Market Musings 31/10/11

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.

Market Musings 27/10/11

The main news since my last blog, clearly, has been the developments in the euro-area. Markets have spiked upwards in a move that to me suggests that there is a lot of short covering going on, not least given that there had already been quite a good bit of buying on optimism of a resolution to the crisis ahead of the latest round of talks.

 

Citigroup has a good summary on the implications for the euro which you can read here. I am particularly struck by this paragraph:

 

We doubt that this package can bring long-term support to the euro, even as we note that there are a lot of committed USD sellers out there. There is a risk of running stops to the upside, as positions still seem somewhat short EUR, but we don’t think this package can sustain major gains unless outside money is more enthusiastic about backing euro zone debt than either the ECB or euro zone governments seem to be, and we are not sure why this should be the case.

 

(Disclaimer: I am a shareholder in PetroNeft plc) Speaking of things that are going up, I am pleased to see PetroNeft’s share price motoring ahead. At the time of writing the shares are 30% above their recent lows. While violent moves in share prices are not unusual in a smallcap, I wonder if there is some buying going on in optimism of a positive result (due in December) from its hydraulic fracturing programme at the Lineynoye oil field. I recently doubled my shareholding in the company, and while clearly my timing could have been better, I’m glad that I persevered with the stock!

 

Greencore received a preliminary takeover approach on Tuesday, which is an unusual development given that the group has only just concluded the €125m takeover of Uniq. While some people suggested that the interest could be coming from Kerry Group, I would dismiss that out of hand – Kerry’s M&A strategy in consumer foods is centred on buying brands, not the own-label products that Greencore and Uniq produce. My guess is that the approach is from a private equity fund with existing interests in the UK consumer food space that is keen to cherry pick certain business units across Greencore and Uniq that overlap with its owned businesses and flip the rest out to other firms/funds in the space. As an aside, I note that there has been some talk about the P/E multiple that a successful bidder would have to pay for Greencore. You can disregard that, because in reality it is the EV/EBITDA multiple that is of relevance in a takeover situation.

 

(Disclaimer: I am a shareholder in CRH plc) I was pleased to see CRH appoint a top-drawer business person as a non-executive director. Ernst Bärtschi is CEO of Sika Group and the former CFO of Schindler. This is the sort of best practice approach to non-executive director appointments that all large plcs should be looking to emulate.

 

Just when I thought the social media bubble was at an end, up popped this - Groupon seeks valuation of 5 times 2012 sales.

 

My MBA class had a Halloween themed party last night. Which reminds me of this – Halloween by the Numbers.

 

If you’ve a spare hour, why not spend it with the magnificent Hugh Hendry?

 

And finally, I was amused by this tweet by Lorcan Roche Kelly, who is one of the most astute financial commentators in Ireland:

 

When trying to sell retail sovereign debt, is a cliff the best thing to put on the brochure cover?

Market Musings 4/10/11

It’s been an another extraordinary day on the markets. The S&P 500 officially went into bear market territory earlier today, as markets remain nervous about the European debt crisis. Most of Europe’s leading indices were down 2-3% today, while my own portfolio had one of its worst days ever, shedding a whopping 4.6%, with PetroNeft (-18%) – which I’d only recently doubled my shareholding in! – doing most of the damage there.

 

While markets have been focused on Greece in recent days, legendary investor Marc Faber continues a theme I’ve been warning about for some time – forget the EU debt crisis, a China meltdown is the real threat.

 

(Disclaimer: I am a shareholder in CRH plc and ICG plc) Most investment banks have been pushing a similar line to what Deutsche Bank writes in its latest update. It says: “We see GDP declining in the euro area over the next two quarters, expanding only sluggishly in the US“. Merrion’s Ross McEvoy sums up both schools of thought in the markets at this time in his latest quarterly update, published earlier today. McEvoy says the “tug of war” over whether this is “a double-dip or just a soft patch” will continue to year end. Based on his prediction of “subdued growth” he likes European equities here and recommends CRH, ICG, Henkel, Ericsson, Bayer, Axel Springer, Weir, Anglo American, Infineon and Kingfisher as long ideas.

 

Speaking of CRH, I note positive US construction data and also a marked improvement in Wolseley’s performance in the US, both of which are bullish for CRH’s North American operations.

 

Regular readers will recall that I poured scorn on the short-selling ban several European countries introduced for their banking stocks upon its introduction. None of you will therefore be surprised to read that a study by Instinet shows that it has done little to help European banks.

 

(Disclaimer: I am a shareholder in Playtech plc). I was pleased to see Paddy Power sign a multi-year deal with Playtech for its casino product. This represents a nice vote of confidence in Playtech, which is a stock I’ve struggled with in the past.

 

Turning to the Irish housing, I was interested to read Ronan Lyons’ call that we may be nearing the bottom of the market here. Readers of this blog will know how extremely pessimistic I am about Irish house prices. So, clearly, the starting positions for Ronan and I are rather different! I would disagree with his view that domestic banks here should stop deleveraging – they simply cannot access cheap funding to support such a move at this time (not to mention that to do so would be a breach of the terms of the EU-IMF arrangement). He’s right about the desirability of new banks coming in here (I’ve previously written about how HSBC and KBC in particular seem to be stepping up their presence in this market). Overall, I think we’re looking at 2013 at the earliest before house prices level off.

