Posts Tagged ‘IMF’
I’ve had no end of distractions over the long weekend, which means that activity on the blog has been rather quiet. So what’s been going on?
Markets have given up some of the significant gains recorded after the EU summit last week. This comes as no surprise to me, given what I said about the movements having suggested that a lot of the move was due to short-covering.
With the Presidential election out of the way, the media’s focus will now turn to December’s budget. Hopefully the increased coverage will be matched by improved coverage – I was perplexed to read a headline stating that the “IMF says deeper cuts not needed in budget”. If you read through the article, what the IMF actually said was that the government does not need to go beyond cuts that would get to an 8.6% deficit for 2012. However, with growth projections for next year having been pared back of late, it is clear that a fiscal adjustment of more than what the government is currently targeting (€3.6bn) will be needed to get to an 8.6% deficit for next year. So, you can take the word “not” out of that headline! To briefly return to the Presidential election, I was amused to hear our new President suggest that his election represented a victory for socialism over Austrian economics. That “logic” is so woolly that it makes me wonder if most Irish politicians think “Austrian economics” means the Minister for Finance in Vienna!
Last Monday brought near-biblical flooding to parts of the east coast of Ireland. While such events are hardly unprecedented for insurers, I do note that the share price of the only listed Irish general insurer, FBD Holdings, is, at the time of writing, higher than it was before the floods. Given the extent of the damage wrought on Dublin and the surrounding areas, I wonder if there is some near-term downside risk to FBD’s share price. Management has yet to comment on what the likely financial impact of the floods will be.
(Disclaimer: I am a shareholder in Glanbia plc) Turning to the food sector, two things in this space have grabbed my attention. Firstly, data released by the CSO show that net subsidies accounted for 84.6% of agricultural income in Ireland in 2010. This is hardly sustainable. Elsewhere, in a very welcome move I see there has been more consolidation in the Irish dairy sector, with Connacht Gold buying Donegal Creameries’ milk business. With milk quotas being phased out, Ireland has a tremendous opportunity to significantly boost output over the coming years. Concentrating the industry in the hands of a small number of well-resourced players (as New Zealand has done with Fonterra) will allow Irish firms such as Glanbia and Kerry Group (assuming they retain their dairy operations) play a key role in this structural growth story.
The Occupy Wall Street movement shows no signs of giving up their protest just yet. I was pleased to see Peter Schiff (who I’d the pleasure of meeting last year) engage with the protesters. If you’ve a spare 20 minutes, make yourself a cup of coffee and watch this video.
Bill Gross at PIMCO released an excellent update earlier today – Pennies from Heaven. Have a read.
In a recent blog I warned that last Thursday’s referendums would “have negative consequences for our freedoms if passed”. I’m pleased to see that the 30th amendment was defeated, despite threatening and arrogant rhetoric from our Minister for Justice, who hopefully will not stay in his job much longer.
Blogging has been abnormally light this past week due to a confluence of factors, chiefly the fact that on Monday I’ve both 3,000 words due for Business & Finance magazine and an exam worth 70% of the marks in that module in Smurfit!
David Einhorn at Greenlight Capital announced that he was going short Green Mountain Coffee. His investment rationale can be viewed here. While I don’t know anything about Green Mountain or whether Einhorn is justified in taking this position, there’s no denying that private investors can learn a lot about the type of “due diligence” hedgies do by reading Einhorn’s presentation.
We got a reminder of Irish headquartered bookmaker Paddy Power’s gift for generating lots of free publicity earlier this week. This is a marketing tactic that Paddy Power rolls out all the time – management takes a view that if the person, team or event they pay out early on wins, they would have had to pay out anyway. If they call it wrong, they take the cost of it out of the marketing budget. In any event, stunts like this result in the company’s name getting a lot of mentions in the media (perversely, they get even more publicity when they call things wrong, such as when they paid out early on Arsenal to win the 2002/03 Premier League title!), which can only be a good thing, especially given that the press coverage is for “punter friendly” actions such as this. This should also be a particularly helpful move given that Paddy Power’s operations now extend across rugby loving nations such as Ireland, the UK and Australia (where, and I’m always surprised by how many Irish people don’t know this, Paddy Power is the largest “corporate” – i.e. private – bookmaker). Of course, it isn’t the first stunt Paddy Power that has pulled at a Rugby World Cup.
