Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘US Economy

Market Musings 25/10/11

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Thankfully, with my articles submitted to Business & Finance and an exam safely negotiated, a choke point in terms of demands on my time has been overcome, at least for another few weeks! Outside of these especially pressing demands on my time, I’ve also been distracted by the folly that is Ireland’s Presidential election (where all 7 candidates have done a great job in advertising why the office should be abolished), the Rugby World Cup final (payback for the Rainbow Warrior!) and this week’s two referendums in Ireland, which I believe will have negative consequences for our freedoms if passed.


So what has been going on in terms of the markets? The Eurozone crisis continues to rumble on. Last weekend saw a meeting in Brussels which was touted as a “make-or-break” summit, but which degenerated, like all other EU meetings, into having a meeting about having… several more meetings. It is incredible that Europe’s political leadership continues to fiddle while the currency union burns.


Speaking of areas with weak economic governance, I was unsurprised to read Merrill Lynch predict that the United States will lose its AAA rating from a second ratings agency before the year end. You might recall a few months ago there was a political flap over raising the federal debt ceiling to above $14.25 trillion. Just six months on, the US federal government’s debt is now $14.9 trillion. On top of that, at a State level you’ll find a further $4 trillion in debt. While President Obama’s profligacy is beyond question, it is sad to see that the only GOP primary candidate willing to address the deficit, Ron Paul, is struggling to even get into double-digits in the latest polls. To me this indicates that, regardless of the result of next year’s election, the US credit rating will continue to decline.


Speaking of public finances, in terms of a top-down view of the global debt crisis, this is worth a read.


Elsewhere, David Smith is one of my favourite economics commentators. He writes an excellent Sunday Times column which I’m an avid follower of. A couple of days ago he wrote an excellent piece comparing the UK to Ireland on his blog which is worth a read. To me what it illustrates is the success of the competitive devaluation in recent years here (something I’ve mentioned before), which has helped narrow the gap between “rip-off Ireland” and its peers. While the UK has been quick to blame “imported inflation” for its spiraling CPI, this is, as I’ve previously noted, simply the inevitable consequence of the BOE turning sterling into toilet roll.


Another thing I’ve previously noted is how dubious Argentina’s official economic statistics are. These statistics are regularly touted by default advocates here as an example of the “success” we’ll experience if we stiff our creditors. This article illustrates why you shouldn’t believe everything you read about Argentina’s “economic success”. And if you’re still not convinced, have a read of this one too. Having been to Argentina earlier this year and having seen at first hand the grinding poverty many (40%, according to one estimate) of its people endure, and also watched how many passengers on the ferry from Buenos Aires to Montevideo carry their savings out of Argentina to deposit it in Uruguayan banks, such is their limited faith in their supposedly “successful” economy, I have to say that I am unmoved by the argument that Ireland should emulate our Latin American friends.


(Disclaimer: I am a shareholder in Glanbia plc) Turning to corporate newsflow, I was interested to read an interview with Glanbia CEO John Moloney in which he guided that the group could spend up to €200m next year on strengthening its nutritionals division. I think Glanbia has done a super job on this unit, which it has taken from a US focused business at the time of acquisition into an internationally diversified operation – just by way of an anecdote I saw an entire wall of a healthfood store in a shopping mall in Dubai taken up with Glanbia’s Optimum Nutrition product range on my honeymoon earlier this year. On a more quantitative measure, Glanbia’s 2010 annual report reveals that the percentage of group revenues coming from outside of its core markets of Ireland, the US and UK rose from 16% in 2009 to 18.5% in 2010. You can read a little more about Glanbia’s nutritionals business here.


(Disclaimer: I am a shareholder in BP plc) I was also pleased to see BP report a solid set of results earlier this morning. The company has upped its target for disposals by 50% to $45bn, which provides it with a substantial warchest. I was pleased to see management mention higher dividends and share buybacks, which should help bolster the share price. I like BP a lot. It’s very cheap, with the share price at the time of writing putting it trading on just 6.3x next year’s earnings, it has a strong balance sheet (net debt/equity was only 19% at the end of Q3) and for income investors it offers a 4.2% prospective yield. I also see clear potential for positive “surprises” in the shape of compensation from more of its partners for Macondo, while reports suggest that the company will receive a decent rebate from the fund it has established to make good the economic damage the Deepwater Horizon well caused.


Finally, congratulations to New Zealand on winning the Rugby World Cup, and for helping me relieve my bookmaker of a tidy sum after I backed them at 1/5 early in the second half!

Market Musings 23/9/11

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College deadlines and Arthur’s Day both conspired to prevent me from updating this blog yesterday, which is a pity given the volume of interesting snippets that I’ve come across since Wednesday.


