Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘John McElligott

Market Musings 28/1/2012

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We’ve been hit with a tsunami of corporate newsflow in recent days, with airlines and financial stocks in the spotlight. Let’s run through what’s been happening since my last update.


(Disclaimer: I am a shareholder in Ryanair plc) The main scheduled corporate newsflow in Ireland this coming week is Ryanair’s Q3 results on Monday. Bloxham’s Joe Gill provides an excellent preview of them here. In addition to the results, one thing that could act as a catalyst for Ryanair’s share price is news that a key competitor, Spanair, has gone bust. Spanair carried more than 13m passengers in Spain in 2010, which is roughly half of what Ryanair carried in the same time period in that market. Given that Spain accounts for circa 35% of Ryanair’s annual passengers, this news is a clear positive for the stock in my view. Elsewhere, The Irish Times‘ Conor Pope has a very interesting piece on what life in Ryanair HQ is like here.


(Disclaimer: I am a shareholder in Allied Irish Banks plc, Bank of Ireland plc and Irish Life & Permanent plc) There was also a lot of chatter around Ireland’s financial sector. The NTMA said that domestic deposits have stabilised, which is consistent with the most recent updates from both AIB and Bank of Ireland. The recent deposit trends represent a good vote of confidence in the sector. Speaking of votes of confidence in Ireland’s financial sector, Investec announced that it has agreed to buy NCB. Elsewhere, Ireland’s richest man, Denis O’Brien, says that he would consider buying shares in Bank of Ireland.


In the support services space, Ireland’s biggest recruitment firm, CPL Resources, reported strong results despite what it rightly says are “very challenging trading conditions”.  I like CPL a lot, given its excellent management team, market dominance and proven track record. I don’t really have space for it in the portfolio at the moment though, and in any event I already have a leveraged play on Ireland Inc in the shape of Bank of Ireland (my other Irish financial holdings account for an embarrassingly small share of my portfolio), so it’s not one I’d be rushing to buy just yet.


(Disclaimer: I am a shareholder in Marston’s plc) In the pub sector we had strong Christmas trading updates from Marston’s, the most recent addition to my portfolio, and also Fuller, Smith & Turner. While the comparatives are obviously helped by the extreme weather conditions in winter 2010, the positive signals from the sector are nonetheless very encouraging.


Switching to macro matters, I have written before about the sorry state of America’s public finances. Two videos that I spotted in recent days really put the US’ problems in this regard in perspective. In the first clip, you can see where so much of the deficit has ended up being ‘invested’ in. The second video features a rant by Rick Santelli that fiscal conservatives will approve of.


In the blogosphere, John McElligott makes a good case for investing in Dart Group, while Mark Carter has a very interesting piece on how the higher risk stocks have been outperforming. I can particularly relate to Mark’s blog, as I’ve been finding so far this year that the stuff I would like to boot out of the portfolio are doing nothing, while the ones I want to buy more of are flying. If only it was the other way around!

Market Musings 14/1/2012

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From  a macro perspective, a few things have caught my attention in recent days. The British government published details of the 16 million square metres of property and land it owns across the UK – six times the area of the City of London. With significant excess capacity (550 of the 13,900 properties are vacant – while reading the article it’s clear that many of the ‘occupied’ ones are far from fully utilised) I assume that this will be an area of focus for generating new revenues / saving money for the Exchequer.


Now here’s something worth looking at – UK hedge fund Toscafund believes that a Greek exit from the eurozone would result in European social unrest, hyperinflation and a military coup.


Switching to equities, the UK retail sector is something that I’ve written extensively about in the past. Following this week’s sharp share price fall by Tesco, a lot of people are asking whether now is the time to pull the trigger and buy into the sector. Here are some perspectives from John Kingham, who asks: Are Marks & Spencer Shares Good Value? and John McElligott, who writes about many of the UK’s biggest listed companies in that space. I should add that I added some UK consumer exposure into my portfolio recently, having acquired a stake in pub group Marston’s, which I’ve written about before here.


Staying with UK equities, Calum has written a good piece on the listed housebuilders, that’s worth a read.


