Market Musings 24/8/11

In my last blog I wrote about how this was going to be a busy week for corporate newsflow, so it’s no surprise that I focus mainly on this today, however, I also have some interesting (to me anyway!) nuggets on State transport policy, QE3 and gold to share with you.

 

(Disclaimer: I’m a shareholder in Glanbia plc) I was delighted to see Glanbia report “excellent” results earlier today. So was the market, with the shares up over 5% at one stage. The company has raised its full-year guidance to 18-20% growth (constant FX) in adjusted EPS from the previous 11-13%. Regular readers will know that it’s one I have been positive on for a while. The conference call threw up some interesting pieces of information. Six of the top ten sports nutrition supplements listed on the leading US website are made by the group, while  in the premix ingredients space Glanbia is no. 3 globally after DSM and US private company Fortitech. Both of those achievements are a vindication of the strategy the group has embarked upon for some years now to diversify away from its commodity business roots. In terms of M&A activity, Glanbia says that it is looking to buy ingredients companies in Asia and customer facing nutritional companies in the US and Europe. All of which sounds good to me!

 

We also got results from FBD this morning which reveal a solid operating performance and news of a JV with Farmers Business Developments for its hotels and leisure business. This JV is a positive development, which will take investor attention away from the non-operating business and allow it to focus more on its excellent insurance unit.

 

The third Irish company to report today was Tullow Oil. The market reaction was positive, but I do note the downward revisions to production (90 – 94 kbopd to 82 – 84 kbopd). Obviously the main value in Tullow is in its exploration and future production upside, but I would prefer to see production picking up to help with the funding of its ambitious plans to develop its new resources.

 

(Disclaimer: I’m a shareholder in Uniq plc) Greencore announced a 91% take-up by shareholders of its rights issue to fund the takeover of Uniq. This is a positive development for the company, and the high take-up was particularly welcome given the recent market turmoil. The challenge now for Greencore’s management team is to integrate the businesses, take costs out and do all it can to prevent the multiples from squeezing margins lower. All of which is easier said than done! This is a stock I have traded successfully in the past and one that remains on the watchlist. I’ll wait and see how the integration and cost take-out goes over the next while.

 

(Disclaimer: I’m a shareholder in Ryanair plc). Ryanair announced the ending of its flights from Dublin to both Kerry and Cork yesterday, which the Irish Examiner’s Niamh Hennessy has a good overview of here. This prompted a lot of debate on various social media websites, and I offer these perspectives to people wondering about the decision:

 

1. Ryanair has been redeploying aircraft across its network to more profitable routes for years. While there was talk that Cork-Dublin was a “very profitable” route for the carrier, I don’t buy that given the competitive prices (relative to rail etc.) Ryanair charged. Also, on the cost side, Ireland’s main airports are among the most expensive in Europe in terms of landing charges.
2. Landing charges, a small population and/or a weak domestic economy mean that most of Ireland’s airports hold little attraction for carriers outside of the two domestic airlines, Aer Lingus and Ryanair (I count Aer Arann within AERL, given the importance to it of its relationship with its bigger peer). You can see what I mean by looking at how few carriers outside of AERL and RYA operate year-round scheduled services at Cork, Kerry, Shannon and Ireland West-Knock, which are the main airports outside of Dublin.
3. Investment in road and rail infrastructure during the Tiger years meant that the Cork-Dublin route did not save a whole lot of time relative to other modes of transport, which limited pricing power on the route.
4. Some people felt that Kerry Airport should have been an attractive market for Ryanair. This doesn’t stand up to scrutiny, considering that (i) The airport only attracted 424k passengers in the 14 months to the end of 2010; and (ii) If flights from Kerry to Ireland’s major population centre require a taxpayer funded PSO subsidy, there just isn’t the demand for the route.
5. If Ireland didn’t have so many airports, economies of scale could allow for reduced landing charges at the ones kept open, which would stimulate more interest from carriers. It makes no sense that 4 of the 6 counties in Munster (population 1.2m) have airports. Similarly, it makes no sense that every single county on the west coast of Ireland (save for Leitrim, which only has a 2.5km long coastline) has an airport. Basic economics suggests that airports in the south and west of Ireland will be consolidating over the medium term.
6. Before I am accused of being a Jackeen with no understanding of the needs of rural Ireland, I should mention that I’m a Cork-born Munster Rugby fanatic.

 

Moneyweek has a beginners guide to investing in gold, which some of you might find of use. Staying with precious metals, here’s two interesting charts – Dow to silver and Dow to gold ratio charts.

 

Fisher Investments provide some useful insights into QE3 here which it posted ahead of the start of the Fed’s Jackson Hole meeting.

 

Finally, a lesson for Ireland. One of our biggest listed companies, Smurfit Kappa Group, has seen Moody’s upgrade its outlook on its debt to “positive” since my last blog. Progress in terms of addressing its debt position was the main driver behind this improved stance, and there’s a lesson there for Irish policymakers, not least given that the State is rated as “junk”. We could solve a lot our financing woes at a stroke by living within our means, rather than continuing to bequeath an obscene national debt mountain onto future generations.