I was amused to see this philosophical take on the recent UK riots by the CEO of JD Sports:


As the riots showed, there is a strong demand for our products on the High Street

Long-term trends in alcohol consumption is something that has interested me in the past. We’ve seen traditional beers lose market share to spirits, cider and wine for many years now, which has clear implications for the likes of Guinness owner Diageo and Bulmers/Magners owner C&C. This chart from Mike McDonough shows that growth in wine spend in the US has outstripped beer over the past decade.


This is an interesting article – BT’s copper wiring is worth more than the group’s enterprise value.


Staying with the US, this is a very effective table explaining the US fiscal position in household budget terms. Elsewhere in the States, I note that unemployment among the over-55s stands at levels not seen for six decades.


Following on from my last blog, one of my readers sent me this link to some interesting pointers on “Full Tilt Ponzi“.


Turning to corporate newsflow, we saw some very strong results from Origin Enterprises yesterday. Earnings growth of 16% was well ahead of consensus of circa 10%. Origin’s outlook statement was more qualitative than quantitative, as you’d expect given its FY12 has only just started. However, it is clear that things are looking up for this company, which is perfectly placed to benefit from the positive conditions in the agri sector.


I note that Easyjet increased its full-year PBT guidance from £200-230m to £240-250m yesterday. The company also declared a £150m special dividend. From an Irish perspective there is obvious positive read-through for Ryanair’s quarterly results in November.


Speaking of upgrades, Goodbody Stockbrokers raised its forecast for Irish 2011 GDP growth from 0.5% to 1.3%, with the GNP forecast moving from -1.0% to 0%. This revision is solely down to net exports, with domestic demand remaining weak.


DCC announced a great deal in the energy space this morning, which will go a long way towards meeting its ambitions of securing 20% of the UK fuel market. Assuming that today’s acquisition and the previously announced Pace deal both secure regulatory approval, these will take the volume of fuel that DCC distributes each year to over 9bn litres. DCC has a consistent track record of delivering high returns from its energy business, and it is one of my preferred stocks at the moment.

Market Musings 28/4/11

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A case of “as you were” in the markets since my last update. Commodities remain at dizzying heights, sovereign concerns continue to loom large and equity markets continue to defy gravity.

Eurostat released its debt and deficit updates for 2010 on Tuesday, which reaffirmed what we already knew about the woeful state of the balance sheets and profit & loss accounts of many EU’s countries. Greece’s deficit hit 10.5% of GDP, above the 9.6% forecast. It was exceeded only by ourselves – at 32.4% – while other states in the deficit dog house include the UK (10.4%), Spain (9.2%) and Portugal (9.1%). I cannot understand why so many British commentators criticise the austerity measures being implemented by Chancellor Osborne – were it not for these steps the UK’s 10 year bond yield, currently at 3.48%, would be a lot closer to Greece’s 15.39%.

Ireland’s debt/GDP ratio ballooned from 65.6% in 2009 to 96.2% at the end of last year. Only Greece (142.8%), Italy (119.0%) and Belgium (96.8%) have a higher ratio than ourselves. Given the state of the Exchequer Returns posted since the start of the year, I assume that we’ve eclipsed Belgium by now. The words of Thomas Jefferson come to mind: “To preserve our independence, we must not let our rulers load us with perpetual debt”.

The bond markets continue to suggest that debt restructuring is inevitable in the PIG countries. The 2 year bond yields for Greece, Portugal and Ireland as I type stand at 23.4%, 11.4% and 11.1% respectively. Those of you who don’t obsess about markets as much as I do (!) may wonder why I’ve narrowed it down from the “PIIGS” acronym that used to do the rounds. Simple fact is that the market seemingly isn’t as bothered about Italy (2 year yield is only 3.0%) and Spain (2 year: 3.3%). You’d have to be a brave person to say the market has it wrong, but I am extremely nervous about Spain, and wouldn’t be surprised to see it moving back into the bears’ cross-hairs later in the year.

Turning to the US, here is some interesting housing stuff for you – More than 1 in every 5 Phoenix-area mortgage holders would need their homes to double in value just to break even. Elsewhere, there were few surprises from the Federal Reserve after its meeting this week. I do note, however, that the Fed has downgraded its growth expectations for the US, despite its massive stimulus efforts. By The Ben Bernank’s own admission: “It is a relatively slow recovery“. For a good primer on the folly that is quantitative easing, watch this video. Congressman Paul, one of my favourite politicians, talks a lot of sense about the Fed here.

Economics geeks will treasure this video.