Dublin was visited by the Troika earlier this week, who had this to say. Overall it would appear that we’re ticking all the boxes, but reading between the lines I see a hint of larger-than-currently-guided fiscal consolidation in the upcoming budget, specifically the part that reads: “The forthcoming 2012 budget will make progress along that path by targeting a deficit of no more than 8.6% of GDP” (emphasis mine). Bear in mind that the economic outlook has clearly deteriorated since Minister Noonan first guided €3.6bn in measures in the next budget - so don’t be surprised when he ups this target.
Speaking of the Irish economy, we got two reminders of how it is not out of the woods by any means in this morning’s press. Builder Manor Park has gone into receivership, less than 4 years after DCC sold its 49% stake for €181m – the old adage of “timing is everything” comes to mind! Elsewhere, a provisional liquidator has been appointed to Zapa Technology.
In terms of Irish corporate newsflow, Dragon Oil issued a very solid interim management statement in which it guided output growth in excess of 25% in the current year. Merrion Pharmaceuticals said it will not meet 2011 revenue targets, while it has also hired advisors and may sell all or part of the company. Following on from the announcement made earlier this week, United Drug disclosed that it will receive £8.2m for its stake in the Medco jv in the UK.
In terms of what some of the people I follow are writing, my old pal Joe Gill had some interesting things to say about social networking. Speaking of pals, Makro Trader had some interesting observations on the Swedish housing market – have the authorities there learned enough lessons from the early 1990s crash? Elsewhere John McElligott provided an update on his thoughts on the UK retailers. Regular readers of this blog know my attitude towards that sector – as I’ve said before, “rioters are the only ones frequenting the High Street“. Ian Parsley, who is one of the best commentators on politics and economics in Northern Ireland, echoed my recent sentiments about the UK’s soaring inflation by saying:
If you print money, the value of money in your pocket decreases and the amount of it you need to buy stuff increases. Why the surprise re: inflation?
The demands of college work have kept me away from this blog in recent days, which is a pity given how much newsflow there has been. In this entry I’m focusing on the financials in particular, along with some troubling (and inter-related) European macro indicators.
As I said in the introduction, we’ve seen a lot of troubling macroeconomic indicators. S&P downgraded its credit rating on Spain by one notch, while its negative outlook suggests that there’s more to come. Turning to the UK, in terms of the housing market, a survey revealed that more and more British homeowners are cutting asking prices, while average selling times are lengthening. Hardly something that recommends UK-focused financials and housebuilders at this stage of the cycle to investors I would think.
Speaking of recommendations, legendary investor Jim Rogers warns that bonds are in bubble territory and that the US is in for a period of stagflation. I would concur with that – see this blog post of mine from late August in which I warned that bonds were overvalued and argued that equities were too cheap – while that trade has been playing out in recent weeks, in my view it has further to go. Speaking of which, my fellow Irish equities’ blogger John McElligott sees value in some ISEQ stocks.
(Disclaimer: I’m a shareholder in Bank of Ireland plc) One sector that I’m very cautious on is the financials. And why shouldn’t I be, with research such as this note from Credit Suisse. After taking a chainsaw to the Chinese financials a few days ago, Credit Suisse sees two-thirds of European banks failing a renewed EBA stress test. It should be highlighted for my domestic readers that Bank of Ireland scores quite well, which is as expected given that it was recently recapitalised. Interestingly, that the French and German banks score particularly badly tells you all you need to know about why Merkel and Sarkozy have been so unwilling up to now to contemplate haircuts for bondholders.
I’ve written about the myth that is austerity in Ireland before. Now you can read of the myth that is austerity in Greece. But moving from myths into reality, I was struck by a really good piece by Mark McCutcheon a few days ago which illustrates the tax advantages to employers that arise from hiring unemployed people in Ireland. This is something that really needs to be highlighted at this time. Speaking of Ireland’s unemployment issues, I note that Ajai Chopra, our IMF Viceroy, says that Ireland will not be able to pop the champagne corks until after it gets its jobless crisis under control. Might I suggest that one way that the Irish government should not attempt to achieve this is by recycling privatisation proceeds into job creation efforts – you only have to look at Fás to see what happens when Irish politicians attempt to create employment. Reducing the tax and regulatory burden on businesses is the best way forward.
