Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

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Market Musings 16/10/11

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The demands of college work have kept me away from this blog in recent days, which is a pity given how much newsflow there has been. In this entry I’m focusing on the financials in particular, along with some troubling (and inter-related) European macro indicators.


As I said in the introduction, we’ve seen a lot of troubling macroeconomic indicators. S&P downgraded its credit rating on Spain by one notch, while its negative outlook suggests that there’s more to come. Turning to the UK, in terms of the housing market, a survey revealed that more and more British homeowners are cutting asking prices, while average selling times are lengthening. Hardly something that recommends UK-focused financials and housebuilders at this stage of the cycle to investors I would think.


Speaking of recommendations, legendary investor Jim Rogers warns that bonds are in bubble territory and that the US is in for a period of stagflation. I would concur with that – see this blog post of mine from late August in which I warned that bonds were overvalued and argued that equities were too cheap – while that trade has been playing out in recent weeks, in my view it has further to go. Speaking of which, my fellow Irish equities’ blogger John McElligott sees value in some ISEQ stocks.


(Disclaimer: I’m a shareholder in Bank of Ireland plc) One sector that I’m very cautious on is the financials. And why shouldn’t I be, with research such as this note from Credit Suisse. After taking a chainsaw to the Chinese financials a few days ago, Credit Suisse sees two-thirds of European banks failing a renewed EBA stress test. It should be highlighted for my domestic readers that Bank of Ireland scores quite well, which is as expected given that it was recently recapitalised. Interestingly, that the French and German banks score particularly badly tells you all you need to know about why Merkel and Sarkozy have been so unwilling up to now to contemplate haircuts for bondholders.


I’ve written about the myth that is austerity in Ireland before. Now you can read of the myth that is austerity in Greece. But moving from myths into reality, I was struck by a really good piece by Mark McCutcheon a few days ago which illustrates the tax advantages to employers that arise from hiring unemployed people in Ireland. This is something that really needs to be highlighted at this time. Speaking of Ireland’s unemployment issues, I note that Ajai Chopra, our IMF Viceroy, says that Ireland will not be able to pop the champagne corks until after it gets its jobless crisis under control. Might I suggest that one way that the Irish government should not attempt to achieve this is by recycling privatisation proceeds into job creation efforts – you only have to look at Fás to see what happens when Irish politicians attempt to create employment. Reducing the tax and regulatory burden on businesses is the best way forward.


A couple of times this year I’ve been accused, not undeservedly (!), of being extremely bearish. To mitigate against the above economic doom, gloom and ka-boom (to use a line from an email I sent to my MBA classmates earlier this week), here’s a video that shows that not everything is bad, at least in Ireland.


Finally, looking ahead, it’s going to be a busy week for Irish corporate newsflow. The main highlights are First Derivatives’ H1 results (Tuesday), C&C’s H1 results (Wednesday) and Dragon Oil’s IMS (Thursday). If I can tear myself away from the books I’ll provide you with some “musings” on them.


Market Musings 15/04/11

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It’s been a case of “as you were” since my last blog earlier this week, with the same narrative running through to today. Despite the narrative being a bearish one, I view this as positive, as it’s reassuring to see the market play out just as you expect it to. We’ve seen more wobbles on the commodity side as Goldman Sachs continue to reiterate their negative call on commodity prices. We’ve also seen further concerning data from the BRICs which strengthens my conviction that those are not markets to play for now. I have taken some money off the table, selling one of my “core holdings”, but I don’t see a compelling reason to top up any of my “trading positions” just yet.

(Disclaimer: I am a shareholder in Ryanair) The sector that will benefit the most from a sliding oil price is of course the airline sector. West Texas Crude fell 4.1% between the start of the week and last night’s close, and this has had a corresponding benefit on the likes of Aer Lingus (+8.8% in the same period) and Ryanair (+2.1%). The negative noises around the oil price and the world economy give me confidence that Ireland’s two listed airlines will outperform over the coming months.

