....and the froth continues to build! Lonmin now, and more undoubtedly still to come by way of M&A activity before the bathwater starts swirling into the drains.

It certainly won't come as a huge surprise to me if the FTSE100 can put on yet another spurt to the upside over the coming few weeks before the inevitable drop, if history is anything to go by. (I don't plan to bore you by rehashing too much of what has been covered in previous WICS issues as regards 'history repeating itself' but it WILL do so, that's a promise!
Everything I see, is telling me that recession is looming.)

Anyway, today I would like us to have a look at the 'Big Picture' specifically in the context of 'What it might mean for us as traders'.
Quite a few of you have been asking me to 'explain myself' given the fact that markets are still rising in the face of my ongoing view that 'the end is nigh' so below is a wee 'economics essay' that I hope may prove beneficial to all of us.

As of course you know from everything I bang on about in WICS, I expect a pretty major downturn to manifest itself soon in most Western economies.
I realise that's a view currently shared by very few, but that's because all the fudging, spinning, and downright lying by governments over 'economic statistics' is still serving to keep the general public pretty much in the dark.

The real 'biggie' in terms of outright government lying, is of course the latest manipulation of inflation statistics.

Without getting into detail, the way in which inflation figures are calculated, has been twisted to ensure that just like Goldilocks' porridge, inflation seems neither 'too hot', nor 'too cold'. It appears to be 'just right' and of course the media happily goes along with the spin because
nobody really wants to hear bad news that might affect their pockets.

That has worked pretty well for quite a while overall, as evidenced by the carefree abandon with which Joe Public has been borrowing - he now owes the equivalent of one year and four months' worth of the entire GDP of the United Kingdom. No Olympic Gold for that achievement, but my goodness, it's some achievement nonetheless!

Anyway, what exactly am I rabbitting on about and how will it impact upon people's lives?

More specifically, what does it mean to us as traders?

Essentially, what I'm getting at is the difference between 'discretionary' and 'non discretionary' spending and how that is going to impact upon the overall economy.

'Discretionary' spending covers (mostly) the stuff you WANT to buy, whereas 'non discretionary' involves that which you NEED to buy.

Now current inflation figures are derived from BOTH of the above, but guess what?

Yup, your friendly caring government, realising some time ago that what you NEED to buy is rising in price far faster than what you WANT to buy, has ensured that 'non discretionary' expenditure takes ever more of a back seat in the overall compilation of the published figures.

After all, they care for your wellbeing and they know (on your behalf) that an inflation rate of 'around 2%' is 'just right'. Welcome, Goldilocks.

Let's just think about this more deeply though.

Many 'discretionary' items - things you WANT - have undoubtedly been FALLING in price for some time, largely as a result of outsourcing to the likes of China for example. There's no doubt that clothing, electrical and electronic goods etc are cheaper in real terms than they have ever been.
Competition on the High Street has ensured that carpets, furniture, and such are also relatively cheap. If you measure inflation based on all of that, then the figure would in fact be a NEGATIVE one.

Governments don't like that, because it might mean Joe Public waking up to the notion that if he puts off buying that new kitchen worktop for another year, it will probably cost him less than it would today.

And that's BAD in 'government - think' because if everyone started deferring the purchase of such stuff, sales would fall, jobs would be lost, unemployment benefit costs would rise, blah blah. And of course the WORST effect would be that you might all start blaming Tony and Gordon, and not vote them back in.

Not all 'discretionary' items are falling in price, however - eating out, taking the train to visit Granny, or visiting the theatre might be good examples.
Equally of course, not all 'non discretionary' expenditure is rising - currently for example, mortgage rates are still historically very low.

But that statement leads me nicely into suggesting that overall, 'non discretionary' spending is rising very steeply indeed, as a result of inflationary pressures thereon.

