Market Musings 11/10/11

It’s been an interesting couple of days since my last blog, with Irish listed stocks in particular giving me a lot to mull over.

 

Yesterday Dragon Oil announced that it has farmed-in to an offshore prospect in Tunisia. This marks the group’s latest attempts to diversify from its current single producing asset (in Turkmenistan) model. A previous overseas foray, into Yemen, has to date proved disappointing. I like Dragon, due to its strong balance sheet (net cash was an incredible $1.5bn at the end of H1 2011), simple business model centred on growing output from the Cheleken field, from which it has been producing for many years and inexpensive valuation (EV/BOE of circa $2.8). Elsewhere within the energy space, Petroceltic had two positive announcements out yesterday – confirming that it has inked a deal on a new facility with Macquarie and also announcing successful results from its fraccing activities in Algeria. The shares marked up sharply on the back of this newsflow.

 

Aryzta peer CSM issued a profit warning, citing difficult economic conditions. Aryzta was one of the weakest performers on the ISEQ yesterday, presumably on the back of this announcement, but it should be noted that the Irish-Swiss concern recently issued a solid enough set of results.

 

Staying within the Irish food space, I note that Fyffes has returned to the markets to buy more of its own shares – in this case acquiring roughly 6% of its outstanding shares on Friday.

 

(Disclaimer: I am a shareholder in Bank of Ireland plc) In terms of what other bloggers are writing about, my old friend John McElligott has written a great blog post on both Bank of Ireland and FBD. I would agree with his views on both. For me BKIR is a complete punt here, while FBD offers remarkably good value at these levels for investors with a longer-term investment horizon.

 

Speaking of share recommendations, I was interested to see that my former employers Goodbody have initiated coverage on Easyjet with an “Add” recommendation. They have pitched their estimates well below consensus (5% below in FY12, 18% below in FY13) on macro concerns, which looks reasonable to me given recent updates from the likes of Flybe (the UK accounts for c. 40% of EZJ’s capacity).

 

A reminder that not all parts of the economy are struggling – Apple announced that pre-orders for its new iPhone 4S topped one million in a single day.

 

Last, but not least, Reuters has produced this very useful computer model which allows people to “stress-test” European banks under a range of different sovereign debt haircut scenarios.

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 24/6/11

I finally got my articles submitted to Business & Finance this afternoon, so that’s freed up some time to do a bit of blogging. I’ve come across a few interesting bits and pieces since my last update – some of which were so interesting that several newspapers and one national broadcaster felt compelled to run a story they picked up from my twitter feed with no hint of an acknowledgement! Still though, at least those of you who follow me both here and on twitter can say that you saw the story before anyone else in Ireland did.

 

In terms of the most interesting thing I came across this week, I noticed that the 49.99% stake in a Bulgarian bank that AIB paid €216m for in 2008 was sold for a mere €100k. The acquirer is the girlfriend of the Prime Minister of Bulgaria. Strangely enough several media outlets reported it within hours of my highlighting it on twitter, which I’m sure is just a remarkable coincidence.

 

Greece passing the confidence vote was no great surprise for me, given that politicians have no problem in voting to receive money in the short-term, regardless of what the longer-term consequences may be. It will be interesting to see how long the government survives for, given its slim majority, so don’t be surprised if we see another “Greek crisis” before the year end. And the consequences of this? Continued market turmoil as investors dump risk assets in the euro-area, and the single currency will continue to weaken (yesterday it reached a record low against the Swiss franc). One reader emailed to ask me why people are seeking safety in the Swiss franc over the euro. My response?

 

“Because Switzerland doesn’t come with Greece, Portugal and Ireland attached”

 

I’d read a detailed analysis in Bloomberg Markets magazine on this topic a few months ago, but this piece on how KFC and Pizza Hut have thrived in China is well worth a look.

 

The US Senate recently voted to end ethanol subsidies, which is a good start in addressing an immoral system that has served to raise the cost of basic foodstuffs for so many people. You may recall the food riots across the third world over the past 18 months as hungry people looked on in disbelief as the biofuels industry (and, let’s be fair, quantitative easing) helped push the price of agricultural commodities higher. As an illustration of the effect of this policy, Bloomberg reported that from September onwards more corn will be used to fuel cars in the US than feed animals. But don’t just take my word on it. France says we could be facing a “century of hunger”. While obviously the world will have to look at alternatives to fossil fuels, I think that measures to improve fuel efficiency and the phasing out of fuel subsidies in some parts of the world would have a more beneficial overall impact than by continuing to drive food prices higher to maintain unsustainable energy usage.

 

Tackling government waste is a priority across the developed world at this time. Every single line item has to be looked at to ensure that the axe falls on the things we can do without so that essential services can be maintained. I was less than pleased to see that the new government here has maintained the MerrionStreet “information portal”, despite the leader of the junior coalition party having dismissed it as a “propaganda site” while in opposition. Of course, this wouldn’t be the first time that Eamon Gilmore has flip-flopped, would it? Speaking of flip-flopping, if you read this Minister’s comments closely, you’ll see that he’s actually teeing up this policy for a U-turn before it is even implemented!

 

Am I wrong in thinking that the EU is preparing to bury some bad news? Of course, no sensible investor will take these latest stress tests seriously, given the way that the Irish banks who passed the last test all needed massive capital injections afterwards!

 

There has also been some intellectually dishonest (at best) debate around the retirement age doing the rounds. Ireland’s government has rightly – and sensibly – raised it to 68 which to me is just the start. I would be amazed if it is still at that level 20 years from now. Given the dramatic increase in life expectancy in recent decades – and advances in healthcare – coupled with our ageing population and the structural problem relating to the fact that successive governments have failed to provide adequately for State pensions the retirement age will continue to trend higher.

 

From an Irish corporate newsflow perspective, I attended the PetroNeft AGM earlier this week after it announced that it was revising down its production targets in the short term. For full disclosure, I am a shareholder in PetroNeft, and have looked on in horror at its recent share price performance. While management is upbeat about its longer-term prospects, I get the impression that the price will struggle in the near-term until it can meaningfully demonstrate that it can grow its output in Siberia. To me it’s a hold, but I wouldn’t be adding to my position here. Elsewhere, DCC made another acquisition, this time in the waste sector, which will add 2c to earnings in a full year, according to Goodbody’s David O’Brien, who is one of the sharpest young analysts in Dublin. DCC is a fantastic business, with a proven track record of strong cash generation and returns. It’s been an underperformer on the ISEQ in the year to date, which I find hard to understand given the defensive nature of the majority of its businesses. Turning to the banks, Bank of Ireland announced that most bondholders have opted for shares over cash in its latest capital raising exercise. This is not a surprise to me, as I noted before on twitter that they were heavily incentivised to take the equity option. However, the logical extension of this as I said yesterday (and as some brokers have highlighted in their morning notes today) is that there will be a big overhang on the Bank of Ireland share price for the next while. Yet another reason why I wouldn’t touch the equity here (As a disclaimer, I am a shareholder in BKIR, but I am so far under water on that position that it is purely being retained to serve as a useful tax loss in time).

 

Staying with Ireland, the latest quarterly national accounts were released yesterday. Some commentators hailed the positive GDP print, which to me only served to advertise their lack of understanding of the Irish economy. The GNP figure is far more relevant and this retreated by a staggering 4.3% qoq. Government plans to raise taxes on an economy that is in such a fragile state will only drive more people onto the dole queues.

 

And finally, this is a fantastic link – Sir John Templeton’s “best 16 rules of investing that you’ll ever read“.