While everyone has been focusing on the credit crunch, the real economy is taking a kicking.
It's hard to see how anyone ever believed that such a dramatic downturn in the financial markets could fail to have an impact on the high street, but plenty did.
It's becoming very plain that they were wrong. The most obvious credit crunch casualty so far has been the housing market more on which below. But now the British Retail Consortium has revealed that like-for-like high street sales fell 1.6% year-on-year in March. And The Telegraph reports that accountant BDO Stoy Hayward reckons the figure was more like 2.9%.
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And yet, prices are rising
No more easy credit to accommodate the rising prices
Consumers are caught between a rock and a hard place. The price of everything they need is rising. The Office for National Statistics reported that wholesale food prices rose 8.5% in the past year. Data from MySupermarket.co.uk suggests that rising food prices have added nearly £600 to the average family's food bill in the past year.
Fuel costs aren't helping either. The days of £1 a litre petrol seem far behind us it's more like £1.10 now.
But what's new? Prices have been rising for a long time maybe not at current rates, but certainly, the experience of living in Britain for several years now has been one of rising domestic costs, offset' by falling import prices. So what's changed? You guessed it, the credit crunch.
Rising prices didn't matter while there was plenty of easy credit to pay for them. But the credit lines have been shut down, and there's no more money left in the pot.
Hence the fall in high street sales. We've already seen DSGi (formerly known as Dixons) issue its second profit warning of the year as consumers pull back on buying unnecessary electronic gadgets. Philips yesterday warned that falling sales of flatscreen TVs had hammered its profits for the first quarter, while the end of the construction boom meant lighting sales had taken a dive, particularly in Spain.
Surveyors: this is worse than the 90s crash
And as mentioned above - there's been yet more bad news for the housing market. The Royal Institution of Chartered Surveyors has just reported that almost 80% of surveyors saw house prices fall in March. That's the worst reading since such records began, 30 years ago. Surveyors are also more pessimistic than ever before, with 73% expecting prices to fall over the next three months.
Yes, you read that right surveyors now believe that the state of the housing market is worse than at any time throughout the 90s crash. Yet most commentators are still claiming that it won't be as bad this time around. The professionals clearly disagree with them.
Things look grim. And the credit crunch will only get worse we look at the various other nasties piled up on banks' balance sheets waiting to wreak havoc, in the latest issue of MoneyWeek, out on Friday (if you're not already a subscriber, you can get your first three issues free by clicking here.
But what does this misery mean for investors? You might be tempted to stick all your money under the mattress, but the truth is there are still plenty of interesting investment opportunities out there. Sure, you should be avoiding any consumer-facing stocks and by that I mean banks, airlines, travel companies, leisure companies, retailers anyone whose business relies on selling discretionary items to consumers. The UK recession will be much worse than most people yet expect (it's still somewhat controversial to even say that there will be a recession), which means that stocks aren't yet pricing it in sufficiently.
Why you should follow China's lead on BP
However, to take one example, big oil still looks cheap. I'm not convinced that oil prices above $100 a barrel will be sustainable for the rest of this year and next, as economic conditions worsen across the globe (though in the long term, peak oil and rising demand may well mean that we one day look back on $100 a barrel as a bargain). But the truth is that the oil majors' shares haven't really risen with the oil price in the past year or so, as they've had their own worries.
So at these levels, regardless of what happens to the oil price (within reason), both Shell (RDSB) and BP (BP) look cheap. The Chinese certainly think so The Telegraph reports that Beijing has built up a near-1% stake in BP through a sovereign wealth fund. While the Chinese haven't exactly shown stupendous judgement (buying Blackstone just as the private equity bubble burst, for example), I wouldn't want to bet against them on this one.
Turning to the wider markets
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On Friday, the FTSE 100 closed down 63 points at 5,831. Insurer Friends Provident was the main faller after US group JC Flowers said it will pull its proposed offer unless the group enters talks by the end of this week.
Across the Channel, the Paris CAC-40 lost 31 points to end the day at 4,766. And in Frankfurt, the DAX-30 fell 49 points to 6,554.
On Wall Street, US stocks edged lower as the country's fourth-largest bank Wachovia said it would raise $7bn in capital and cut its dividend sharply, after losing $350m in its first quarter. The Dow Jones slipped 23 points to end at 12,302. The broader S&P 500 fell 4 points, to 1,328, while the tech-heavy Nasdaq slid 14 points to close at 2,275.
In Asia, Japanese stocks headed higher, with the Nikkei 225 closing 73 points higher at 12,990. Trading houses, which generate a large chunk of their profits from commodities trading, headed higher as oil hit a fresh record.
Crude oil was trading at around $112.04 this morning, after hitting a record of $112.48, while Brent spot was trading at $110.06.
Spot gold was trading at around $934 an ounce this morning. Platinum was also higher, at around $2,012, while silver was trading at $17.98.
Turning to forex, sterling was trading at 1.9711 against the dollar, and at 1.2430 against the euro. The dollar was last trading at 0.6308 against the euro and 100.93 against the Japanese yen.
And this morning, Tesco's full-year results met City forecasts, with an 11% rise in annual profit for the 52 weeks to February 23rd. Like-for-like sales (excluding petrol) were up 3.5%, and up more than 4% in the first five weeks of the new financial year. Chief executive Terry Leahy acknowledged that the tough economy would have an impact on consumer habits, but told Reuters that Tesco tends to "grow market share in this kind of environment".
Our recommended articles for today...
Why the IMF was right to slash US growth forecasts
- The IMF forecasts a downbeat 2008 for the global economy as it deals with the ongoing credit crisis, the economic slowdown and stubbornly high inflation.It also reckons that total losses associated with the credit crisis could hit $1tr. To read Jeremy Batstone-Carr's analysis of the bank's comments, click here: Why the US growth forecast was cut from 2.7% to 0.5% (/file/45348/why-the-us-growth-forecast-was-cut-from-27-to-05.html)
Why sub-prime debt matters
Have you ever wondered if sub-prime debt is such a tiny part of global debt why does its demise have such widespread consequences? Martin Spring looks at this question and explains that despite the recent rally in the market, there are fundamental reasons why the economy is not going to bounce back any time soon. To find out why increasing liquidity isn't going to help insolvency, read: Why sub-prime debt matters (/file/45349/why-sub-prime-debt-matters.html)