You NEED to pay that mortgage or rent (and mortgage payments will rise soon enough, fear not). You NEED to pay your council tax, water bill, gas bill, electric bill, car insurance....You NEED to buy your rail ticket or put petrol in your car. (When did anyone ever WANT to put petrol in the car?)
You NEED to pay your income tax and NI contributions....'need' I go on? In fact, another term you might use for 'non discretionary purchases' is 'DISTRESS purchases' - it distresses you to have to cough up for them. And you KNOW - only too well - just how much inflation you're having to suffer in those areas.

Now government figures would have you believe that not only is 'overall' inflation only 1.9% currently, but that you are actually better off now than you have ever been (thanks to Tone and Gordy of course.)

Why? Because according to them, your salary has gone up 4% if you work in the private sector, and 4.8% if you are in the public sector. Ergo, you are roughly 2% better off 'in real terms' (as they put it) than you were this time last year.

However, it appears something has been missed in the above calculation.
In fact, TWO pretty major things have been missed.

One thing that people seem to have missed is that whereas you CAN cut back on the 'discretionary' stuff, you CAN'T cut back on the rest, and the second point that has been glossed over is the dreaded income tax and NI. Assuming you are already paying income tax and NI, and you have indeed had a 4% increase in salary, is that figure 'gross' or is it 'net'? Your pay rise was tax free, was it?

Okay, if you're still with me, you'll see that all the stuff you NEED to pay for, is going through the roof, and that in fact your available 'after tax' income is falling behind as related to the 'need to pay' bills.

Is that scenario likely to change any time soon? How can it? Will taxes be reduced? Petrol down to 50p a litre? Hmmm, that's a hard one.

So in true Poirot style, I deduce that what will really be hit, is people's overall 'discretionary' spending - indeed this would have long since collapsed were it not for the sheer stupidity of all those who still believe they NEED a flat screen telly because the neighbours have one, and who have contributed to the mountain of debt to which I referred earlier.

And bringing my little essay to a conclusion, what will all this mean to you and to me, as traders seeking to profit by standing aloof from the sheep? (Digressing a little for a moment, I note a new word has been coined to define the mass of people who are so easily led: 'sheeple'. Tony's favourite folk.)

Well, I don't expect the likes of MFI, Matalan, Kingfisher etc to announce an upbeat trading statement, nor mega profits, for example. (Indeed it may well be that the current M&A (Merger and Acquisition) froth will spill over into that sector - there's little doubt someone thought Alba might have been a target lately but that clearly was - for now at least - a baseless rumour).

I don't expect the likes of Marks and Sparks' shares would be a raging 'buy to hold' at current prices - but nonetheless they are a great recent example of having 'let the charts do the talking'. It's just that in the bigger picture, they are highly vulnerable to a 'discretionary spending' downturn.

On the other side of the coin, I would think that 'lower end' food retailers might take a bigger share of the market - if you think about it, food is both 'discretionary' and 'non discretionary' - you need to buy it but you can choose between 'cheaper' or 'dearer'. 'Cheaper!' I believe is a Lidl slogan...

In the field of travel, you might still visit Granny in Gwent but this year, you might take a coach rather than a Virgin train.

A construction company thinking of changing its fleet of JCBs, might decide to hire them instead.

People way beyond the limit of their borrowing might decide just to slip the house keys through the bank's letterbox late one evening, load up the hired luton van, and head back to Mum and Dad's.

And sadly - indeed if I get upset about anything in life, this one truthfully DOES sadden me - governments will more and more try to divert your attention from the 'R' word ('Recession'- as if you didn't already know), by increasingly ramping up the 'T' word. ('Terrorism').

That in turn will lead to increasing expenditure on so - called 'Defence' projects, and military - related companies will likely do pretty well overall.

And of course the real 'nail in the coffin' will be that as low - inflation 'discretionary' spending falls away, even this spin - obsessed government will finally have to accept that with an ever - increasing proportion of outgoings being directed towards the high - inflation 'non discretionary' element of household budgets, the 'headline' inflation rate will inevitably
have to rise.
That of course will lead to the Bank of England attempting to put the brakes on by increasing interest rates - hence why I suggested above that mortgage payments will rise. And so of course it goes on - a self fulfilling prophecy, if you will, with inflation rising, debt becoming ever more unserviceable, and recession the inevitable result.

