London's top stocks went into retreat for a third straight day, with a profit alert from Tomkins intensifying doubts about the strength of the United States economy.
Online gaming stocks plunged after SportingBet said its non-executive chairman had been detained by US authorities, reigniting fears about a crackdown on gaming in the US. Vodafone was another faller as the mobile phone firm lost one of its few remaining fans in the City.
The FTSE 100 index dropped by 71.2 to 5858.1, its weakest in a month. Having closed on Monday at its best level since May, the benchmark has dropped 128 points. Declines were broad based, with directories publisher Yell the only blue chip stock to spend the day in positive territory.
Meanwhile, the Dow Jones Industrial Average lost as much as 76.3 to 11329.9, more than doubling yesterday's decline. A surprise upward revision of second-quarter labour costs had yesterday cast doubt over whether the Federal Reserve has enough evidence to hold rates, while grim news today from the housing sector questioned whether the economy could absorb another twist.
HSBC's chief economists, Stephen King and Ian Morris, were sending around a "recession risk" warning to clients this afternoon. The Hong Kong bank cut its 2007 growth forecast for the US economy to just 1.9 per cent, or 1.3 per cent for next year's fourth quarter alone.
"Following the 2000-01 stock market crash, the US economy staged a miraculous recovery. That miracle is now ending. A cocktail of higher energy prices, tighter monetary policy, an end to tax cuts and, more recently, a housing market that appears to be in free-fall threatens to poison the upswing," they said.
On this side of the pond, the Bank of England surprised nobody by leaving its benchmark rate at 4.75 per cent following last month's unexpected quarter-point hike.
For more on the interest rate decision, click here.
Companies exposed to the American property market featured on the FTSE loserboard, with Wolseley, the world's largest plumbing supplies firm, down 35p to £11.15 and brick maker Hanson losing 14p to 658p. That followed KB Homes, the nation's No 5 constructor, cut profit forecasts and Hovnanian Enterprises, a luxury specialist, reported its second straight drop in quarterly earnings.
A profit warning from engineer Tomkins, which gets three quarters of its sales from the States, deepened the gloom. The former buns-to-guns conglomerate now makes air conditioners, acrylic baths and power transmission systems for manufacturers such as Ford.
Despite management assuring that everything was fine at its interim results a month ago, Tomkins said today that its third quarter operating profit in July and August was substantially below its expectations. It blamed a weaker than expected North American residential market following interest rate hikes, and falling demand from the big three US auto manufacturers.
Tomkins had previously indicated that, due to contracts and cost savings, its second half profits would be substantially above the £63.8 million before tax it reported in the first half. Today it warned that profit would be about £11 million for the seasonally quiet third quarter, leading analysts to forecast a six-month shortfall of £30 million or more.
Shares dived 41.5p to 241.25p, the lowest since September 2003.
Goldman Sachs said it expected Tomkins to maintain its dividend, which means shares yield nearly 6 per cent at current levels. This should provide downside support, although shares will likely underperfom a rising sector, the broker told clients as it suspended its "buy" rating.
Fellow auto parts maker GKN retreated 8.75p to 292.75p.
"Although residential appears to be Tomkins’ main issue, inevitably GKN shares will be unsettled by the profit warning from its industrial peer," said Citigroup, which noted that the top US auto firms account for 9 per cent of GKN sales. It guessed that tough conditions would cut about £6 million, or 3 per cent, from GKN's trading profit.
Online betting stocks such as PartyGaming and 888 plummeted on news that Peter Dicks, non-executive chairman of SportingBet, was detained in the early hours of this morning while visiting the States. Mr SportingBet suspended its shares pending clarification of what was going on.
The gaming sector had rallied in recent weeks, having dropped in July on news that the chief executive of Betonsports was arrested in Texas and charged with alleged fraud and racketeering. After the initial panic, traders had begun to assume that the probe extended no further than BetOnSports. Today's news raises fresh doubts about that assumption.
In the backdrop, Senate is preparing to debate a law that could prohibit most types of internet and telephone gaming in the US. Still, many analysts expect the Senate to decide it does not have time for the debate during the current session, and will eventually go with the industry's favoured option of a review into the effects of gaming rather than an outright ban.
PartyGaming was the sharpest FTSE 100 faller, down 11.5p to 105.75p as the news from the US overshadowed an in-line set of interim results from the poker firm. 888 Holdings, the world's biggest online casino operator, slumped 27p to 144p having been lifted yesterday by spurious bid gossip. Neteller, a Paypal for betting sites, sank 94p to 336p.
World Gaming dropped 27.5p to 64.5p. Earlier, SportingBet had said it may make an all-share offer for World Gaming the provider of its casino and bookmaking software -- the likely genesis of the rumour that buoyed 888 late yesterday.
For the latest on Mr Dicks' detainment, click here.
Back among the blue chips, Vodafone was off 1.75p to 112.5p after Lehman Brothers analysts downgraded the mobile operator to "equal-weight" from "overweight", citing ongoing competition in the mobile telecoms operator's core European markets.
The broker, which upgraded Vodafone in March, added that there are not enough catalysts for outperformance on the horizon now the group has completed its sale of Japan Telecom. The downgrade means that, among the City's heavyweight research houses, only Merrill Lynch has Vodafone on a "buy" recommendation.