(Disclaimer: I am a shareholder in RBS plc) RBS has been in the spotlight in recent days. It announced 3,500 redundancies, with 950 jobs going at its Irish operation, Ulster Bank. While obviously these job losses are a tragedy for those involved, they are far from unexpected given the well-documented macro challenges facing the group. With almost indecent haste some brokers, including Seymour Pierce, have been rushing to give the shares a push on the back of the restructuring, and the price motored ahead on the back of this, closing at 24.1p on Friday having finished the previous week at 20.5p. I have a well-below-water legacy position in RBS but I won’t be rushing to add to it (or ‘average down’!) just yet – I would want to see a much brighter macro outlook before I’d consider doing that.


(Disclaimer: I am a shareholder in Ryanair plc) Ryanair announced a 25c per passenger charge to cover what it describes as a “new EU eco-looney tax“. Based on its current run-rate of 76m passengers a year this will raise at least €19m per annum. What’s significant about it is that it serves as a reminder that even an extra 25c in revenue per passenger can produce a chunky bit of change for Europe’s largest low cost carrier. I should also point out that Ryanair’s ‘fill the plane’ pricing model and its young fleet of aircraft means that it will always have a lower per passenger charge than its European competitors where green taxes like this are concerned, which underlines its competitive advantage. Staying with airlines, I was interested to read in Friday’s FT that of the 1.2bn people in India, only 55m flew in an airplane last year. Now that’s what I call a growth opportunity!


In the energy sector, Dragon Oil announced that it exited 2011 producing 71,751 barrels of oil per day, which is slightly ahead of its 70k target. Elsewhere, I found two pieces of interest in this oil sector note by Edison. The first is the chart on page 3 which rates oil stocks on an EV/BOE basis – this shows that some companies’ oil reserves are being valued at close to nothing (or in some cases less than nothing). The obvious health warning on that chart being that investors need to look at the companies’ ability to bring those reserves into production in a shareholder friendly way before rushing into all of those names. The second thing of note in the report is the question the analysts pose about the potential for consolidation in the sector, which echoes Paul Curtis’ views from two weeks ago.


(Disclaimer: I am an indirect shareholder in DCC) In the support services space, NCB published a research note on DCC. While they have trimmed their price target, they are retaining their buy recommendation, which I agree with – DCC is very cheap given its undoubted quality, stable business model and proven track record of creating shareholder value.

Written by Philip O'Sullivan

January 14, 2012 at 4:15 pm

Market Musings 12/1/2012

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The volume of newsflow is still quite light, but at least what little there is, mainly in the form of trading updates, has provided much food for thought.


Computer games retailer Game Group issued a very grim update covering the Christmas trading period. Like-for-like sales in its UK and Irish stores were -15.2% in the 8 weeks to January 7th. This was worse than the -10% recorded in the 49 weeks to the same date, so Christmas offered no respite, even in spite of the much milder weather we have seen this winter. Even more ominously, Game said that “the difficult market conditions raise the likelihood that [Game] will not meet its EBITDA covenants (fixed charge coverage and leverage) when they are tested on 27 February 2012″. Given those pressures, and the structural issues around computer game retailing (both the encroachment of multiples like Tesco into the space and internet operators) it’s not a stock for me.


(Disclaimer: I am a shareholder in Ryanair plc) Switching to the travel sector, Ryanair announced that it has opened its 50th base – its first in Cyprus. This marks the latest push by the carrier into Southern Europe, and is a further setback for tour operators and charter airlines alike. 


In the construction space, Grafton issued a very solid trading update, with buoyant sales in the UK (helped by good weather) in November and December in particular driving a modest upgrade to its 2011 profit guidance. I was pleased to see a modest uptick in sales trends in its Irish business (circa 25% of revenues), but this was presumably also helped by easy comparatives given the snow disruption in the previous year. Its peer SIG also revealed that 2011 was a bit better than it had projected, but it did add that it believes “market volumes will be slightly down overall in 2012”.


(Disclaimer: I am a shareholder in Abbey plc) Staying with construction stocks, housebuilder Barratt Developments issued a strong trading update this morning, revealing a 40% increase in operating profits and saying that it has a “strengthened forward order book” going into the second half of its financial year. It noted that while house prices overall were stable, it saw “greater robustness” in the South-East of England, which has positive implications for Irish listed Abbey, which has most of its operating units in that area.


