Market Musings 2/10/11

It’s been a busy few days, with a lot of college assignments to work on. Thankfully there hasn’t been a lot of newsflow to go through. Most of what I’ve seen has had a distinctly Irish feel to it. Let’s take a look:

 

(Disclaimer: I’m a shareholder in AIB, CRH and Ryanair) In terms of the markets, I was intrigued to read that AIB’s €21bn market cap is more than CRH (€8.3bn), Ryanair (€4.9bn), Kerry (€4.6bn) and Paddy Power (€1.9bn) combined. This anomaly is primarily down to the billions of shares AIB has issued to the State and its very low free-float – every 1c move in AIB’s share price moves the group’s market cap by €5bn. In terms of where Allieds should be trading at, it’s clearly finger in the air stuff. But for reference, its closest peer, Bank of Ireland, trades at a market cap of only €2.3bn, and you can decide for yourselves whether AIB should be trading at such a vast premium to its main rival.

 

Elsewhere on the ISEQ, I was interested to learn that Irish-Swiss baking group Aryzta’s La Brea line is the 9th best selling fresh bread brand in the United States. Aryzta has a lot of “hidden brands” as well. For example, if you buy a cookie in Subway, it’s made by Arytza’s Otis Spunkmeyer unit. If you buy a McDonalds burger in Australia, it’s made by Aryzta’s Fresh Start Bakeries unit. If you go into a Tim Hortons restaurant in Canada and buy a bagel, it’s made at Aryzta’s Maidstone Bakeries unit. If you go into a Starbucks in the United States and buy a sandwich, the bread is made by Aryzta’s Pennant Foods unit. The list goes on!

 

(Disclaimer: I’m a shareholder in Total Produce plc) Staying in the Irish food sector, I note that the listeria outbreak in the US is spreading. First it was affecting melons, now it’s hitting lettuce. This may have an impact (albeit a small one) on Ireland’s Total Produce and Fyffes.

 

Ireland Inc got a very welcome vote of confidence from Google, which announced that it is to invest €75m in a new data centre in Dublin. The city has become a major hub for the internet industry, with the likes of Twitter, LinkedIn and Facebook all having been attracted to the capital. Hopefully the example they set will encourage more Irish entrepreneurs to set up online businesses, to add to previous success stories such as the gifted Collison brothers from Limerick. As an aside, I was amused to read a report that a pub crawl may have contributed to Twitter’s decision to open an office in Dublin!

 

Bloomberg reports that Ireland is looking for payback for “averting Europe’s Lehman”. While I agree with the gist of the story, I did scratch my head at the mention of how much our bond yields have improved by. Make no mistakes about it, the primary reason for this improvement is gargantuan purchases of our debt by the ECB in the secondary market. The Irish economy has been deteriorating in recent months and the public finances are not materially different to the targets set at the start of the year.

 

Speaking of Ireland’s public finances, how about this revealing comment from Socialist Workers Party TD Richard Boyd-Barrett – when queried about his €12k annual expenses claims for travelling the 12 kilometres between his constituency and Dáil Éireann (the Irish parliament), he explained:

 

“I do not use that money; it goes into a campaign fund.”

 

You’d wonder how many Irish taxpayers would be willing, if it were optional, to pay taxes to fund politicians’ “campaigns”.

Market Musings 25/8/11

There’s been a couple of interesting developments since I wrote my last blog yesterday around the topics of transport, gold, corporate news and the public finances. Let’s go through them in turn.

Firstly, there were a couple of “postscripts” to my piece yesterday about why Ryanair ended its Irish domestic routes. The Transport Minister, Dr. Leo Varadkar, announced that he would pay two airlines €7.6m a year to operate flights between Dublin and Kerry and also Dublin and Donegal. This decision is frankly ridiculous. Ireland has spent billions upgrading its road, rail and public transport systems, and then the government turns around and gives subsidies to airlines to overfly most of it. Not to mention that this absurdity that this is occurring at a time when the State is running enormous deficits – the Exchequer deficit for the first half of 2011 came to circa €2,500 for every man, woman and child in the country. To further highlight how unsustainable these subsidies are, did you know that between 2005 and November 2010, the Irish taxpayer forked out €69 for every single passenger that went through Donegal and Sligo Airports?

Speaking of wasteful public spending, I see that local councillors can now get their further education paid for by the Irish taxpayer. I didn’t know that having a degree was a prerequisite to becoming a good public representative.

There was a steep drop in the gold price yesterday. I had recently noted that the price was “looking frothy“, so this pullback isn’t a huge surprise. Recently I wrote of how I foresaw further “violent” moves in prices, as volatility across all asset classes is at elevated levels. This partly explains yesterday’s fall. This also helps explain it, and there is likely to be more to come. Mind you, the long-term fundamentals for the barbarous relic remain intact, given that, unlike paper currency, central banks can’t print gold.

I’ve made no secret of the fact that I’m bullish on equities. Fidelity’s Sanjeev Shah, who took over Anthony Bolton’s old fund, agrees.