Now that has all been a wee bit longwinded, but I hope it may help you see where I'm 'coming from' overall, and that it might give you an idea or two to pursue when you're looking for potential trading opportunities.

In the even bigger scheme of things, a widespread recession throughout Western economies, would trigger a much reduced overall demand for consumer goods worldwide, and that would have serious effects on the likes of India and China, whose current massive growth rates would stall - and that would result in a reduced demand for raw materials, like say copper, steel, and plastics - not to mention reduced consumer demand for the likes of cars, fridges and so on.
Even oil prices would drop back in such a scenario, but of course in the longer term, oil prices can only keep rising as it becomes ever scarcer - so looking even further ahead, 'alternative energy' companies should do especially well in theory, although I suspect 'Big Oil' will muscle in and dominate that area in due course.

OK - moving on - I was going to put up a question asked recently by one of you, and my answer thereto, but I think that's going to have to wait till next weekend because my poor wee fingers are sore from typing - it's hard when I still can't use my left hand. (Cue sympathy...)

For now, before we discuss some charts, I just want to briefly mention the use of CFDs ('Contracts for Difference') as an alternative to spread betting, because a few of you have recently asked that question.

Before I do so, please note that nothing I say should be taken as any kind of tax advice - if in doubt, ask an accountant. Please also note that my explanation below is very superficial - if you want the detail, ask a stockbroker because I really don't have time to get any more involved - nor indeed can I do so in any meaningful sense.

Spread betting, as you know, is UK tax free (currently) and its other main advantage is that you can trade in very small amounts, depositing relatively little by way of 'margin' with your spread bet provider.
You can also choose from a huge range of available trades.
You pay no broker fees nor commissions. The downsides are the relatively high spread costs and the fact that you also pay even more, every time you roll over a trade at the end of each contract term if you want to keep it open. You also cannot offset losses against profits.

A CFD on the other hand, costs very little by way of spread, and it remains open indefinitely - ie until you choose to close it.
Most stockbrokers will offer CFDs.
CFDs are taxed in the UK under the Capital Gains Tax regime unless you are classed as a 'professional trader' (as I said above, ask an accountant if you want more detail).
Losses can be offset against profits.
Downsides are that generally you need to put up a fair amount of 'margin' so you might not be able to have that many trades open at a time, depending upon your bank size. Also there are fewer contracts available from which to choose.
(Finspreads, by the way, are worth contacting to enquire about their 'mini CFD' contracts, if you are interested. Much lower margins are required than for full CFDs.)
If you are likely to be trading a lot and earning quite a bit from the enterprise, you might find the taxation element of CFDs quite onerous, whereas if your trading is more of a 'hobby' and your CGT allowance isn't being utilised elsewhere, the benefits might outweigh the possible disadvantages.

In a nutshell, CFDs are perfectly viable as TTEW style trading vehicles, with pros and cons as related to spread betting, but YOU need to do the necessary research if you wish to pursue the matter, because everyone's situation is different and I can't possibly advise on an individual basis.

Moving on to today's charts, I said last weekend we would look again at Pilkington, so we'll start with that one.

Then we'll look on the chart of Wolfson at 'dilemmas' regarding exactly how and where to draw trendlines and the implications thereof, and finally I'll update the William Hill chart last featured on 8th January this year.

And that's that for this weekend - back to the Winter Games for me - can't wait to get back on the slopes myself!

All the best till next weekend,
Ian.

.'IMPORTANT NOTICE: These WICS charts are for EDUCATIONAL PURPOSES ONLY. They represent only MY understanding of what is happening in the market for any particular share, stock, commodity or index. In NO circumstances should they be construed as recommendations to trade. If I choose to trade what I see, that is MY decision. YOU must, in turn, come to YOUR OWN conclusions about what action, if any, YOU might choose to take'.