A couple of times this year I’ve been accused, not undeservedly (!), of being extremely bearish. To mitigate against the above economic doom, gloom and ka-boom (to use a line from an email I sent to my MBA classmates earlier this week), here’s a video that shows that not everything is bad, at least in Ireland.
Finally, looking ahead, it’s going to be a busy week for Irish corporate newsflow. The main highlights are First Derivatives’ H1 results (Tuesday), C&C’s H1 results (Wednesday) and Dragon Oil’s IMS (Thursday). If I can tear myself away from the books I’ll provide you with some “musings” on them.
Since my last update we’ve seen alleged Ponzi schemes, gold bullion vaults that are running out of space, a deterioration in Ireland’s competitive position and quite a bit of Irish corporate newsflow.
Given the perilous state of public finances across the Western World, wholesale reform of welfare systems is something that is an inevitability, regardless of the ideological persuasion of governments. This chart by the always brilliant “Tyler Durden” (!) at Zerohedge gives a clue about the inverted welfare pyramid that is forming in developed economies as demographics turn nasty. RTE’s Emma McNamara tweeted the following this morning:
…which goes to show that Ireland is no different. Speaking of Ireland, Ronan Lyons had an interesting piece on welfare spending yesterday. He identifies one way of saving €700m, but as is inferred by the opening paragraphs of his blogpost, Ireland needs an 11 digit fiscal adjustment, not a 9 digit one.
The Open Republic Institute collates Irish data for the Economic Freedom of the World report. It reveals that Ireland has plummeted 14 places in just a year to become only the 25th most free economy. This is a very worrying development, especially given the way FDI migrates to freer countries, and the way Ireland urgently needs more investment to kick-start the economy.
(Disclaimer: I’m a shareholder in PetroNeft plc). We got a good bit of newsflow from PetroNeft in the past 48 hours. Firstly, the company reported a mixed set of interim results yesterday, but it has followed this up with the announcement this morning that it has discovered a new oil field. For me, PetroNeft has been a Jekyll and Hyde story this year, with production undershooting but new discoveries seeing upward revisions to reserves. This isn’t as bad as it could be – I much prefer the way things are to, say, if PetroNeft was exceeding production targets but cutting estimates of its reserves! However, if management can iron out the production shortcomings we could see a big upward move in the share price (PetroNeft is ridiculously cheap on an EV/BOE basis). It’s a stock I’d definitely consider buying more of.
We saw some more share buyback activity on the ISEQ yesterday, with Fyffes the latest plc to buy its own shares this year. It joins Ryanair, Abbey and United Drug in doing so. The trade-off to more share buybacks by Irish plcs, however, is that it suggests reluctance towards stepping up M&A activity in these uncertain times.
The IMF cut its global growth forecasts yesterday, which prompted frenzied commentary on financial sites and much of the media. However, this downgrade should not have come as a surprise to anyone given the blatantly obvious deterioration in the economic situation in most large countries in recent months.
(Disclaimer: I am a shareholder in France Telecom plc). I was pleased to see France Telecom engaging in more repositioning of its portfolio, with the planned sale of its Swiss unit and acquisition of a firm in the (hilariously named) “Democratic Republic” of the Congo. I bought France Telecom years ago for around €17/share and have enjoyed fat dividends (current payout is €1.40/share) since then, so I’m not overly cross with its current share price (it’s just under €12 this morning). While I am pretty certain that the dividend will be cut in the medium term, I note that a dividend of, say, €1/share would mean a yield of 8.3%, which is pretty good by any measure.
Here’s Peter Schiff, who I had the pleasure of meeting last year, giving an economics masterclass to Congress last week. Schiff makes a good deal of money from trading gold, so he will no doubt be reading today of how gold bullion vaults are running out of space.
Things are getting worse for Full Tilt Poker. A US attorney has alleged that the firm was operating a Ponzi scheme.
