Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 20/7/11

with one comment

This may well be my final blog for quite some time as I’ll only be spending another 2 days in Ireland between now and August 11th. The vast majority of this time will be spent on honeymoon and convention dictates that I should try to switch off from the markets then!


Before I leave – a useful recap of where we are. The Eurozone sovereign debt crisis, economic sclerosis in the United States (where the Misery Index stands at a 28 year high and Goldmans have cut their GDP estimates), and a looming mega-recession in China all paint a grim picture for much of the remainder of 2011. Closer to home, the domestic economy remains extremely fragile, while the government’s inability to control the deficit (voted spending here actually increased year-on-year in the first half of the year, a point lost on a large number of media commentators who mindlessly repeat the spin that the public finances are “on track”) serves only to darken the country’s future prospects.


In the short term, the prospects for some sort of deal (more likely an “extend and pretend“, as the FT’s James Mackintosh put it, arrangement for Greek debt) being hammered out at tomorrow’s EU summit look to have improved, while in the US President Obama has welcomed the Gang of Six’s proposals on the deficit, which while not enough to fix the debt ceiling issue in itself signals that a political compromise may be nearing. These and strong corporate earnings in the US from the likes of Apple have strengthened my conviction from earlier this week about there being decent enough potential for a near-term “relief rally” (before the next down-leg in the market!). Hence I’ve increased my exposure to equities, topping up my existing position in Smurfit Kappa yesterday at €6.84. Regular readers will recall that I recently placed SKG on my wish list with a view to buying more of it lower down. At that stage the shares were at €7.80, so a 12%+ pullback in the price since then, taking it to 0.9x historic P/B made it attractive enough to buy more of it as my “relief rally” play. Time will tell if I’m proven right!


Returning to peripheral Europe for a moment, I was asked this question earlier today:


What happens if the EU summit is a complete failure and Greece goes under?


Note the word “if” above. As I stated above, I suspect a “extend and pretend” fudge will be reached. However, my correspondent has asked what is obviously the $6m question at this time and deserves an answer. That said, if I knew all the answers to questions like this I would be blogging from a mansion in the Bahamas instead of an apartment in Dublin, but I did offer the following as a response:


We got some clues about what happens in that case in recent days, with Spanish and Italian sovereign bonds slumping on increased fears about peripheral Europe while bank shares also tanked. While some of these pressures have eased on optimism about the summit, a failure is likely to see their return – in an amplified way. I don’t believe that most commentators have grasped the gravity of the situation – for example, I keep seeing tables showing the exposure of significant European banks to the PIIGS countries. But what these tables don’t show is that they also have significant exposure to other institutions which in turn have material exposure to the PIIGS. The hit to Europe’s banks from a disorderly Greek default and the domino-effect this would have across other countries’ sovereign bonds would likely exceed the most pessimistic forecasts out there. After a lengthy period in which they appeared to be de-coupling we have again seen Italy and Spain flirt with the other PIG countries. But why shouldn’t countries like the UK, with its 10% deficit and sclerotic growth also get sucked into this mess? Why not France? This problem could easily spread to many other countries. Note also that banks’ trading losses on sovereign bond holdings would soar, which would further erode already weak capital levels. I wouldn’t be surprised if by the end of 2011 politicians start calling for a temporary derogation on capital rules to stop some banks from going under…  


(Disclaimer: I’m a shareholder in Irish Life & Permanent plc) Elsewhere, shareholders at IL&P voted to reject the recapitalisation plans for the institution at its EGM today. One or two commentators who should know better described this as a “win” for IL&P shareholders, but in reality the government will simply move to the courts to get approval for the recap as it has previously done with other Irish institutions. This will no doubt be presented as some sort of “big story” by the media, but in reality it’s a mere footnote to the bigger issues such as the ones outlined above.


(Disclaimer: I’m a shareholder in Playtech plc) I was pleased to see a solid trading update and a well-received acquisition announcement from Playtech earlier today. At the time of writing the shares are up a stonking 10%, which helps bring them to within 5% of where I bought the shares initially. Regular readers will know that it’s a stock I’ve fallen out of love with,  but a few more days like today might change my mind on it!


Finally, I’m pleased to see that there’s a second Irish person blogging about equities. John McElligott’s blog can be found here:


One Response

Subscribe to comments with RSS.

  1. […] has had a positive effect on equity markets, with the makings of a relief rally firmly in train. I was pleased to see my punt on an “amend and pretend” deal giving comfort to investors,…. I am a little fearful that this gain will be eroded if the US debt talks don’t get […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: