Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 15/04/11

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It’s been a case of “as you were” since my last blog earlier this week, with the same narrative running through to today. Despite the narrative being a bearish one, I view this as positive, as it’s reassuring to see the market play out just as you expect it to. We’ve seen more wobbles on the commodity side as Goldman Sachs continue to reiterate their negative call on commodity prices. We’ve also seen further concerning data from the BRICs which strengthens my conviction that those are not markets to play for now. I have taken some money off the table, selling one of my “core holdings”, but I don’t see a compelling reason to top up any of my “trading positions” just yet.

(Disclaimer: I am a shareholder in Ryanair) The sector that will benefit the most from a sliding oil price is of course the airline sector. West Texas Crude fell 4.1% between the start of the week and last night’s close, and this has had a corresponding benefit on the likes of Aer Lingus (+8.8% in the same period) and Ryanair (+2.1%). The negative noises around the oil price and the world economy give me confidence that Ireland’s two listed airlines will outperform over the coming months.

Anyone who reads the papers knows that the US economy is very sick. Forecasters are downgrading their expectations for the US economy, which in turn will lead to downgrades for earnings estimates for stocks. These downgrades could well see global markets retrench over the quiet summer months. In my last Business & Finance article I asked if this is going to be a year where the old adage – “Sell in May and go away” applies. I suspect it will be. The US budget deal was heralded by those lacking in intellectual curiosity as a “historic agreement”.  But that’s just garbage. The amount of money the deal aims to save is $38.5bn. The US deficit over the past 12 months was $1.4trn. Complete drop in the ocean stuff. Citigroup takes up this narrative, warning on the prospects for the US dollar.

There was similar economic madness from the Irish authorities. The Minister for Public Expenditure and Reform, Brendan Howlin, said that the “stimulus” package his government is planning may be funded through higher taxes. In reality, the only thing that higher taxes will stimulate is higher unemployment.

The BRIC economies continue to cause concern for me. Especially China. I’ve previously banged the drum about the 64m empty apartments in the country, which makes Ireland’s property bubble look like “a modest overhang”. You can now add collapsing car sales and soaring inflation to the mix of things that make me bearish on China. Oh, and I almost forgot – to add to my narrative on the Chinese property market, Moody’s lowered its outlook for China’s property sector from “stable” to “negative”, saying that sales could fall as much as 30%.

Europe is still seeing severe problems, especially on the periphery. During the week the Greek 10 year bond yield went above 13% for the first time, with its spread over bunds at a Euro-era record. In an effort to address this lack of confidence, Greece plans to sell assets and cut spending, but will not restructure its debts.

The ratings agencies get little by way of enthusiasm here given their form for “closing the stable door after the horse has bolted”. However, Fitch’s decision to downgrade its ratings on Libya by three levels amused me given that Libya has no sovereign debt.

Bank of Ireland released full-year results, and while the absence of any detail on its capital raising means that many investors will wait on the sidelines until this is clarified, I was struck by the different trends it’s seeing relative to AIB. Firstly, BKIR’s deposits have been stable since November (AIB is still seeing outflows). Secondly, BKIR’s “challenged loans” were down sequentially in H2 2010, while AIB’s “criticised loans” were up sequentially in the same period. Thirdly, BKIR’s “impaired loans” stand at 9.2% (from 7.1% in H1), versus AIB’s, which are rising at a much faster rate – to 12.9% in H2 2010 (from 8.4% in H1).

Overall, very troubling macro developments. I suspect we’re in for a choppy few months in the markets.

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Written by Philip O'Sullivan

April 15, 2011 at 10:46 am

One Response

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  1. […] first time ever. This is no surprise, given what I’ve written in the past about the US’ unsustainable deficit. Other sovereign concerns saw gold break $1,500 an ounce for the first time, while Greek 2 year […]


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