Some interesting pointers from today’s corporate results. Johnston Press said that the rate of decline in Irish print advertising revenue in H1 2011 reduced to 18.2% (from 29.0% in the first half of 2010). With numbers like that, it is inevitable that Ireland will see further newspaper closures over the next 12-18 months. Tomorrow, Ireland’s biggest newspaper publisher, Independent News & Media plc publishes its H1 results, which will give a further indication on advertising trends here. (Disclaimer: I’m a shareholder in Playtech plc). We also got interim results from betting software provider Playtech today. Regular readers will know that this is a stock I’ve a difficult relationship with, and news that the dividend has been deferred upset me further this morning! However, the reason for deferring the dividend is that it “wanted to retain flexibility for significant joint venture opportunities that exist in the near term“. Hopefully this will prove to be a shareholder-friendly opportunity!

I was amused to see that Belgian, French, Italian and Spanish regulators are extending their short-selling ban on financial shares. It has been a tremendous success up to now, hasn’t it? Andrew Baker, CEO of the Alternative Investment Management Association, says: “Short-selling was not the reason bank share prices were under pressure and banning it has not relieved that pressure“. This sounds like something I wrote at the time this ban came in, doesn’t it?

Finally, a perspective on Ireland’s problems. France (population 63m) has just announced an €11bn austerity package. Ireland’s (population 4m)’s Exchequer deficit in H111 was also €11bn. Anyone in Ireland foolish enough to think that we are not in for further massive spending cuts (including to public sector pay and pensions) and tax hikes has their head in the sand.

Market Musings 10/04/11

Since I last offered my thoughts on the markets on Thursday morning we’ve seen some interesting developments, especially where interest rates and commodity prices are concerned.

 

Thursday brought news that the Old Lady of Threadneedle Street – The Bank of England – was, as expected, keeping rates on hold for now. I wouldn’t be surprised to see a hike at the next meeting, assuming that the Q1 UK GDP reading on April 27 doesn’t throw up any surprises. One central bank that did hike was the ECB, which raised rates (by 0.25%) for the first time since July 2008. The market is bracing itself for further rate increases over the coming months, and we could well see the ECB base rate hit 2.00% by year-end. This is bad news for the 400,000 tracker mortgage holders in Ireland. As I’ve said before, Ireland has had an inappropriate monetary policy on the way up, and now we have an inappropriate policy on the way down too.

 

The main culprit behind these rate increases is, of course, inflation. We got a few reminders of how frothy commodity prices have gotten this week with silver breaking the $40 level for the first time since 1980, brent crude hitting a 32 month high and gold reaching another record level. Indeed, China reported its first quarterly trade deficit for 7 years this week, as soaring commodity prices have added massively to its import bill. With the Federal Reserve’s QE2 programme scheduled to end in June, it will be interesting to see what the consequences of this will be. Bloomberg economist Michael McDonough wrote an interesting piece showing a strong correlation between commodity prices and Fed Treasury purchases, which is worth a look.

 

Despite all of the talk of austerity here, I was surprised to see that subsidies for flights between Dublin and Galway will be maintained until the middle of the summer. The PSO has, in my view, had absolutely no justification for the past few years given the major investment by the State in both road and rail infrastructure between the two cities.

 

Speaking of austerity, some eye-popping numbers – the US incurred a budget deficit of $830bn in the first six months of fiscal year 2011, some $113bn than in the same period in the previous fiscal year. Figures like that really show up the “historic” $38bn US budget deal for what it is – a complete joke which barely makes a dent in the deficit. On that note, Peter Schiff, as always, tells it how it is here. If you are looking for more details on the US budget, read this thought-provoking piece by Peter Tchir.

 

In terms of sector calls, Davy turned negative on UK housebuilders, which for me wasn’t a huge surprise given the scary updates coming out of firms exposed to the UK consumer in recent times. I was interested to see some predators looking at European debt too – BlueBay is buying Irish government bonds while SVP is attracted by opportunities in distressed debt in Euroland. Fisher Investments, whose insights I’m a big admirer of, released its latest guidance for investors.  It says that this year will be one where stock-picking skills are to the fore, a theme I’ve explored in my articles for Business & Finance magazine since the start of the year.

 

(Disclaimer: I am a shareholder in CRH plc and AIB plc) Turning to Corporate Ireland, the government confirmed that its stake in AIB is to rise to 92.8% – post the completion of this AIB will have 12.25bn shares in issue. Another plc that caught my eye was Fyffes. I was surprised to read that Fyffes (market cap €143m) paid its directors €2.7m last year, while Ireland’s biggest plc, CRH (market cap €12bn) paid its directors €8.0m in the same period.

 

In terms of the week ahead, I’ll be watching results from Punch and the IMS from Michael Page tomorrow to get more clues on the health of the UK consumer, while on Wednesday 3 Irish plcs – Tullow, Kerry and Fyffes – all go ex-div so watch out for some interesting price action there. All told my mood is bearish, I’m overweight defensives and see no reason to rebalance my portfolio.