Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 31/12/2011

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Having been on holidays down the country for much of the past week and having prioritised what little writing time I had on my 2012 outlook (part I and part II), this blog represents a ‘catch up’ on what’s been happening since my last wrap on December 20th. While this is traditionally a quiet time on the markets there have been incidents in the past where companies have tried to sneak out a profit warning just before Christmas or New Year’s Eve, but thankfully we didn’t see a repeat performance by any Irish plc this year!


To kick off with some macro news – in the UK, despite media reports of bumper Christmas sales in some areas, I note that consumer confidence indicators suggest that this optimism may be a little premature. It should be noted that base effects may impact on headline sales figures also, given last year’s weather-related disruption.


In the Eurozone, outgoing ECB board member Lorenzo Bini Smaghi said that QE could become an appropriate tool for the central bank to use if conditions worsen. I have previously stated my belief that the ECB will eventually resort to QE, so I’m not surprised by these comments.


This is an unbelievable statistic – Japan will raise more cash from debt issuance than taxes for a fourth year in a row. Given Japan’s demographics, I would be very reluctant to even consider investing in all but the most short-term Japanese government debt.


(Disclaimer: I am a shareholder in Playtech) The betting sector was in focus in recent days, following reports that the US is easing its hardline stance on internet gambling. We’ve seen reports like this before, so I’m inclined to be a little cautious around them. However, in the event of an easing of restrictions, this would have clear benefits for the likes of 888, Playtech, Digital Entertainment and Ireland’s Paddy Power (which has already inked B2B partnerships in France and Canada).


NCB published a great note on Greencore, noting that while it offers an attractive dividend yield, three key risks (cashflow, pension deficit, concentrated customer base) remain. As an aside, speaking of attractive dividend yields, just a point that keeps coming to mind whenever I dip into investment bulletin boards – it’s amazing how many “income investors” don’t understand that cash flow dividend cover is more important than the dividend yield when evaluating stocks from that perspective. I learned this the hard way as an undergraduate when I invested in Waterford Wedgwood, which was ‘yielding’ around 20% on paper. Within a short period of time the dividend was suspended and I ultimately lost most of my ‘investment’.  Had I been a few years younger it would truly have been a ‘schoolboy error’!


(Disclaimer: I am a shareholder in Total Produce plc) Elsewhere, Total Produce did a bit of housekeeping among its portfolio of investments, swapping its stake in its international jv with Capespan for a bigger shareholding in the South African firm and €8.5m in cash.


(Disclaimer: I am a shareholder in CRH plc) I note that CRH has made yet another bolt-on acquisition, this time in the US, which is the latest example of the firm putting its industry-leading balance sheet to work. I note also the slide in the value of the euro against the dollar to a 15 month lowthis is positive for CRH, which reports in euro and generates 45% of its EBITDA from its Americas division.


(Disclaimer: I am a shareholder in AIB, Bank of Ireland and Irish Life & Permanent) I was pleased to learn that Ireland has lifted its ban on short-selling financial shares. This is a long-overdue move, although the ban did illustrate, as I have shown before, the futility of such restrictions. This may focus some attention on the anomalous valuation of Ireland’s two largest quoted banks – Bank of Ireland (market cap €2.5bn) and its weaker rival AIB (market cap €35.4bn).


Finally, I wish all of my readers a happy, healthy and prosperous 2012!

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