Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 25/4/11

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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!


Written by Philip O'Sullivan

April 25, 2011 at 4:34 pm

One Response

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  1. […] by 13% to $14,513 per contract. Margins were $4,250 a year ago. Last month I wondered if “silver has had its move for now“. It’s dropped by over $3 an ounce since then, so I guess it has!  I know that quite a […]

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