Market report: Wednesday close

 

Goldman Sachs and Cazenove are the latest top City brokers to suggest the recent rally in shares of cash-strapped housebuilders may have been a false dawn.

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The sector has rallied 30% since the start of the month, albeit from a low point that tends to flatter.

Goldman says it now sees the potential for further share-price falls on the basis of fundamental valuation, and describes the UK housebuilding sector as the least defensive in terms of profits. The US broker still views the sector as a one-way street.

Rival Cazenove reckons this month's rally may have at least deterred the bears from continuing to short the sector. It says the trading update was 'awful', but not as awful as had been feared. The writedowns on the land banks have not been as large as expected but that does not mean the corner has been turned. The builders themselves have been cutting and passing dividends and laying off staff, and have not been buying their own shares.

Goldman already has Bovis Homes, down ¾p at 345p, and Berkeley, 12½p lower at 744p, on its influential conviction sell list. Its 2009 profit estimate for Bovis is 85% below consensus while Berkeley is seen as plain expensive in relation to profits on a historical basis. Those also on the sell list include Bellway, 24p cheaper at 491½p, Persimmon, 1¼p off at 310¼p, and Redrow, easier 1p at 134½p.

Redrow has collapsed from 548½p this year, bringing a headache for biggest shareholder Toscafund asset management, run by Martin 'Rottweiler' Hughes. Toscafund holds 43m shares, or 27% of the company, and is now believed to be sitting on a sizeable paper loss. The slump in the housing market has also taken a heavy toll of the builders. Many need to find fresh funds after seeing the value of their land banks shrink considerably.

A convincing performance on Wall Street overnight gave the london market its lead. The FTSE 100 index closed 101.5 higher to 5420.7 in thin trading. This afternoon the Dow extended its overnight gains with a rise of 133 points to 11,530.5 as investors awaited the latest oil statistics. High inventory levels would lead to a further drop in the price of crude.

Lloyds TSB fell 15p to 306p, having made bigger-than-expected banking crisis writedowns that left first-half profits 70% down. Tomorrow it is the turn of HBOS, 1½p lower at 271¼p. Once again, profits are expected to have collapsed, which will do little for the share price or for the smattering of private investors who chose to take up the group's £4bn rights issue at 275p.

Sentiment was underpinned by results from life assurer Aviva, 40¾p better at 507½p, and car insurer Admiral, up 89p at 914p. The miners also made headway, encouraged by impressive first-half numbers from Xstrata, up 212p at 3647p, and Kazakhmys, 44p higher at 1420p. Xstrata said it had enjoyed record output for the first six months of the year in a range of minerals.

Panmure Gordon confesses it has no confidence in its own forecasts for Pendragon, down 0.64p at 8.71p, ahead of interims next month. difficult market conditions will prevent the motor distributor from executing a market-recovery strategy. Panmure has slashed its target from 21p to 10p, and tells clients to avoid the shares for now.

British Airways put on 14½p to 263p in response to its proposed merger with Iberia. Dealers say the bears are trying to cover their short positions.

UBS has downgraded Dimension Data, off 1p at 49¼p, from buy to neutral, claiming US giant cisco may drive sector sentiment lower with results next week. It expects Cisco's fourth quarter to be in line with market forecasts but notes there is an increased likelihood it will lower first-quarter guidance.

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Tomorrow's agenda

HBOS is likely to take centre stage on a busy day for corporate reporting. The bank is tipped to post miserable first-half results, with analysts forecasting pre-tax profits down by up to 60% at £1.2bn. There is also talk it may be forced to make further writedowns, as income from corporate banking slumps.

Oil giant Royal Dutch Shell is expected to follow rival BP in reporting bumper profits, no doubt fuelling campaigners' calls for a windfall tax on the behemoths. Although attacks on its pipelines in Nigeria remain a concern, the soaring oil price is offsetting any hit to output.

British Gas owner Centrica, pharmaceuticals group AstraZeneca, consumer goods giant Unilever, broadcaster BSkyB, BT and British American Tobacco are among the other companies updating the market on trading.

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