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Strongly expressed opinions are a rarity in analysts’ notes.
Comment is usually hedged and concealed behind figures and charts and ratios. This gives some illusion of objectivity, when in fact whether a stock is a buy or a sell really does largely come down to what the individual analyst’s opinion is.
It’s a safe way to operate – but it doesn’t half make for dull reading.
That’s why it’s refreshing when you get to see an analyst really laying into something. And that’s exactly what Dresdner Kleinwort’s Alastair Stewart did to the housebuilders yesterday…
Housebuilding stocks tumbled yesterday after a brutal research note from Dresdner Kleinwort analyst Alastair Stewart, who warned that “reckless lending and over-building of flats threatens recession.”
Most homebuilders will start reporting their results next week. But Stewart warned investors to “head for the exit” before then. Taking a wrecking ball to earnings forecasts, he said: “We believe it is pay-back time for years of speculation, to which most housebuilders are now indirectly exposed.”
Worst case, he expects to see “a multi-year slump, losses in two to three years, land write-downs, strain on cash and dividends.”
Regular MoneyWeek readers are unlikely to be invested in housebuilders, but suffice to say we agree with him entirely.
Of course, it’s not just the housebuilders who are going to be affected by the collapse in the housing market. Alliance & Leicester’s results yesterday just confirmed Stewart’s comments about “reckless lending.”
‘Worst of all worlds’ for Alliance and Leicester
The ex-building society saw shares fall to their lowest level in eight years – since it listed in fact. That’s a bit sobering really, for devotees of the ‘buy and hold’ investment strategy, if you think about it. If you were one of the lucky A&L customers to get a windfall when it demutualised, your shares are now worth less than they were then. In eight years. Sure, you got the money for nothing – but it could have been put to a lot better use than that. Even spending it would have been more profitable.
Anyway. A&L said its cost of funding is set to jump by £150m this year, as a result of the freeze in the credit markets, which destroyed its rival, Northern Rock. The group also ditched its profit growth target of 9% a year, and said it expects ‘core profit’ to be lower than in 2007.
They must have been putting testosterone in the City’s water supply yesterday, as Collins Stewart analyst Alex Potter was also pretty blunt when he called the results “a profit warning on revenues, costs and cash returns – the worst of all worlds”.
The bad news for the housing market (and of course, housebuilders) is that A&L is going to run down its mortgage book, and plans to ask all new borrowers for at least a 10% deposit. Beyond a shadow of a doubt, time has been called – by all the banks and building societies – on the reckless lending policies of the last few years. And reckless lending is the only thing that’s kept the housing bubble inflated.
Forget about a soft landing. Housing demand has been entirely a function of the amount of money available to borrow to pump into property. That availability isn’t diminishing slowly – it’s been pole-axed by the belated realization – stemming initially from the
Basic economics – cut demand, while supply remains constant, and the result is falling prices. It’ll take a while to show up in the major indices, and they’ll fight it all the way down with every statistical trick they can pull out of the book. But even so I’d expect Nationwide and
What can be done? David Blanchflower – the Monetary Policy Committee’s wannabe Ben Bernanke – voted for a half-point interest rate cut at the last meeting of the Bank of England’s interest-rate setting committee. Meanwhile, we also learned that oil had hit a new nominal record of $101 a barrel in
But what’s inflation to Mr Blanchflower? The only inflation that matters to him is house price inflation. If it’s going up, life is good. If not, life is bad. But here’s a suggestion for Mr Blanchflower – look to Japan. You can slash interest rates all the way down to zero, but if lenders haven’t got the money to lend and borrowers haven’t got the stomach to overstretch themselves any further, it won’t do any good. In fact, all it does is mark you out as an abnormal economy scrabbling around on life support, which puts any sane person off investing in you – as Japan has discovered to its cost for nigh-on two decades now.
Let’s hope we don’t end up the same way.
Turning to the wider markets…
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Housebuilders weigh on FTSE
On the Continent, the Frankfurt DAX-30 closed down 102 points, at 6,899, with financials including Hypo Real Estate weighing heavily. In
Across the
In
Record highs for gold, oil and platinum
After achieving a new record close of $100.74 in
Thanks to the soaring oil price and falling dollar, spot gold hit a new all-time high of $948.60 today. Silver hit a new 27-year high of $18.00. And platinum hit a new historic high of $2,182.
In the currency markets, sterling had risen to 1.9539 against the dollar and was at 1,3255 against the euro. And the dollar was at 0.6779 against the euro and 108.00 against the Japanese yen.
And in
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