Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘France

Market Musings 24/11/11

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I was thinking that I should have something special for this entry, which is my 100th blog post, but in the event the Eurozone has provided all the fireworks.


If you want proof of how the Eurozone crisis has spread from the periphery to the so-called “safe” core, look at yesterday’s German bund auction, described by Monument’s Ostwald as “a complete and utter disaster. If Germany can’t find buyers for its 10 year issuance, what hope has the rest of the currency union? I don’t know about the rest of you, but I prefer being invested in financially strong blue-chips with strong franchises and also commodities over Euro government debt. Staying with the now-troubled “core”, Fitch warned yesterday that its AAA rating on France could be at risk. Elsewhere in the Eurozone, Greece’s Central Bank warns that the country is on its last chance to stay in the single currency. On the plus side, when the Greeks bring back the drachma at least we can all enjoy cheap holidays over there!


Speaking of commodities – a lot of people have been saying to me that they think gold is in bubble territory. For a contrarian view, this tweet from Goldcore is interesting: “Lack of coverage of gold in [the] media is symptomatic of bull market in its infancy as animal spirits & public participation remain negligible“.


My bearish view on consumer facing stocks in the UK means that high quality companies such as Grafton, Wolseley (which I’ve traded before), SIG and Travis Perkins that would ordinarily be contenders for inclusion in my fund aren’t getting a look-in these days. However, one report I recently came across highlights the long-term structural driver for builders’ merchants, namely, that 55% of UK housing was built before 1970 (see Table 2.4 on page 54). Once I’m satisfied that we’re at the low point in the cycle, I will look to buy some exposure to this sector.


Some other interesting data points – the FT had an interesting report on UK university endowments, which showed that Cambridge has built up a £4.0bn fund, Oxford a £3.3bn one, while the remaining 163 other UK universities ‘only’ have £2.0bn. I assume, given the propensity for short-termism in Ireland’s public sector and political establishment, that none of our universities have established the type of meaningful reserves that would propel them into the top tier internationally. Yet the talking heads here persist with the myth that Ireland has a ‘world-class’ education system, despite, for example, our failure to produce a single Nobel Prize winner in any scientific field since Ernest Walton in 1951. Or the fact that no Irish university ranks in the top 200 globally, as per the Academic Ranking of World Universities 2011.


And another data point – I also read in the FT that UK households now dump ‘only’ 7.2m tonnes of food waste annually, 13% below 2006/07 levels, as hard-pressed families embrace thrift.


(Disclaimer: I am a shareholder in Playtech plc) Turning to corporate newsflow, Playtech continues to be a source of extreme annoyance for me. Yesterday it announced a £100m placing, plans for more M&A/jv activity and a new dividend policy. Ivor Jones at Numis makes some good comments about it here which sums up my views about all of this. I also note that the CEO of William Hill, one of Playtech’s largest customers (if not the largest) has been blogging about his sense of annoyance towards Playtech’s CEO. My patience with this company is close to exhaustion.


(Disclaimer: I am a shareholder in PetroNeft plc) I was pleased to see Peel Hunt initiate coverage on PetroNeft with a “Buy” recommendation and 54p price target (150% upside to this morning’s price!). However, near term performance from the Siberian oil producer, as I’ve noted before, will hinge on the results from its hydraulic fracturing programme at the Lineynoye oil field.


(Disclaimer: I am a shareholder in Smurfit Kappa Group) I am intrigued by news that Smurfit has invested in a packaging plant in Russia. Details remain sketchy but I assume that this investment – if confirmed – will not materially alter its debt-reduction plans.