In the food sector, Swiss-Irish baked goods group Aryzta raised just over €140m from a placing. This is a shrewd move that strengthens its balance sheet and gives it more flexibility to undertake more deals in the future.


(Disclaimer: I am a shareholder in Playtech Ltd) In the blogosphere, Mark Carter writes of his decision to sell his shareholding in Playtech. I’m minded to follow him to the exit, but I’m in no particular rush to do so (there is not a lot on my ‘shopping list’ at the moment). Elsewhere, John McElligott concludes his two part series asking if Eurozone equities offer good value at these levels.

Written by Philip O'Sullivan

January 12, 2012 at 10:48 am

Market Musings 9/12/11

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The main event since my last blog has been the European summit. Markets pushed a bit higher today and it was interesting to once more see the banks leading the way. If a proper resolution to the Euromess can be found, I suspect banks will be the area to own and hence I’m thinking about increasing my financials exposure. That said, I am reminded of the words of John McElligott in an interview I conducted with him for Business & Finance, in which he said: “Investing in the banking sector is considerably more speculative, if not outright madness“. As for whether or not the latest summit will solve the bloc’s problems, well, if the proposals are put to the Irish people in a referendum I suspect that you would be more likely to see Elvis Presley riding Shergar than see Ireland vote Yes to any European treaty.


(Disclaimer: I am a shareholder in Abbey plc) Housebuilder Abbey released H1 numbers earlier this week which came in behind market consensus and prompted a round of downward revisions to forecasts across the stockbroking community. Not that this miss particularly concerns me, as the difficult housing market conditions that caused the miss is hardly ‘new news’. In any event, for me, Abbey is a compelling story. Its balance sheet is in fantastic shape, with cash and cash equivalents at the end of November of €74m. That’s equal to €3.37 a share, or 66% of the current share price! The company has no debt and its pension scheme is in surplus (to the tune of €3m). Based on tonight’s closing price of €5.15, the company is trading at a discount of 30% to its NAV (€7.35). Its financial strength gives it considerable flexibility in terms of being able to grow its landbank (which the company has been doing, albeit to a modest extent, in recent times), while the company has also been returning money to shareholders through a share buyback (in the past 13 months it has bought back 11% of its shares) as well as paying dividends (8c a share, making a 1.6% yield). While housing market conditions remain challenging across its areas of operation (Southern England, Leinster, Prague), Abbey’s obvious financial strength means that it has the staying power, and more importantly, the firepower, to capitalise on any recovery. 


(Disclaimer: I am a shareholder in Ryanair plc) Aer Lingus released strong passenger statistics for November, which continues the positive narrative from the company that I’ve been tracking in recent times. It also mirrors Ryanair’s better-than-expected passenger stats for the same month, which along with the recent upgrade to earnings guidance from Europe’s largest LCC has helped give the shares a lift in recent times.


Value guru Richard Beddard asked if I was familiar with CPL Resources, Ireland’s leading staffer. It’s a stock I covered in my analyst days, and one I have great admiration for. Just by way of background, the company was founded by CEO Anne Heraty in 1989. Its name comes from Computer Placement Limited, which underlines its technology recruitment origins. It has, however, expanded into multiple other business areas over the years through a series of smart acquisitions. CPL has been very disciplined on the M&A front, preferring to spend six or low seven digit sums of money for businesses, as it understands that when you buy a staffer you’re buying a business whose assets walk out the door at 5pm every evening. So, the M&A strategy has been about buying a good group of people in a particular niche and then investing in growing that team so that if anyone leaves there is ample strength in depth to compensate for their departure.


The group has a dominant position in the recruitment market in Ireland (it’s particularly strong in the multinational space, so while the domestic economy’s troubles have hurt it, CPL has plenty of other domestic revenue streams), and it has a decent overseas business with offices in the UK, the Czech Republic, Slovakia, Poland, Hungary, Bulgaria and Spain. In its 2011 financial year the company generated 33% of its profits outside of Ireland.


CPL’s business is not just about placing candidates. It has also built up a decent operation providing outsourced functions to companies such as payroll, training, and HR services. This provides it with a lot of recurring revenue, while its strength in temporary placements delivers similar results (for staffers, permanent placements generate a once-off fee, while temporary placements generate recurring fees so long as the candidate is in situ).


