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 29/6/11

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Even though not a lot of time has passed since my last update, there has been so much interesting  newsflow that I figured I should scribble it down before forgetting any of it!

The installation of Christine Lagarde as the new head of the IMF happened just seconds after I posted my blog yesterday. As I’ve said before, I view this development as an unwelcome one for Ireland, and my fears were heightened by President Sarkozy’s description of her success as “A victory for France, which suggests that the Franco-German policies which have failed to contain the problems in peripheral Europe might well become flavour of the month in the IMF, which had up to now been arguing for more sensible measures for countries such as Ireland.

Cider and beer producer C&C issued a trading statement earlier today. Within it, management reaffirmed FY guidance of operating profits in the €108-115m range, which I feel is a great achievement for a consumer discretionary company whose primary markets are the UK and Ireland. C&C’s core cider brands recorded 11% volume growth, but revenue lagged behind (+5.6%) as the firm cut prices and upped marketing spend to stimulate demand.

Another Irish food and beverage company, Kerry Group, issued a bullish long-term projection today. Management sees “in excess of 10% adjusted earnings per share growth on average per annum over the next five-years”, which few would bet against given its track record over many years, the structural growth story around nutrition globally and the ongoing margin improvement measures which have already begun to reap dividends.

(Disclaimer: I’m a shareholder in Ryanair plc) This is not a surprise given the carrier’s policies of maximising load factors and maintaining a young fleet, but it was nice to see Ryanair being confirmed as the greenest airline in the world.

Some positive news for Ireland Inc today – we were the second-largest net recipient of foreign direct investment from outside the EU last year.

(Disclaimer: I’m a shareholder in Playtech plc) Turning to other sectors, I read an interesting piece by Goodbody’s analyst Gavin Kelleher on the suspension of Full Tilt Poker’s licence by the authorities in Alderney. Before today, Full Tilt was the #2 online poker network with a c.19% market share (Pokerstars is #1 with c.40%). Kelleher believes that “European listed operators such as, Playtech and 888 should see a significant market share improvement…over the medium term” as gamblers transition to stronger brands with no regulatory uncertainties. In terms of the listed companies’ exposure to online poker as a % of total revenue: has 28%, Playtech 18%, 888 14.6%, Unibet 13.7%, Sportingbet 8.4%, Betfair 5.9%, William Hill 2.0%, Ladbrokes 1.9% and Paddy Power 3.8%. As an aside, one of the key attractions that Kelleher sees around Ireland’s Paddy Power is that it only operates in fully legal markets, which makes it less risky than some of its peers.

I was unsurprised to hear that Myspace is reportedly to be sold for as little as $35m. This being the same Myspace that News Corporation paid $580m for. It joins a long list of social networking stars who like Icarus have come crashing down to earth – remember how Bebo was bought by AOL for $810m in 2008 and sold to Criterion Capital Partners for less than $10m two years later.  Or Friends Reunited, bought by ITV for £120m in 2005 and sold for £25m to DC Thomson in 2009. At the time of writing Facebook and LinkedIn are valued at $70bn and $8bn. What will they be valued at 3 years from now?

Tomorrow is going to be a very interesting day on the markets. In addition to it being the month-end, which will prompt widespread attempts at marking-up by people looking to flatter their monthly performance, it also marks the end of QE2. I’ve posted a video which explains the folly of quantitative easing before. If you haven’t seen it before, click here.

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