I was pleased to see a snap-back in equity markets yesterday, with strong performances on both sides of the Atlantic. I haven’t been too surprised by the recent market gyrations – regular readers of this blog know that I’ve been cautioning about extreme volatility in share prices for some time. Hence all of my trades this year have been ‘for cash’, with none on margin.
So what has been grabbing my attention of late? The main items of note are an interesting follow up on Switzerland’s interventions in the FX market, speculation around the Obama jobs announcement, Aer Lingus’ traffic stats and share register, the UK retail sector and assorted macro indicators.
ZeroHedge had an interesting chart following the SNB intervention – “Here is how Switzerland caught up to the rest of the world in devaluing paper currencies against gold“.
President Obama will announce his jobs package later today. Reports suggest that it will cost in the region of $300bn, which works out at over $20,000 for every unemployed American. This is, of course, like many of his administration’s other economic policies, completely unsustainable. I was amused to see a number of Irish commentators praise this sort of Keynesian intervention. Ireland had some similar ‘stimulus programmes’ in the late 1970s that nearly bankrupted the country, so clearly having a poor memory is no obstacle to building a profile in this part of the world.
In terms of what the US should be doing, I can not better the always-excellent Jill Kerby, who writes:
“America’s jobs crisis will solve itself when debts are cleared, budgets balanced & competitiveness restored. A long haul…”
(Disclaimer: I am a shareholder in Ryanair plc) Elsewhere, Aer Lingus reported its latest traffic statistics yesterday. While I am a huge admirer of the carrier’s CEO Christoph Mueller, I was a little disappointed by Aer Lingus’ year-to-date performance. On this measure, passengers carried are down 1.4% relative to year-earlier levels, while load factors have declined by 2.4ppt. This is despite the absence of last year’s volcano-related disruption and a huge increase in traffic at its Aer Lingus Regional partnership, which acts as a feeder into AERL’s other services. Transport Minister Leo Varadkar indicated that the government could sell its stake in the airline yesterday. Here’s the response of its biggest shareholder, Ryanair. Here’s Davy on it.
It appears that rioters are the only ones frequenting Britain’s High Street these days – Dixons reported a 10% drop in like-for-like sales in the 12 weeks ending July 23. And for more retail woe – Both Argos and Homebase recorded big drops in like-for-like sales in the 13 weeks ending August 27.
Speaking of matters macro related, Greece’s 1-year bond yield hit 97% yesterday.
It’s been an extremely busy few days, both in terms of the financial markets and also in terms of preparations for my honeymoon – at this stage, however, the jungles of Borneo look safer than most risk assets! So what has been catching my attention?
Goldbugs have been amazed, and rightly so, by this exchange between Congressman Ron Paul, who has spent his career fighting for sound money and economic discipline, and Ben Bernanke, who has not. While the entire video is worth watching (let’s be honest, I think anything involving Dr. Paul is worth watching!), the part starting at 4.25 to the end is truly astonishing.
Fitch downgraded Greece by 3 notches to CCC. Just as we had here earlier this week, there was a chorus of discontent from local politicians, central bankers and the European Commission, but who could blame Fitch for this move? According to its own definition, CCC means: ”currently vulnerable and dependent on favorable economic conditions to meet its commitments“. That said, I don’t think that Fitch’s new rating quite covers the mess Greece is in.
I raised an eyebrow when I spotted the normally very good James Mackintosh express surprise that Ireland’s ISEQ index was in positive territory the day after the sovereign was downgraded to junk status. Firstly, movements in the ISEQ are meaningless, as 30% of its market cap is comprised of only 2 stocks – CRH and Ryanair. Secondly, the majority of the profits generated by companies listed on the ISEQ come from outside of Ireland. Indeed, on my numbers not 1 of the 10 biggest ISEQ names (which at the time of writing are: Tullow, CRH, Kerry, Ryanair, Dragon, Aryzta, Smurfit Kappa, DCC, Paddy Power and Glanbia) have Ireland as their main profit centre!
