Posts Tagged ‘UK’
Market Musings 5/1/2012
Ireland released its final set of Exchequer Returns data for 2011. The deficit works out at €5,439 for every person in the country. Regular readers of the blog will know well my sense of horror at this position and my view that the fiscal jaws need to be closed a lot faster (and tighter) than what the government’s medium term fiscal strategy proposes. In terms of the public finances, I have noticed over the past year a tendency on the part of certain commentators to suggest that the public finances are in the state they’re in purely because of the cost of bank recaps. While there is no denying that these play a role, let’s take a proper look at what the underlying fiscal position is, based on Exchequer Returns data for 2011.
- Total receipts for the year came to €36.8bn. Total current expenditure came to €48.0bn, leaving a deficit on the current account of €11.2bn.
- On the capital side, total receipts were €2.5bn and total expenditure came to €16.2bn. This produced a deficit on the capital account of €13.7bn.
- The total reported Exchequer deficit for the year was €24.9bn, which is the product of the result of (1) and (2) above.
- Contained within the Exchequer’s €36.8bn receipts for the year as a whole are the following: Income from the various guarantee schemes (paid by the banks) of €1.2bn; proceeds of €1.0bn from selling Bank of Ireland shares and bank recap fees of €0.05bn. So a ballpark €2.25bn in revenue came from the banks, leaving underlying revenues at €34.5bn. I am ignoring other taxes paid by the banks as these would have been paid anyway.
- Contained with the Exchequer’s €64.2bn spending for the year as a whole are the following: Acquisition of shares in IL&P €2.3bn; Promissory Notes €3.1bn; Bank Recap payments €5.3bn; Contribution to Credit Resolution Fund €0.25bn. This gives a ballpark direct cost of €11bn from the banks, or slightly more than one-sixth of total expenditure. Stripping out this leaves underlying expenditure at €53.2bn.
- Taking (5) away from (4) above produces an underlying deficit for the year of €18.7bn. Put another way, roughly 75% of the Exchequer Deficit for 2011 was not directly caused by the cost of bank recaps. Now, obviously, some of the deficit was indirectly caused by the banks e.g. interest payments on borrowings used to bail them out in previous years, while in addition the effect of the banks’ implosion on the state of the economy is clearly very material.
The above analysis is merely offered as a way of illustrating that there are more moving parts to our fiscal position than simply “bailing out the banks”.
Staying on the fiscal theme, Britain’s Defence Secretary says the debt crisis should be considered the greatest strategic threat to the future security of the West. Across the Atlantic, the US is reportedly considering ending its policy of having the resources to fight two major ground wars simultaneously, which is no surprise given the country’s ugly fiscal position. One of the most striking things about the US’ overseas military deployments is how lopsided they are – it makes no sense for the US to have 80 times more troops in Europe than it has in Africa, and neither does it make any sense to have nearly twice as many troops in Germany than in South Korea.
Following on from the bearish tack on Irish house prices I expressed in my last blog, here’s a fine piece by Cormac Lucey on the outlook for same.
Some 500 hedge funds have been attracted to Malta. Given our shared EU membership and the collapse in property costs here, there is no reason why Ireland shouldn’t be trying to attract these sort of companies to the IFSC.
This is an interesting article - Sweden shows Europe how to cut debt and weather the recession.
(Disclaimer: I am a shareholder in Ryanair plc) Switching to equities, Ryanair issued December passenger stats today. Reported traffic was -5%, in line with company guidance for winter of a decline of approximately 5%. However, given that November’s statistics were better than expected, at -8% versus company expectations of -10%, I wonder if there is some potential for outperformance on the passenger side as we head towards Ryanair’s financial year-end in March.
Finally, in the blogosphere John McElligott asks if Eurozone equities offer good value here. In the interests of transparency I should disclose that I own most of the stocks he identifies as being cheap in Ireland, namely: Bank of Ireland, Independent News & Media, Total Produce and Abbey.
Market Musings 15/11/11
This has been a quiet day (by the current standards!) in terms of corporate newsflow. Despite the lack of activity on that front, we’ve also seen the good and bad side of politics, along with the first of a number of my side-projects coming to fruition.
