Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 25/8/11

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There’s been a couple of interesting developments since I wrote my last blog yesterday around the topics of transport, gold, corporate news and the public finances. Let’s go through them in turn.

Firstly, there were a couple of “postscripts” to my piece yesterday about why Ryanair ended its Irish domestic routes. The Transport Minister, Dr. Leo Varadkar, announced that he would pay two airlines €7.6m a year to operate flights between Dublin and Kerry and also Dublin and Donegal. This decision is frankly ridiculous. Ireland has spent billions upgrading its road, rail and public transport systems, and then the government turns around and gives subsidies to airlines to overfly most of it. Not to mention that this absurdity that this is occurring at a time when the State is running enormous deficits – the Exchequer deficit for the first half of 2011 came to circa €2,500 for every man, woman and child in the country. To further highlight how unsustainable these subsidies are, did you know that between 2005 and November 2010, the Irish taxpayer forked out €69 for every single passenger that went through Donegal and Sligo Airports?

Speaking of wasteful public spending, I see that local councillors can now get their further education paid for by the Irish taxpayer. I didn’t know that having a degree was a prerequisite to becoming a good public representative.

There was a steep drop in the gold price yesterday. I had recently noted that the price was “looking frothy“, so this pullback isn’t a huge surprise. Recently I wrote of how I foresaw further “violent” moves in prices, as volatility across all asset classes is at elevated levels. This partly explains yesterday’s fall. This also helps explain it, and there is likely to be more to come. Mind you, the long-term fundamentals for the barbarous relic remain intact, given that, unlike paper currency, central banks can’t print gold.

I’ve made no secret of the fact that I’m bullish on equities. Fidelity’s Sanjeev Shah, who took over Anthony Bolton’s old fund, agrees.

Some interesting pointers from today’s corporate results. Johnston Press said that the rate of decline in Irish print advertising revenue in H1 2011 reduced to 18.2% (from 29.0% in the first half of 2010). With numbers like that, it is inevitable that Ireland will see further newspaper closures over the next 12-18 months. Tomorrow, Ireland’s biggest newspaper publisher, Independent News & Media plc publishes its H1 results, which will give a further indication on advertising trends here. (Disclaimer: I’m a shareholder in Playtech plc). We also got interim results from betting software provider Playtech today. Regular readers will know that this is a stock I’ve a difficult relationship with, and news that the dividend has been deferred upset me further this morning! However, the reason for deferring the dividend is that it “wanted to retain flexibility for significant joint venture opportunities that exist in the near term“. Hopefully this will prove to be a shareholder-friendly opportunity!

I was amused to see that Belgian, French, Italian and Spanish regulators are extending their short-selling ban on financial shares. It has been a tremendous success up to now, hasn’t it? Andrew Baker, CEO of the Alternative Investment Management Association, says: “Short-selling was not the reason bank share prices were under pressure and banning it has not relieved that pressure“. This sounds like something I wrote at the time this ban came in, doesn’t it?

Finally, a perspective on Ireland’s problems. France (population 63m) has just announced an €11bn austerity package. Ireland’s (population 4m)’s Exchequer deficit in H111 was also €11bn. Anyone in Ireland foolish enough to think that we are not in for further massive spending cuts (including to public sector pay and pensions) and tax hikes has their head in the sand.


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