The FTSE 100 was up 11.5 points at 5838.8 at 11:02 a.m. on Wednesday. Energy and resource stocks rallied, again, on the outlook for the price of oil, but house builders were down, again, after Merrill Lynch dashed for the alarm button. The broker cut Barratt, Bellway, Berkeley and Redrow to underperform, and moved Persimmon to “neutral” from "buy".
"Given the deteriorating market backdrop that the UK house builders have experienced over the past three months, we believe that the early 1990s housing market recession has increasing relevance as a comparator," Merrill said, adding:
"Note once again the critical importance of unemployment levels as the single most important determinant of consumer confidence and housing transactions; this was the case in the early 1990s recession. If, as we suspect, unemployment trends higher, then we believe that this will put additional pressure on housing transaction volumes. More than anything else, watch this variable closely."
Like other brokers, Merrill also highlighted the prospect of capital raisings, noting that if [net asset value] write downs happen, "then we judge that most house builders will have little option but to come to the market for additional capital".
"Such rights issues or placing will have to be both deeply discounted and heavy, implying potentially significant dilution to both NAV/shares as well as [earnings per share]. Note that in the early 1990's the UK house builders raised 105p for every 100p of land write down," the broker added.
Barratt, which suffered heavy losses yesterday, was off another 25.68 per cent or 23.5p at 68p this morning.
Taylor Wimpey lost 20.38 per cent or 13.25p at 51.75p, Bellway was down 11.15p at 56.5p at 450p, Bovis Homes lost 8.08 per cent or 27.75p at 315.75p, Redrow shed 9.67 per cent or 16.75p to 148.75p and Berkeley was down 5.76 per cent or 42p at 687.5p.
As a point of record, KBC Peel Hunt went the other way and set a "speculative buy" rating on Barratt.
"What has changed practically in the last two days? Nothing we suspect just a shift of perspective. BDEV still needs rescue funding and is close to the edge on key covenants," the broker said, but added:
"However, only the net worth covenant is under any pressure as at end June 2008. BDEV must stay above an 85% loans to net worth ratio and on forecast year end debt this will be 78%. What has changed is the belief that asset write downs will start as soon as this June. BDEV need only see a write down of a couple of percent on its land and WIP (which totals over £4bn) to put it in breach. We would argue that major asset impairment less likely this early in the cycle (in the early 1990s the bulk came right at the end of the slump) so we see the large, June/July year end write downs as being forecast too early - no question on the eventuality of these, just the timing."
Predictions of $250 per barrel of oil drove Amec to pole position on the FTSE 100, up 3.02 per cent or 27p at 921.5p. BP, at second place, gained 3 per cent or 17.5p to 600.5p, Royal Dutch Shell added 48p to climb to 2142p and Cairn Energy was up 55p at 3529p.
HBOS was the best among the banks and rose by 5p to 297p after UBS upgraded the stock to "buy".
On the FTSE 250, IG Group was up 8.25p at 376.25p after Citigroup moved the stock to "buy" from "hold".
"Within our forecast changes, we have substantially upgraded our international revenue estimates for 2009 (29%), compared with the UK (15% upgrade). Now that international revenues (mainly Europe and Australia) account for c30% of the group, these faster growth rates start to have a more significant impact on overall group growth rates," the broker said.
Beside house builders, economic uncertainty bore on the retail sector where Next, which was also struck by a "sell" note from Citigroup, lost 5.83 per cent or 64p to 1033p.
"An Englishman's home might be his castle, but the moat protecting it is most certainly looking less and less secure. With house prices on an alarming downward path, levels of private debt sky high and inflationary risks leading many to believe that Mervyn and his MPC friend's next move could now be to hike rates, the outlook for the UK consumer is looking pretty dire," Citi said, adding:
"The UK consumer has still not fully capitulated and we now expect the peak of this brutal slowdown to be felt in 2009."
In addition to its rating on Next, the broker maintains a "sell" on Kingfisher, which was down 4.2p at 124.2p, Debenhams, which lost 5p to 52p, DSG International, which was down 3.5p at 54.25p, Home Retail Group, which lost 4.5p to 224.75p, Signet, which was down 2.75p at 53.5p, Sports Direct, which lost 4p to 86.25p, and JJB Sports, which was down 3.5p at 101.75p this morning.