An interim management statement on 15^th May revealed first quarter production has been in line with expectations, over four times higher than the previous year, significantly lifting revenue and profit.

Against a tough backdrop, Kier continues to win new business and expand into other markets, which given the good cash generation, strong balance sheet and attractive fundamentals, I believe the share are worth buying for both income and capital growth.

It has been a resilient week for equities in light of the strong recent gains, which is perhaps surprising given that we still await a conclusion to the Greek debt and austerity negotiations. 

Greek debt talks are getting down to the wire, as pressure mounts to accept the terms of a new €130 billion bail-out. Any further delay would leave time exceptionally short to enact the debt exchange in time for the redemption on March 20th that would otherwise be due. 

The underlying mood among investors appeared to be that a deal would eventually be struck. Market activity is, however, becoming increasingly light due to growing concerns over the longer-term outlook for Greece, even if a deal was agreed.

The Greek government is already showing fatigue in implementing its austerity drive, increasing the risk that they will choose to default in the future. The underlying problems remain unsolved and many market participants believe a Greek exit is inevitable, but such a move could paradoxically strengthen the Eurozone’s creditability. 

Aside from Greece, it has been a relatively quiet week with little in terms of global economic data. On a domestic front, British employers expanded their permanent workforce for the first time in four months in January. The Recruitment and Employment Confederation said the monthly index of permanent staff placement rose to 51.2 from 48.5 in December, adding to signs that the economy may be improving. 

British industrial output also recovered more than forecast in December, as manufacturers increased production. Industrial production, which accounts for around 15% of the British economy, grew 0.5% on the month, ahead of forecasts of a 0.2% rise, further dampening fears of a recession. 

Retailers, however, suffered their second weakest January since records started in 1995 as shoppers reigned in spending, according to the British Retail Consortium this week. The figures also chime with an earlier report from the Confederation of British Industry that showed the biggest fall in retail sales in nearly three years, intensifying concerns that without consumer spending growth the economy could fall back into recession.  

Technical analysis highlights the 800+ point rally on the FTSE 100 in the past two months, with the index returning to levels last seen before the Eurozone debt-crisis escalated last summer. The strong medium-term uptrend remains intact and the formation of a golden cross, where the 50-day moving average has broken above the 200-day moving average, is a bullish indicator. The oscillators are, however, at extremely overbought levels and given the deterioration in trading volumes, it could trigger a rapid retracement. 

In conclusion, there are undoubtedly some green shoots of recovery evident in the global economy, assisted by monetary pumping from central banks and renewed optimism surrounding Europe. The market has, however, been here before and with the major indices back at pre-Eurozone crisis levels, my short-term suspicion is that risk is now skewed to the downside with a viable solution to Europe still some way off. 

Fears over the uncertain economic outlook encouraged shoppers to limit their spending ahead of a difficult year. The sharp slowdown in food and clothing sales heightened investors’ concerns over the heath of the sector following a series of failures including Barratts, La Senza, Blacks and Peacocks.

Clothing sales slowed sharply to near zero growth after a good December and any sales were largely discount-driven, resulting in lower margins for retailers. A related company I have been monitoring is Debenhams (LON:DEB), a leading department store with a total of 167 stores throughout the UK, Ireland and Denmark. 

The above chart of Debenhams illustrates the downwards channel the shares have followed during the past two years. A recent improvement in the wider market has, however, boosted the retailer by almost 30% since the start of 2012, taking the shares towards the upper band of the downward channel. 

Strong resistance is likely to be encountered from this trend line at 72.7p, which combined with the oscillators rolling over within overbought territory, leaves the shares looking vulnerable to renewed weakness.

The group’s post-Christmas sales update was broadly in-line with expectations. Strong December like-for-like sales gained 6.5%, helping offset a weak October and November, although easy comparisons with 2010 (when bad weather impacted the festive period) arguably distorts the figures. 

