Cannot find the straw that broke the camel’s back?

Cannot find the straw that broke the camel’s back?

The UK stock market has some exciting moments in July.  Banco Espirito Santo SA, Portugal’s second largest bank by market value, gave the market a cold shower as some of Grupo Espirito Santo’s units missed commercial paper payments.  FTSE 100 Index first rallied to 6850 level then broke the 200 days moving average support for the first time since April and tested 6650 level.  It then bounced back to 6800 which was the supporting level in May and June.  For the past year, it has been a good strategy to buy FTSE100 when it dips below its 200 days moving average (the average price of the past 200 trading days’ closing prices) and sell a month later.  6900 level has been challenged in May, June and July and with the continuous bullish sentiment in US stock market, there is still a chance for FTSE100 to be above 6900 level in 2014.

While the FTSE100 has had an uptrend in the past year, the index has only gone up 3.5% from 25 July, 2013 to 24 July, 2014.  Buy and hold investors have done better than bank deposit and inflation.  The US stock market represented by S&P500 index has gone up 17.6% in price but only 6.1% in GBP terms in the same 12 months period.  GBP has been strong against the USD strengthening from a low of GBP 1 to USD 1.4814 on 9 July, 2013 to GBP 1 to USD 1.7192 on 15 July, 2014.  This makes the S&P500 index gain in USD much less lower in GBP terms.  It is still great to be up 6.1% in 12 months for those invested in US S&P500 Index Funds.

The Euro stock market has been as bullish as US.  It may sound illogical as US has recovery written all over it while Europe only has managed to pick up World Cup in Brazil.  Eurostoxx 50 Index is up 17.5% in the past year and was up 20% until the Banco Espirito credit issue emerged.  GBP has also gained against EUR in the past year and the 17.5% gain in Eurostoxx 50 in EUR terms would become 7.9% gain in GBP terms.  So sticking to the big index funds in US, Europe and UK have been fairy fruitful investments in the past 12 months.

Zooming into the individual stocks in FTSE100, there are a lot of dramas.  2014 top performers are Shire Plc which is up 75% year to date as of 24 July.  United Utilities and Randgold Resources are up 34% to 35%.  Weir Group, Ashtead Group, Next Plc, Fresnillo Plc, Smith & Nephew, AstraZeneca and Glencore are up 23% to 27%.  There are a lot of household names in the worst ten performers.  Tesco, Pearson, Vodafone, Kingfisher, Coca-Cola HBC, Hargreaves Lansdown, Barclays, ARM Holdings, Royal Mail are down 18% to 21%.  At the bottom of the list is WM Morrison that is down 33.5% year to date.

Shire Plc is a biopharmaceutical company with over 5,000 staff and it is bought by its US rival AbbVie Inc for about GBP 32 billion.  AbbVie can lower its tax rate as the new combined company will be a UK domiciled company.  After the AbbVie Shire merger, AstraZeneca shareholders are hoping for a better bid from Pfizer after the last bid was rejected in May.  However, its share price at 4,300-4,400p level has already priced in a merger premium.

While UK pharmaceutical companies enjoy bidding interest from US rivals, the UK supermarkets are beaten up.  WM Morrison is struggling to find breathing space between the 3 giants (Tesco, Asda and Sainsbury) and the 2 rangers (Aldi and Lidl).  Morrisons are not really big in online or in physical convenience stores.  Even Tesco is down 18% year to date which shows how tough it is in the supermarket space.

Post Office is not supposed to be a roller coaster business but Royal Mail share price have been swinging like high tech stock share price.  Royal Mail, the 500-year-old institution, came to the stock market at 330p to close at 455p on the first day of trading and peaked at 615p on 15 January which made every investor very happy.  But the share price has been heading South since March with a one month rebound in mid-April.  It closed at 441.1p on 25 July.  Amazon is withdrawing its entire business from Royal Mail.  Amazon has expanded its own delivery network and introduces a GBP10 minimum spend for free delivery.  Amazon scrapped free “super-saver” delivery on items worth less than GBP10 in January which resulted in less business for Royal Mail.  New entrants like TNT are also cannibalizing Royal Mail’s business.

The third quarter is going to be interesting for stock investors with the Russian Ukarine situation as a potential catalyst and the US unstoppable bull market could be waiting for the straw that broke the camel’s back.