Given the M&A discipline noted above, its limited capex requirements and its record of consistently generating profits the company has been an impressive cash generator over the years. At the end of FY11 (end-June) the company had €46m in net cash. Management elected to return €20m of this to shareholders through a tender offer at €3 a share.


In terms of the valuation, post the completion of the tender offer CPL has 30,545,159 shares in issue. Based on its closing price this evening of €2.70 this gives it a market cap of €82.5m. Taking net cash as €26m (i.e. the end-FY11 net cash less €20m for the tender offer), this gives an enterprise value of €56.5m. Which is just under 7x its FY11 EBITDA. In its most recent update management said that it expects “further profitable growth in the six  months to 31 December 2011. This is an industry with limited visibility on future earnings, so even if you conservatively assume that the current dislocation means that FY12 profits will be flat, the question you must ask yourself is this: “Does a recruiter with diversified earnings streams (both by industry and geography), a very strong balance sheet, an excellent and experienced management team and a proven track record going back over 20 years merit an EV/EBITDA rating above 7x at this stage of the cycle?” The answer for me is a yes.

Written by Philip O'Sullivan

December 9, 2011 at 8:39 pm

Market Musings 28/11/11

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Blogging has been light as I have a raft of end-of-term MBA assignments and exams falling due. However, newsflow has been anything but light, with continued Euroland turmoil and a slew of corporate announcements grabbing my attention in recent days. Let’s quickly recap on what’s been happening.


In terms of the Eurozone, I don’t see any alternative to debt monetisation by the ECB. This will not be a panacea for the bloc’s problems, but it will buy the members of the currency union some time to get their houses in order (whether it’s used or not, of course, is another matter). All of the PIIGS countries have seen regime change in 2011 to no avail. What the market clearly wants is new policies, not new politicians. I am unmoved by calls for delinquent states to be drop-kicked out of the single currency, as the domino-effect we’ve seen playing out over the past while leaves me convinced that the market will take a “Who’s next?” approach if the likes of Greece are ejected. Such a move would, as we have seen in the US during its quantitative easing drives, lead to a rally for stocks and commodities (especially gold), while it would prove bearish for cash (as inflation will rise) and (at a minimum) longer dated government bonds as inflation expectations pick up. If Eurobonds are introduced, this will likely slap down existing short-dated Euroland government bonds as they will be perceived as riskier than short-term issues guaranteed by all of the Eurozone member states. And of course, if existing government bonds sell off, this will damage banks’ balance sheets even more.


Something from the archives – Prudent Investor outlines The 4 Kinds of Money.


Switching to corporate newsflow, Promethean disclosed that it has exited its position in IFG. It had held circa 4% of IFG’s shares in issue (which made it the sixth-largest shareholder in IFG), and while a sale at the low level IFG trades at surprised some market watchers, it is in keeping with the winding-up programme underway at Promethean.


Recruiter Harvey Nash is a stock I used to hold, before selling it earlier this year on UK macro concerns. It issued a solid update last week in which it revealed that it is still seeing strong growth, adding that it expects the FY out-turn to be in-line with expectations. I like HVN, but given the challenging outlook for the UK it’s not one I’ll be buying again in the near term.


Matterley has a great value-oriented investment approach, so those of you who follow that doctrine should download this videoFund Manager Henry Dixon says he is positive on Dragon Oil, Petropavlovsk, Cranswick and RPC.


As we head towards the Budget in Ireland the government is drip-feeding out information to soften up citizens for a tough series of measures. I was very disappointed to hear of plans to raise taxes on dividends, which flies in the face of drives to encourage more saving and investment. Irish household balance sheets are in urgent need of repair, as slides 24 and 25  in this excellent presentation by Cormac Lucey show.


(Disclaimer: I am a shareholder in AIB, Bank of Ireland and Irish Life & Permanent). Other Irish balance sheets are in need of shrinking, chiefly, the banks. I was disappointed to see the sale of Irish Life halted. This means that the State will have to inject €1.3bn into its parent, Irish Life & Permanent, or around €300 for every citizen of this country. On a happier note I was pleased to see a Core Tier 1 neutral sale of a Project Finance loan portfolio with total drawn and undrawn commitments of c. €0.59bn by Bank of Ireland today, while reports indicate that AIB is looking to offload €1.4bn of property loans.