Written by Philip O'Sullivan

November 24, 2011 at 10:18 am

Market Musings 19/10/11

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Since my last update, we have seen even more troubling economic newsflow. Japan cut its economic growth forecasts, chiefly due to concerns about the world economy. Portugal reports that its budget deficit is running at €3.4bn worse than expectedChina’s economy grew 9.1% year-on-year in Q3, the slowest pace since 2009. Moody’s warned on its AAA rating for France. Belgian government bonds traded at a record discount to German debt – which prompted ascerbic Twitterer “Schaefdogschaef” to quip: “I still chuckle when I remember 7 days ago they said that taking 60% of Dexia’s balance sheet as a guarantee is no problem!“. UK inflation sky-rocketed – the RPI is at a 20 year high, CPI at a 3 year high. Which is precisely what you’d expect when your country’s central bank turns your country’s currency into toilet paper. The UK ‘misery’ index is now at a 19 year high, compared against the US which is at a 28 year high.


The disruptive effects of the internet continue to shine through – mall vacancies in the US stand at record levels. We all know what’s happened to music retailers, book shops, even some clothing companies. The structural trends have clear implications for commercial property and the retail industry.


(Disclaimer: I’m a shareholder in BP plc) Anadarko agreed to pay BP $4bn over the Macondo disaster. This is a clear positive for BP, and as I have noted before, settlements of this type can act as a catalyst for the share price.


Turning to Irish corporate newsflow, we saw a report in the FT that Etihad is considering a bid for the Irish government’s stake in Aer Lingus. I’m a little dubious about this story, and would echo a lot of the good points Joe Gill at Bloxham makes here. Elsewhere, the departure of Air France – KLM’s CEO should presumably knock speculation on the head that the carrier was considering a move for Aer Lingus. The intentions of IAG (British Airways and Iberia) remain unknown, but to me they seem like the most probable buyer of the government’s 25% stake (provided, one assumes, that Ryanair is willing to sell theirs too). Speaking of Ryanair’s attitude towards Aer Lingus, this morning it threatened to call an EGM and put forward a number of motions. One of those is that Aer Lingus pay a special dividend – it will be interesting to see how Ireland’s cash-strapped government votes if that goes ahead.


We also saw United Drug’s 50% UK home health jv partner Medco buy out the company’s shareholding. This is a shame as the jv has an enormous amount of potential given government drives for more people to be treated at home as opposed to in hospitals.


Elsewhere, C&C reported H1 results earlier today. The company has retained its full-year guidance despite a “tough second quarter”. Its CEO is also to step down, and be replaced by the CFO. I note that C&C’s H1 revenues were -7.2% yoy in constant currency terms (not a surprise given the weather and tough consumer backdrop), but good work on pricing (yes, this has some impact on revenues) saw operating margins rise by 3.1 percentage points.


I note the latest round of oil and gas exploration licences here failed to attract any bids from the supermajors. A lot of political “activists” and their cheerleaders in the media here like to claim that the Irish government is “giving away” our natural resources. If that is true (and I don’t for one second believe that it is), then why are the supermajors not interested?

Market Musings 12/8/11

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Markets rebounded a bit yesterday, but remain well below recent highs. Since my last update the main news has been the introduction of a short-selling ban in a number of EU member states, which I’ll look at in more detail below, while other things that have caught my eye include the price of gold, poor economic indicators in the UK and France, and also some corporate newsflow.


First up though, I was pleased to be “welcomed back” (!) by two readers who posed some really great questions to me about commodity prices and the short-selling ban yesterday. If there are any topics, within reason, that you’d like me to visit on this blog, feel free to get in touch and I’ll tackle it them here asap.


When the rumours about the introduction of a short-selling ban emerged yesterday afternoon, my initial response was to say that (i) this will does nothing to cure the problems in Europe’s banks; (ii) such measures have failed to work before; and (iii) bans are counter-productive because they increase the perceived riskiness of assets that are the subject of such bans, as market participants will no doubt become more wary about investments where governments and/or regulators intervene to significantly change the rules of the game.


These counter-arguments were put to me:


Well it’s time for something radical

It’s better than doing nothing and have rampers profit from what is nothing short of criminal with no risk of prosecution

If Italy and Spain are happy with their fundamentals they will not suffer from a suspension of short selling

The Irish and US experiences with bans are poor examples to give


My quick response to those four arguments are: (i) I agree that radical policies are needed, but I don’t see how a short-selling ban will do anything to cure the patient; (ii) The short-sellers wouldn’t have been circling around the banking sector unless something was very rotten in the system; (iii) Italy and Spain’s “fundamentals” – sclerotic growth, substantial public debt, big deficits, dire demographics, structurally high unemployment – would make me nervous; and (iv) I think using a fellow peripheral European country and the country where this bank problem first really started to emerge is fair.