Separately, the European Union's top court decided the mobile operators should not be able to reclaim sales tax on the cash their purchase of 3G licences. Most investors were resigned to the defeat.
Vodafone was among the operators aiming to reclaim £3.3 billion of the £22.5 billion they paid the UK government for the licence fees, saying they were due a refund because subscribers, rather than the companies, were the final consumers. The European court sided with British tax authorities, which had argued there was no VAT component in the sale.
Leading the FTSE, Yell jumped 39p to 572p after Britain’s competition watchdog proposed to ease price controls, saying the directories firm faced increased competition from BT and the Internet.
In a surprisingly mild draft proposal, Britain’s Competition Commission said it planned to allow the Yellow Pages publisher to raise prices in line with the retail price index from April 2008. Yell's prices are currently capped to six percentage points below the rate of inflation.
The Commission said it was publishing its proposals for consultation and that it would make its final report before early April 2007.
For more on the Yell story, click here.
Sainsbury also outperformed, ahead 3.75p to 359.5p, after the FTSE's index committee said last night it would increase the supermarket's weighting to 100 per cent from 75 per cent, because of sales out of its blind trust. That will force tracker funds to increase their Sainsbury holdings.
According to UBS analysts, the reweighing could equate to the purchase of 40 million Sainsbury shares by index funds, equivalent to 3 days of trading volume.
In the mid-caps, Premier Foods was ahead 6.75p to 270.75p as dealers awaited news on the auction of United Biscuits, due any day now. United, the maker of Jaffa Cakes, Penguin biscuits and Hula Hoops, is being broken up by Kraft and the three financial owners that took it private six years ago.
Premier is said to be bidding from United in concert with Lion Capital and NPM Capital, offering about £1.7 billion. The buyout firms reportedly want United's KP snacks and its northern European business respectively, while Premier is after the McVitie's biscuits unit in return for about £1.1 billion of the purchase price. Today is the deadline for bidders, which may also include private equity firm Blackstone.
Citigroup was in favour of Premier getting United, saying management were unlikely to make a meal of it. Its team repeated "buy" advice with a 300p target, raised from 260p.
The Wall Street broker argued that Premier management has already proved itself because, since flotation in 2004, the shares have added 50 per cent solely on the basis of acquisitions such as Birds (custard), Campbells (soup) and Quorn (processed fungus).
Citigroup reckoned that Premier could fund the deal entirely with debt, find modest cost savings, and still come out with accretion to earnings of around 20 per cent in the first year and 30 per cent in the second. It also saw huge potential to cut costs, noting the United's overheads are 28 per cent of sales compared to just 10 per cent at Premier.
Track today's trading by industry sector here.
Bright Things, which makes the Bubble games console, was the day's most spectacular performer, rising more than fourfold after management confirmed leaks that its new DVD game -- Tomb Raider, the Action Adventure -- was seeing positive interest from the trade, and that it was close to a deal to licence its intellectual property.
The stock soared 15.25p to 18.75p in reaction. It peaked at 203p last year, and hit a low of 2.75p at the start of the month as Bubble sales disappointed.
Bright Things was set up by two former executives of Eidos, Tomb Raider's original developer, who had made a games system that speaks to DVD players. Having failed to capture much of the pre-school market with offerings featuring Pingu and Noddy, management returned to the top-heavy attractions of Lara Croft as it searched for new opportunities to use the technology.
Can things get any worse for ISoft? Shares in the punch-drunk NHS software contractor rallied from a record low of 41.75p to reach 58.25p late last month after it renegotiated banking facilities, giving it a credit line out to November 2007.
But, according to ABN Amro, the debt facility is useless beyond the end of the year iSoft will almost certainly have to turn to shareholders for funds. The broker kept "sell" advice on the stock with a valuation of just 15p, from 90p previously.
The big surprise last month was that iSoft was able to get any kind of leeway with its lenders, given it had just switched its revenue policy in results not signed off by its auditor because of an investigation into accounting irregularities. The terms of the loan were not given much attention: ISoft will be paying between 2 and 4.5 per cent above the base rate, in addition to payment in kind interest on the whole facility that moves from 5 per cent of the total at January next year to 10 per cent by July.
"While facilities are in place till November 2007, they are economically unviable beyond 31 December 2006," ABN told clients. "This gives the company about four months to find a more sustainable balance sheet structure. We believe this must include consideration for some kind of equity refinancing."
ISoft shares slid 4.75p to 45p.
Also on broker watch:
UBS cut Gallaher to "reduce" from "neutral".
Citigroup raised Scottish & Southern Energy to "buy" from "hold", upgraded Johnston Press to "hold" from "sell" and cut Gondola to "hold" from "buy".
ABN Amro downgraded Uniq to "hold" from "buy".
Dresdner Kleinwort raised Paddy Power to "buy" from "add", cut John Menzies to "add" from "buy" and dropped Dawson Holdings to "hold" from "buy".
Panmure Gordon cut Gondola to "hold" from "buy".
Evolution cut Tomkins to "reduce" from "buy".
Teather & Greenwood downgraded Gondola to "hold" from "buy".
And Morgan Stanley cut Bunzl to "equal weight" from "overweight".
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