Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 11/7/11

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What a volatile session it has proved to be on the markets. My screen at time of writing (3.45pm) is a sea of red as macro concerns, particularly around Italy, intensify. It’s certainly a time where the term “Risk Off” comes to mind.

 

In a sign of the growing panic around peripheral Europe, Italy announced last night that it was considering curbing short selling following Friday’s fire-sale in Milan. Ireland banned the shorting of bank shares in September 2008, and we all know how well that turned out. Today has been a day where people have been rushing to safety, and I can’t help but wonder when Spain will become the next target of the market’s fury. This all provides a toxic near-term outlook for Eurozone equities. The European Union and ECB’s handling of the peripheral crisis has been a failure and there are few signs of positivity elsewhere, with the US soon to hit its debt limit, the UK finding out that its consumers have no money left and China about to discover that its pro-cyclical economic policies have fueled one of the biggest bubbles of all time. Some of my readers have teased me for always being bearish since I started this blog, but the reality is that the troubled macro backdrop that we have now has been an ever-present since I began writing this blog. Believe me, I would love to have something positive to talk about!

 

(Disclaimer: I’m a shareholder in Bank of Ireland plc) The Bank of Ireland rights issue circus really gets going this week. I was amused by this story in the Irish Independent, in which Harris Associates appears to have forgotten that major banks such as HSBC, RBS, Danske & KBC have operations here. There is a terminology for this sort of thing – “talking up your own book” (another term I like for this sort of thing is “getting high on your own supply”). Now don’t get me wrong, perhaps BKIR will be a big winner once the dust settles. I hope it is, mainly because this will allow the State (i.e. we the taxpayers) to recoup some or all of its “investment” into it. At the time of writing Bank of Ireland’s shares are trading just 0.7c above the 10c rights price. Last year’s rights issue (at 55c) represented a 64% discount, so in the absence of a generous discount it will be tricky to ensure a substantial private sector participation. If it doesn’t happen, then the €150m in expenses paid to advisers by BKIR for its capital raising will look even more ridiculous (given BKIR’s market cap is only €562m) than it currently does.

 

Bloxham has an Irish equity strategy note (“Tin Hats”) out today. Its key picks are DCC, ICG, Kerry & Paddy Power, which are selected due to their strong balance sheets, the potential for share buybacks/special dividends and limited dilution risk for shareholders. It also selects four microcap stocks, Abbey, CPL, Datalex and Total Produce, due to their attractive rating and long-term upside potential. I recently identified four Irish companies as my preferred stocks on the ISEQ and I note that 3 of the 4 make the Bloxham list for much the same reasons why I included them. And for the sake of full disclosure, of Bloxham’s 8 picks, I currently hold ICG, Abbey, Datalex and Total Produce.

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Written by Philip O'Sullivan

July 11, 2011 at 3:02 pm

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