(Disclaimer: I’m a shareholder in Abbey plc) Staying with Irish plcs, yesterday brought the release of housebuilder Abbey’s results. While there were a number of variances with what the brokers were forecasting on the revenue line and so on, its adjusted EPS of 41.4c was 3% ahead of consensus (Davy 42.0c, Goodbody 38.0c). Abbey’s net cash was €77.4m at end-FY11, or €3.37/share, an impressive out-turn after it spent €21.4m buying land and €8.5m on share buybacks. So its net cash is 67% of its current market capitalisation, which implies that the market is valuing the rest of the group at €37.5m. Considering that the group is well run, debt free and carrying inventory (plots of land, part/wholly finished houses, materials) with a (audited in April of this year) book value of €83m (and obvious upside potential once the landbank is developed) and fixed assets of €22m, this looks too low even after taking the trade creditors of €30.8m into account. I think Abbey is cheap here.
And in other corporate Ireland news, DCC moderated its FY earnings guidance (in constant currency terms) from “broadly in line with the prior year” to “broadly in line with to modestly behind the prior year” in an interim management statement issued earlier today. I wouldn’t lose sleep over this downward revision – Q1 (the period covered in the IMS) is a seasonally quiet time of the year (representing 15% of full-year profits) and a particularly cold winter (DCC’s guidance assumes a “normal winter”) would see earnings estimates revised sharply upwards. In any event, DCC is trading on less than 10x earnings, which is an inexpensive rating for a company of its quality, track record, impressive returns and balance sheet strength.
Kerry Group announced this afternoon that it has made an approach to Cargill Group for its flavors business. Stockbrokers NCB tell me that they estimate that the unit has revenues of “around $200m”, so slapping an EV/Sales multiple of circa 1.5x on that would get you a €200-250m valuation, which is within Kerry’s existing facilities. NCB’s Darren Greenfield tells me that this would only take Kerry’s net debt/EBITDA to “around 2x” so there’s plenty more scope for it to make further acquisitions.
Some positive news for Ireland Inc – four private equity groups are leading the battle for Anglo Irish Bank’s US loanbook. This level of interest bodes well for the sale price.
The troika was in Dublin this week, to tell us that we’re meeting all of the targets set as part of the EU-IMF arrangement (I loathe the term “bailout”). That’s all fine and dandy, however, the markets are clearly saying that Ireland needs to start exceeding them.
Speaking of credibility, the EBA released the latest round of European banks’ stress tests this evening. Supposedly they only have a combined capital shortfall of €2.5bn, which incidentally is less than what Ireland had to put into Irish Nationwide Building Society alone. I have every expectation that this stress test will prove to be every bit as credible as its predecessors, with my suspicions only partially heightened by this excellent analysis by Tracy Alloway in the FT.
It’s been an interesting couple of days with the backdrop of continued unrest in Greece ahead of a (yet another) crucial parliamentary vote and the (I assume) imminent announcement of Christine Lagarde as the new head of the IMF, an appointment that, as I’ve said before, is likely to have adverse consequences for Ireland.
There was an interesting article in the Irish Times about the longer-term prospects for the agri sector here. One data point of note was the revelation that one in six infants in the world now feed on infant milk formula produced and processed in Ireland. While a number of foreign owned companies are prominent among the list of producers here, I know that this is an area that Kerry Group has made big strides in, especially in China where locals remain wary of Chinese producers after this scandal. My highlighting of Ireland’s large presence in this space led to a rather heated discussion on Twitter about the rights and wrongs of these products, so in order to avoid my blog becoming a similar battleground, I simply present the facts as reported by the Irish Times here!
(Disclaimer: I am a shareholder in BP plc) Dolmen Stockbrokers released a bullish note on BP yesterday. It believes that recent legal developments around Macondo (e.g. Weatherford) have positive implications for outstanding litigation. I agree with their view, and it is a big factor behind my long position in the stock. As I noted yesterday on Twitter: “BP’s market cap is $131bn. Further settlements should cut into the $20bn set aside for Macondo claims and act as catalyst for the share price“.
Elsewhere on the FTSE, we received further signs of weakness in the UK consumer sector today. Carpetright announced that it has suspended its dividend. Its Chairman and CEO, Lord Harris of Peckham, said: “Looking forward, I see no respite from the challenging environment over the next year“. Chocolate retailer Thorntons also provided a glum strategy update today, announcing that it will close up to half of its stores. I wonder how many Irish companies with an exposure to the UK consumer will provide similar updates in the upcoming results season?
