Lessons Learned

While blogging earlier this week I noticed that I was approaching my 100th post on this site. I thought that this would be a good time to ‘take stock’ of the lessons learned since I started to publish my musings back in March.

 

There have been a number of consistent themes on the blog throughout the year. From a macro perspective I’ve been very bearish (and remain so) on all of the world’s leading economies. While this was hardly an earth-shattering stance to take, I have been surprised by just how weak the response of policymakers in both the US and Europe has been. The only other macro-surprise that I’ve encountered is the way the Chinese economy hasn’t slowed down as much as I had anticipated, but given how unreliable official Chinese “data” is (apparently if you sum all of the reported provincial GDPs in China and compare the result with reported national GDP the difference is bigger than the size of the Swiss economy!) you can never be sure what the truth is.

 

From a stocks’ perspective, my preference all year has been for defensives over cyclicals, which is no surprise given my macro call. I haven’t rigidly stuck to that call, however, having made a couple of opportunistic cyclical trades in the past few months (although, to be fair, I had significant defensive exposure within the portfolio to begin with). I’ve also seen two of the companies in my portfolio, Uniq and Chaucer, taken over. I also did a lot of travelling during the year which constrained my ability to monitor the markets and trade more often. Excluding takeovers, here are the trades I’ve made since launching the blog:

 

• Harvey Nash (Support Services/Recruitment). Sold on 24/3/11 for 71p/share. Price now = 58p. I exited this holding due my nervousness around the UK economy. I like the company, and management, but given my macro view this isn’t one I’d be looking to buy back into anytime soon.
• Ryanair (Transport / Airlines). Bought on 28/3/11 for €3.25/share. Price now = €3.67. I doubled my holding in Europe’s low-cost carrier because I liked the valuation and the potential for another special dividend. Strong recent results and increasing chatter around a special dividend makes this one I’m a very happy holder of. The main reason why I won’t buy more here is that I have a chunky (c. 20% of my portfolio) exposure to it.
• Kentz (Energy / Oil Services). Sold on 29/3/11 for £4.03/share. Price now = £4.765. I sold out of Kentz having slightly more than doubled my money on the stock. Clearly the timing could have been better, alas! Kentz is a stock I do like due to its strong balance sheet, track record and excellent management team. I’m sure that I’ll buy it again in the future.
• Trinity Mirror (Media / Newspapers). Bought on 30/3/11 for £0.47/share. Price now = £0.515. I tripled my holding in this company after its shares had tanked. I like this one a lot – strong asset backing, a very inexpensive rating and decent potential for upside for equity holders from its ongoing deleveraging.
• AstraZeneca (Healthcare / Pharmaceuticals). Sold on 13/4/11 for £30.095/share. Price now = £29.095. I had made about 10% out of this one (>15% if you add in dividends) and was talked into selling it by a pharma analyst. One that I’d need to do a lot of work on before buying back into.
• Standard Life (Financials / Insurance). Bought on 20/4/11 for £2.102/share. Price now = £2.057. Doubled my holding in this one after being attracted by the chunky dividend and also a desire to maintain my insurance sector exposure after Chaucer headed for the stock market exit.
• Smurfit Kappa Group (Industrials / Paper & Packaging). Bought on 19/7/11 for €6.84/share. Price now = €4.80. The dramatic events in the Euro-area have thumped this company’s share price. I believe the shares were fundamentally undervalued at €6.84 when I nearly doubled my holding. At the current level they are even more so.
• PetroNeft (Energy / Oil Exploration & Production). Bought on 28/9/11 for £0.215/share. Price now = £0.245. Doubled my holding in this Siberian oil producer after market sentiment towards it was dented by poor production figures. Further discoveries of oil during the year underline the deep value in this company, but it is going to have to prevail over its operational issues before it gets the rating it deserves.

Overall, my trading record hasn’t been too bad, but of course had I liquidated my portfolio earlier in the year and bought back in more recently I’d be far happier! At the moment I’ve 20 positions across the UK, Irish and French markets, which is probably as many different holdings as I can manage given the other demands on my time. This is why, as you’ve probably noticed, all of my buys have been top-ups of existing holdings.

