Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Ben Bernanke

Market Musings 15/9/2012

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It’s been an eventful few days since my last ‘general’ round-up on what’s been happening in the markets, with the Federal Reserve further opening the monetary sluices and continued positive developments around Ireland Inc (a well received sale of bills, positive noises from the IMF, soaring bond prices etc.)


For me, the central message to take from these markets at this time is that the monetary authorities on both sides of the Atlantic stand ready to do ‘whatever it takes‘ on the policy front. This is unambiguously bullish for a number of asset classes, in particular equities (in general) and commodities (including gold, which I’ve been a bull on for some time), however, it also has other consequences that are worth bearing in mind. While the growth outlook is concern enough in itself, the main overall threat in the system (in my view) remains on the prices front, as an enthralling battle takes place between the forces of inflation (central banks’ printing presses) and deflation (private sector deleveraging). Which force is likely to prevail? The old rule of “Don’t bet against the Fed” comes to mind. This to my mind puts the onus on investors to position themselves accordingly. We have seen from the share price reactions to Helicopter Ben’s latest move how they should do this, with mining stocks (e.g. commodity plays) surging, financials pushing higher (anything that pushes up asset prices a positive, while the funding outlook is improved) and a lift in those highly leveraged stocks operating well within covenants and who may take the opportunity to refinance at even lower rates as yields are pushed down elsewhere by central bank intervention (a good example being Smurfit Kappa Group, which I hold, whose balance sheet is to my mind still very much misunderstood by the market, and which rose 13% on 11 times average daily volume in Dublin yesterday as more investors wake up to to the story). Of course, it is also worth bearing in mind that higher commodity prices are likely to hurt a lot of stocks that are price takers on the input side and who will struggle, due to the tough economic backdrop, to pass on higher input prices to consumers.


In terms of my own response to all of this, I have been stepping up my exposure to financials, trebling my stake in Bank of Ireland and significantly increasing my exposure to RBS (which is now my third-largest portfolio position). The recent surge in the value of Irish government bonds prompted my Bank of Ireland move, given that BKIR held €5,945m worth of them at the end of June (up to €1.5bn of which were acquired following the LTRO earlier this year). As the notes to BKIR’s interim results show (see page 99), the vast majority of these are in the books on a ‘Level 1’ fair value basis, i.e. “valued using quoted market prices in active markets”. Given the recent lift in Irish bond prices, this should have a positive impact on Bank of Ireland’s NAV, given that “any change in fair value is treated as a movement in the [available for sale] reserve in Stockholder’s equity”. Elsewhere, in the case of RBS, the IPO of its Direct Line business and recent moves towards agreeing financial settlements for Libor and IT issues indicate that the narrative around the group may be about to radically shift, as I noted in a recent blog post.


(Disclaimer: I am a shareholder in Datalex plc) In other news, travel software company Datalex confirmed that interim CEO Aidan Brogan is to get the job on a permanent basis. This is a sensible decision. Aidan has been with the firm for almost 20 years, and his strong background in sales is likely to help Datalex build on its growing list of clients.


Elsewhere in the TMT space, Johnston Press has reportedly delayed its relaunch programme. You can read my recent piece on the firm here.


(Disclaimer: I am a shareholder in France Telecom plc) And in other TMT news, the team in aviate came up with an interesting angle on Apple’s latest toy, namely that “in the European launch only Deutsche Telkom and France Telecom were given the hallowed LTE version of the iPhone 5“. I must confess that what I know about ‘fashionable’ mobile phones could fit on the back of a postage stamp, so hopefully one of my kind readers will let me know if this is a significant advantage over other carriers or not!


In the energy sector, consolidation has been a big theme this year, as cash-rich majors have snapped up financially constrained small cap names with proven resources. This clip suggests that the trend has further to run (and indeed, assuming the latest QE moves push up oil prices, this will provide the large caps with even more cash to play around with).


In the blogosphere, Lewis profiled Impellam. Elsewhere, John took a good look at Rolls-Royce.

Written by Philip O'Sullivan

September 15, 2012 at 12:01 pm

Market Musings 9/9/11

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Since my last update, we’ve seen the good (Tullow), the bad (ECB, Euroland, Obama’s jobs proposals) and the ugly (HMV).


On Tullow, one of my more thoughtful readers contacted me yesterday to ask about rumours of bid interest from CNOOC (China National Offshore Oil Corporation). This story continually does the rounds, and given both China’s thirst for oil reserves and Tullow’s spectacular oil finds in Ghana and Uganda (in particular) you can see why. However, while a “Chinese takeaway” is a credible endgame for Tullow, the story itself has appeared with so much frequency that one is reminded of the fable of the boy who cried wolf. So, I wouldn’t be punting on Tullow on the basis of the latest manifestation of this rumour. However, why I would consider punting on Tullow is its exploration activity. On this front, we received a reminder of Tullow’s proven skill in finding oil in new markets with news of a 72m net oil pay find in offshore French Guiana today. This is a shedload of oil. Goodbody’s Gerry Hennigan, who is one of the top oil analysts I’ve ever come across, puts today’s discovery into context:


“In comparison to [the] previous discovery in Ghana, 72m of net oil pay is considerable, Mahogany-1 and Mahogany-2 encountered 95m and 50m respectively”


And if that’s double-Dutch to you, this piece explains why Tullow’s Ghana find was huge.


