Year....6 Months....3 Months...1 Month

My Spreadbet Account . +85.31% ..+84.99% ... +12.05% ....+0.03%

FTSE 100 Index ......... . -14.65% ... 12.93% ... +10.12% …. +6.93%

M&G Recovery ....... ... .. -5.75% ...+19.87% ....+15.17% ....+6.27%

Inv. Perp. Income ..... .. -12.70% …...-3.08% . .. +6.06% …..+3.43%

Thoughts For Next Week?

Short-term the FTSE 100 Index is too high in my view – with thin trading over the coming holiday period, markets could be volatile, and I wouldn’t be surprised if we move back towards 4200.

Long term I’d say that while the general outlook may be discouraging, there's still money to be made. As Neil Woodford of Invesco Perpetual points out, defensive sectors with secure dividend growth potential, such as pharmaceuticals, telecoms, utilities and tobacco, look cheap.

The graph above takes a look back at the FTSE 100 Index over recent years, and clearly shows RSI declining through 2007, as the Index struggled higher - the 'bottom; in early 2009 is clearly indicated by both RSI as well as stochastics. The chart below looks at price/earnings levels for the S&P 500 Index, suggesting that the PE ratio is around half what it was at the market peak - of course earnings are falling, which would make the PE ratio rise, but in principle the longer term signs are better than the short term ones - for now.

At this precise moment though, as regards individual stocks, there’s really nothing I’d want to buy at the current price that I don’t already hold. There’s an abundance of potential ‘shorts’, but if the market is determined to start trending up, I’m not going to bet against it....

That's it....

24th July 2009

Week Twenty-Four....

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The short summary of the week sees my account ahead by just over 12%. After around six weeks of declining markets, I felt last week that the fall in the FTSE 100 Index of 8.4% since 1st June suggested that a rise might be on the cards – hence the decision to increase total exposure by 40% over the course of last week.

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The first three days trading of this week did indeed see strong rises for equity markets – by Wednesday evening the gain for the FTSE 100 Index had already reached 5.3%, on track for the best weekly gain in two months. On Wednesday alone, strong US corporate results and improving US economic data lifted the FTSE 100 Index by 2.6% to its highest close in four weeks. The chart below shows Wednesday's rise.

The graph below was part of the basis behind the reason to remove some of the 'risk' after Wednesday's rise - the bollinger band was just about breached, and with large exposure to a strongly rising market, it seemed wise to take some profits.

Given this very strong rise, and having increased overall exposure the previous week on the basis that markets were ‘cheap’, I took the view that some profit taking was in order. Therefore, late Wednesday some of the positions held were reduced:-
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Brent Crude Oil (September ’09 Futures contract) – the net ‘cost’ of my trading Brent Crude Oil positions over the past two weeks stood at $60.85 – on Wednesday the position was reduced by three quarters at an average price of $62.24 – a gain of 2.28%. Had I waited a further twenty four hours, the gains would have been greater – even more had a waited until Friday. The benefit of hindsight….

I also reduced by one-sixth the position in National Grid, selling at a price of 554.58 – as against an average cost since mid June of 544.2. I had also bought Royal Dutch Shell last week at an average price of 1447.58 – one quarter of the position was sold on Wednesday at a price of 1499.87, a gain of 3.6%. An additional stake in Vodafone (bought the previous day at 112.63) was sold on Wednesday at 114.41 for a gain of just less than 1.6%.

Five minutes before Friday’s close last week I had bought an additional stake in BAE Systems, at a price of 324 – half of that additional stake was also sold on Wednesday at a price of 334.25 – a gain of 3.16%. Other smaller trades were placed, which contributed to leverage declining to 1.89 by the close on Wednesday - from 2.87 times funds held at the end of the previous week. Effectively all the additional investment made last week was taken out by the close on Wednesday – a reduction of around 35% of funds invested.

The rise in the FTSE 100 Index on Thursday was much smaller at just 15 index points, or 0.35%. Just two sales were carried out on Thursday – the positions in both Vodafone and BAE Systems were reduced further, with both sales made at prices which exceeded the closing price for the day.

By the close on Thursday leverage had reduced again to 1.77 times funds held. At the same time my account was within sight of its highest-ever level, showing a gain of 128.34% since 1st January 2008, as compared to the FTSE 100 Index which had declined by 32.03% over the same period.