 

In terms of what other bloggers are writing, ValuhunterUK had a detailed piece on FTSE 250 stock Devro which is well worth a look.

 

I’ve also been expanding my writings into other “markets” – my first entry in the UCD Smurfit MBA blog was posted earlier today, while I was also interviewed about how our economy is doing by a Portuguese newspaper – assuming that gets posted online I’ll share it with you later this week.

Market Musings 13/6/11

Haven’t been blogging for the past few days as my stag weekend successfully competed for my attention against the financial markets! While it was in London, I did my bit for Ireland Inc by flying Ryanair and staying in a hotel that is now under the control of NAMA.

 

As regular blog readers will know, I’ve been extremely cautious around equity markets for some time, and this caution has proved warranted. All of the ingredients remain in place for continued weak performance over the coming months, with concerns about the strength of the US economic recovery (not helped by weak jobs data), further evidence of a slowdown in China (note the decline in new loans in this article) and the ongoing European debt crisis showing no signs of going away. This is a good primer on the challenges the market faces.

 

In the US, I note that Fitch is threatening to downgrade its AAA rating if the country’s debt ceiling isn’t raised. I’ve previously noted that the Federal Government is running an unsustainable deficit of 10% of GDP, and again I ask how borrowing more is going to solve America’s debt problems. I suspect we’ll be hearing a lot more rhetoric like this before the year is out – not that America isn’t justified in complaining about its European allies. The Financial Times reported over the weekend that the US share of total NATO defence spending has climbed from 50% in 2001 to 75% today, with EU member states having slashed defence spending by $45bn in the past two years – that’s equivalent to Germany’s total annual spend. Elsewhere, expectations that QE3 will be launched by the Fed continue to rise, as evidenced by this chart.

 

The received wisdom about Spain being “different” to the rest of peripheral Europe continues despite alarming reports such as this.

 

The social networking bubble continues to baffle me, and I would concur with the views of Forrester’s Mulpuru about the valuation being applied to Groupon.

 

From an Irish corporate perspective, I note that shares in PetroNeft continue to drift after its disappointing operations update, following which Goodbody cut its NAV valuation (from 81.9p to 77.5p) and 2011 production (3.9k to 3.4k/day) forecasts.  I’ve been a shareholder in this stock for some time, and while I think it’s very cheap when measured on an EV/BOE basis, I can see from the share price that I’m not alone in being disappointed by poor production levels. Hopefully we’ll see improving output trends later on in the year.

 

Staying with corporate Ireland, I was pleased to see that the Irish Stock Exchange is to see its first new listing since – I believe – Merrion Pharma joined the market in December 2007. Continental Farmers Group counts Origin Enterprises plc as its largest shareholder and the board contains heavy hitters such as Peter Priestley and former UK Foreign Secretary Malcolm Rifkind. Given the structural drivers around the agri sector and with Origin’s agronomy expertise underpinning its assets, it looks like an interesting addition to the ESM. One to definitely keep an eye on.

 

I’m afraid to click on any links to stories relating to the Irish banks at the best of times, but this one is an important read.

 

And for the final corporate Ireland update, I note positive noises from Kingfisher and Michelmersh about Poland and the UK respectively, which bode well for CRH’s operations in those markets (Disclaimer: I’m a shareholder in CRH).

 

Finally, this is surreal – a James Bond parody featuring Tessa Jowell, Wikipedia’s Jimmy Wales & Ocado’s Jason Gissing

Market Musings 25/5/11

I didn’t expect to have any time to blog on my travels through North and South America but with an hour to spare I thought I should scribble down a few observations.  From a broad markets perspective, I wasn’t surprised to see that most of the leading share indices have declined in line with the prediction given in my last update, but I have to admit that I would have thought that the declines would have been more pronounced than they have been. We’ve seen a good bit of volatility in currency markets too. The “flight to safety” theme is well and truly in the ascendancy here with the Swiss franc rising to an all-time high against the euro. Concerns about peripheral Europe remain to the fore, but the EU elite appear hell-bent on pursuing measures that will worsen and prolong the crisis instead of doing the sensible thing and imposing haircuts on the unsustainable debts that Ireland, Portugal and Greece have.

One of the worst offenders when it comes to advocating policies to address the peripheral countries’ problems that make absolutely no sense is the French government. My heart sank when I saw that Christine Lagarde is the leading candidate to take over the IMF. Christine believes that Ireland should be raising taxes on business (translation: jobs) at a time of deep recession, which of course will serve only to heap further pain onto the Irish economy. It was staggering to see several Irish politicians enthusiastically support her candidacy, given her views about our economy. Something to remember for the next time a canvasser calls to your door.

