Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Credit Suisse

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 13/10/11

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Since my last update, China has been the main thing that has grabbed my attention. Legendary hedge fund manager Jim Chanos, who founded Kynikos Associates, declared that he is shorting commodity companies with major exposure to China in another sign of the deterioration in the Asian powerhouse’s economy. Some wags in the media have been calling him a “Panda Bear” (!) but I think his concerns are warranted, not least given my previous blog post about the proportion of global commodity consumption that China accounts for. Another pointer of note about China, which should give a lot of investors the heebie-jeebies, is this note from Credit Suisse. According to Credit Suisse, under its more pessimistic scenario, a rise in non-performing loans could wipe out 65-100% of banks’ equity. Note that the Chinese government has started aggressively buying bank shares in recent days, in a further sign of strain. So, my advice would be to stay the hell away from Chinese bank shares!


Elsewhere, Aer Lingus announced that it is to hold an EGM which will pave the way for the company to pay dividends at a later date (management are indicating that nothing imminent is on the table).


Staying with Ireland, the Fiscal Council here called for deeper cuts than what the government is currently targeting. This is an argument that I’ve been pushing for some time, given that the huge deficits the State is running up means that we are going to experience a long-term “1980s scenario” where a huge chunk of the budget is eaten up by interest payments.


It’s primary season in the US, with attention focused on the crowded GOP field. With next year’s election certain to be all about the economy, the results of this poll by Bloomberg News on Which candidate do you feel understands the economy best? makes for interesting reading. While I appreciate that we’re still at an early stage in the cycle, it is sad to see that the people with the best understanding of economics are not among the front-runners.


There’s also a presidential election in Ireland later this month, which as with all other elections means that voters are treated to a stream of dubious pledges from the candidates. I was amused by this boast by one of the contenders:


“As a former Minister and a MEP, I have the experience and International contacts we need to help attract jobs to the country”


The obvious answer to that is: In the unlikely event that what you say is true, then why haven’t you used them up to now?

Written by Philip O'Sullivan

October 13, 2011 at 7:55 am

Market Musings 30/6/11

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It’s been an interesting day in terms of Irish corporate newsflow, with updates from Glanbia and Prime Active Capital, along with some interesting broker commentary on Kerry Group and Bank of Ireland.


(Disclaimer: I’m a shareholder in Glanbia plc). Glanbia issued a solid trading update this morning. Management reiterated 2011 full year adjusted EPS guidance of 11-13% growth, on a constant currency basis. I’m a fan of this group, for reasons I’ve gone into before.


Staying with the food sector, there was a lot of follow-through to Kerry’s investor day from the brokers. Davy’s Cathal Kenny had a good summary here, while the incomparable Joe Gill in Bloxham was on vintage form: “If you allow for cashflows to nuke debt…“. However, it was a piece by Goodbody analyst Liam Igoe that really caught my eye. Igoe, who has followed the stock for 20 years and knows it inside-out, offered some interesting perspectives on the group following its investor day yesterday. He believes it can deliver 12% p.a. organic growth into the medium term, ahead of the 10% it guided yesterday, helped by ongoing internal re-organisation measures. He reckons acquisitions can boost this by a further 5% so average annual medium term growth of up to 17%.  Taking the above into account, by my own calculations, using 2011 as the base line and growing EPS by 17% per annum means that EPS will rise by ~155% between now and the end of 2017. That would imply that the group is capable of doing €5.40 of EPS in 2017, which puts it on a 2017 PE of 5.3x. Assuming that a global nutritionals behemoth like Kerry should trade on 15x earnings, that implies that by 2017 we could realistically imagine a share price of up to €80/share by then versus the €28.45 it was trading at earlier this afternoon.


Prime Active Capital issued its results this morning. It’s not a company that I’m particularly keen on due to (i) its small size; (ii) exposure to consumers what it describes as “the Georgia/Alabama and Pittsburgh /Ohio regions” of the US; (iii) poor cash generation – operating cash flow was negative €19k; and (iv) foreign currency risk – it reports in euro and its main operations and investments are in the US and UK. What I did find interesting about the statement was Chairman Peter Lynch’s dry observation about the firm’s main market at this time: “The USA has a fragile deficit economy sustained by government spending vastly in excess of its income. While the recession and this cycle continue customer confidence is easily shaken and this has immediate repercussions into the retail environment in which we operate. This economic context also puts pressure on volumes, margins and the credit environment“.


The preliminary Irish census data were released today. One thing that caught my eye was this chart, which showed that 9 of the 10 regions that experienced the largest increase in their housing stock between 2006 and 2011 were rural ones. Best of luck to NAMA with trying to sort ghost estates in those areas out!


Credit Suisse had a detailed note on Bank of Ireland out today. I was interested to read its estimate that at the end of June the percentage of stock held by retail investors was 60%, from 31% at end-2010. Will these people follow their money in the rights issue?


Turning to Irish political matters, I was astonished to see Fianna Fáil TD Michael McGrath condemn bonuses paid to NTMA workers on the news last night. These bonuses were paid in respect of 2010 – when his party was in government. Just how stupid does this guy think the average Irish voter is?

Written by Philip O'Sullivan

June 30, 2011 at 3:52 pm

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