Aryzta issued a solid Q1 trading update earlier this morning. Revenue trends have continued from FY11 and in terms of the outlook management is retaining its FY EPS guidance.


(Disclaimer: I am a shareholder in France Telecom plc and Total Produce plc) Finally, in terms of the best entries I’ve seen in the blogosphere of late, John McElligott has an interesting piece asking if European telecoms dividends are sustainable; while Wexboy has conducted even more detailed research on Total Produce.

Market Musings 18/11/11

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Since my last update it’s been all about the Eurozone crisis and a tidal wave of company newsflow. The latter reads a lot better than the former, which continues my narrative about how corporations appear a safer store of value than sovereigns at this time.


(Disclaimer: I am a shareholder in Datalex plc). Kicking off with corporate newsflow, Datalex issued a solid (if frustratingly qualitative) trading update yesterday, in which management revealed that it has doubled its customer base in the past 18 months. The company says that it is on track to deliver growth in both EBITDA and cash this year, but it held back from providing anything more specific than that. In all, a positive enough update, but more detail would have been appreciated.


Elsewhere, UTV Media’s trading update, also released yesterday, showed that TV and Irish radio weakness is being cancelled out by UK radio strength. I like what UTV has been doing of late, but what turns me off the story is the way the value of its core radio and TV franchises are being eroded away by structural changes in technology and media consumption.


(Disclaimer: I am a shareholder in Independent News & Media plc) Staying in the media space, Independent News & Media issued a trading statement earlier today in which management downgraded the group’s FY EBIT guidance from a range of €78-83m to €74-78m, but at the same time it said that the net debt reduction goal is “on target”. Given how, as I’ve noted before, the INM investment case hinges on deleveraging, I’m relaxed about the profit warning (in any event, given deteriorating macro indicators is it really a surprise?) so long as they can continue to squeeze enough cash out of the business to continue to meet their debt reduction goals.


Turning to insurer FBD, going into today’s trading statement I cautioned that the recent floods could dent the group’s near-term fortunes. In the event, management issued a very strong trading update, upgrading its full-year earnings guidance by 10%, helped by an improving loss ratio. So, a very big slice of humble pie for me where this company is concerned!


The other small listed Irish financial company, IFG, issued a solid statement today. While they don’t spell out what their full-year targets are, management say  “the group is on track for the year as a whole” and “net debt is now negligible”.


(Disclaimer: I am a shareholder in Total Produce plc). Fyffes announced yet another share buyback this afternoon. The company now holds 33m shares in Treasury, which equates to over 10% of the shares it has in issue. I note increasing chatter about the possibility of a re-merger of Fyffes with Total Produce, which is something that I would not welcome given the inherent riskiness of the Fyffes model versus the low-risk strategy Total Produce adopts. It seems that half the blogosphere (possibly a slight exaggeration!) is to be found on the Total Produce share register, with the likes of John McElligott, Wexboy, Valueandopportunity and myself all holding it. Perhaps we should set up our own value-oriented investment fund!


Switching to macro news, data released by the Irish Banking Federation show new mortgage lending has halved in the year to the end of September. Even more significantly (but hardly surprising) is the revelation that the volume of investor mortgages, which represented c.14% of total Irish mortgages in 2005/2006, is -99% from peak levels.


Interestingly, the Brent-WTI crude spread is narrowing. My old friend Wexboy has a good primer on this issue here.


The Eurozone crisis is rumbling on, and to me debt monetisation now looks unavoidable. I gave a presentation to the Smurfit MBA Student Investment Fund earlier today which touched on that issue, and I note this evening that Pimco’s Bill Gross has opined:


“[The] ECB must write checks; trillion dollar ones. Otherwise financial delevering will accelerate & threaten systemic stability”.


Staying with the Eurozone, this is an interesting blog post – Looking at the eurozone through a NIIP prism.


And finally, one of my classmates, Stephen Smith, made this excellent short documentary for the 45th anniversary celebrations for the Smurfit MBA.