Speaking of bad policy decisions, I note Tullow Oil’s subtle dig at the UK government in its announcement accompanying its acquisition of Nuon in the Dutch part of the North Sea. At a time where concerns about energy security are elevated it makes no sense that George Osborne raised taxes on E&P operators in his last budget.

The US debt ceiling talks continue to drag on. The reality that both the Democrats and the Republicans need to face up to is that America’s debt and deficit positions are completely unsustainable. The fiscal jaws need to close sooner rather than later, and I was pleased to see that Grover Norquist, who I’d the pleasure of meeting at a free-market conference in Brussels some years ago, is applying pressure on politicians to do the right thing and cut spending, instead of raising taxes.

Turning to the banks, I see that Moody’s has placed 14 UK banks, including Bank of Ireland’s UK subsidiary, on notice for a possible downgrade. Not a big surprise, but I do think that the UK government is trying to wean them off its support a little too early. I note an interesting suggestion by economist Ronan Lyons for a maximum LTV to be applied to future mortgages by the regulators in Ireland. That’s a sensible suggestion which I endorse, but I would go a step further and say that total borrowings should be taken into account as well – we all know imprudent folk who have built up a “portfolio of debt” that encompasses personal loans, car loans, credit card debt and mortgages. While my more libertarian-minded friends would say that individuals should be allowed do with their finances as they wish, the problem with that logic, as we’ve seen in Ireland, is that the taxpayer usually has to pick up the tab for financial messes created by other people.

Did you know that shale gas formations have the potential to double the world’s gas reserves? Staying on energy, here are some interesting perspectives on US gasoline consumption, via the good people at Morgan Stanley:

1. Americans spend $500bn on gasoline a year (50% of total US oil demand).
2. US households spend twice as much on gasoline and motor oil as they do on education.
3. At $5/gallon (it’s at $3.85 now), assuming constant demand, US households would spend as much on gas & motor oil as they do on healthcare.

Finally,  a commodity price update – Starbucks is raising the price of bagged coffee sold at its US stores by 17%. I like coffee as long-term investment given that the commodity has robust structural drivers – the demand boost that the more than 1bn “emerging middle class” people in Asia will give this over the coming years is going to be staggering to watch.

Market Musings 3/5/11

Blogging will be very light over the rest of this month as I’m going to be on holidays for most of it. Since my last update equity markets have been flat-to-marginally-down, and given the near-term economic headwinds I’ve previously highlighted I wouldn’t be surprised to see them lower by the time I return from my trip. On this note, I was interested to see that Sarasin in Zurich is advising clients to take some risk off the table.

(Disclaimer: I’m a shareholder in both Uniq plc and Ryanair plc). Turning to the Irish corporates, there was a bit of newsflow around, with Greencore reported to be contemplating making a bid for fellow UK-based food producer Uniq. I’ve previously noted the need for consolidation in the UK food manufacturer space – where the fragmented nature of the industry means that large retailers such as Tesco and M&S can squeeze their suppliers’ margins – and a tie-up between Greencore and Uniq would be a clear positive for the sector. From Greencore’s perspective Uniq would enhance its already strong position in the sandwich market (thus giving rise to potential synergies), while Uniq’s customer base appears to be complementary to Greencore, so no cannibalisation of sales is likely to arise from a transaction. In addition, it would answer the “what now?” questions that arose after Greencore recently failed to acquire Northern Foods. In other news, the Irish government signaled that it wouldn’t entertain another bid for Aer Lingus by Ryanair.

The commodity markets have been volatile in recent days, with silver particularly ropey after the CME raised the initial margin by 13% to $14,513 per contract. Margins were $4,250 a year ago. Last month I wondered if “silver has had its move for now“. It’s dropped by over $3 an ounce since then, so I guess it has!  I know that quite a few of my readers are interested in gold – and one of them asked me about the reasons investors have for buying gold while quantitative easing is ongoing, as opposed to buying if after QE2 ends next month. An excellent question, and one that I answered as follows:

QE has created a tsunami of money that is being invested into all categories of risk assets – the return on cash is so low that people chase higher returns from equities, commodities, you name it. When QE ends there will be nervousness that the riskiest assets like equities will struggle (as they did between QE1 & QE2), so investors may be willing to move their money into gold (which rose in the interregnum between QE1 and QE2). There is a view in the markets that the price of oil and gold (which are both $ denominated) is rising at this time to compensate for $ weakness, so in addition to being seen as safer than equities some investors may view gold as a hedge against $ declines.

Turning to sovereign issues, I was interested to see that Deloitte & Touche say that they see UK rates on hold until 2013. It will be interesting to see if inflation rolls over as D&T expect it to, personally I’m unconvinced that it will given how loose monetary policies have been in the UK and elsewhere, such as the US (see this excellent op-ed for a primer on what the Fed is up to). But perhaps the UK economy might be helped by extra sales of this sort of thing (!).

This is an excellent investor letter by Bill Gross at Pimco – “There should be little doubt that simply holding Treasuries at these yield levels for an extended period of time represents an abdication of responsibility“. I agree.