Market Musings 19/12/11
Earlier this year when I kicked off this blog one of the first themes that appeared on it was the fragility of UK retail. I wrote quite a bit about the structural and cyclical pressures facing HMV in particular. This morning the music and games retailer issued grim H1 results. Within the statement, management revealed that net cash flow pre-disposals was -£29.6m, while HMV Retail’s like-for-like sales were -11.9%. With underlying net debt of £163.7m (it would have been £200m had the £36.6m proceeds from the sale of Waterstone’s and HMV Canada not come through during the period) and heavy losses (H1 EBITDA was -£30.0m) this is not one for me. As a postscript, I note that legendary retail guru Nick Bubb has tweeted the following:
HMV said that “The Inbetweeners” DVD will be their best seller of all time! And they will sell 2m headphones this year
They’ll need to sell a lot more headphones to fix their balance sheet!
Apart from HMV shares, another thing that’s not for me is UK property. Rightmove says that house prices in England and Wales have fallen a remarkable 2.7% this month, while it sees a “challenging” 2012.
(Disclaimer: I am a shareholder in Bank of Ireland plc) I was pleased to read another positive update from Bank of Ireland this morning. The group has sold part of its UK and American loanbook (Burdale) to Wells Fargo for a minimal haircut (0.8% of Burdale’s drawn down balances), while it also announced that “loan redemptions and repayments remain in line with our expectations and deposits have increased since 31 October 2011“. The point on deposits is particularly encouraging as I would have imagined that recent Eurozone turmoil would have seen some outflows. Elsewhere within the statement Bank of Ireland says that in terms of the deleveraging completed to date and what’s yet to complete under the 2011 PLAR/PCAR, it sees this being done “within the overall base case discount assumptions used as part of the 2011 PCAR”, which has positive implications for the Bank’s capital position.
I have been tracking the Irish financials for some time, encouraged by positive noises on NIM and deposit trends. While acknowledging that the risks to the euro make this sector a highly speculative one, based on recent improving signs from the Irish banks and my gut feeling that the ECB will ultimately have to deploy its bazooka to save the euro (as all other options will, I believe, result in political bottlenecks) I am happy to increase my exposure to it. Hence, this morning I have quintupled my shareholding in Bank of Ireland (note that this takes its share of the portfolio to nearly 2%, so it’s still a relatively small position).
Switching to the political arena, following the recent EU summit much media attention focused, bizarrely, on how ‘isolated‘ the UK was following its decision to opt out of plans for further fiscal consolidation. I say ‘bizarrely’ because, outside of the political sphere (and even on that, support for the Tories has risen to its highest level in 18 months), it’s hard to see much evidence of downside for the UK arising from this. Sterling has strengthened against the euro to levels last seen in the first quarter of this year, while the performance of the FTSE 350 index, which is a much better guide for UK companies than the resource-heavy FTSE 100, looks to be tracking in-line with the Eurostoxx indices. Another bizarre aspect of the media coverage the UK’s decision has received is that many journalists appear to have completely missed the fact that most European countries are already significantly in breach of the Eurozone’s fiscal rules, as this handy graphic shows. So, the EU can propose as many fiscal rules as it likes, but when a majority of its members are significantly in breach of them, why should they be taken seriously?
In the US, I’m giddy with excitement to hear that Ron Paul is opening up a decent lead over his rivals in Iowa. A victory for Paul would put his policies of fiscal responsibility and sound money into the centre-stage where they belong. Speaking of giddiness, if you’ve 20 minutes to spare, why not watch this video of Ron Paul’s recent appearance on Jay Leno’s Tonight Show – from the standing ovation that greeted him when he came on stage to the cheers that all of his policy suggestions received, you can see why one American commentator was moved to write “The passion for Ron Paul is reminiscent of the excitement then candidate Barack Obama was able to generate in 2008“.