I got the latest UBS strategy report emailed across to me (I cannot stress enough how grateful I am to those of my readers who send me things like that!) this morning. I note that the investment bank has cut its 2012 FTSE earnings growth forecast from 3% to 0%, adding that it believes that investors are unlikely to pay-up for profits in the near term. On their numbers the FTSE’s 2012 dividend yield is a healthy 4.2%. This downward earnings revision surely can’t come as a surprise to anyone, given the general tone of trading updates in recent times, but with the FTSE PE ratio at undemanding levels (even when taking the downward risk to earnings estimates into account) I see no reason to reduce my UK exposure here, especially given the attractive yields on offer.
(Disclaimer: I am a shareholder in Trinity Mirror plc). Regional newspaper publisher Johnston Press reported improving UK advertising & circulation trends, helped by easier comparatives. This follows on from the recent positive update by Trinity Mirror and suggests that things are looking a little brighter for the sector, but as ever the fragile UK consumer backdrop cannot be ignored.
Now here’s something interesting – speculators have lifted bullish raw-material bets to a 7 week high.
I’ve provided the commentary for the latest report on the rental market by Ireland’s largest property website, Daft.ie
Some encouraging political news – Ron Paul, whose strong economic credentials I’ve noted before, looks like he could win the Iowa caucus, which would give a huge lift to his campaign. If you’re unfamiliar with his views, make yourself a coffee and watch this video.
Sadly, this was also a day in which we saw the worst in politics, with Irish Minister of State Willie Penrose resigning over the closure of a barracks in his hometown. His move is a deeply cynical one, and reflective of a narrow-minded, parochial and short-termist mindset that has played a key role in getting Ireland into the trouble it’s in. The Exchequer deficit for the first 10 months of 2011 was €22bn. We simply can’t afford to base troops in Mullingar to defend County Westmeath from non-existent threats.
Finally, to end on an uplifting note. Those of you who are into sport will no doubt have heard of Munster’s incredible last-ditch victory over the weekend. The commentary on this video really captures the “who dares wins” nature of the win, while Gerry Thornley in the Irish Times, as ever, sketches a perfect picture of how the entire game played out.
Market Musings 16/10/11
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.
Market Musings 9/9/11
Since my last update, we’ve seen the good (Tullow), the bad (ECB, Euroland, Obama’s jobs proposals) and the ugly (HMV).
On Tullow, one of my more thoughtful readers contacted me yesterday to ask about rumours of bid interest from CNOOC (China National Offshore Oil Corporation). This story continually does the rounds, and given both China’s thirst for oil reserves and Tullow’s spectacular oil finds in Ghana and Uganda (in particular) you can see why. However, while a “Chinese takeaway” is a credible endgame for Tullow, the story itself has appeared with so much frequency that one is reminded of the fable of the boy who cried wolf. So, I wouldn’t be punting on Tullow on the basis of the latest manifestation of this rumour. However, why I would consider punting on Tullow is its exploration activity. On this front, we received a reminder of Tullow’s proven skill in finding oil in new markets with news of a 72m net oil pay find in offshore French Guiana today. This is a shedload of oil. Goodbody’s Gerry Hennigan, who is one of the top oil analysts I’ve ever come across, puts today’s discovery into context:
“In comparison to [the] previous discovery in Ghana, 72m of net oil pay is considerable, Mahogany-1 and Mahogany-2 encountered 95m and 50m respectively”
And if that’s double-Dutch to you, this piece explains why Tullow’s Ghana find was huge.
In Euroland, we have seen both Greece being warned about its fiscal delinquency and the latest ECB meeting. On the latter, the euro has come under pressure as the European Central Bank has halted moves to hike rates, and indeed rate cuts in 2012 are increasingly being seen as a given.
Here’s Danske Bank on why the UK should be rated A+, not AAA.
Turning to the US, markets have given a lukewarm reaction to President Obama’s jobs plan. The best way America can grow employment is by giving companies the confidence to invest the trillions of dollars in cash they have sitting on corporate balance sheets, rather than having the Federal Government continue to spend money that it doesn’t have. The uncertainty caused by the unsustainable fiscal and monetary paths the Obama administration and Chairman Bernanke have respectively embarked upon does little to promote confidence.
Do you know who the 10 countries with the biggest gold reserves are?
(Disclaimer: I am a shareholder in Irish Continental Group plc) In terms of other corporate newsflow, Goodbody had a bullish note out on Greencore following its Uniq deal yesterday. They rate it as a “buy” with an 80c price target (c.33% upside). The broker is particularly positive on the food producer’s cashflow and 7.8% dividend yield. By my calculations, Greencore and Irish Continental Group (7.0% yield based on yesterday’s close) are the two highest yielding stocks listed on Dublin’s ISEQ Index. Something for income investors to think about.
