Posts Tagged ‘QE2’
Market Musings 2/7/11
It’s hard to believe that we’re already into the second half of the year. Looking over the books for H1, I see that in euro terms my share portfolio was down 1.3% in the first six months of 2011, but this doesn’t concern me unduly, given sterling’s 4.6% decline against the single currency during the period (my UK exposure has oscillated between 40% and 51% of my portfolio since the start of the year). While I would obviously would like to be repeating last year’s double-digit gains, given the troubled macro backdrop for me this year has been more about trying to hold on to what I have than trying to chase alpha. Looking ahead to H2, the removal of QE2 is likely to have serious consequences for risk asset valuations, while the upcoming results season should bring a lot of profit warnings our way. Speaking of which, an Ernst & Young survey during the week revealed that UK plcs issued 75 profit warnings in Q111, the largest number since Q109 and a 47% increase on Q410, with most of the profit warnings occurring in the retail, media and support services sectors. I’ve tried to position myself for what I see happening in H2 as well as I can, by remaining overweight cash, and selling the more expensively rated consumer-facing stocks in my portfolio since the start of the year (the latter strategy has been vindicated by recent profit warnings in the UK in particular).
I divide my portfolio into two segments – the biggest one comprises my “core positions” – the ones that I see as long-term holds due to their inexpensive ratings, strong market positions and “will never give me a sleepless night” characteristics. The smaller one is my trading portfolio – the stocks I intend selling once they hit my price targets. There are only four names in that – France Telecom, Ryanair, Playtech and Trinity Mirror. France Telecom has been good to me over the years, paying me a 9% gross dividend yield each year since I bought it, but I’m worried about the sustainability of its business model over the longer-term and also the political interference which prevents it from cutting its bloated domestic workforce. Playtech has a potentially huge structural opportunity as gaming markets liberalise, but I fell out of love with it due to its handling of its recent acquisition of businesses from its largest shareholder. Trinity Mirror‘s businesses might be very exposed to the UK consumer, but I see it as a value play. The company prints 5 national newspapers and 160 regional titles in the UK, makes underlying operating profits of £120m a year and has cut net debt by 25% in the past year to £266m, thus giving it the financial staying power to keep going as weaker competitors go by the wayside. While it’s undeniable that more and more advertising will transition away from print, it doesn’t bother me if the pie shrinks so long as Trinity Mirror’s share of the pie is able to grow to make up for it. Trinity Mirror also owns freehold property assets worth 72p a share, versus a current share price of around 42p. So as debt shrinks and competitors exit the market, I see good upside for the shares from here. Ryanair looks a strange one to have ready to be drop kicked out of here, but I see it as a hedge against the oil stocks in my core portfolio. If oil sinks in H2, Ryanair should spike up and I have a few things in mind to recycle the proceeds into when the time comes.
(Disclaimer: I’m a shareholder in Uniq plc) In other news, I was interested to see Greencore’s share price fall below €1.00 during the week – the way it has been trading of late I wonder if some market observers are betting on a successful outcome in its battle to buy Uniq – which some brokers suggest would be at least part funded through a rights issue. Speaking as a Uniq shareholder I would welcome a share alternative, given the synergy benefits that would arise from a merger between the two.
Here are some interesting statistics I saw during the week: Morgan Stanley says China produces 80% of the world’s toys, and accounts for nearly half of the clothing imported into Europe.
One51 parted company with its CEO Philip Lynch last night. I’ve written about the company before, and again reiterate my view that the company should seek a full listing on the Irish Stock Exchange to improve liquidity and transparency. (Disclaimer: I am a shareholder in ICG plc) I wonder whether Lynch’s departure will have any consequence for its holdings in listed companies ICG and IFG, not to mention grey market listed NTR.
Market Musings 29/6/11
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.
(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 Bwin.party, 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: bwin.party 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.
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.
Philip O'Sullivan's Market Musings 