Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 12/04/11

with 5 comments

Since my last installment we’ve seen further concerning news about the health of the UK economy, coupled with wobbles in the commodity market and further evidence that M&A activity is on the way back – in the more defensive sectors at least.

 

A series of updates from UK consumer oriented firms continued to support my caution around that market. Recruiter Michael Page said that market conditions “remain tough”, with public sector hiring demand “difficult”, while plant hire group Speedy Hire said that it remains cautious about the prospects for a short-term recovery. The BRC said that UK retail sales plunged by the most on record in March,

 

As I recently discussed in an article in Business & Finance magazine, one area that continues to benefit from positive commodity trends is agriculture. On this front, Carr’s Milling, a peer of Ireland’s Origin Enterprises, released an update which has a bullish read-across for Origin. Elsewhere, cocoa prices plunged after French special forces seized Laurent Gbagbo in the Ivory Coast, which should hopefully lead to a new chapter in that State’s troubled history. Hard commodities such as oil wobbled today after Goldmans cooled its view on them.

 

(Disclaimer: I am a shareholder in AIB plc). AIB released 2010 results earlier this morning, that showed the bank lost €10.2bn last year. The group says that: “business and market conditions remain challenging and the environment for operating income generation remains difficult”. While deposit outflows had been flagged last year, I still raised an eyebrow at the confirmation that customer deposits decreased by €22 billion in 2010 to €52 billion. The deposit outflow was most acute in capital markets (corporate deposits), where deposits were -65% vs -10% in AIB ROI & -24% in AIB UK. AIB’s LDR widened to 165% at end-2010 vs 123% at end-2009. In terms of the quality of the loan book, AIB’s “criticised loans” are now at 30.2% of total loans, while impaired loans are at 13.4% of total loans. On funding, at end-2010, AIB had ECB drawings of €25.2bn & another €11.4bn from Ireland’s central bank, a combined €36.6bn or 25% of the balance sheet. However, the Polish disposal and Anglo deposit acquisition will have cut that somewhat since the start of the year. All in all things look very grave for the bank, which is effectively on life support from the State for now.

 

On the M&A front, we had denials from both BHP Billiton and Woodside that they were in discussions over a $49bn deal, while Schneider Electric was rumoured to be planning a deal for Tyco (market cap $23bn) . There has been a lot of speculation about BP’s intentions for its troublesome TNK-BP operation, and I was interested in this article about it. In terms of deals that are going ahead, post AT&T/T-Mobile USA & Vivendi/SFR I had wondered if more telco M&A would come. Then Level 3 paid $3bn for Global Crossing. Elsewhere, Flowers Foods paid $165m for Tasty Baking, which continues the narrative of consolidation in the North American bakery market, a process which Ireland’s Aryzta has been very active in.

 

There was a bit of military newsflow that caught my eye this week. Firstly, data was released that show global military spending continues to rise, with the world’s biggest spender, the US, having raised its expenditure by 81% since 2001. The US Navy conducted its first test of a laser weapon at sea. Speaking of weapons, watch this video.

 

I do hope that I’m ultimately proven wrong, but the government here looks to be dithering every bit as much as its predecessor when it comes to pushing through reforms and fiscal consolidation. And reform is urgently needed. One example of this came in the shape of a recent Irish Times article which revealed that despite the failings in governance in many areas of the public sector in recent years, a mere 1 of the 300 external candidates for senior civil service positions in the past 3-and-a-half years was successful. Opening recruitment in the public sector to further outside competition can only be a positive in terms of incentivising better delivery of services. On the spending front, the government announced yet another “review” which simply wastes more time and thus will result in even more debt being loaded onto our battered economy. Speaking of our battered economy, Bank of Ireland became the latest forecaster to cut its estimates for GDP growth.

 

I’m rather sceptical on the BRIC economies at the moment, for reasons that deserve a blog all of its own. A couple of pieces of news caught my eye in this space which reinforced my suspicions. Firstly, George Soros said that inflation in China is “somewhat out of control“. This chart by Bloomberg economist Michael McDonough also tells a lot about the inflationary issues affecting these emerging markets. Finally, one of the biggest holders of US Treasurys is of course the People’s Bank of China, and I was interested in reading that a former PBOC official has described the US Treasury market as “a giant Ponzi scheme. Elsewhere, Australian housing data looks to be turning negative – this is a trend worth keeping an eye on.

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5 Responses

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  1. Your comment on Australia is accurate and I think understates the fundamental problems in the Australian housing market. While the banks did not engage in reckless lending (in fact, they were rather conservative pre 2008), they kept the money flowing up until recently with a lot of cajoling from the Government and the RBA. The development backlog in 2008 was massive (had demand stopped altogether) and the crash there would have rivaled that in Ireland were it not for – responsible banking practices, policies from the Ruud government not to rock the boat too much but further restricting development through state/local government, and a strong mining and export sector. However, the Gillard government has created uncertainty around most every issue facing the Australian economy and good performance is totally dependent upon mining and exports at this point…..not good in the face of global uncertainty. While the Australian housing markets do not have good prospects overall, it could have been much worse.

    James

    April 12, 2011 at 8:24 pm

  2. Great colour James, thanks. I agree that the Aussie economy is dangerously dependent on commodities and the likes of China – with both looking like they might roll over in the near term this will likely have serious effects on Australia.

    By the way, have you got your own blog? Would be useful to link you on this.

    Philip O'Sullivan

    April 13, 2011 at 6:09 am

  3. Regarding Australia, we probably won’t see much certainty there until after the next election, which could be as soon as a year or so. The governing ALP (Labor) were trounced in the recent state elections in their own stronghold of New South Wales, which leads one to conclude that unless Gillard pulls a rabbit out of a hat, the Liberals & Tony Abbott will sweep into the corridors of power come the next general election. They’ll bring with them a fairly common sense approach to encouraging prosperity & growth, but not at the risk of instability.

    As for the US Navy’s alleged laser gun, I think I agree with the views of ‘The War Nerd’ Gary Brecher on such gizmo displays:

    http://exiledonline.com/xm25-gee-whiz-how-can-we-be-losing-with-such-cool-stuff/

    Andrew Cusack

    April 14, 2011 at 12:32 pm

  4. Agreed re Australia. That military blog looks really interesting, thanks for the link.

    Philip O'Sullivan

    April 14, 2011 at 12:54 pm

  5. […] raised its reserve requirements for banks for the fourth time this year today. A reminder that George Soros recently described inflation in China as being “somewhat out of control”. JP Morgan has a good note here on the effect of the government’s interventions in the […]


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