Anyone who reads the papers knows that the US economy is very sick. Forecasters are downgrading their expectations for the US economy, which in turn will lead to downgrades for earnings estimates for stocks. These downgrades could well see global markets retrench over the quiet summer months. In my last Business & Finance article I asked if this is going to be a year where the old adage – “Sell in May and go away” applies. I suspect it will be. The US budget deal was heralded by those lacking in intellectual curiosity as a “historic agreement”.  But that’s just garbage. The amount of money the deal aims to save is $38.5bn. The US deficit over the past 12 months was $1.4trn. Complete drop in the ocean stuff. Citigroup takes up this narrative, warning on the prospects for the US dollar.

There was similar economic madness from the Irish authorities. The Minister for Public Expenditure and Reform, Brendan Howlin, said that the “stimulus” package his government is planning may be funded through higher taxes. In reality, the only thing that higher taxes will stimulate is higher unemployment.

The BRIC economies continue to cause concern for me. Especially China. I’ve previously banged the drum about the 64m empty apartments in the country, which makes Ireland’s property bubble look like “a modest overhang”. You can now add collapsing car sales and soaring inflation to the mix of things that make me bearish on China. Oh, and I almost forgot – to add to my narrative on the Chinese property market, Moody’s lowered its outlook for China’s property sector from “stable” to “negative”, saying that sales could fall as much as 30%.

Europe is still seeing severe problems, especially on the periphery. During the week the Greek 10 year bond yield went above 13% for the first time, with its spread over bunds at a Euro-era record. In an effort to address this lack of confidence, Greece plans to sell assets and cut spending, but will not restructure its debts.

The ratings agencies get little by way of enthusiasm here given their form for “closing the stable door after the horse has bolted”. However, Fitch’s decision to downgrade its ratings on Libya by three levels amused me given that Libya has no sovereign debt.

Bank of Ireland released full-year results, and while the absence of any detail on its capital raising means that many investors will wait on the sidelines until this is clarified, I was struck by the different trends it’s seeing relative to AIB. Firstly, BKIR’s deposits have been stable since November (AIB is still seeing outflows). Secondly, BKIR’s “challenged loans” were down sequentially in H2 2010, while AIB’s “criticised loans” were up sequentially in the same period. Thirdly, BKIR’s “impaired loans” stand at 9.2% (from 7.1% in H1), versus AIB’s, which are rising at a much faster rate – to 12.9% in H2 2010 (from 8.4% in H1).

Overall, very troubling macro developments. I suspect we’re in for a choppy few months in the markets.

Written by Philip O'Sullivan

April 15, 2011 at 10:46 am

Market Musings 29/03/11

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China has 64 million empty apartments

Regular readers of my twitter feed will know that I’ve been bearish on China for a good while now. I’m very nervous about the country’s property bubble and the consequences of its eventual bursting. Given the monetary authorities’ habit of turning up late to the party in this part of the world I wonder if the recent reserve requirement hike by China’s central bank – the 9th in 15 months – suggests that things are about to get very ugly. This video did the rounds today, and it’s a useful primer on just how serious the situation is. The most eye-popping statement in it – China has 64m empty apartments. Yes, 64 million empty apartments. Katie Melua once sang that there are 9m bicycles in Beijing. Not many will be singing about these millions of empty apartments.

Peripheral Europe gets a kicking – again

Speaking of authorities arriving late to the party, S&P’s “experts” downgraded Greece to BB-, keeping it on rating watch negative today, while it also downgraded Portugal to BBB- from BBB, also with a negative outlook. The downgrades prompted little by way of a reaction from the single currency, presumably because you’d have to be in a coma not to know how grave the situation in those countries is. Ireland will presumably be in focus come Thursday afternoon’s stress test results. All of this makes me wonder if the ECB will delay raising rates, which would be positive for the 400,000 Irish borrowers with tracker mortgages. If it doesn’t, we’ll have a situation where Ireland will experience inappropriate ECB rates on the way up as well as on the way down. Who knows how many more people here will be tipped over the edge when the rates do eventually move higher.

