Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘QE3

Market Musings 15/9/2012

with 2 comments

It’s been an eventful few days since my last ‘general’ round-up on what’s been happening in the markets, with the Federal Reserve further opening the monetary sluices and continued positive developments around Ireland Inc (a well received sale of bills, positive noises from the IMF, soaring bond prices etc.)


For me, the central message to take from these markets at this time is that the monetary authorities on both sides of the Atlantic stand ready to do ‘whatever it takes‘ on the policy front. This is unambiguously bullish for a number of asset classes, in particular equities (in general) and commodities (including gold, which I’ve been a bull on for some time), however, it also has other consequences that are worth bearing in mind. While the growth outlook is concern enough in itself, the main overall threat in the system (in my view) remains on the prices front, as an enthralling battle takes place between the forces of inflation (central banks’ printing presses) and deflation (private sector deleveraging). Which force is likely to prevail? The old rule of “Don’t bet against the Fed” comes to mind. This to my mind puts the onus on investors to position themselves accordingly. We have seen from the share price reactions to Helicopter Ben’s latest move how they should do this, with mining stocks (e.g. commodity plays) surging, financials pushing higher (anything that pushes up asset prices a positive, while the funding outlook is improved) and a lift in those highly leveraged stocks operating well within covenants and who may take the opportunity to refinance at even lower rates as yields are pushed down elsewhere by central bank intervention (a good example being Smurfit Kappa Group, which I hold, whose balance sheet is to my mind still very much misunderstood by the market, and which rose 13% on 11 times average daily volume in Dublin yesterday as more investors wake up to to the story). Of course, it is also worth bearing in mind that higher commodity prices are likely to hurt a lot of stocks that are price takers on the input side and who will struggle, due to the tough economic backdrop, to pass on higher input prices to consumers.


In terms of my own response to all of this, I have been stepping up my exposure to financials, trebling my stake in Bank of Ireland and significantly increasing my exposure to RBS (which is now my third-largest portfolio position). The recent surge in the value of Irish government bonds prompted my Bank of Ireland move, given that BKIR held €5,945m worth of them at the end of June (up to €1.5bn of which were acquired following the LTRO earlier this year). As the notes to BKIR’s interim results show (see page 99), the vast majority of these are in the books on a ‘Level 1’ fair value basis, i.e. “valued using quoted market prices in active markets”. Given the recent lift in Irish bond prices, this should have a positive impact on Bank of Ireland’s NAV, given that “any change in fair value is treated as a movement in the [available for sale] reserve in Stockholder’s equity”. Elsewhere, in the case of RBS, the IPO of its Direct Line business and recent moves towards agreeing financial settlements for Libor and IT issues indicate that the narrative around the group may be about to radically shift, as I noted in a recent blog post.


(Disclaimer: I am a shareholder in Datalex plc) In other news, travel software company Datalex confirmed that interim CEO Aidan Brogan is to get the job on a permanent basis. This is a sensible decision. Aidan has been with the firm for almost 20 years, and his strong background in sales is likely to help Datalex build on its growing list of clients.


Elsewhere in the TMT space, Johnston Press has reportedly delayed its relaunch programme. You can read my recent piece on the firm here.


(Disclaimer: I am a shareholder in France Telecom plc) And in other TMT news, the team in aviate came up with an interesting angle on Apple’s latest toy, namely that “in the European launch only Deutsche Telkom and France Telecom were given the hallowed LTE version of the iPhone 5“. I must confess that what I know about ‘fashionable’ mobile phones could fit on the back of a postage stamp, so hopefully one of my kind readers will let me know if this is a significant advantage over other carriers or not!


In the energy sector, consolidation has been a big theme this year, as cash-rich majors have snapped up financially constrained small cap names with proven resources. This clip suggests that the trend has further to run (and indeed, assuming the latest QE moves push up oil prices, this will provide the large caps with even more cash to play around with).


In the blogosphere, Lewis profiled Impellam. Elsewhere, John took a good look at Rolls-Royce.

Written by Philip O'Sullivan

September 15, 2012 at 12:01 pm

Market Musings 13/7/11

with one comment

It’s been an interesting 24 hours since my last blog, with Ireland downgraded to junk status by Moody’s and Chairman Bernanke hinting at the possible introduction of QE3.


From an Irish perspective, the main news really since my last blog has been the Moody’s downgrade of our sovereign debt to junk status. And there may be worse to come, given that Moody’s outlook on our debt remains negative and there are a further 10 rungs of the “junk ladder” below our new rating, Ba1. In terms of the practical consequences of this move, it is clearly negative in terms of domestic confidence and international sentiment towards Ireland. It probably won’t have too serious an impact on deposits, given that most corporates have already moved their (typically) ratings-sensitive money out of the Irish banking system, but on the bond side it is a negative given that some bond funds can only hold investment-grade bonds in their portfolios (although, granted, they were probably underweight Ireland to begin with) and will consequently be forced sellers. Therefore it is no surprise to see Irish sovereign bonds were under pressure on the markets today. In terms of what Ireland should do now, the government should heed Moody’s advice that it could upgrade Ireland’s rating if we continue to hit fiscal targets and return to sustained growth – that presumably would read: “will upgrade” if we close the fiscal jaws faster and facilitate a more rapid return to economic growth – by cutting red tape, keeping business taxes low and redirecting what little money there is away from useless stuff like Fás and towards giving grants and/or tax breaks to entrepreneurs. However, instead of doubling its efforts to win what is essentially a war to regain our sovereignty, the government and “Auntie Mae” (the NTMA) have instead been spinning like crazy – you know that they’re out of ideas when one of the first things they said in response to this was that the other ratings agencies haven’t cut us to junk. The word “yet” comes to mind – I have pointed this out before, but it should be noted that total Irish government voted spending was up year-on-year in the first 6 months of 2011. Some people like to pretend that this is “austerity”.


Taking a step back for a moment, I find it surprising that, despite all of peripheral Europe in crisis, so many people here still buy the line that Ireland’s mess is solely down to “pantomime villains” in the banks. If only it were true that: “If it wasn’t for Seanie and Fingers we’d be grand”. The truth, of course, is much more complex, hence again I recommend that you read this presentation which explores the causes of our problems by Cormac Lucey.


Across the water, Chairman Bernanke has been hinting at the possible introduction of another round of quantitative easing. I highlight four things in response to this. The first is that he has correctly been labelled a “hooligan” by none other than Russia’s Vladimir Putin. The second is the video, “Quantitative Easing Explained“, which exposes the “Mugabenomic” policies being implemented by the Federal Reserve. The third is that the US unemployment rate increased from 9.0% in January to 9.2% in June, during the last six months of QE2. Some stimulus! The fourth is the violent reaction in the commodity markets, which is no surprise given that, as everyone who doesn’t work for the Fed knows, you can’t print gold.


Just a follow-on from something I covered yesterday – Greencore CEO Patrick Coveney gave an interview to RTE about its Uniq acquisition which you can download here.


Things are bad in Ireland, but they could be about to get just as bad elsewhere – this is what Bloomberg’s Nick Dunbar tweeted yesterday:


I spoke at a conference on reunifying Cyprus today. Their banking sector would need a 30% of GDP bailout if a full Greek default happened.


That’s not far off the cost of our own bailout.

Written by Philip O'Sullivan

July 13, 2011 at 4:04 pm

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