Market Musings 11/11/11

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Markets are going better on optimism around regime change in Greece and Italy, but I suspect this positive sentiment is a little premature given how often we’ve been let down by Europe’s political class. We’ve also seen some political pressure applied to the Irish financial sector, which is a case of “Robbing Peter to pay Pól”. Finally, the Irish blogging sector has a great new entrant, more of which anon.


(Disclaimer: I am a shareholder in AIB plc) 99.9% State-owned AIB announced that it has u-turned on its previous decision not to pass on the recent ECB rate cut after being leaned on by the government. The bank’s previous stance had been categorised as Scrooge-like behaviour, but in reality, as economist Ronan Lyons says, it represents “a win for mostly pre-2004 borrowers at the expense of taxpayers“. By holding back AIB’s ability to return to profitability and rebuild its capital, this exposes taxpayers to the risk of having to inject even more money into the bank down the road.


(Disclaimer: I am a shareholder in Bank of Ireland plc) Elsewhere, Bank of Ireland released a solid trading statement earlier today. One broker note I saw states: “it reads like it’s steadying the ship”, which I think is a reasonable summation. I was pleased with the improvement in the LDR (from 164% in June to 153% at end-October) and the stabilising NIM. Of course, the big unknowns are what happens if the eurozone crisis deepens and/or the Irish government gets even more ‘hands on’ with the financial sector, so let’s not count our chickens just yet!


Staying with corporate newsflow, Carr’s Milling released full-year results earlier today that confirmed a buoyant agri-sector in the UK, which has positive read-through for Irish listed Origin Enterprises.


(Disclaimer: I am a shareholder in Total Produce) Finally, I was delighted to learn earlier today that there are now three Irish blogs focused on equities. In addition to mine and John McElligott’s ‘Value Stock Inquisition‘, you can now follow Wexboy’s value investing blog. He has a great post on Total Produce, which I’m a big fan of, that’s really worth a read. Be sure to bookmark his site.

Written by Philip O'Sullivan

November 11, 2011 at 6:40 pm

Market Musings 7/11/11

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The past couple of days have been rather busy due to college and work commitments, which from this blog’s perspective is a pity in that I wasn’t able to provide the sort of timely analysis that I normally try to do. We’ve seen a lot of troubling economic developments around the world, but against that we’re also seeing some positive signs from corporates and from the Sage of Omaha. Let’s drill down into what’s been happening.


(Disclaimer: I am a shareholder in Ryanair plc) Ryanair reported a very good set of numbers earlier today. Encouragingly, the group raised its full-year net income forecast by 10% to €440m. The market gave all of this the thumbs up, with the shares finishing up 5.1% in Dublin this evening. You can see an interview with Ryanair CEO Michael O’Leary here. Overall, it is a testament to the resilience of Ryanair’s business model that it is able to churn out a performance like this in such an extraordinarily challenging market. Elsewhere in the airline sector, Aer Lingus released decent traffic stats this morning, with good capacity management seeing load factors rise 2.1ppt in October.


Greencore’s share price jumped nearly 10% just before the close on Friday, leading me to wonder aloud if the weekend papers were going to contain any major news on the stock. In the event, the Sunday Times said that the fund behind the recent approach for the company looks to be US private equity firm Clayton Dubilier & Rice, which counts former Tesco supremo Sir Terry Leahy among its team. One to keep an eye on.


(Disclaimer: I am a shareholder in Total Produce) Staying with the food space, John McElligott posted a great blog earlier today on the UK retailers and also Irish headquartered fruit and vegetable distributor Total Produce. I’m a big fan of TOT for some of the reasons John touches on – a very defensive business model, high cash generation, a strong balance sheet and enormous scope for the group to expand through acquisition in the extremely fragmented European produce distribution space (where TOT is the biggest player despite having only 5% market share!).


An interesting development – Warren Buffett invested $23.9 billion in the third quarter, the most in at least 15 years.


To return to a regular theme on this blog – if you want to know how grim things are getting in China, read this.