I have a bit of cash in my trading account at present, but I’m reluctant to invest more at this time due to a combination of an uncertain backdrop and also the way that I’m toying with around 5 different buy ideas. What the latter tells me is that I don’t have enough conviction to pull the trigger on anything just yet, while in any event having cash gives me the flexibility to respond appropriately if any compelling opportunities present themselves, which is clearly no bad thing. When I was younger I tended to be impulsive and invest whenever I had the funds to do so. Perhaps my current conservatism is a sign that I’m getting old!

On a final note, one of the main benefits for me of operating this blog is that it has given me an opportunity to interact with some of the top investment bloggers. Since going live with the first (to my knowledge) Irish-orientated blog I’ve been joined by two outstanding peers – John McElligott and Wexboy – whose views I highly recommend. In terms of blogs based in other countries, I really value the insights of Expecting Value, Kelpie Capital, Makro Trader, Mark Carter, Sharecropper, UK Value Investor, ValuhunterUK and the incomparable Zero Hedge. Hopefully by the time I approach my 200th post this list will be considerably longer.

Market Musings 27/10/11

The main news since my last blog, clearly, has been the developments in the euro-area. Markets have spiked upwards in a move that to me suggests that there is a lot of short covering going on, not least given that there had already been quite a good bit of buying on optimism of a resolution to the crisis ahead of the latest round of talks.

 

Citigroup has a good summary on the implications for the euro which you can read here. I am particularly struck by this paragraph:

 

We doubt that this package can bring long-term support to the euro, even as we note that there are a lot of committed USD sellers out there. There is a risk of running stops to the upside, as positions still seem somewhat short EUR, but we don’t think this package can sustain major gains unless outside money is more enthusiastic about backing euro zone debt than either the ECB or euro zone governments seem to be, and we are not sure why this should be the case.

 

(Disclaimer: I am a shareholder in PetroNeft plc) Speaking of things that are going up, I am pleased to see PetroNeft’s share price motoring ahead. At the time of writing the shares are 30% above their recent lows. While violent moves in share prices are not unusual in a smallcap, I wonder if there is some buying going on in optimism of a positive result (due in December) from its hydraulic fracturing programme at the Lineynoye oil field. I recently doubled my shareholding in the company, and while clearly my timing could have been better, I’m glad that I persevered with the stock!

 

Greencore received a preliminary takeover approach on Tuesday, which is an unusual development given that the group has only just concluded the €125m takeover of Uniq. While some people suggested that the interest could be coming from Kerry Group, I would dismiss that out of hand – Kerry’s M&A strategy in consumer foods is centred on buying brands, not the own-label products that Greencore and Uniq produce. My guess is that the approach is from a private equity fund with existing interests in the UK consumer food space that is keen to cherry pick certain business units across Greencore and Uniq that overlap with its owned businesses and flip the rest out to other firms/funds in the space. As an aside, I note that there has been some talk about the P/E multiple that a successful bidder would have to pay for Greencore. You can disregard that, because in reality it is the EV/EBITDA multiple that is of relevance in a takeover situation.

 

(Disclaimer: I am a shareholder in CRH plc) I was pleased to see CRH appoint a top-drawer business person as a non-executive director. Ernst Bärtschi is CEO of Sika Group and the former CFO of Schindler. This is the sort of best practice approach to non-executive director appointments that all large plcs should be looking to emulate.

 

Just when I thought the social media bubble was at an end, up popped this – Groupon seeks valuation of 5 times 2012 sales.

 

My MBA class had a Halloween themed party last night. Which reminds me of this – Halloween by the Numbers.

 

If you’ve a spare hour, why not spend it with the magnificent Hugh Hendry?

 

And finally, I was amused by this tweet by Lorcan Roche Kelly, who is one of the most astute financial commentators in Ireland:

 

When trying to sell retail sovereign debt, is a cliff the best thing to put on the brochure cover?

Market Musings 17/9/11

Since my last update we’ve seen some heroics from the Irish team at the Rugby World Cup, co-ordinated central bank moves, a rogue trader and good news for Greencore.

 

Probably the biggest news this week was the announcement of co-ordinated central bank intervention by the Fed, BoE, ECB, SNB and BOJ to boost liquidity. In recent months there had been a number of unilateral moves by central banks (the Swiss monetary authority’s move to devalue the franc being one example) so it’s good to see the powers that be working together again. The markets welcomed this liquidity move, which is timely (and, let’s be honest, necessary) given the concerns around European banks.