The FTSE 100 Index managed to rise on Friday as well – making five consecutive daily rises. The last time the FTSE 100 Index managed straight gains from Monday through to Friday was in August 2007. That particular week the Index closed at 6220 – this week it closed at 4388, for an overall gain over the week of 6.34%. The chart below shows the full weeks' movement in the FTSE 100 Index.

With a further day of rising prices on Friday I took the view that reducing some of the positions was the correct action to take. With that in mind, a further slug of BAE Systems was taken out, along with minor reductions in BP and Royal Dutch Shell.

At the close of this week, my ‘oil’ exposure through those two companies still represents a little more than 30% of open positions, and with that in mind I took advantage of a strong rise in Brent Crude Oil mid-way through Friday afternoon to close the remaining position. The graph below shows the strong rise at the time the sale was made (at $64.36) – though frustratingly the price moved ever upwards towards $65. Hindsight again….

In terms of Brent Crude – I have not invested in the US WTI benchmark for some time - the August futures contract expired this week. At any given time, my spreadbet provider will only allow trading in the current (August) and forward (September) month’s contracts. From next week, this will change to September and October, hence the September contract becomes the current month. I have an auto rollover as and when a ‘month’ expires, and whilst this is achieved at half the spread, it still involved a small additional cost. Therefore, from next week, as and when I decide to buy further stakes in Brent Crude, I will now be doing so in the October contract.

Oil has risen in price lately, in part helped by the weakness of the US$. Oil and gold – as well as other commodities - are priced in US$. This mean that if the price of the US currency falls (weakens) then more dollars are needed to purchase. US inventories data painted a mixed picture, with crude oil stocks falling 2.8 million barrels last week – more than the consensus decline of 1.6 million barrels. Whilst this is potentially ‘good news’, this was to a degree offset by the news that US refinery demand for crude remains weak, as a result of poor profit margins, and weak demand from end users.

I suspect I will be investing in Brent Crude Oil again at some stage – certainly the volatility makes it potentially an attractive trade, as long as I’m right more often than wrong. The strong rise in my account through March 2009 (up more than 31%) was very largely being on the right side as oil rose around 23% in three weeks. The graph below covers the period including the month of March.

In the first week of March leverage was as high as six times funds held at one stage – remember that the FTSE 100 Index hit a low of just 3512 on 3rd March - though by the end of the following week it had reduced to just under four times funds held. Increased leverage magnifies results – losses as well as gains.

The only other trades on Friday involved Vodafone – a purchase in the early afternoon at 112.58 was sold out less than an hour later at 113.36.

Over this week as a whole, my account also managed gains on five straight days, and an overall return of 12.02%. The last time I managed straight gains from Monday through to Friday was in late October last year. Since January last year, over eighteen complete months, I have only had two negative months – September and October 2008 - the FTSE 100 Index has declined in eleven of those eighteen months.
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Current positions (last week’s position in brackets)…..

BAE Systems………………33.89% .....(28.75%)

BP……………………………...16.26% .....(9.09%)

Royal Dutch Shell……….13.95%......(11.37%)

United Utilities…………… .13.48%.....(7.18%)

Vodafone………………….….12.36% ....(13.37%)

National Grid………… ….…10.07% ......(6.04%)

Brent Crude Oil…………....nil ..........(23.81%)

The relative exposure of United Utilities and National Grid are appearing ‘up’ over the week purely because neither of those stakes were reduced. The stake in BP was slightly reduced, but the remaining holding performed strongly - up 7.19% over the week – hence it represents a higher percentage than last week.

At the close today leverage stands at just 1.4 times funds held, so I am suitably exposed if markets continue to rise. However, last week leverage was 2.87 times funds held – this means that over the last week I have not only earned a return of more than 12%, but also more than halved my exposed positions.

Figures to the close on Friday 17th July are as follows:-

Rolling Performance........1 Year......6 Months....3 Months....1 Month

My Spreadbet Account . +93.3% ... +90.5% ..... +16.8% ......+5.4%

FTSE 100 Index ......... . -16.9% ... ..+5.8% .... . +7.2% …... +2.5%

M&G Recovery ....... .. . . -7.8% .....+14.7% ... ..+14.5% .. ...-1.3%

Inv. Perp. Income ..... .. -12.8% … ...-4.0% . .. . +7.1% …....+1.2%

The M&G and Invesco funds are included to compare with well managed UK equity funds, with excellent long term track records. Today my account did indeed reach the highest point ever – a gain of 130.55% since 1st January 2008 – and also reached its highest point relative to the FTSE 100 Index as well.

