Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 07/04/11

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Blogging has been non-existent of late as I headed to Cork for a few days both to avoid being disinherited (Mother’s Day!) and due to my guessing, correctly as it turned out, that the markets would be quiet before the expected ECB rate hike announcement.

So what have I learned the past while?

Firstly, I was aghast to read on Zero Hedge that the Federal Reserve has printed $2.5 trillion dollars to create 1,492,000 jobs from the recession trough. That’s $1.7m per job.

This article warns of the dangers in investing in penny stocks. If something appears too good to be true, it almost always is. I have never traded any stock that I’ve come across due to a recommendation from a ramper. A policy I’m not likely to change.

You can read about the world’s 10 strongest liquor brands here. Contrary to the stereotype only one was founded by an Irishman!

I’ve written before about how new media continues to gain market share from traditional media, and this statistic again illustrates the trend. How many Irish TV shows have a greater audience than Facebook on any given day in Ireland? Just one – The Late Late Toy Show.

(Disclaimer: 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 completed a historic pension deficit-for-equity swap, announced that it has put itself up for sale. Potential suitors presumably include Ireland’s Greencore, given the product overlap between the two (hence plenty of synergies to squeeze out of a deal), Uniq’s strong relationship with M&S, a retailer that Greencore wants to get more exposure to, and Greencore is I imagine under pressure to cut a deal after being trumped by turkey mogul Ranjit Boparan in the battle to acquire Northern Foods.

I would classify my own investment style as being a mixture of contrarian and value, and the former side was very interested to hear of data compiled by Explorers of London that show that as of March 30th, the value of stocks on loan to short sellers was a paltry $273 bln, the lowest level in 5 yrs. Moreover, a survey by Investors Intelligence puts the Bulls at 57.3% (highest level since since mid-Dec 2010) and the Bears at 15.7% (the lowest level since Dec 2009). The difference of +41.6% is close to the 2007 high of +42.4%. Stats like that given the macro backdrop make me very nervous about market direction.

In my first blog post I noted the proposed $39bn AT&T-T Mobile USA deal. This has been followed by the $11bn acquisition of Vodafone’s stake in France’s SFR by Vivendi. Might these deals herald the start of a new wave of consolidation in the telecoms space?

Exchequer returns data for the first quarter of 2011 was released by the Department of Finance and it made for disappointing reading. While the spin put on it was that the numbers were “broadly in line“, the reality was that they were behind expectations. I was dismayed to read that total headline voted expenditure by the Irish government was +2% yoy in Q1 2011 – despite all of the hand-wringing about cutbacks – while even the political parties failed to lead by example, with State funding to them rising by a staggering 10% in Q1 relative to the same period last year. In addition, I note that Election 2011 cost the State some €13.9m.

Speaking of spendthrift governments, the US confirmed that it will hit its debt ceiling by May 16. Secretary Geithner’s letter to Congress is hair-raising stuff. The US’ current debt? $14.25trn. Another country with troubles, albeit well hidden ones, is China, where the Central Bank raised rates for the fourth time since October. They should have done that before 64m empty apartments were built there.

There was a touch of Groundhog Day about Tuesday, with HMV issuing yet another profit warning – its 3rd in 4 months, while oil, gold and silver all hit new highs. (Disclaimer: I am a shareholder in Ryanair plc) Oil has been messing around with a lot of brokers’ forecasts of late, and I was interested to see Goodbody slash its Ryanair forecasts, after factoring in $120 oil for the unhedged portion of its fuel requirements. That move sees FY13 EPS cut to 31.7c from 41.7c, while FY12 (where more of RYA’s needs are hedged) goes from 33.1c to 32.5c. Goodbody’s fair value on the stock has been cut by 6% to €4.70. Elsewhere within the sector British Airways raised fuel surcharges on return long-haul business class flights to up to £290, a 7 year high.

Those of you interested in gambling stocks might be interested in Davy’s observations from its recent sector conference.

The ECB is expected to raise interest rates in an hour or so, despite the well-documented pressures in Greece, Ireland and Portugal, which has become the third country to receive a bail-out. There’s a lot of confident talk about Spain dodging the need for a bailout, but I am unconvinced about that, given its horrific housing sector, Spain’s recent downgrading of its GDP forecasts and soaring unemployment.

Finally, Goodbody’s Dermot O’Leary has a great presentation from the Irish Debt Dynamics conference held yesterday in London. Amongst other things in it, here are some quotes from the European Commission, the IMF and the now Chancellor of the Exchequer from the good times to show how not even they saw the mess coming:

Ireland’s “budgetary position is sound & the budgetary strategy provides a good example of fiscal policies in compliance with SGP” – EC, 2006

Ireland’s “performance has been underpinned by outward-oriented policies, prudent fiscal policy, low taxes…” – IMF, 2007

Ireland is “a shining example of the art of the possible in long-term economic policymaking” – George Osborne, 2006

And we’re being advised by some of these people now?


Written by Philip O'Sullivan

April 7, 2011 at 10:46 am

One Response

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  1. […] given the realities of Spain’s property market, which I’ve blogged about before here and here. Unsurprisingly, I see no reason to own any bank with material exposure to […]

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