On 8.1x earnings the valuation remains undemanding, but the relative valuation in comparison to the sector has narrowed recently. Furthermore, it doesn’t have the tangible asset backing relating to property that many of the other major retailers have. Recent restructuring has reduced their net debt to £383.7 million, but this still represents almost half the market capitalisation. 

Many analysts are forecasting little pre-tax profit growth over the next few years and given the vulnerable technical outlook combined with possible downside macro-economic shocks, I believe it is a stock to avoid in the short-term. 

At the time of writing the share price is 70.7p and given the close proximity of major resistance, a short trade with a stop-loss at 73.5p, creates an attractive risk/reward bias. Near term targets are seen at 67.5p, 65.1p and 57p. 

This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Debenhams, but client accounts may. The material in this report has come from Simply Charts and Debenhams’s corporate website.

What if the Eurozone breaks apart?

Could the FTSE 100 retest the March 2009 lows?

What are the investments to keep an eye on in 2012?

Historical analysis reveals that property related stocks are one of the best performing sectors in the first year following a recession and given the recent improvement in economic data, my preferred investment is commercial property giant British Land (LON:BLND). 

Volatility seen in November continues to make the market a difficult call on a day to day basis.
What is driving the market as we move towards 2012?
What are the prospects of a pre-Christmas rally to cheer investors?

It has been another strong week for UK equities as investors react to a highly anticipated solution to the Eurozone sovereign debt crisis.

Policymakers delayed an announcement from last weekend and subsequently cancelled the mid-week meeting between EU finance ministers, known as Ecofin, as the finer details of the meeting had not been finalised.

On Wednesday however, European officials announced the outline of a plan aimed to draw a line under the spiralling debt problem that has threatened the global economy. Under the deal, private sector holders of Greek debt have agreed to voluntarily accept a 50% cut in its investments, which will reduce Greece’s debt burden by €100 billion, lowering its debt to 120% of GDP by 2020 from 160% currently.

Simultaneously, the European Financial Stability Facility, which has been used to support Ireland, Portugal and Greece, has been leveraged four to five times to around €1 trillion. This will be used to offer a credit enhancement to those that have taken a haircut on their Greek exposure and to provide on-going support to the region as a whole.

Against that backdrop came further negative news from Italy, after the country’s inability to deliver a sustainable plan for reforming its pensions system raised doubts about Prime Minister Silvio Berlusconi’s ability to tackle the crisis that threatens the economy. Italy has the largest sovereign bond market in Europe, with public debt at 120% of GDP.

Global economic data has largely been affected by the on-going uncertainty in Europe, with Eurozone PMI slipping to 47.2 in October from 49.1 in September, below forecasts of 48.8 and its lowest level since July 2009.

UK factory orders fell at their fastest pace in a year in October to -18 from -9 in September, as exports declined and firms expected to cut output as worries about the debt-crisis weighed on sentiment.

The mood amongst US consumers also deteriorated further this month, with the Conference Board’s consumer confidence index plunging to 39.8 in October from 46.4 in September. This was well below the 46.0 expected by economists and is back to levels last seen during the 2008-2009 recession.

Technical analysis captures the recent increase in risk appetite, with the FTSE 100 gaining 17% in the past few weeks. The index has catapulted through resistance from the 50 and 200 day moving averages at 5370 and 5572 respectively and moved above key historical support at 5600.

The oscillators are however, extremely overbought with the majority of metrics near all-time highs. Support is now seen at 5572, 5490 and 5400 with the next upside target at 6000.

In conclusion, it has been an incredible move for equities of late. Despite the deteriorating macro-economic backdrop, investors appear to have solely focused on a resolution in Europe and see the recent announcement as a building block for an economic recovery.

In practice however, much good news has already been priced in and I am sceptical that the risks have been removed.  Aside from the Eurozone debt, global economic data has continued to deteriorate with many metrics declining to levels last seen in 2009, when the FTSE 100 was at 3600. Debt in many peripheral nations is at historically high levels, at multiple to GDP and any continued deterioration in economic conditions will take its toll. 