Market Musings 18/7/11

Markets remain difficult as we approach crunch talks in both Europe (peripheral debt crisis) and the United States (debt ceiling crisis). We have continued to see equities move lower as investors move into perceived safe havens (gold broke $1,600 an ounce for the first time today). Keep an eye on silver too – this is trading around $40 at the moment, putting the gold:silver price ratio to circa 40x, a good deal below the 47x long-term average.

 

The US debt ceiling issue remains a headache inducer at this time. With depressing predictability, US politicians continue to provide grave warnings about the deficit (which at 10% of GDP is similar to what Greece “achieved” in 2010) and the national debt, which stands at just over $14,000,000,000,000. However, most of them don’t have the courage to do anything to significantly improve the fiscal position, so I expect that after more grandstanding an eleventh hour deal to raise the ceiling will be cut, thus postponing the eventual US fiscal meltdown. So just like Europe, America’s leaders like kicking the can down the road, and on this note they will likely be attracted by this suggestion from Moody’s. For more on the US debt ceiling, check out Gluskin Sheff’s David Rosenberg here.

 

Speaking of debts, here’s Ireland’s National Debt Clock. We will not regain our sovereignty so long as it continues to rise.

 

Like almost every other commentator out there, I consider the latest European bank stress tests to be an absolute joke. SocGen has a good note out on them which I’d encourage you to look at. On SocGen’s numbers, applying a 50% haircut to Irish, Portuguese and Greek government debt and a 20% haircut to Spanish and Italian debt, would increase the capital shortfall to €22bn for a subset of 40 larger quoted banks – or around 9x what the EBA calculated for the 90 European banks it surveyed. SocGen’s calculations do not appear at all unreasonable when you look at where peripheral European bonds are trading.

 

Last week I wrote about how the overall ISEQ level is irrelevant. In recent days Greencore has said that it will move its main listing to the FTSE, while DCC is considering doing the same thing. With volumes on the ISE continuing to decline this year after last year’s double-digit drop, these announcements surely come as a further blow to the top brass at the exchange.

 

So, where next for markets? My hunch is that if the EU summit kicks the can hard enough to give the bloc some breathing space and the US okays a debt ceiling increase then a short-term relief rally follows. However, I would emphasise the words “short-term”, seeing as neither of these “best case” (at this point in time, given the political appetite out there) out-turns would address the structural problems faced by the leading developed countries. Aside from the opportunistic nibble at the market (one Irish name in particular has tempted me today, but not quite enough for me to buy it yet), I remain in “take profits” mode, not that many of my current positions are at levels that I’d be happy selling at!

Market Musings 3/5/11

Blogging will be very light over the rest of this month as I’m going to be on holidays for most of it. Since my last update equity markets have been flat-to-marginally-down, and given the near-term economic headwinds I’ve previously highlighted I wouldn’t be surprised to see them lower by the time I return from my trip. On this note, I was interested to see that Sarasin in Zurich is advising clients to take some risk off the table.

(Disclaimer: I’m a shareholder in both Uniq plc and Ryanair plc). Turning to the Irish corporates, there was a bit of newsflow around, with Greencore reported to be contemplating making a bid for fellow UK-based food producer Uniq. I’ve previously noted the need for consolidation in the UK food manufacturer space – where the fragmented nature of the industry means that large retailers such as Tesco and M&S can squeeze their suppliers’ margins – and a tie-up between Greencore and Uniq would be a clear positive for the sector. From Greencore’s perspective Uniq would enhance its already strong position in the sandwich market (thus giving rise to potential synergies), while Uniq’s customer base appears to be complementary to Greencore, so no cannibalisation of sales is likely to arise from a transaction. In addition, it would answer the “what now?” questions that arose after Greencore recently failed to acquire Northern Foods. In other news, the Irish government signaled that it wouldn’t entertain another bid for Aer Lingus by Ryanair.

The commodity markets have been volatile in recent days, with silver particularly ropey after the CME raised the initial margin by 13% to $14,513 per contract. Margins were $4,250 a year ago. Last month I wondered if “silver has had its move for now“. It’s dropped by over $3 an ounce since then, so I guess it has!  I know that quite a few of my readers are interested in gold – and one of them asked me about the reasons investors have for buying gold while quantitative easing is ongoing, as opposed to buying if after QE2 ends next month. An excellent question, and one that I answered as follows:

QE has created a tsunami of money that is being invested into all categories of risk assets – the return on cash is so low that people chase higher returns from equities, commodities, you name it. When QE ends there will be nervousness that the riskiest assets like equities will struggle (as they did between QE1 & QE2), so investors may be willing to move their money into gold (which rose in the interregnum between QE1 and QE2). There is a view in the markets that the price of oil and gold (which are both $ denominated) is rising at this time to compensate for $ weakness, so in addition to being seen as safer than equities some investors may view gold as a hedge against $ declines.

Turning to sovereign issues, I was interested to see that Deloitte & Touche say that they see UK rates on hold until 2013. It will be interesting to see if inflation rolls over as D&T expect it to, personally I’m unconvinced that it will given how loose monetary policies have been in the UK and elsewhere, such as the US (see this excellent op-ed for a primer on what the Fed is up to). But perhaps the UK economy might be helped by extra sales of this sort of thing (!).