Thoughts For Next Week?

The table above lists current positions – they are ranked in order of exposure, the higher ‘investment’ at the top. I always look at the bigger positions first, since they will cause more loss if they ‘go wrong’. Looking at existing positions then:-

BAE Systems – I’ve commented frequently in recent weeks on this one. A low PE – a very substantial discount to the likes of US peer Lockheed – and an attractive yield which is well covered. I think that there is plenty of scope here, though trading works better than ‘buy and hold’ at the moment.

The stock has been in the 320 to 345 range for a little while now, and to date I have been able to trade the ups and downs quite successfully. I am pretty convinced that the final move will be upwards, for the reasons given earlier, as well as in previous weeks.

BP and Royal Dutch Shell – each have rolling PE ratios this year and next (forecast) in single figures, as well as net dividend yields close to 7%, which are well covered. Earlier this year BP suggested that they could ‘afford’ the dividend as long as Crude Oil remained at $45 or above – tonight it stands in the mid $60’s.

These two should still have further to go, and are also a 'safer' way to play the oil price. There has been much speculation about what is causing the oil price to move in such a volatile fashion -$147 last August, $40 earlier this year, and recently back towards $75. The big integrated oil companies are far less volatile - and have good earnings as well as dividend income.

United Utilities and National Grid – two defensive stocks with near 7% yields. If the market were to head down, defensives such as these ought to fare well.

Vodafone sits in between the above two – there is a trading statement due out on 24th July, it probably won’t be good – but then again, a lot of this is probably already factored into the price. I have though been reducing this one – though as with today, it does behave in a way which makes it a good trade on a day to day basis.

Markets Generally - the graph below indicates that for the first time in six weeks the trend is upwards. That said, following a trend (and using indicators such as moving averages) only works as long as the trend continues. I'm not sure that there is enough good news around at this stage for this 'one week trend' to continue.

Markets have been 'ranging' in channel between 4100 and 4500 since the end of April. Obviously the longer this continues, the greater the break is likely to be - in either direction. I do consider that markets are 'medium term cheap' but that's not to say that they might not lurch downwards in the wake of the truly awful UK umemployment figures (fewer consumers with money, less consumer spending - in an economy based around consumption). Equally in the US, we have the prospect of CIT Group needing a government rescue package - this is important since the company is one of America's biggest lenders to small and mid-sized businesses.

In terms of new positions, there’s nothing I like the look of in the FTSE 100 Index – in the wider Mid 250 Index, I’m going to do some further research on Lancashire Holdings, a ‘non-life assurer’..

In May the company reported a 23% drop in premium income for the first quarter, but said it expected to benefit from rising insurance prices in the months ahead. For the three months to 31st March the company had written gross premiums of $142.8 million, down from $186.7 million a year earlier. The decline arose as Lancashire held off writing new business in order to benefit from higher prices later in the year, and as some customers delayed renewing their policies.

However, at the same time the company said the market had become "extremely active" and that key markets were experiencing a hardening in rates and terms. That month the share price rose to a peak of 514 (18th May) but it closed today at 435.

The first chart below covers the last week - the second chart covers the last year....

The view in May was that if Lancashire could find the business at these higher rates then the outlook for top line and profitability could surpass market expectations. This one is looking interesting, but it’s a small company which means that I have to be very sure before I make a purchase.

As regards possible sales – effectively ‘going short’ – I still think Barclays is vulnerable….

The price has multiplied six-fold since the January low of 51. It is widely known that there has been a big rise in the exposure to assets which the market 'can't value', as well as a doubling of net derivatives exposure. This and the likely increase in impairment charges means there could well be major losses for the next couple of years. If Barclays prefers not to take the government's money, it will presumably have to go to shareholders (or middle eastern investors) with a discounted share issue.

This must be a chance - and certainly with the recent sale of BGI to BlackRock, Barclays has lost the jewel in its banking crown

That’s it!

17th July 2009

Week Twenty-Three....

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Warning!