 

News of a fresh rogue trader scandal emerged shortly after I finished writing my last entry. In a sign of the way things go these days, the suspect in this case already has a wikipedia entry and a number of fan clubs on Facebook! Disturbingly, his alleged actions go back as far as 2008, which if true raises obvious questions about UBS’ risk management systems and both its internal and external auditors. I was amused to see the ratings agencies, who are always the last to the party, suggest that they may downgrade UBS on the back of this.

 

We had the folly of Tim Geithner visiting Europe this week to lecture our political overlords, with no hint of irony, on how things should be done. I would concur with Juergen Stark’s comments.

 

I was drawn into a rather circular debate the other night about the provision of universal benefits in Ireland. We have a situation here where roughly half of the Irish population is in receipt of at least one social welfare payment. Is it any wonder that the total social welfare budget for 2010 (€13.2bn) was more than the government’s total income tax take (€11.3bn)? At a time when the State is teetering on the verge of bankruptcy, we simply cannot continue to support a system where people can qualify for benefits regardless of their means.

 

(Disclaimer: I am a shareholder in Uniq plc) Turning to corporate news, Uniq released its last-ever set of interim results yesterday. It will shortly be taken over by Irish-headquartered Greencore plc. Shareholders in the latter should be pleased with the strong performance by Uniq’s food-to-go unit, which is the area of most overlap with Greencore’s operations.

 

Speaking of plcs, Expecting Value had a great blog piece on Barratt Developments, which I’d encourage you to take a look at.

 

Finally, what an amazing win for Ireland in the Rugby World Cup today! I think it’s only fitting that the last word should go to Ronan O’Gara – it really is “a great day to be Irish”.

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 13/7/11

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.

Market Musings 12/7/11

It’s another weak day on the equity markets as sovereign debt concerns continue to cause jitters. Since I blogged yesterday, we’ve seen further symptoms emerge of the disease that Europe has failed to contain. Markets continue to tumble, while both the Spanish and Italian 10 year bond yields are at their highest level since 1997. James Mackintosh from the FT has a good video on the European mess here. Not that things are rosy elsewhere – Morgan Stanley cut its US H2 GDP forecast to 3.5% from the previous 4%.

 

(Disclaimer: I’m a shareholder in Uniq plc) Greencore issued two notable updates this morning. The first was a trading statement in which management said that it “anticipates delivering adjusted EPS in line with market expectations” for the full year. That was overshadowed by the second, in which Greencore announced a recommended £113m offer for Uniq plc, which will be part funded by an €80.2m rights issue. Not that this will come as a surprise to any of my regular readers – check out this tweet from June 30th. For background primer to this, the FT has a good article here, while I previously wrote about the logic of a Greencore-Uniq tie-up here. This is the second UK plc in my portfolio (after Chaucer) that has agreed to a takeover this year, which happily frees up even more cash for me to invest once markets settle down.

 

I was interested to see that Greencore’s rights issue is priced at a >50% discount, which compares to the <20% discount that Bank of Ireland (BKIR) had priced its one at. Earlier today BKIR was trading below its rights price, which is an ominous sign, while stockbroker Dolmen says:

 

“Due to [the bondholder] overhang plus the uncertainty over NIM and the low ROE the group will generate over  coming years we are recommending not taking up the rights. The capital can be used better elsewhere in  the market and we believe the shares will remain weak post the rights due to the bondholder overhang plus  the current uncertainty within Europe”

 

I have been calling for Ireland to step up its austerity drive for some months now. These scary charts show why time is of the essence, while this report saying that “almost half of the population is now receiving a social welfare payment” gives a clue as to where some considerable savings can be achieved.

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 5/6/11

A few bits and pieces have caught my eye since my last update, mostly on the corporate side with a sprinkling of macro news thrown in too for good measure.