Jeremy Grantham, who is the G in GMO, has written an outstanding investor letter which you can download here. While I wouldn’t agree with 100% of it, it is peppered with thought-provoking analysis and interesting stats. One thing that particularly caught my eye was the table that revealed China’s share of world commodity consumption:

  • Cement 53.2%
  • Iron Ore 47.7%
  • Coal 46.9%
  • Pigs 46.4%
  • Steel 45.4%
  • Lead 44.6%
  • Zinc 41.3%
  • Aluminum 40.6%
  • Copper 38.9%
  • Eggs 37.2%
  • Nickel 36.3%
  • Rice 28.1%
  • Soybeans 24.6%
  • Wheat 16.6%
  • Chickens 15.6%
  • PPP GDP 13.6%
  • Oil 10.3%
  • Cattle 9.5%
  • GDP 9.4%
When the Chinese economy rolls over, as I expect it will in the not-too-distant-future (see previous blog entries about China’s property bubble and other pressures), that table will be particularly useful when it comes to predicting what commodities and shares will be the most affected.

Market Musings 15/04/11

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It’s been a case of “as you were” since my last blog earlier this week, with the same narrative running through to today. Despite the narrative being a bearish one, I view this as positive, as it’s reassuring to see the market play out just as you expect it to. We’ve seen more wobbles on the commodity side as Goldman Sachs continue to reiterate their negative call on commodity prices. We’ve also seen further concerning data from the BRICs which strengthens my conviction that those are not markets to play for now. I have taken some money off the table, selling one of my “core holdings”, but I don’t see a compelling reason to top up any of my “trading positions” just yet.

(Disclaimer: I am a shareholder in Ryanair) The sector that will benefit the most from a sliding oil price is of course the airline sector. West Texas Crude fell 4.1% between the start of the week and last night’s close, and this has had a corresponding benefit on the likes of Aer Lingus (+8.8% in the same period) and Ryanair (+2.1%). The negative noises around the oil price and the world economy give me confidence that Ireland’s two listed airlines will outperform over the coming months.

Anyone who reads the papers knows that the US economy is very sick. Forecasters are downgrading their expectations for the US economy, which in turn will lead to downgrades for earnings estimates for stocks. These downgrades could well see global markets retrench over the quiet summer months. In my last Business & Finance article I asked if this is going to be a year where the old adage – “Sell in May and go away” applies. I suspect it will be. The US budget deal was heralded by those lacking in intellectual curiosity as a “historic agreement”.  But that’s just garbage. The amount of money the deal aims to save is $38.5bn. The US deficit over the past 12 months was $1.4trn. Complete drop in the ocean stuff. Citigroup takes up this narrative, warning on the prospects for the US dollar.

There was similar economic madness from the Irish authorities. The Minister for Public Expenditure and Reform, Brendan Howlin, said that the “stimulus” package his government is planning may be funded through higher taxes. In reality, the only thing that higher taxes will stimulate is higher unemployment.

The BRIC economies continue to cause concern for me. Especially China. I’ve previously banged the drum about the 64m empty apartments in the country, which makes Ireland’s property bubble look like “a modest overhang”. You can now add collapsing car sales and soaring inflation to the mix of things that make me bearish on China. Oh, and I almost forgot – to add to my narrative on the Chinese property market, Moody’s lowered its outlook for China’s property sector from “stable” to “negative”, saying that sales could fall as much as 30%.

Europe is still seeing severe problems, especially on the periphery. During the week the Greek 10 year bond yield went above 13% for the first time, with its spread over bunds at a Euro-era record. In an effort to address this lack of confidence, Greece plans to sell assets and cut spending, but will not restructure its debts.

The ratings agencies get little by way of enthusiasm here given their form for “closing the stable door after the horse has bolted”. However, Fitch’s decision to downgrade its ratings on Libya by three levels amused me given that Libya has no sovereign debt.

Bank of Ireland released full-year results, and while the absence of any detail on its capital raising means that many investors will wait on the sidelines until this is clarified, I was struck by the different trends it’s seeing relative to AIB. Firstly, BKIR’s deposits have been stable since November (AIB is still seeing outflows). Secondly, BKIR’s “challenged loans” were down sequentially in H2 2010, while AIB’s “criticised loans” were up sequentially in the same period. Thirdly, BKIR’s “impaired loans” stand at 9.2% (from 7.1% in H1), versus AIB’s, which are rising at a much faster rate – to 12.9% in H2 2010 (from 8.4% in H1).

Overall, very troubling macro developments. I suspect we’re in for a choppy few months in the markets.

Written by Philip O'Sullivan

April 15, 2011 at 10:46 am

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