Following yesterday’s grim updates from Dixons and Home Retail Group (which owns Argos and Homebase), the UK High Street Horror Show continued today with yet another set of eye-watering like-for-like sales numbers from HMV. The UK retail sector is not on my list of things I’d like to invest in at the moment!
Another one of my thoughtful readers brought this new film to my attention. Looks good!
Market Musings 12/8/11
Markets rebounded a bit yesterday, but remain well below recent highs. Since my last update the main news has been the introduction of a short-selling ban in a number of EU member states, which I’ll look at in more detail below, while other things that have caught my eye include the price of gold, poor economic indicators in the UK and France, and also some corporate newsflow.
First up though, I was pleased to be “welcomed back” (!) by two readers who posed some really great questions to me about commodity prices and the short-selling ban yesterday. If there are any topics, within reason, that you’d like me to visit on this blog, feel free to get in touch and I’ll tackle it them here asap.
When the rumours about the introduction of a short-selling ban emerged yesterday afternoon, my initial response was to say that (i) this will does nothing to cure the problems in Europe’s banks; (ii) such measures have failed to work before; and (iii) bans are counter-productive because they increase the perceived riskiness of assets that are the subject of such bans, as market participants will no doubt become more wary about investments where governments and/or regulators intervene to significantly change the rules of the game.
These counter-arguments were put to me:
Well it’s time for something radical
It’s better than doing nothing and have rampers profit from what is nothing short of criminal with no risk of prosecution
If Italy and Spain are happy with their fundamentals they will not suffer from a suspension of short selling
The Irish and US experiences with bans are poor examples to give
My quick response to those four arguments are: (i) I agree that radical policies are needed, but I don’t see how a short-selling ban will do anything to cure the patient; (ii) The short-sellers wouldn’t have been circling around the banking sector unless something was very rotten in the system; (iii) Italy and Spain’s “fundamentals” – sclerotic growth, substantial public debt, big deficits, dire demographics, structurally high unemployment – would make me nervous; and (iv) I think using a fellow peripheral European country and the country where this bank problem first really started to emerge is fair.
To the above I would add the following: Bloomberg’s Mike McDonough, who is a must-follow on Twitter, produced this great chart which shows the experience of a short-selling ban across five countries, adding the UK, Germany and the Netherlands to the two I provided as examples. As I said above, the ban does nothing to address the fundamental reasons why the market has turned negative on financials, namely worries about the growth outlook, the increasingly likelihood of substantial write-downs on holdings of sovereign debt and political calls for a punitive tax on banks. These problems will not go away as a result of a trading restriction which Galileo Global Advisors describes as “knee-jerk” in a FT article that’s well worth a read. In particular for this bit:
A 2005 Cornell University study looked at short selling rules in 111 countries and found no evidence that bans reduced the frequency of market crashes. More recently, the International Monetary Fund found that 2008 prohibitions “did relatively little to support the targeted institutions’ underlying stock prices, while liquidity dropped and volatility rose substantially”.
Elsewhere in the FT, the influential Lex column concludes with this point that mirrors part of the argument I made yesterday:
Market gravity pulled weak companies down, as investors recognised that the shorts were right. When pessimism is justified, bans will not stop the truth from emerging.
Turning to France, earlier today it announced that second quarter GDP growth came in at zero, below consensus of +0.3%. Clearly this is the last thing Sarkozy et al need after the recent concerns about its economy. Staying with macroeconomic news, a study by LSL and Acadametrics says that UK house prices have fallen to a 19 month low.
In the commodity space, gold futures hit $1,800 an ounce earlier this week but have fallen back a little on CME margin hikes and also the uptick in equity prices. Given how volatile markets are at this time, I wouldn’t be surprised to see the upward trend resume in the near term – Merrill Lynch reckons gold will hit $2,000 in the next 12 months, which looks easily attainable given the troubled backdrop and the possibility of another round of quantitative easing in the United States. The margin increase serves as a reminder that while the path of least resistance is up, it will be a rocky one. One of my readers has asked if I can provide…
An analysis of the equity and businesses surrounding gold extraction and trade
…which is something I aim to tackle over the weekend, along with the dividend yield report I promised yesterday!