To the above I would add the following: Bloomberg’s Mike McDonough, who is a must-follow on Twitter, produced this great chart which shows the experience of a short-selling ban across five countries, adding the UK, Germany and the Netherlands to the two I provided as examples.  As I said above, the ban does nothing to address the fundamental reasons why the market has turned negative on financials, namely worries about the growth outlook, the increasingly likelihood of substantial write-downs on holdings of sovereign debt and political calls for a punitive tax on banks. These problems will not go away as a result of  a trading restriction which Galileo Global Advisors describes as “knee-jerk” in a FT article that’s well worth a read. In particular for this bit:


A 2005 Cornell University study looked at short selling rules in 111 countries and found no evidence that bans reduced the frequency of market crashes. More recently, the International Monetary Fund found that 2008 prohibitions “did relatively little to support the targeted institutions’ underlying stock prices, while liquidity dropped and volatility rose substantially”.


Elsewhere in the FT, the influential Lex column concludes with this point that mirrors part of the argument I made yesterday:


Market gravity pulled weak companies down, as investors recognised that the shorts were right. When pessimism is justified, bans will not stop the truth from emerging.


Turning to France, earlier today it announced that second quarter GDP growth came in at zero, below consensus of +0.3%. Clearly this is the last thing Sarkozy et al need after the recent concerns about its economy. Staying with macroeconomic news, a study by LSL and Acadametrics says that UK house prices have fallen to a 19 month low.


In the commodity space, gold futures hit $1,800 an ounce earlier this week but have fallen back a little on CME margin hikes and also the uptick in equity prices. Given how volatile markets are at this time, I wouldn’t be surprised to see the upward trend resume in the near term – Merrill Lynch reckons gold will hit $2,000 in the next 12 months, which looks easily attainable given the troubled backdrop and the possibility of another round of quantitative easing in the United States. The margin increase serves as a reminder that while the path of least resistance is up, it will be a rocky one. One of my readers has asked if I can provide…


An analysis of the equity and businesses surrounding gold extraction and trade


…which is something I aim to tackle over the weekend, along with the dividend yield report I promised yesterday!


Finally, one “grey market” name I’ve written about before is One51. It released its 2010 annual report yesterday, which revealed a solid underlying performance, with pre-tax profits (before exceptional items) rising to €24.5m from €19.5m in the previous year. Its NAV of €2.56 per share was well down on the €3.66 at the end of 2009, with most of this decline down to a non-cash impairment charge on the value of its listed and unlisted investments. The main worry I would have on this front would be the value of its NTR stake, which it includes in the books at €48.7m, or just under 40c a share. Even if you wrote this to zero (which would obviously be an aggressively cautious step to take), you still get a NAV of over €2 a share, versus a current share price of €1.00. While its illiquid grey market status and significant Irish exposure mean that a discount to NAV is warranted in my book, a 50%+ discount looks excessive to me. One way that it could help to address this discount is by transitioning to a listing on the Irish Stock Exchange, which would improve the marketability of its shares. One area that has attracted media attention is remuneration levels at the group. While it is easy to point at how much the top dog in any company is paid, overall employee costs should not be ignored. The total P&L charge on this front of €65.4m was -6% from the previous year, while average wages & salary costs of €38k per employee (a whopping 14% below 2009 levels) are hardly excessive.


Two highly alarming stats to chew over – the percentage of Americans who don’t have $1,000 in savings to cover emergencies? 64%. The percentage of Americans who don’t have any savings whatsoever to cover emergencies? 24%.


And finally, seeing this gold-dispensing ATM was a highlight of my recent trip to Dubai.

Written by Philip O'Sullivan

August 12, 2011 at 9:17 am

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