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All contents in this blog are for educational and informational purposes only and should not be construed as investment advice regarding the purchase or sale of stocks or any other investments. Stock market investments are risky – spread betting is very high risk, and may result in the entire loss of your investment. You should be aware of your risk tolerance level and financial situation at all times. Past performance doesn't guarantee future results, and no assurance is given that anything described here will be successful.

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However, here are the performance figures for the week ended Friday 10th July.

Rolling Performance........1 Year......6 Months....3 Months....1 Month
My Spreadbet Account . +74.4% ... +74.8% ..... +4.3% ......+0.6%
FTSE 100 Index ......... . -23.6% ... .. -7.2% ..... +3.6% …... -6.9%
M&G Recovery ....... ... . -14.6% .....+4.4% .....+11.4% ......-5.7%
Inv. Perp. Income ..... .. -13.1% …...-7.5% . .. . +4.4% …....-1.45%

Figures for the M&G and Invesco funds are included to reflect results achieved through active fund management, and with excellent longer term track records.

At the close of last week, BAE Systems was the largest position held, ending the week at 326.25. On Monday this week the price fell, and two purchases were placed at an average price of 322.24 – this additional stake was sold that afternoon at a price of 326.75, a gain of approaching 1.4%.

The following day the price rose further and an additional sale was made at a price of 332 - five minutes before the market close today (Friday 10th July), the price breached the limit ‘buy’ order I had set at 324, which meant I was able to reinstate BAE as my largest holding, 2.5% lower than the price sold on Tuesday.

Last week, brokers Redmayne-Bentley and RBS both issued positive comment on the company – this week it was the turn of Credit Suisse, which reiterated it's ‘outperform’ rating on the defence group's stock. "The stock has been weak, driven by investor concerns that defence spending is in structural decline, but we see both positive near-term catalysts and longer-term growth drivers," the broker said, adding the BAE has also "significantly underperformed its US peers this year and now trades at a 27% discount to Lockheed Martin".

The chart below covers the last week's price movements, with the mid-week sale well timed, as well as the reinvestment late on Friday.

BAE Systems now trades on a rolling PE of 7.01 times earnings, forecast at 7.52 times for the following year – the rolling dividend yield stands at 4.7%, covered three and a half times. It is hard to see downside from here. The graph below covers a slightly longer period, starting with the point at which the initial purchase was made (an intra day low of 318.24) in mid June - and also shows just how high the price was in the month before (high 370's) as well as earlier in the year (over 400).

Even when the market bottomed in early March, the price wasn't materially different from where it is today. The RSI 'buy' signal in June is clearly shown - and we are back to the same level now.

BP had ended last week at 479.25, and with the price declining an additional purchase was made at 466.1 on Monday, with one third of the additional stake sold on Tuesday at 473.99 – a gain of 1.7%. BP ended the week lower at 461.5, its lowest daily close since 23rd April. The dividend yield now stands at 7.4%, covered twice. I am more than happy to hold BP at the current price.

Still on ‘oil’, Royal Dutch Shell moved below 1500 this week for the first time since late April –purchases on Wednesday and Friday at an average price of 1447.58 were placed – though the week ended at 1443, with a dividend yield of more than 7% and a PE ratio this year and next even lower than for BP, this also offers plenty of upside, with little downside - I hope.

The chart below indicates the Royal Dutch Shell decline over the last month or so. I had initailly aimed to buy at below 1500 in June when RSI signalled the move, but I was too greedy and the price didn't quite go to the 1400's - however, we are now significantly lower - hence the buys this week.

Bear in mind also that whilst the 'usual' way to read Relative Strength Index (RSI) is that a financial instrument is considered to be oversold when its RSI falls below 30 and overbought when its RSI rises over 70, it is also equally important to spot divergences between price and RSI.

Divergences (when market trends go in a different direction than market indicators predicted, usually signifying the onset of a trend change) occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the RSI. Prices usually correct and move in the direction of the RSI. This is signified in the Royal Dutch Shell chart below, with RSI starting to rise, whilst the share price has declined further - I'd expect the price to start to follow the direction of RSI.

Vodafone ended with another disappointing week – the position held is slightly smaller than that of last week. I am gradually running out of patience with this stock – it ought to be doing better. I might soon decide that the funds could be better allocated elsewhere.