Citigroup today provided investors with its list of preferred UK mid-cap picks, while LCH raised its margin requirement on Irish government bonds for the second time in a matter of weeks. It’s now 80%, from 75% previously.
Turning to the elimination of government waste, I was pleased to see the cabinet agree to proposals to combine the two local authorities in Limerick (whose population is a mere 186,000). This is a good first step, but there is plenty more low-hanging fruit to cut as well. For instance the government should implement the recommendation in the McCarthy Report to abolish all town councils and borough councils as well – I really struggle to see the value of expensive (in aggregate) talking shops where some elected representatives have polled fewer than 3 dozen first preference votes. As an aside, I was amused to see Fianna Fáil Senator Averil Power, with a straight face, warn Irish people about the potential downsides to selling State assets last night, given that her party signed up to privatising same just a few short months ago in the EU/IMF “bailout” agreement. I’m open to correction on this, but I believe that the all of the governments that privatised State assets since Ireland achieved its independence were led by Fianna Fáil!
There has been a lot of commentary about the different “bailout” (citation needed) rates being applied to the loans going to battered economies around the world. I see that Egypt has secured 1.5% funding from the IMF, and poor Ireland is being stiffed by the European Union (translation: France), despite the fact that of the three bailout countries we’ve been the star pupil. An issue which again prompts me to wonder why the Irish government is supporting the IMF candidacy of Christine Lagarde, who supports tax-raising policies that would drive the final nail into our economy’s coffin.
From an Irish corporate newsflow perspective, yesterday brought updates from Aryzta and its 71% owned associate Origin Enterprises, both of which are listed on the ISEQ. Aryzta says that ”underlying EPS guidance given at the half year stage still appears reasonable”, but notes both that “raw material inflation has continued & shows no signs of abating”, while it sees a “fragile recovery in consumer activity in most markets”. Origin, which is riding the crest of the agri-commodity boom, says it’s ”comfortable with consensus market estimates of 10% FY growth in adjusted fully diluted EPS”. The contrasting tone in their statements is no surprise and reflects the inflationary trends I wrote about in the March edition of Business & Finance here.
The saga around HMV rumbles on, with UK lenders (and, by extension, the UK taxpayer) taking shares in the music retailer. I’ve blogged about HMV’s issues before, but with the company continuing to face serious structural (declining offline music sales, intense internet competition with effectively no barriers to entry thus limiting pricing power) and cyclical (a weak UK consumer environment) issues I have no desire at this point to add my name to the group’s shareholder register. Staying with the UK, Severfield-Rowen, a stock I’ve traded in the past, issued a trading statement ahead of its AGM today. Severfield is a good stock to watch as it’s a structural steel player hence it’s a leading indicator for the UK construction industry (as its products are one of the first things to go into any major building project). It’s saying that ”a broad recovery of the UK market remains distant“. Elsewhere, Moody’s says the UK’s Aaa rating will be at risk if the govt misses debt reduction targets.
On the M&A front, I saw that US packaging firm International Paper offered $30.60/share for its domestic peer Temple-Inland. This comes on the back of the recent $3.5bn Rock-Tenn/Smurfit-Stone deal in the same sector, and hopefully this will give a decent lift to valuations of European firms in the industry such as Ireland’s Smurfit Kappa (Disclaimer: which I am a shareholder of).
Remember the Russian spy ring that used fake Irish passports? One of them is now launching a career in venture capital.
Some grim news from the US housing market: 66% of Las Vegas mortgages are underwater, 27.7% of total US housing debt has negative and near-negative equity.
Regular readers of my blog will know that I’m extremely bearish on China. The reasons for this stance have been well-discussed before – a construction bubble, widespread instances of accounting irregularities, environmentally ruinous development, government interference in the economy, corruption etc. But today I’ve a new one to add to the mix – flooding of Biblical proportions.
Finally, two snippets for the gold bugs: (1) George Soros sold $800m worth of gold in the first quarter of 2011; and (2) Several Irish people have asked me if we should re-launch the old Irish punt, backed up by our gold holdings. Sadly, I must inform you that our Central Bank holds a mere €200m of gold, the vast majority of which is curiously stored in the Bank of England!