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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Tui unlikely to escape the cold winter
It has been a challenging week for equities as sentiment crumbles amid a lack of short-term solutions from policymakers in Europe.
The fiscal governance reforms announced at last week’s highly anticipated EU summit were long-term measures that failed to address the immediate funding crisis. German chancellor, Angela Merkel also ruled out substantially increasing the size of the bail-out fund, a move widely regarded as necessary to offer near term support for the debt-stricken Eurozone economies. Concerns are also mounting that the UK has been tied to a further £30 billion to Eurozone rescue loans through the International Monetary Fund.
As previously warned, the on-going lack of resolution last week, is likely to trigger a wave of credit rating downgrades across Europe, possibly including many of the stronger European member states. Moody’s said it would revisit the ratings of many of the regions nations in the first quarter of 2012, while Standard & Poor’s warned that time was running out for the currency bloc.
In a bond auction this week Italy paid a Euro era record yield of 6.47% for five-year paper at its first auction of longer-term debt since the EU moved towards greater fiscal integration at last week’s summit. Dwindling confidence in the region also sent the single currency to an 11 month low against the dollar.
Global economic data continues to disappoint, with US retail sales failing to meet expectations, after only growing 0.2% in November. The data offers an indication that the start of the holiday shopping season has not been as strong as investors had initially hoped. Comments from the Federal Reserve indicated the US economy was “expanding moderately”, but warned that turmoil in Europe presents a big risk to the economy, although they failed to take any new steps to stimulate growth.
On the domestic front, the number of people out of work rose to its highest level in more than 17 years, in the three months to October. Recruitment company Manpower said that employers hiring intentions for the coming quarter were the weakest in three years and the government plans to cut more public sector jobs next year.
Inflation, however, eased in November for a second successive month, in accord with the Bank of England’s forecast, bolstering expectations the central bank will have scope to provide extra stimulus next year.
Technical analysis shows the recent weakness with the blue chip index once again failing to break through resistance at 5600 and falling back below the 50 and 200 day moving averages. The oscillators are also trending lower, indicating deterioration in momentum and suggesting a new downtrend could be underway. Support is seen at 5100 and 4945.
In conclusion, the continued lack of apparent urgency among policymakers to enact any significant short-term solutions to solve the Eurozone debt crisis, weighed on investors sentiment. Further negative economic data and rising bond yields in Europe triggered a fresh wave of risk-aversion and with little policy action expected until the New Year, I believe the market is likely to drift lower.
Travel company Thomas Cook has stolen the headlines recently as vast debts and a slowing business model threaten to undermine the business. In comparison after reading the last set of results from rival Tui Travel (Epic: TT.), it was initially hard to believe they operate in the same sector.
Operating profit at Tui reached a record £471 million for the year ended September 30th 2011, an 18% rise on the previous year, as well as reporting a record free cash flow of £451 million. A number of key regions including the UK, reached its best ever level and management expect cost savings of £107 million over the next three years. As a result, the company hiked its dividend payout by 2.7% to an impressive 7.3% annual yield.
The outlook for Tui Travel, however, will remind investors of the tough conditions faced by the sector and hinted that perhaps they are not immune to the nightmare faced by Thomas Cook. Winter bookings since Tui’s last trading update are down 10% in Germany, 12% in the UK and 14% in France. Summer bookings are also off 11% in the UK and 14% in the Nordic region, suggesting the next set of results might not be so robust.
Renewed geopolitical tensions in the Middle East on reports of Iranian military exercises, once again threatened to impact the popular winter jaunts in North Africa and the ongoing debt crisis in Europe continues to erode people’s confidence.
The above chart of Tui Travel shows the downward channel the shares have experienced over the past two years, losing 50% of its value since early 2010. In comparison Thomas Cook has fallen almost 95% in the same period. The 200-day moving average has contained much of the upside this year and the recent fall below the 50-day moving average, combined with the declining oscillators, suggests the momentum is diminishing.
It feels like Tui Travel has tried to distance itself as much as possible from Thomas Cook by issuing very impressive final results, but their latest sales figures are alarmingly slow and the industry outlook is not good. I believe the long-term downtrend is likely to continue and the shares are too high.
At the time of writing the share price is 155.9p and near term targets are seen at 148.2p, 143.8p and 140.5p, with a stop loss above the 50-day moving average at 163.5p.
This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Tui Travel, but client accounts may. The material in this report has come from Simply Charts and Tui Travel’s corporate website.