This is an excellent investor letter by Bill Gross at Pimco – “There should be little doubt that simply holding Treasuries at these yield levels for an extended period of time represents an abdication of responsibility“. I agree.

Market Musings 25/4/11

Blogging has been quiet with the Easter break. However, there’s been a good bit of action around the market, with commodities and sovereign concerns again to the fore. So, let’s recap what’s been going on.

As I noted in a recent article in Business & Finance, this year will see a marked increase in M&A activity both here in Ireland and abroad. Divestments – actual and expected – are particularly newsworthy these days between the banks (Bank of Ireland sold its 50% stake in a fund-of-funds business) and the State, where there is ongong speculation about what assets the government will offload in an effort to repair Ireland Inc’s balance sheet. One of the points I made in my B&F article was that State assets would need to be reformed ahead of their disposal, and an obvious target here is their cost structure. The Sunday Independent had a good analysis comparing pay at the highest levels of public enterprises here versus other countries which threw up some eye-popping results, including the revelation that the head of An Post enjoys a level of remuneration that is nearly three times that of the head of the Royal Mail.

In the US, concerns about the country’s $14.3trn national debt show no signs of abating.  Legendary investor Jim Rogers is the latest to warn about the lack of buyers of US Treasurys once quantitative easing ends in June. This is a theme I touch on in the upcoming May edition of Business & Finance in a piece which examines whether or not investors should, as the saying goes, “Sell in May and go away“. One thing which I’m not inclined to buy is the US dollar, which I see weakening further against the euro over the rest of the year. Here’s something which added to my general bearish sentiment towards the dollar.

The national debt in the UK also concerns me. In March the Exchequer racked up a deficit of £18.6bn. Over the last 12 months the total fiscal deficit in the UK has been £141.1bn (circa 10% of GDP). Britain’s deficit relative to its GDP is at a similar level to the US, and indeed ourselves. So the Anglosphere “delinquents” collectively need to get their houses in order.

Speaking of countries that need to sort out their debts, Greece was again in the spotlight, with its 30 year debt trading at 50c in the euro late last week, which to me shows that the market is convinced that a restructuring of its debts is inevitable. I expect Interpol to come knocking on my door shortly (!), because Greece isn’t best pleased with anyone who says that sort of thing. Of course, Greece blaming Citigroup for its latest woes reminds me of Anglo Irish accusing UK brokers of spreading ‘baseless rumours’ before its demise. But what shape might Greece’s debt restructuring take? This Citi note offers a few ideas. Ideas that may well apply closer to home too.

Further afield, China continues to deteriorate. The Financial Times reported over the weekend that it has ordered its banks to conduct stress tests modelling for a drop of up to 50% in house prices. Regular readers of this blog will be familiar with the video showing that China has 64m empty apartments, which makes me think that the fall out from a crash in China will be horrendous. I wouldn’t be keen on buying anything with a material exposure to China at this point.

Speaking of materials, silver looks like it is about to break the $50/ounce level, not long after gold crossed the $1,500/ounce mark. For what it’s worth, I remain positive on gold, despite its dramatic rise in the past year or so, as it’s not a bad place to hide from any trouble – and we’ve a lot of that going on at the moment. Also, I note that gold surged after the withdrawal of QE1 last year, so will we see a similar move when QE2 is withdrawn? One point of note though – the gold/silver price ratio of circa 30:1 is well below the 20th century average of 47:1, so I wonder if silver has had its move for now. Watch this space!

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.

Market Musings 21/03/2011

This was a day in which the main market focus was on a good news story – AT&T’s $39bn cash-and-shares bid for T-Mobile USA. A number of things caught my eye about that deal, the main ones being the whopping $1,147 per subscriber the bid values T-Mobile USA at and also the potential for regulatory issues to delay the transaction. Unsurprisingly, news of the deal saw European telcos rise today, but with Deutsche Telekom reportedly planning to use the proceeds to pay down debt as opposed to acquiring telcos in this part of the world it’s unlikely to spur further mobile phone consolidation in Europe.

I was interested to see that 2 Irish broadsheets – the Sunday Independent and Sunday Business Post – had published articles on Irish Continental Group over the weekend which mentioned the potential for another attempt at an MBO. I wonder if this press coverage is a mere coincidence or if it’s down to someone flying a kite. One to keep an eye on (Disclaimer: I am a shareholder in ICG).

The oil sector was quite busy today. Given the West is currently bombing Libya, I was interested to check out who the main oil producers are in that country – see here. How that conflict plays out may have consequences for some of those names. Elsewhere, some good news on the drilling front in both the North Sea and the Falkland Islands saw a raft of UK listed oil stocks in focus.

On the commodities front, silver is something that’s caught my eye of late. And I’m not alone. I was also interested to see earlier today that silver has gained 17% in the year to date while gold is up by less than 1%.

In the US Citigroup announced a share consolidation and the resumption of dividends, while housing data disappointed.

And finally, some humour. Nike prepared this ad before last weekend’s game in Dublin, clearly anticipating a different outcome!