(Disclaimer: I’m a shareholder in Glanbia plc) Those of you into emerging markets should read this profile of PZ Cussons’ operations in Nigeria. PZ Cussons has a dairy jv with Ireland’s Glanbia in that market, which has a positive long-term outlook given Nigeria’s rapidly growing population and the strong economic growth it has recorded in recent years. While many Irish people associate Glanbia solely with its domestic liquid milk business (which processes a remarkable 1.4bn litres annually), most of them have no idea that the group has manufacturing facilities in seven countries from Canada to China, or that Glanbia’s facilities in the US State of Idaho process 1.9bn litres of milk (i.e. 35% more than its domestic operations!) annually. Of course, the group is no longer all about dairy, having successfully entered the higher margin nutritionals business through its acquisitions of Optimum Nutrition and BSN. To me Glanbia is like a smaller version of Kerry Group, having evolved from a domestically-focused agri-commodity producer into a diversified international player. I like the company’s business model, and management, a lot!

(Disclaimer: I’m a shareholder in Uniq plc) Elsewhere within the Irish food sector, Greencore was named as a first round bidder for Uniq in the press this week. Regular readers of this blog will know that I am a fan of a tie-up between the two groups, given the cost synergies that this will give coupled with the fact that there is limited overlap in terms of the customer base – Uniq is a major supplier to M&S, which is the UK multiple that Greencore has for many years struggled to break into. Unsurprisingly, given Greencore’s balance sheet (at the end of 2010 group net debt was €193.4m, 2.3x EBITDA) many brokers, including Bloxham, have stated that an element of equity financing (i.e. part or full payment in shares) would be needed to get a deal over the line. My gut feel is that the Uniq pension fund, which holds circa 90% of the shares in Uniq, would be attracted by taking shares in a listed plc as part of a deal. We’ll wait and see what happens.

The issues around government finances show no signs of going away. The Irish Department of Finance released the Exchequer Statement, which made for depressing reading. Irish Exchequer voted expenditure was +6% yoy in the first 5 months of 2011, which is indefensible given the state of the public finances. In terms of Irish govt spending, it should be highlighted that the areas that have seen the biggest cutbacks in the ytd are the ones that create jobs like Tourism (-53% yoy), Trade & Innovation (-35%) and Transport (-30%). The ytd deficit is €10.2bn (that’s circa 7% of GDP!), and yet the political leadership of this country continues to insist that Ireland can return to the debt markets by the end of 2012, but who will lend to us given how out-of-control our spending is? Put it this way – would you lend €1,000 to a friend with a track record of spending 1.5x what they earn? The US government’s spending is also unsustainable, but I was perplexed by Moody’s statement that it may downgrade its ratings on the US if there’s no progress on raising the debt ceiling. With the US deficit over the past 12 months running at circa 10% of GDP, the last thing America needs is an increase in its borrowings. Like Ireland, it will have to learn to live within its means. Speaking of the US economy, have a look at this.

Returning to the Irish market, Bank of Ireland provided more details of its capital raising plans. Bondholders are clearly incentivised to take shares over cash, but it’s going to be a while before investors can confidently estimate a value on the equity (as we won’t know for a while how many bondholders will opt for cash versus shares). Not that this has put some people off, with gigantic volumes noted in the stock during last week. I understand that a lot of this demand is CFD led, which means that some investors are essentially buying an “option” on margin!

The Irish plcs have really raised their game when it comes to investor relations in recent years, with many of the leading non-financial corporates holding annual “investor days” at which the buy-side (fund managers) and sell-side (stockbrokers) are given a tour of some operations and then provided with a briefing from management. I was encouraged to hear that both DCC and Paddy Power, two very important members of the ISEQ, had well-received investor days last week.

Finally, did you know that Ryanair is now the 10th largest airline in the world? The carrier transported 75m passengers in the past 12 months.

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 07/04/11

Blogging has been non-existent of late as I headed to Cork for a few days both to avoid being disinherited (Mother’s Day!) and due to my guessing, correctly as it turned out, that the markets would be quiet before the expected ECB rate hike announcement.

So what have I learned the past while?

Firstly, I was aghast to read on Zero Hedge that the Federal Reserve has printed $2.5 trillion dollars to create 1,492,000 jobs from the recession trough. That’s $1.7m per job.

This article warns of the dangers in investing in penny stocks. If something appears too good to be true, it almost always is. I have never traded any stock that I’ve come across due to a recommendation from a ramper. A policy I’m not likely to change.

You can read about the world’s 10 strongest liquor brands here. Contrary to the stereotype only one was founded by an Irishman!