Vodafone use to regularly trade between 120 and 130 - it's been a while now, as the two week chart above indicates.

The stake in Smiths Group was closed out at a profit on Tuesday at an average price of 699.84, compared to the week’s close of 685.5. Equally, the position in Cable & Wireless was closed out at a small loss with an average sale price of 131.32 – which proved to be a correct trade as the stock ended the week at 127.5.

National Grid had closed last week at 546 – two additional small purchases were made on Tuesday at an average price of 548.41 – this defensive stock ended the week lower at 542.5, a loss, but at this price there is more upside than downside. Sticking with ‘defensive’ holdings, two separate purchases were made in United Utilities this week – at an average price of 484.86, compared the close for the week of 484.75. Both these two have dividend yields greater than 6.7%, which should provide plenty of support. JP Morgan announced a ‘neutral’ stance on United Utilities on 1st July, with a price target of 502. The chart below shows United Utilities over the past month.

Most of the activity this week was around Brent Crude Oil. Over the week I placed various trades in the forward month September 2009 futures contract. The net result produced an average cost of $61.88.

Whilst it seems I bought in too early in that Brent Crude ended lower, the two trades last week (sale at $71.76 and repurchase at $66.81) do translate into an average cost for the position held of $60.85 over the full two weeks. The fall in price has been dramatic (from $73 to $60), and we are at an RSI level (which suggest 'divergence' - see the Royal Dutch Shell comment earlier) which makes additional positions worthwhile.
Oil fell to a six-week low on Wednesday afternoon, under pressure from the growing oversupply of fuels and a string of negative economic indicators. US government data showing larger-than-expected increases in distillate (a fuel typically more linked to the industrial sector) and gasoline inventories last week, which overshadowed data on crude inventories, which declined more than forecast.

Crude Oil inventories fell by 2.9 million barrels - more than the average analyst forecast for a 2.3-million barrel reduction. Nevertheless, despite what could have been taken as ‘good news’, crude oil ended the week even lower still. As my second largest position, this decline contributed towards an all-round negative week.

However, Merrill Lynch this week revised its 2009 crude oil price forecasts to $66 in the third quarter, and an average price of $68 in the second half of 2009. With crude oil and petroleum inventories at very high levels, any near-term upside to oil prices could well be limited, and there might even be a temporary dip below $60. However, in their report Merrill Lynch believe a rebound in oil demand led by emerging markets can be expected, and have therefore revised their average crude oil price forecast for 2010 to $75, from $62.

Current positions (last week’s position in brackets)…..

BAE Systems………………28.75% ................(45.05%)
Brent Crude Oil…………..23.81% .................(9.15%)
Vodafone…………………….13.37% ...............(18.09%)
Royal Dutch Shell……….11.37%...................( nil )
BP………………………………….9.09% ................(6.64%)
United Utilities…………… .7.18%...................( nil )
National Grid………… ….…6.04% .................(6.04%)
Smiths Group…………… …..nil……… ..............(7.68%)
Cable & Wireless………..….nil .....................(7.35%)

Overall then, the week saw a decline – with the combination of leverage, and the performance of the largest positions contributing to a disappointing week. Indeed to date July has seen the account decline by 7.6%, compared to the FTSE 100 Index which is off only 2.8% over the same period.

With the FTSE 100 Index having fallen for four weeks in a row (see chart below) I have taken advantage of ‘cheap’ prices to invest further, and leverage now stands at 2.87 times funds actually held – an increase in the total invested of more than 40% over last week.

BAE Systems has fallen 4.5% since the end of June (though I have a very healthy profit from the initial purchase) and my entry into Brent Crude Oil, could have been better timed – we will know more next week. All in all though – Vodafone aside, I am not entirely convinced on this one – I do believe that the positions I have are sound.

Thoughts For Next Week?

The FTSE 100 Index has broadly been drifting lower now for six weeks, closing at 4217 compared to 4506 on 1st June, a decline of 8.4%. That said, the Index is still 17.5% higher than the 3rd March low of 3512. At this level the FTSE 100 Index itself is starting to look interesting for an ETF trade. In terms of individual stocks, there are many which are starting to look very attractive….

London Stock Exchange Group looks like a possibility – not one that I have traded before, so there will need to be plenty of research beforehand. Equally, two property companies have appeared on my radar – Hammerson and Land Securities – plus four life assurers, which I think I shall avoid.

