Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 15/8/11

with 2 comments

One thing that caught my eye over the weekend was a report in the FT that company share buybacks on the London Stock Exchange have increased from £329m in 2009 to £4.35bn in 2010 to £8.93bn in the year to date. Two things immediately come to mind from reading this. Firstly, on the positive side, this shows that management teams are demonstrating more faith in their businesses’ fortunes and valuations by deploying capital to buy back shares on the open market. Secondly, on the negative side, it also implies that some management teams are being more cautious in buying back their own shares rather than buying other businesses, which means less M&A activity. So far this year three Irish plcs (my apologies if I’ve left any out) – Abbey, Ryanair and United Drug – have stepped in to the market to buy their own shares.


Elsewhere, with the security aspect out of the way, the focus from the recent UK riots has switched to the financial fall-out from them. The Association of British Insurers estimates that households and businesses suffered losses of over £200m from the disturbances. Footage of the riots showed that the looters had a marked preference for electronics, alcohol and sportswear, with these sectors likely to have particularly suffered. One apparel chain, JD Sports, had 30 of its 350 stores looted during the troubles.


Staying with the UK, two side-by-side articles in the Money section of last weekend’s FT reminded me of how different perception and reality can sometimes be. One article, headlined: “Mortgage choice improves for first-time buyers”, said that UK borrowers can now choose from a range of thirty-five 95% LTV mortgages, “compared with just three at the bottom of the market in February 2009”. When it comes to 90% LTV mortgages, first-time buyers can choose from a menu of 275 products, up from 71 in May 2009. Above this article sat another one headlined: “Decline in lending by high street banks”. Within that one it revealed that average LTVs for new lending by the 8 biggest financial institutions in the UK in the first half of 2011 ranged from 53% to 69% (of the UK listed banks, HSBC and Barclays were both on 53.0%, RBS was on 54.9% and Lloyds 61.3%). So, well below the sort of figures supposedly being “offered” – only 0.4% of Barclays’ new mortgage lending in H1 2011 was at an LTV of over 85%. Of first-time buyer mortgages specifically, Lloyds advanced only 24,000 of these in the first half of the year, while in the same period HSBC gave out 19,000. When you think of the millions of people looking to get on the housing ladder in the UK, you’d wonder how many of them will even get on the first rung if this sort of credit supply continues. Staying with UK housing, Rightmove has just reported a drop in asking prices this month.


In terms of the Eurozone and its problems, there has been a lot of speculation about the possible introduction of “euro bonds”. I am very wary of this suggestion, given the clear moral hazard problem that this creates where fiscally delinquent countries are concerned. What better way for certain countries’ politicians to defer having to make tough decisions than by getting access to credit at rates more disciplined countries borrow at? The status quo, where countries are being forced to get their house in order as soon as possible, is surely the better option for Europe as a whole, especially when one considers that one of the main arguments euro bond advocates are relying on is that they would be allied to new “strict fiscal rules” – just like the Stability and Growth Pact! There’s another interesting angle to this debate which my Swedish friend Makro Trader tweeted about over the weekend:


I wonder how they would execute Eurobonds as Italy calls for. A new issue would destroy old bonds leading to bank failures.


This is an important consideration, and one that has been totally overlooked by euro bond advocates (who don’t appear to have many people with actual financial markets experience among their ranks). I have a novel solution to this funding conundrum, which is that governments in eurozone countries could simply live within their means, and stop wasting taxpayers’ money on useless stuff like this. If they did that, then they’d no longer have to worry about the price at which they can borrow money at. It should also be pointed out that the consensus view of bond investors (i.e. the people whose opinions really matter in this debate, given that they’re the ones who provide the funding) is that Europe’s governments need to borrow less, not find more creative ways to borrow more – if the opposite was true then the ECB wouldn’t be spending billions propping up the value of the PIIGS’ sovereign debt.


Elsewhere, gold is something that I’m repeatedly asked about by followers of this blog. From a fundamental viewpoint, I’m bullish about gold both because I’m wary of the loose monetary policies being pursued by many countries the world over, and the resulting longer-term inflationary pressures that arise from this, and also because history has shown that at times of political and economic upheaval it’s a useful safe haven.


In terms of investing in gold, my old friends in GoldCore have produced a handy guide on this. While you shouldn’t invest in anything without discussing the merits of doing so with a professional financial advisor, I would strongly emphasise that you must also do your homework about the counterparty you deal with, the liquidity of the asset you’re considering buying and the risks involved. The table at the end of page 9 of the GoldCore guide I linked above gives a good overview of this.


Finally, the main Irish corporate newsflow to look out for this week is the release of interim results by CRH (Tuesday) and Kerry (Wednesday).


Written by Philip O'Sullivan

August 15, 2011 at 6:59 am

2 Responses

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  1. […] main developments since my last blog have been vocal political opposition to the euro bonds I expressed doubts about yesterday, further weak economic readings from core Europe and from a corporate perspective, H1 2011 results […]

  2. […] recently commented about how there has been a spike in share buybacks. On Thursday Ryanair disclosed that it has […]

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