Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 20/6/11

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It’s been a busy few days as I’ve been juggling getting my latest articles for Business & Finance magazine finished along with the various other demands on my time. It’s also been a busy few days in terms of newsflow. The main focus has been on the Greek tragedy, and the ham-fisted approach from the European authorities to this.


In recent days, the European Commission and the ECB have gone out of their way to try to ensure that a restructuring of Greece’s debts doesn’t trigger a credit event. The fact is, as commentators including Paul Sommerville have noted, that this will make sovereign CDS protection worthless, which will lead to major risk aversion around peripheral European debt. Which includes our own – not that Irish sovereign debt is a particularly attractive asset class at this time, mind! From a top-down perspective, the muddled response from the European authorities to this problem isn’t helping either, especially with the received wisdom being that they are looking for yet another patch-up instead of a proper lasting resolution. As Pimco’s Bill Gross remarked, the  “Greek can [is] likely to be kicked down the road, but it’s broke and investors know it“. As a sign of investor skepticism about the handling of the situation there, Greece’s 2 year yields topped 30% on June 16.


In the UK, we had a update on trading from Sainsbury. CEO Justin King said that the consumer environment is the toughest he’s seen in 30 years in the business. Not that this is a surprise given the pressures UK shoppers are under pressure these days (the average household had £167 a week of discretionary income in April 2011, 7.1% lower than a year earlier). Interestingly, the appropriately named King disclosed a few data points on the impact of the Royal Wedding – Sainbury sold 300 miles of bunting, 159,000 flags and 49,000 mugs to people celebrating the happy occasion, while also disclosing that they “sold the most champagne we have ever sold outside of Christmas”. The pressure is on for Prince Harry to give consumers another lift next year!


Closer to home, we had the review of the Croke Park agreement’s “progress” since its implementation. I didn’t go through it in a lot of detail because I can see that it simply will not endure given the fiscal situation the country is in. There was a big splash in the media about how it has supposedly saved the Exchequer €600m so far, but let’s not delude ourselves. The savings from the Croke Park deal are less than the interest costs on borrowing €20bn each year to pay for bloated public expenditure.


Elsewhere, we learned that the government is (rightly) looking for burden sharing with bondholders in Anglo and Irish Nationwide. Given the cool response so far to this, I would judge the chances of success with securing approval from our “friends in Brussels” at less than 50-50, but perhaps it can be used as leverage to get a better deal on the bailout rate and so on. Our dealings with Europe might have been easier if it wasn’t for the delinquent behaviour of members of the Cowen administration. The Irish Examiner reported on June 17 that “Ministers in the last Government missed almost two thirds of Ecofin/European council finance meetings from 2007 to 2011”. Returning to the bond issue, some so-called commentators said that Noonan’s announcement was a “shocker”, but to me this served more to illustrate their poor grasp of the market than the reality of the situation. The wide discount to par that the bonds were trading at meant that the market was anticipating something along those lines.


I was interested to learn that Ireland’s government is planning to tighten the country’s media M&A rules. This has clear implications for the two listed Irish media stocks, Independent News & Media and UTV Media. Shares in INM, which I am a shareholder in, slumped 7.5% on the back of that story.


Today brought news of another bolt-on deal by Origin Enterprises, this time it’s snapping up Carr’s Milling’s fertiliser business, which is a great fit for its operations in that area. Origin has made tremendous progress since its partial de-merger from Aryzta, and it’s a good way to play the structural agri-commodity growth story. It’s one I’ve kicked myself for not buying in the past, and if the price comes back from here it is one I’d definitely consider investing in.


I’m amazed by how little coverage the gradual implosion of the Chinese economy is getting here. In today’s latest bear point, I see that house prices have fallen in a third of cities surveyed, according to an official report. And we all know how dubious Chinese State data is, so the reality is presumably even worse.


And finally, Lloyds is reviewing insurance payouts that help secure the release of boats and crew held by pirates.


Written by Philip O'Sullivan

June 20, 2011 at 10:19 pm

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