In Euroland, we have seen both Greece being warned about its fiscal delinquency and the latest ECB meeting. On the latter, the euro has come under pressure as the European Central Bank has halted moves to hike rates, and indeed rate cuts in 2012 are increasingly being seen as a given.


Here’s Danske Bank on why the UK should be rated A+, not AAA.


Turning to the US, markets have given a lukewarm reaction to President Obama’s jobs plan. The best way America can grow employment is by giving companies the confidence to invest the trillions of dollars in cash they have sitting on corporate balance sheets, rather than having the Federal Government continue to spend money that it doesn’t have. The uncertainty caused by the unsustainable fiscal and monetary paths the Obama administration and Chairman Bernanke have respectively embarked upon does little to promote confidence.


Do you know who the 10 countries with the biggest gold reserves are?


(Disclaimer: I am a shareholder in Irish Continental Group plc) In terms of other corporate newsflow, Goodbody had a bullish note out on Greencore following its Uniq deal yesterday. They rate it as a “buy” with an 80c price target (c.33% upside). The broker is particularly positive on the food producer’s cashflow and 7.8% dividend yield. By my calculations, Greencore and Irish Continental Group (7.0% yield based on yesterday’s close) are the two highest yielding stocks listed on Dublin’s ISEQ Index. Something for income investors to think about.


Following yesterday’s grim updates from Dixons and Home Retail Group (which owns Argos and Homebase), the UK High Street Horror Show continued today with yet another set of eye-watering like-for-like sales numbers from HMV. The UK retail sector is not on my list of things I’d like to invest in at the moment!


Another one of my thoughtful readers brought this new film to my attention. Looks good!

Written by Philip O'Sullivan

September 9, 2011 at 1:23 pm

Market Musings 27/8/11

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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.


A cautionary tale: A Greek retiree withdrew his savings from the bank, stashing the paper money in the wall of his home. Rats devoured it.


Bank of America-Merrill Lynch has an interesting piece on Eurobonds that’s worth a read.


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.

Market Musings 15/7/11

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It’s been an extremely busy few days, both in terms of the financial markets and also in terms of preparations for my honeymoon – at this stage, however, the jungles of Borneo look safer than most risk assets! So what has been catching my attention?


Goldbugs have been amazed, and rightly so, by this exchange between Congressman Ron Paul, who has spent his career fighting for sound money and economic discipline, and Ben Bernanke, who has not. While the entire video is worth watching (let’s be honest, I think anything involving Dr. Paul is worth watching!), the part starting at 4.25 to the end is truly astonishing.



Fitch downgraded Greece by 3 notches to CCC. Just as we had here earlier this week, there was a chorus of discontent from local politicians, central bankers and the European Commission, but who could blame Fitch for this move? According to its own definition, CCC means:  “currently vulnerable and dependent on favorable economic conditions to meet its commitments“. That said, I don’t think that Fitch’s new rating quite covers the mess Greece is in.


I raised an eyebrow when I spotted the normally very good James Mackintosh express surprise that Ireland’s ISEQ index was in positive territory the day after the sovereign was downgraded to junk status. Firstly, movements in the ISEQ are meaningless, as 30% of its market cap is comprised of only 2 stocks – CRH and Ryanair. Secondly, the majority of the profits generated by companies listed on the ISEQ come from outside of Ireland. Indeed, on my numbers not 1 of the 10 biggest ISEQ names (which at the time of writing are: Tullow, CRH, Kerry, Ryanair, Dragon, Aryzta, Smurfit Kappa, DCC, Paddy Power and Glanbia) have Ireland as their main profit centre!


(Disclaimer: I’m a shareholder in Abbey plc) Staying with Irish plcs, yesterday brought the release of housebuilder Abbey’s results. While there were a number of variances with what the brokers were forecasting on the revenue line and so on, its adjusted EPS of 41.4c was 3% ahead of consensus (Davy 42.0c, Goodbody 38.0c). Abbey’s net cash was €77.4m at end-FY11, or €3.37/share, an impressive out-turn after it spent €21.4m buying land and €8.5m on share buybacks.  So its net cash is 67% of its current market capitalisation, which implies that the market is valuing the rest of the group at €37.5m. Considering that the group is well run, debt free and carrying inventory (plots of land, part/wholly finished houses, materials) with a (audited in April of this year) book value of €83m (and obvious upside potential once the landbank is developed) and fixed assets of €22m, this looks too low even after taking the trade creditors of €30.8m into account. I think Abbey is cheap here.


And in other corporate Ireland news, DCC  moderated its FY earnings guidance (in constant currency terms) from “broadly in line with the prior year” to “broadly in line with to modestly behind the prior year” in an interim management statement issued earlier today. I wouldn’t lose sleep over this downward revision – Q1 (the period covered in the IMS) is a seasonally quiet time of the year (representing 15% of full-year profits) and a particularly cold winter (DCC’s guidance assumes a “normal winter”) would see earnings estimates revised sharply upwards. In any event, DCC is trading on less than 10x earnings, which is an inexpensive rating for a company of its quality, track record, impressive returns and balance sheet strength.