Online about to become the biggest advertising market in the UK

Research from the Internet Advertising Bureau said that UK online advertising rose 12.8% in 2010 to a record £4.1bn. This puts online second only to television (£4.28bn). I read a piece recently which argued that TV advertising was coming under pressure from newish innovations such as the ability to “pause” live TV and so on, which in practice often leads to the ads being skipped. Hence the new drive for product placement in TV programmes themselves (now permitted in the UK). I can’t see £4.28bn being spent on product placement though.

Treasure Ireland?

Treasure hunters are searching for a ship with a $260m cargo that was torpedoed by the Nazis off Ireland

The “knowledge economy”?

So, outside of Literature & Peace, how many Nobel laureates has Ireland produced? Only one – Ernest Walton (Physics, 1951). If that’s not an indictment of our education system, I don’t know what is.

AT&T – T-Mobile USA update

This is a good article: The Financial Case Against AT&T Buyout Of T-Mobile

Ronan Lyons blogs on Ireland’s $1trn worth of oil and gas reserves

Ronan Lyons has a good blog on Ireland’s supposed oil and gas reserves here. To emphasise, it’s written by Ronan Lyons. Got that? Ronan Lyons. OK? Now that all the cranks know where to direct the hate mail, here’s my view on it. We have seen a lot of hysteria about the supposed give-away of our energy resources to huge multinationals. The problem is, as Ronan correctly points out, that outside of this eye-watering estimate of how much oil and gas we have off the coast, not many people have had luck in finding it. Out of 130 wells drilled, only 4 have proven to be commercial discoveries. So, while it’s nice to think that we might have around 5x our GDP sitting off the coastline, it’s not likely to be a game-changer for Ireland Inc for a long time to come.

Irish Life & Permanent takes the plunge

(Disclaimer: I am a shareholder in Irish Life & Permanent plc). Shares in Irish Life & Permanent tanked in Dublin today on concerns about the government taking a stake in the bancassurer. Goodbody’s Eamonn Hughes has a good primer on this here.

Datalex reports its FY results

(Disclaimer: I am a shareholder in Datalex plc). From a corporate newsflow perspective, today saw results from Irish travel software maker Datalex. They looked solid enough to me, see here for the views of Davy and Goodbody.

By way of request

Someone asked me for a primer on junk bonds. This page – and the links off it – provides a solid enough overview.

Written by Philip O'Sullivan

March 29, 2011 at 2:51 pm

Market Musings 28/03/11 – Closing Bell Edition

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A number of things have grabbed my attention since my earlier epistle.


For starters, the Irish banks provided me with a few things to chew over. Firstly, there was a big spike in the ECB’s marginal lending facility on Friday, and it appears that AIB is at least partly responsible for it. The must-follow Lorcan Roche Kelly has a good piece about this. Elsewhere, ahead of the results of the Irish banks’ stress tests due at 4.30pm on March 31, Reuters has a piece saying that “Ireland may now have enough capital for the banks“. This is broadly in line with consensus heading into Thursday afternoon’s announcement, but for me the big question is, will the market believe the results?


Yet another bricks and mortar music retailer is to close. They really are resembling an endangered species.


UK broker Liberum has a note out today saying that European airline valuations are starting to look attractive. It says that within the sector Lufthansa offers the best value, followed by Easyjet & Ryanair. Speaking of broker notes, I also got a copy of Bloxham’s Irish Equity Strategy piece issued late last week. They’ve identified 4 key themes to play on the ISEQ, namely: 1. Companies with a high level of operational gearing. Key picks here are ICG & Grafton. 2. Attractive dividend yields (Total Produce & CRH). 3. “Category Killers” (!): Ryanair & Paddy Power. 4. Low Irish Consumer Exposures (Origin & Smurfit Kappa Group). (Disclaimer: I am a shareholder in ICG, Total Produce, CRH, Ryanair and Smurfit Kappa Group)


I wrote a piece in the March edition of Business & Finance in which I warned of the impact that soaring commodity prices are having. This Bloomberg article suggests that at least one commodity is shortly expected to pull-back from its 140 year high. Speaking of bubbles, check out this New York Times piece about valuations in the technology sector.

Written by Philip O'Sullivan

March 28, 2011 at 4:13 pm

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