How To Trade The UK Employment Myth

In the first article, Exploding The UK Employment Myth, I suggested that the current job situation wasn’t as positive as the figures suggest. So what are the implications for other parts of the economy and how can I trade this?

To consider all the economic implications would be like writing a dissertation so I’ll just focus on a few main areas.

Housing
I dealt with the main effects of unemployment in the recent piece Are House Prices Set To Tumble? However, another major concern is the missing generation of home buyers. Under the claimant count measure of unemployment the number of under-25s now claiming jobseekers’ benefit has almost doubled over the past year to 456,000; the labour market survey shows 18% of 16-25 year olds without a job.

That’s a lot of people in no position to even dream about buying a house and who are years off ever managing a deposit of £40,000 plus. The last housing downturn had a backstop of twenty-somethings helped by 95-100% mortgages and (for many) safer job prospects (this time around job-losses are spread over a much wider cross-section of industries, in particular the once safe haven of finance).

Last week the National Association of Estate Agents said that seven out of ten potential first-time buyers had now given up hope of owning their own home. As anyone who’s been involved in a house-buying knows, there’s usually a long chain dependent on a first-time buyer at the bottom. Without someone to buy that first house the chain could get a bit rusty.

Borrowing And Saving
Consumer spending fell by 1.3% in the first quarter of 2009, the sharpest fall since 1980. Household disposable incomes fell by 2.4% in the quarter, and the savings ration fell to 3% as households dipped heavily into their savings to pay the bills.

Yesterday the Bank of England’s Credit Conditions survey warned that the number of people defaulting on loans had risen and was likely to keep rising over the next few months. Banks reported more demand for, and increasing availability of, secured loans, but were tightening restrictions on credit card and unsecured loans. This makes perfect sense; banks are under huge political pressure to lend more money but shareholders will start voting with their feet if they get a sniff of loans being handed out to dodgy credits.

Check out the chart on borrowing costs; there’s actually been a rise in credit card rates, reflecting the higher risk of default.

I’m still concerned that the banks have a more skeletons than the Natural History Museum in the form of exposure to loan arrears and credit card debts that will get worse over the coming months.

Rising debts and falling savings don’t bode well for discretionary spending with holiday travel and non-essential items likely to take a hit.

National Debt
I won’t open the lid of Pandora Brown’s spending box (there’s enough there for an article in its own right), but rising unemployment could perversely lead to higher interest rates.

Research by a clever guy at Schroders says that this year benefit payments in the UK will exceed income tax and National Insurance contributions by £25 billion (these figures come from the Treasury, not random guesswork). So the workers are already paying all their dues to those who can’t (or won’t) work, leaving nothing for hospitals, teachers and bobbies on the beat.

I don’t know what level of unemployment was used in this calculation, but given that most Treasury projections bear the hallmark of JK Rowling I doubt they’re anywhere near pessimistic enough. So a higher level of unemployment will mean less income tax and more benefit payments.

At the moment the government has to sell gilts (government bonds) most days in between breakfast and lunch just to keep the country ticking over. If bond investors feel that the UK has reached the financial tipping point and is unable to repay its debts then they’ll refuse to buy any more of its bonds. That’s when the UK becomes Iceland without the geysers, interest rates will rise and you don’t want to be holding Sterling or bonds.

What Trades Am I Looking At?
The main way I’ll be backing this view is through selling the FTSE index, though again I need to choose when it’s relevant and when to stand aside. Yesterday I closed my short position ahead of the US payrolls roulette, but was too slow to get back on board. That’s OK, I’ll wait for the next ‘green shoots day’ to load up again.

I’m not an equity analyst, but I’m looking to build up a few strategic short bets in banking, retail and travel.

I’m already running short trades in Lloyds (these are from ages ago and well onside) and Barclays (yesterday at 290.5p).

In the retail sector I’m watching Kingfisher. Kingfisher failed at its 21-day MAV and dropped below its 50-day MAV with an RSI below 50. Just above 200p would be a sensible place for a stop loss and with a first target of 160p I’ll be looking for a higher entry point than the current 178p.

In the travel sector I’m looking at British Airways and TUI Travel. I might be too late to the party with BA; it’s near the year’s low and has a lot of bad news built into it. On the other hand it could become a total basket case. For the moment I’m holding off, watching for a close below 111p.

TUI Travel has failed to break above its 21-day descending MAV, but is just holding support at the 200-day MAV at 227p. Momentum is failing with an RSI at 43 so I’m watching for a close below the 200-day MAV to target 211p.

That’s the game plan; if anyone out there knows of a good reason why I shouldn’t trade these stocks, let me know please.

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