Finally, one “grey market” name I’ve written about before is One51. It released its 2010 annual report yesterday, which revealed a solid underlying performance, with pre-tax profits (before exceptional items) rising to €24.5m from €19.5m in the previous year. Its NAV of €2.56 per share was well down on the €3.66 at the end of 2009, with most of this decline down to a non-cash impairment charge on the value of its listed and unlisted investments. The main worry I would have on this front would be the value of its NTR stake, which it includes in the books at €48.7m, or just under 40c a share. Even if you wrote this to zero (which would obviously be an aggressively cautious step to take), you still get a NAV of over €2 a share, versus a current share price of €1.00. While its illiquid grey market status and significant Irish exposure mean that a discount to NAV is warranted in my book, a 50%+ discount looks excessive to me. One way that it could help to address this discount is by transitioning to a listing on the Irish Stock Exchange, which would improve the marketability of its shares. One area that has attracted media attention is remuneration levels at the group. While it is easy to point at how much the top dog in any company is paid, overall employee costs should not be ignored. The total P&L charge on this front of €65.4m was -6% from the previous year, while average wages & salary costs of €38k per employee (a whopping 14% below 2009 levels) are hardly excessive.
Two highly alarming stats to chew over – the percentage of Americans who don’t have $1,000 in savings to cover emergencies? 64%. The percentage of Americans who don’t have any savings whatsoever to cover emergencies? 24%.
And finally, seeing this gold-dispensing ATM was a highlight of my recent trip to Dubai.
Market Musings 25/4/11
Blogging has been quiet with the Easter break. However, there’s been a good bit of action around the market, with commodities and sovereign concerns again to the fore. So, let’s recap what’s been going on.
As I noted in a recent article in Business & Finance, this year will see a marked increase in M&A activity both here in Ireland and abroad. Divestments – actual and expected – are particularly newsworthy these days between the banks (Bank of Ireland sold its 50% stake in a fund-of-funds business) and the State, where there is ongong speculation about what assets the government will offload in an effort to repair Ireland Inc’s balance sheet. One of the points I made in my B&F article was that State assets would need to be reformed ahead of their disposal, and an obvious target here is their cost structure. The Sunday Independent had a good analysis comparing pay at the highest levels of public enterprises here versus other countries which threw up some eye-popping results, including the revelation that the head of An Post enjoys a level of remuneration that is nearly three times that of the head of the Royal Mail.
In the US, concerns about the country’s $14.3trn national debt show no signs of abating. Legendary investor Jim Rogers is the latest to warn about the lack of buyers of US Treasurys once quantitative easing ends in June. This is a theme I touch on in the upcoming May edition of Business & Finance in a piece which examines whether or not investors should, as the saying goes, “Sell in May and go away“. One thing which I’m not inclined to buy is the US dollar, which I see weakening further against the euro over the rest of the year. Here’s something which added to my general bearish sentiment towards the dollar.
The national debt in the UK also concerns me. In March the Exchequer racked up a deficit of £18.6bn. Over the last 12 months the total fiscal deficit in the UK has been £141.1bn (circa 10% of GDP). Britain’s deficit relative to its GDP is at a similar level to the US, and indeed ourselves. So the Anglosphere “delinquents” collectively need to get their houses in order.
Speaking of countries that need to sort out their debts, Greece was again in the spotlight, with its 30 year debt trading at 50c in the euro late last week, which to me shows that the market is convinced that a restructuring of its debts is inevitable. I expect Interpol to come knocking on my door shortly (!), because Greece isn’t best pleased with anyone who says that sort of thing. Of course, Greece blaming Citigroup for its latest woes reminds me of Anglo Irish accusing UK brokers of spreading ‘baseless rumours’ before its demise. But what shape might Greece’s debt restructuring take? This Citi note offers a few ideas. Ideas that may well apply closer to home too.
Further afield, China continues to deteriorate. The Financial Times reported over the weekend that it has ordered its banks to conduct stress tests modelling for a drop of up to 50% in house prices. Regular readers of this blog will be familiar with the video showing that China has 64m empty apartments, which makes me think that the fall out from a crash in China will be horrendous. I wouldn’t be keen on buying anything with a material exposure to China at this point.
Speaking of materials, silver looks like it is about to break the $50/ounce level, not long after gold crossed the $1,500/ounce mark. For what it’s worth, I remain positive on gold, despite its dramatic rise in the past year or so, as it’s not a bad place to hide from any trouble – and we’ve a lot of that going on at the moment. Also, I note that gold surged after the withdrawal of QE1 last year, so will we see a similar move when QE2 is withdrawn? One point of note though – the gold/silver price ratio of circa 30:1 is well below the 20th century average of 47:1, so I wonder if silver has had its move for now. Watch this space!
