22Oct 2016

‘The higher the stock market, the more profits warnings there are’ – Zak Mir

Regents St with red buses and bunting in London street.

Regents St with red buses and bunting in London street.

One of the better stock market sayings is that profits warnings come in threes (like London Buses), something which defines the way that once a company hits the skids it can take quite a while for a recovery to take place – if at all.

This would suggest that the plethora of warnings we have seen at UK Plc and beyond could be the tip of the iceberg as far as the corporate state of play over coming months. Clearly, if things are heading downhill on the profits side with interest rates at zero and QE still in force, it does not bode well for the time when the accommodative punch bowl is removed.

‘Hall of Shame’

Companies in the Hall of Shame of late have included building materials Travis Perkins (TPK), on an “uncertain UK outlook”, ground engineering group Keller (KLR) due to APAC division weakness, discount carrier Ryanair (RYA) hit by the fall in Sterling, and perhaps most puzzlingly, Laird Group (LRD), a supplier of Apple (AAPL).

The problem with this particular roll call of gloom and doom is that they are a diversified group of companies, and have until now appeared to be robust plays.  Also providing misery was global security group NCC (NCC),  and Senior Engineering (SNR). They add to October’s other large casualties, outsourcer Capita (CPI) and Sports Direct (SPD), and give the impression that there is a disconnect between the Dollar earners boosting the blue chip indices, and the real health of economy. The question is how long central banks can paper over the cracks?

Salvation for Deutsche Bank?

Speaking of papering over the cracks, it appeared that there was new hope of salvation for ailing Deutsche Bank (DBK.DE), where it is in an ongoing tussle with the Department of Justice as to how much it should pay out in the form of a fine over issues related to toxic mortgages?

A logo is pictured on the Deutsche Bank building in Geneva, Switzerland, October 11, 2016.  REUTERS/Denis Balibouse/File Photo

So far the figure mooted has been $14bn, but with the hope it could be as low as $5bn. The latest development is that the Qatari Royal family and the Chinese could step in to bail the company out – albeit that the CEO John Cryan continues to insist it does not need the money.

Closer to home, those looking for salacious news would have welcomed the revelation that an executive of housebuilder Barratt Developments (BDEV) had allegedly been involved in untoward dealings regarding supply contracts. Perhaps rather surprisingly the share price remained relatively firm. It will be interesting to so whether this remains the case as the story progresses.

Gainers

In terms of the best gainers of the week it was Tesco (TSCO) and Ocado (OCDO) leading the way higher after both the Marmitegate victory for the former, and the rise in inflation – something which is traditionally helpful to supermarkets.

Perhaps rather counter- intuitively leading UK banks were on the leaderboard, with both Barclays (BARC) and RBS (RBS) up nearly 10% on the week. They were helped by it being the run up to next week’s trading updates in which both the aforementioned companies and Lloyds Banking (LLOY)are in the calendar, along with bellwethers BT Group (BT.A) and GlaxoSmithkline (GSK).

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Bats UK 100 and Sector Indices (17-21 October 2016)

Losers

On the downside, apart from the profits warning groups, there was a lacklustre reaction to educational books group Pearson (PSON), despite it feeling the benefit of the sinking Pound, whileRank Group (RNK) sank as the gaming group reported flat revenue.

Perhaps investors anticipated a second bite of the cherry in terms of the previously mooted three way deal between it, 888 Holdings (888) and William Hill (WMH), in the wake of the latter ditching its Amaya merger idea? It could very well be the case that with Amaya out of the wake the market views the previous 364p a share offer from Rank / 888 as a decent deal. This is especially compared to the present share price just below 300p.

Small caps

For the small caps it was Mayan Energy (MYN) which was a standout both in volume terms and in the wake of recent gas production news. The ‘Cup & Handle’ formation on the daily chart suggested further share price recovery could be due.

Hurricane Energy (HUR) found support above its 50 day moving average at 34p to hint at a 50p technical target, and Highland Natural Resources (HNR), broke above its 50 day line on the success of its DT Ultravert Technology. Also in focus is W Resources (WRES) where it has shipped its first Tungsten ahead of schedule.

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Zak Mir-Yahoo – Fri, Oct 21, 2016 09:46 BST

Zak Mir is  the author of chart topping books, including 101 Charts For Trading Success and 49 Golden Rules of Technical Analysis, and is generally acknowledged as being one of the most experienced independent technical analysts in the UK.

Disclaimer: The content on this page does not constitute financial advice and is provided for general information purposes only.  Nothing on this page should be regarded as an offer to conduct investment business or to buy/sell any investment

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