Drax (LON:DRX), which operates the largest coal fired power station in the country, received a boost from the UK Government’s plans to increase incentives for power firms to switch to biomass to reduce carbon emissions.

Biomass is an eco-friendly renewable energy source that Drax plans to invest heavily in. The group however, was hoping to get a greater financial incentive from the Government and prompted CEO Dorothy Thompson to call for a moderate uplift in subsidy to make it viable.

A glance at the above chart of Drax highlights the relative strong performance with the shares gaining 45% year to date, considerably above the European utility sector.

First half results on 2^nd August showed a healthy increase in operating profit to £169 million from £132 million last year, as it also benefited from a £198 million one-off tax credit after negotiations with HMRC. Revenue also grew to £866.3 million from £780.6 million in 2010.

The company however, faces a number of headwinds. Despite an improvement in the first half of 2011, underlying profits for the full-year 2011 are expected to be below 2010, due to escalating forward prices for electricity and coal. Drax is also facing the prospect of considerable green taxes on carbon emissions as free CO2 emission permits cease in 2013.

Drax now trades on 11x earnings, considerably more than the 7.4x it traded on earlier this year and with only 7% growth forecast into next year, it puts them on an unappealing PEG of over 1.5.

Technical analysis of the chart indicates the oscillators are overbought and showing early signs of weakness. The MACD histogram is stepping lower and the stochastic has intersected to the downside, indicating the recent momentum is deteriorating. The shares are also trading within close proximity of major resistance at 541p.

It has been a good year for Drax, but margins are now probably at their peaks. The biomass announcement was not as positive as hoped and with several headwinds ahead, I believe the shares are too high.

At the time of writing the share price is 529p and with a stop-loss marginally above resistance at 551.5p, a short trade offers an attractive risk / reward bias. Short-term targets are seen at 501p, 487.5p and 462p.

This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Drax, but client accounts may. The material in this report has come from Simply Charts and Drax’s corporate website.

A related stock that looks oversold following negative investor sentiment towards the sector is Afferro Mining. Afferro is the iron-ore part of former AIM quoted African Aura Mining, spun out on the 13th April 2011. Its two main projects are in West Africa and recent production updates show both continue to grow.

Despite the recent trading range, downside pressure on markets is mounting.The central bank doves are gaining strength and appear ready to act. With investors increasingly fearful of the Eurozone troubles, the flight to safety is proliferating.

Man Group (LON:EMG) shocked the market this week, as the world’s largest listed hedge-fund group said investors have pulled billions of dollars from its funds since June.

Wolseley (LON:WOS) is the largest specialist trade distributer of plumbing and heating products to professional contractors and a leading supplier of building materials to the professional market.

Housebuilder, Barratt Developments (LON:BDEV) returned to profit for the full year and expects to make further progress despite the dormant housing market.

British high street retailer Next has so far defied the gloom helped by a first-half update on the 3rd August that revealed sales of its clothing and homewares had risen 3.2% and reiterated its full year profit guidance. With elevated consensus forecasts, is the good news already priced in?

It is also worth considering the longer-term chart, as the “death cross” has been formed for the third time in the past decade. Previous alarm signals were in late 2000 and early 2008, both of which turned out to be strong sell signals.

Rockhopper Exploration (LON:RKH), a Falkland Islands oil explorer, this week announced an exploration update, increasing its estimate for how much oil it could find and extract at its Sea Lion complex.

The recent turmoil on the financial markets has caused a significant correction in UK stocks.
However this now presents investors some interesting buying opportunities.
We look at some companies that should be considered at knockdown prices.

RSA, one of the UK’s largest insurers was one of the many companies to beat expectations when they reported on Thursday of this week, suggesting there is still value to be had in the market.