Having bought into United Utilities this week – they remain attractive at the current price – two further water companies also now look tempting – Pennon and Severn Trent. Of the two, I prefer the latter. Closing this week at 1053, it is worth remembering that three weeks ago Goldman Sachs increased their target price for Severn Trent from 1322 to 1451. That said, a week earlier Goldmans had rated BAE Systems as a sell, so maybe one shouldn’t believe all that they say....

The Severn Trent chart below looks remarkably similar to the United Utilities chart included earlier.

Whilst markets are low, I have enough funds committed at the moment, and I suspect that unless I decide to free up some additional firepower through sales, new purchases will have to wait. Of the stocks that I currently hold (see the list earlier), I’m not sure I’d want to reduce either BP or Shell – nor National Grid or United Utilities. Furthermore, I like BAE Systems – even though the stake is very high – which leaves Vodafone and Crude Oil. As I have said earlier, Vodafone has disappointed – and as regards oil, well it has either halved since last summer (and is therefore cheap) or has doubled since February (and is therefore expensive).

For now I am happy having a stake in Brent Crude – this was the biggest weekly decline since late January as economic concerns sent investors seeking safer havens – crude prices prices are down 10% this week, falling in six of the last seven trading sessions.

Taking all into account - and given that I already have a stake in water through United Utilities, if pushed I'd probably go for one of the property companies - the RSI reading for Hammerson is lower than that for Land Securities - just. We shall see….

That’s it for this week….

10th July 2009

Week Twenty-Two....

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A shortened version this week due to time constraints….

Trades….

Brent Crude Oil – I sold the previous week’s position on Monday evening – after the UK markets had closed, but whilst the contract was still being traded in the US. The price achieved was $71.76 – a gain of a little over 7.1% over the price paid, in just under a week. With the price falling back, I reinstated the position late on Thursday evening at a price of $66.81 – the graph below shows recent movements in Brent Crude, specifically the September contract which I am currently trading.

BAE Systems – I have written over the past three weeks of the attraction that I see in the company, and have had limit orders in place to add to the holding should prices decline, on the basis that a short term fall ought not to change the longer term potential. Limit orders are set (by me at whatever price I wish) and left in the system to be traded automatically should the price reach that point - I can cancel the limit order at any time if circumstances change - but not once the trade has actually been made, obviously.
My limit orders as the week commenced were to buy BAE at prices of 324 and 334 – the price decline through the week saw these orders filled on Wednesday and Thursday.

The FTSE 100 Index ended the week off just 0.1%. Of the six equity positions (excluding the oil futures contract) only BP ended the week ahead, with my largest two positions suffering most – BAE Systems off 4.8% and Vodafone off 2.1%.

Overall this contributed to a decline in my account over the week of 3.87% - all the figures which follow are as at close on Friday 3rd July.

Rolling Performance........1 Year......6 Months....3 Months....1 Month
My Spreadbet Account . +81.1% ... +81.1% ..... +8.2% ......+2.6%
FTSE 100 Index ......... . -22.6% ... .. -7.1% ..... +5.1% …... -3.3%
M&G Recovery ....... ... . -11.9% .....+8.7% .....+13.3% ......-0.1%
Inv. Perp. Income ..... .. -10.3% …...-6.4% . .. . +4.1% …....+0.1%

The 12 month and 6 months figures for the account are identical - this is correct, and due to the fact that the performance of the account over the six month period between 4th July 2008 to 3rd January 2009 was just 0.015%. The graph below compares the performance of the account relative to the FTSE 100 Index over the six month period from 4th January 2009 (4561 points) to 3rd July 2009 (4236 points). In a 'relative' sense, the account stands at a figure of 8261 points.

Leverage on the account stands at just under twice capital held. Current positions (last week’s position in brackets)…..

BAE Systems………………45.05% .....(33.67%)
Vodafone…………………….18.09% ....(21.99%)
Brent Crude Oil…………..9.15% ......(11.42%)
Smiths Group…………… …7.68% ..... (9.18%)
Cable & Wireless……..…7.35% . .....(8.76%)
BP………………………………..6.64% . ....(7.78%)
National Grid………… ..…6.04% . .....(7.19%)

That’s it for this week….

3rd July 2009