Market Musings 27/8/11
It’s been a busy 48 hours since I last scribbled down my thoughts on the wider market. I did write a focused piece on Anglo Irish Bank’s H1 results after I attended their presentation yesterday, but there have been plenty of other goings on such as Bernanke’s utterances at Jackson Hole and INM’s results that also caught my eye.
Turning firstly to the commodities space, this chart by Mike McDonough reflects something that I’ve been wondering about for some time – equity markets appear to be pricing in a deeper recession than the commodities markets. As Mike says, “one is wrong”. Regular readers of this blog know that I’ve become a lot more bullish on shares since the recent pull-back, so you can guess which one I believe to be overvalued. Hence, despite their recent performance I’m quite comfortable with my more oil-sensitive (on the cost side) positions Ryanair (oil made up 39% of its operating costs in FY11) and Irish Continental Group (oil made up 20% of operating costs in FY10). It should be noted that (i) ICG does not purchase forward its fuel requirements, unlike Ryanair; and (ii) Clearly, a significant retreat in the oil price will likely be allied to a worsening of the economic outlook, which would sap some customer demand for transport services. In terms of my long oil positions, BP and PetroNeft, both of them are so cheap that I wouldn’t have any sleepless nights over holding them even if the oil price dropped like a stone from here.
(Disclaimer: I’m a shareholder in Independent News & Media plc) Independent News & Media (INM), the biggest newspaper group in both Ireland and South Africa, issued its H1 results yesterday. Operating profits were broadly in-line at €34.5m, but net debt at €452.1m was higher than the €446.3m reported in May. In terms of the outlook, INM says: “advertising conditions remain tough and volatile”, and it sees no “uplift or normalisation in advertising conditions before the year-end”. My rationale for originally buying this stock was that I see real potential for an uplift to the shares as debt is paid down (net debt accounted for circa 75% of INM’s enterprise value at the time of writing). However, given the poor outlook, it’s going to be a while before we see the sort of recovery in advertising markets that would facilitate a meaningful acceleration in the debt pay-down (at the current rate it’s being paid down it will take INM nearly a decade to become debt-free). So for me it’s a hold for now.
Ben Bernanke’s Jackson Hole speech didn’t quite live up to some of the hype going into it. Pimco’s El-Erian has a good ‘interpretation’ of it here. The fact that the Fed has now decided to extend its September meeting to two days to “allow a fuller discussion” of its options means that attention switches both to that and President Obama’s speech after the September 5 Labor Day holiday to see what the next policy rabbit to be pulled out of the hat will be.
Finally, a good news story to end with. Shamrock Rovers this week became the first Irish team to qualify for the group stages of a European club football competition by prevailing over Partizan Belgrade in the Europa League, helped by this fantastic goal. Congratulations to them.