Europe’s woes continue to rumble on. Earlier today Morgan Stanley downgraded European equities to underweight, citing deteriorating growth, falling corporate margins, poor policy responses and leading indicators. The only Irish stocks in Morgan Stanley’s European model portfolio are Tullow Oil (rated overweight by MS) and Ryanair (underweight). Italy has come under extreme pressure today, with political instability not helping matters. Summing up the gravity of the situation, Nordea in a note released earlier today warned that:


The printing press at the ECB increasingly seems to be the only weapon left to save the Euro area from meeting its Waterloo in Rome.

And finally, on a lighter note, Twitter has provided some good chuckles in recent days, such as:


From @Makrotrader in Sweden: “I really really like Tzatziki. But I will boycott that as well. It is over. No more Greece. Good thing they don´t have good wines


and from @drmarkperry in Ireland: “I wouldn’t buy stock in Groupon with an 80% group discount coupon

Market Musings 22/10/11

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Blogging has been abnormally light this past week due to a confluence of factors, chiefly the fact that on Monday I’ve both 3,000 words due for Business & Finance magazine and an exam worth 70% of the marks in that module in Smurfit!


David Einhorn at Greenlight Capital announced that he was going short Green Mountain Coffee. His investment rationale can be viewed here.  While I don’t know anything about Green Mountain or whether Einhorn is justified in taking this position, there’s no denying that private investors can learn a lot about the type of “due diligence” hedgies do by reading Einhorn’s presentation.


We got a reminder of Irish headquartered bookmaker Paddy Power’s gift for generating lots of free publicity earlier this week. This is a marketing tactic that Paddy Power rolls out all the time – management takes a view that if the person, team or event they pay out early on wins, they would have had to pay out anyway. If they call it wrong, they take the cost of it out of the marketing budget. In any event, stunts like this result in the company’s name getting a lot of mentions in the media (perversely, they get even more publicity when they call things wrong, such as when they paid out early on Arsenal to win the 2002/03 Premier League title!), which can only be a good thing, especially given that the press coverage is for “punter friendly” actions such as this. This should also be a particularly helpful move given that Paddy Power’s operations now extend across rugby loving nations such as Ireland, the UK and Australia (where, and I’m always surprised by how many Irish people don’t know this, Paddy Power is the largest “corporate” – i.e. private – bookmaker). Of course, it isn’t the first stunt Paddy Power that has pulled at a Rugby World Cup.


Dublin was visited by the Troika earlier this week, who had this to say. Overall it would appear that we’re ticking all the boxes, but reading between the lines I see a hint of larger-than-currently-guided fiscal consolidation in the upcoming budget, specifically the part that reads: “The forthcoming 2012 budget will make progress along that path by targeting a deficit of no more than 8.6% of GDP” (emphasis mine). Bear in mind that the economic outlook has clearly deteriorated since Minister Noonan first guided €3.6bn in measures in the next budget – so don’t be surprised when he ups this target.


Speaking of the Irish economy, we got two reminders of how it is not out of the woods by any means in this morning’s press. Builder Manor Park has gone into receivership, less than 4 years after DCC sold its 49% stake for €181m – the old adage of “timing is everything” comes to mind! Elsewhere, a provisional liquidator has been appointed to Zapa Technology.


In terms of Irish corporate newsflow, Dragon Oil issued a very solid interim management statement in which it guided output growth in excess of 25% in the current year. Merrion Pharmaceuticals said it will not meet 2011 revenue targets, while it has also hired advisors and may sell all or part of the company. Following on from the announcement made earlier this week, United Drug disclosed that it will receive £8.2m for its stake in the Medco jv in the UK.


The US Air Force has started testing its new F-35B joint strike fighter.


In terms of what some of the people I follow are writing, my old pal Joe Gill had some interesting things to say about social networking. Speaking of pals, Makro Trader had some interesting observations on the Swedish housing market – have the authorities there learned enough lessons from the early 1990s crash? Elsewhere John McElligott provided an update on his thoughts on the UK retailers. Regular readers of this blog know my attitude towards that sector – as I’ve said before, “rioters are the only ones frequenting the High Street“. Ian Parsley, who is one of the best commentators on politics and economics in Northern Ireland, echoed my recent sentiments about the UK’s soaring inflation by saying:


If you print money, the value of money in your pocket decreases and the amount of it you need to buy stuff increases. Why the surprise re: inflation?

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.

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