Kerry Group announced this afternoon that it has made an approach to Cargill Group for its flavors business.  Stockbrokers NCB tell me that they estimate that the unit has revenues of “around $200m”, so slapping an EV/Sales multiple of circa 1.5x on that would get you a €200-250m valuation, which is within Kerry’s existing facilities. NCB’s Darren Greenfield tells me that this would only take Kerry’s net debt/EBITDA to “around 2x” so there’s plenty more scope for it to make further acquisitions.


Some positive news for Ireland Inc – four private equity groups are leading the battle for Anglo Irish Bank’s US loanbook. This level of interest bodes well for the sale price.


The troika was in Dublin this week, to tell us that we’re meeting all of the targets set as part of the EU-IMF arrangement (I loathe the term “bailout”). That’s all fine and dandy, however, the markets are clearly saying that Ireland needs to start exceeding them.


Speaking of credibility, the EBA released the latest round of European banks’ stress tests this evening. Supposedly they only have a combined capital shortfall of €2.5bn, which incidentally is less than what Ireland had to put into Irish Nationwide Building Society alone. I have every expectation that this stress test will prove to be every bit as credible as its predecessors, with my suspicions only partially heightened by this excellent analysis by Tracy Alloway in the FT.

Written by Philip O'Sullivan

July 15, 2011 at 6:12 pm

Market Musings 28/4/11

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A case of “as you were” in the markets since my last update. Commodities remain at dizzying heights, sovereign concerns continue to loom large and equity markets continue to defy gravity.

Eurostat released its debt and deficit updates for 2010 on Tuesday, which reaffirmed what we already knew about the woeful state of the balance sheets and profit & loss accounts of many EU’s countries. Greece’s deficit hit 10.5% of GDP, above the 9.6% forecast. It was exceeded only by ourselves – at 32.4% – while other states in the deficit dog house include the UK (10.4%), Spain (9.2%) and Portugal (9.1%). I cannot understand why so many British commentators criticise the austerity measures being implemented by Chancellor Osborne – were it not for these steps the UK’s 10 year bond yield, currently at 3.48%, would be a lot closer to Greece’s 15.39%.

Ireland’s debt/GDP ratio ballooned from 65.6% in 2009 to 96.2% at the end of last year. Only Greece (142.8%), Italy (119.0%) and Belgium (96.8%) have a higher ratio than ourselves. Given the state of the Exchequer Returns posted since the start of the year, I assume that we’ve eclipsed Belgium by now. The words of Thomas Jefferson come to mind: “To preserve our independence, we must not let our rulers load us with perpetual debt”.

The bond markets continue to suggest that debt restructuring is inevitable in the PIG countries. The 2 year bond yields for Greece, Portugal and Ireland as I type stand at 23.4%, 11.4% and 11.1% respectively. Those of you who don’t obsess about markets as much as I do (!) may wonder why I’ve narrowed it down from the “PIIGS” acronym that used to do the rounds. Simple fact is that the market seemingly isn’t as bothered about Italy (2 year yield is only 3.0%) and Spain (2 year: 3.3%). You’d have to be a brave person to say the market has it wrong, but I am extremely nervous about Spain, and wouldn’t be surprised to see it moving back into the bears’ cross-hairs later in the year.

Turning to the US, here is some interesting housing stuff for you – More than 1 in every 5 Phoenix-area mortgage holders would need their homes to double in value just to break even. Elsewhere, there were few surprises from the Federal Reserve after its meeting this week. I do note, however, that the Fed has downgraded its growth expectations for the US, despite its massive stimulus efforts. By The Ben Bernank’s own admission: “It is a relatively slow recovery“. For a good primer on the folly that is quantitative easing, watch this video. Congressman Paul, one of my favourite politicians, talks a lot of sense about the Fed here.

Economics geeks will treasure this video.

Jeremy Grantham, who is the G in GMO, has written an outstanding investor letter which you can download here. While I wouldn’t agree with 100% of it, it is peppered with thought-provoking analysis and interesting stats. One thing that particularly caught my eye was the table that revealed China’s share of world commodity consumption:

  • Cement 53.2%
  • Iron Ore 47.7%
  • Coal 46.9%
  • Pigs 46.4%
  • Steel 45.4%
  • Lead 44.6%
  • Zinc 41.3%
  • Aluminum 40.6%
  • Copper 38.9%
  • Eggs 37.2%
  • Nickel 36.3%
  • Rice 28.1%
  • Soybeans 24.6%
  • Wheat 16.6%
  • Chickens 15.6%
  • PPP GDP 13.6%
  • Oil 10.3%
  • Cattle 9.5%
  • GDP 9.4%
When the Chinese economy rolls over, as I expect it will in the not-too-distant-future (see previous blog entries about China’s property bubble and other pressures), that table will be particularly useful when it comes to predicting what commodities and shares will be the most affected.
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