Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 25/03/2011

with 5 comments

I haven’t been blogging the past few days because I had to finish off two articles for Business & Finance magazine. So I thought I should do a reprise of the things that interested me since my last blog.

HMV is something that has caught my eye a bit in recent months. Its shares have tanked in recent times on concerns about its debt pile (the group said on March 1 that: “it does not expect to meet certain of its covenant testswhen they are next tested by reference to its full year results”) and also the structural decline in offline music sales. On the latter point I wandered into its Grafton Street store in Dublin a few days ago and was struck by how little – I guesstimate less than 20% – of the floorspace on the ground floor was given over to music. This morning the company said that “it is exploring strategic options in respect of Waterstone’s and HMV Canada”. Assuming they can find buyers for these assets, this will help alleviate its debt worries, but the structural challenges will remain. As I write the company has an enterprise value (market cap + net debt) of £137m, significantly less than 10% of its annual revenues. There might be some value if the company adopts a more successful internet strategy, closes a lot more stores than it currently plans to do and successfully sells the assets referred to in today’s RNS (thus negating a need for an emergency rights issue), but for the time being there is too much uncertainty around its prospects to entice me.

Citigroup had a bearish presentation out during the week on the 8 shocks that “are about to slam the global economy”. Regular readers of my stuff in B&F will know that I’m quite cautious on the  market, largely due to the reasons Citi outlines, so I think their piece is worth looking at to get a quick snapshot of what could go wrong in the short term.  Speaking of perspectives, academics in the Harvard Business School have provided some insights into the effects of the Japanese earthquake that are worth looking at. I’ve a piece in the April edition of B&F (due out next week) on the lessons from that tragedy. And speaking of bearish presentations, check out this offering from Hugh Hendry.

I’m all for entrepreneurship, and Rolling Stone magazine had an interesting article on two young entrepreneurs that I found enthralling.

The bond market had a volatile week, with a lot of interest in peripheral Europe given that Portugal was firmly in the market’s crosshairs. There were some rumours that AIB might default on a coupon payment, which prompted this denial from the bank. Speaking of peripheral countries, I was interested to read that Ireland “is now a dead man walking in the dumbest game of chicken since the creation of the euro“. I was also intrigued by the enormous range of estimates about how much money Portugal needs, from €70bn to €130bn. Real finger in the air stuff.

Did you know that the USA and Ireland are 1st and 3rd in the OECD when it comes to taxing the rich?

The Moriarty Tribunal report came out during the week, and as RTE’s David Murphy (who I’ve a lot of time for) pointed out, it is a further blow to Ireland’s reputation as a place to do business in.

There were a number of broker notes out on Ireland’s larger plcs this week. Berenberg initiated coverage on CRH with a “buy” recommendation. Data compiled by Bloomberg show that of the 33 analysts who follow the stock, 11 rate it “buy”, 15 rate it “hold” and 7 rate it “sell”. There were conflicting broker notes out on Ryanair too. Morgan Stanley has something for the bulls – they see the the recent share decline as providing a buying opportunity, setting a €4.60 price target, while Credit Suisse is nervous on fuel and cut its PT to €3.30 from €4. Morgan Stanley also released its “Global Executive Brief” in which it outlined its main advice to investors – namely to stay cautious given risks such as (i) growth metrics that are near cyclical highs; (ii) earnings revisions that are deteriorating; and (iii) interest rate hikes.

The futility of attempts to interfere in the markets was shown by Egypt’s disastrous “stop-start-stop” reopening of its market after a 2 month halt. It brought back memories of the ban on shorting Irish financial stocks, which did little to halt the rout. The ISEF index of Irish financial shares closed at 4031.62 on September 18 2008 just before the ban was brought in. At the time of writing it’s at 305.39. Success!

The latest US housing data came out and it was disappointing. New home sales were -16.9% at 250k, some 40k below consensus. The last time the index was this weak JFK was in the White House. In the UK I was surprised by how weak the February retail sales data were – core sales were -1.0% mom versus expectations of a 0.6% decline.

The North Sea oil producers were in the spotlight this week between what I believe was a very ill-considered tax hike by Chancellor Osborne and Premier Oil’s results. Premier will not be too affected by the tax hike because it has $1.1bn of tax losses from its 2009 acquisition of Oilexco to use, so it’s in a better place than some of the other firms with exposure to the UK continental shelf.

There was an interesting article in today’s Irish Independent about Greencore, which I would go along with. The fragmented UK convenience food producer sector only serves to allow multiples crush suppliers’ margins. Consolidation needs to happen.

So, overall, not a lot of stuff to get enthusiastic about I would have thought. Yet at the time of writing the VIX index – or the “Fear Index” as it’s known – has improved for the seventh straight session. What will it take to get the markets to retreat from here? Citigroup’s presentation might provide a few useful clues.

Finally, I want one of these.


Written by Philip O'Sullivan

March 25, 2011 at 2:41 pm

5 Responses

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  1. I definitely agree with you about the lack of wisdom in Osborne’s tax hike. In a sense it’s typical Tories, as they don’t have any votes to lose in Scotland and generally treat it like crap (strategically logical, in a sense, but still completely wrong of them).

    It will be interesting to see how this will affect the Lib Dem vote in Scotland. Because of the cultural anti-Tory bias in Scotland, I think the Libs will get a whipping just for going into Coalition, but supporting the oil industry tax hike is adding, no pun intended, fuel to the flames.

    The question then is: will disgruntled Libs go Labour or SNP? I suspect (and hope) the latter. So much of politics is aesthetics, and the SNP offer a much broader vision than Labour (a party which is named after one particular social class, the very opposite of the SNP). Plus they have the same colours, yellow and black!

    This could be a potential game-changer in the long run.

    Andrew Cusack

    March 25, 2011 at 7:49 pm

    • Interesting analysis there. You’re right about the Lib Dems presumably being the Tory mudguard. IIRC most of what’s left of the Con vote in Scotland is centred between Edinburgh and Hadrian’s Wall, which is far away from the Aberdeen/Dundee axis of diesel (!).

      Philip O'Sullivan

      March 26, 2011 at 1:28 pm

  2. […] I am a shareholder in Uniq plc). I’ve commented in the past about the need for consolidation among the UK food producers. Uniq, a company which recently […]

  3. […] 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 […]

  4. […] names got a boost from a welcome u-turn on North Sea taxes from the British government, which had previously appeared hell-bent on endangering the country’s energy security and countless numbe…. Contrarian Investor, one of the main UK share blogs I follow, had a good piece on this here. […]

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