I’ve written before about how new media continues to gain market share from traditional media, and this statistic again illustrates the trend. How many Irish TV shows have a greater audience than Facebook on any given day in Ireland? Just one – The Late Late Toy Show.

(Disclaimer: I am a shareholder in Uniq plc). I’ve commented in the past about the need for consolidation among the UK food producers. Uniq, a company which recently completed a historic pension deficit-for-equity swap, announced that it has put itself up for sale. Potential suitors presumably include Ireland’s Greencore, given the product overlap between the two (hence plenty of synergies to squeeze out of a deal), Uniq’s strong relationship with M&S, a retailer that Greencore wants to get more exposure to, and Greencore is I imagine under pressure to cut a deal after being trumped by turkey mogul Ranjit Boparan in the battle to acquire Northern Foods.

I would classify my own investment style as being a mixture of contrarian and value, and the former side was very interested to hear of data compiled by Explorers of London that show that as of March 30th, the value of stocks on loan to short sellers was a paltry $273 bln, the lowest level in 5 yrs. Moreover, a survey by Investors Intelligence puts the Bulls at 57.3% (highest level since since mid-Dec 2010) and the Bears at 15.7% (the lowest level since Dec 2009). The difference of +41.6% is close to the 2007 high of +42.4%. Stats like that given the macro backdrop make me very nervous about market direction.

In my first blog post I noted the proposed $39bn AT&T-T Mobile USA deal. This has been followed by the $11bn acquisition of Vodafone’s stake in France’s SFR by Vivendi. Might these deals herald the start of a new wave of consolidation in the telecoms space?

Exchequer returns data for the first quarter of 2011 was released by the Department of Finance and it made for disappointing reading. While the spin put on it was that the numbers were “broadly in line“, the reality was that they were behind expectations. I was dismayed to read that total headline voted expenditure by the Irish government was +2% yoy in Q1 2011 – despite all of the hand-wringing about cutbacks – while even the political parties failed to lead by example, with State funding to them rising by a staggering 10% in Q1 relative to the same period last year. In addition, I note that Election 2011 cost the State some €13.9m.

Speaking of spendthrift governments, the US confirmed that it will hit its debt ceiling by May 16. Secretary Geithner’s letter to Congress is hair-raising stuff. The US’ current debt? $14.25trn. Another country with troubles, albeit well hidden ones, is China, where the Central Bank raised rates for the fourth time since October. They should have done that before 64m empty apartments were built there.

There was a touch of Groundhog Day about Tuesday, with HMV issuing yet another profit warning – its 3rd in 4 months, while oil, gold and silver all hit new highs. (Disclaimer: I am a shareholder in Ryanair plc) Oil has been messing around with a lot of brokers’ forecasts of late, and I was interested to see Goodbody slash its Ryanair forecasts, after factoring in $120 oil for the unhedged portion of its fuel requirements. That move sees FY13 EPS cut to 31.7c from 41.7c, while FY12 (where more of RYA’s needs are hedged) goes from 33.1c to 32.5c. Goodbody’s fair value on the stock has been cut by 6% to €4.70. Elsewhere within the sector British Airways raised fuel surcharges on return long-haul business class flights to up to £290, a 7 year high.

Those of you interested in gambling stocks might be interested in Davy’s observations from its recent sector conference.

The ECB is expected to raise interest rates in an hour or so, despite the well-documented pressures in Greece, Ireland and Portugal, which has become the third country to receive a bail-out. There’s a lot of confident talk about Spain dodging the need for a bailout, but I am unconvinced about that, given its horrific housing sector, Spain’s recent downgrading of its GDP forecasts and soaring unemployment.

Finally, Goodbody’s Dermot O’Leary has a great presentation from the Irish Debt Dynamics conference held yesterday in London. Amongst other things in it, here are some quotes from the European Commission, the IMF and the now Chancellor of the Exchequer from the good times to show how not even they saw the mess coming:

Ireland’s “budgetary position is sound & the budgetary strategy provides a good example of fiscal policies in compliance with SGP” – EC, 2006

Ireland’s “performance has been underpinned by outward-oriented policies, prudent fiscal policy, low taxes…” – IMF, 2007

Ireland is “a shining example of the art of the possible in long-term economic policymaking” – George Osborne, 2006

And we’re being advised by some of these people now?