Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘US

Market Musings 5/1/2012

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Ireland released its final set of Exchequer Returns data for 2011. The deficit works out at €5,439 for every person in the country. Regular readers of the blog will know well my sense of horror at this position and my view that the fiscal jaws need to be closed a lot faster (and tighter) than what the government’s medium term fiscal strategy proposes. In terms of the public finances, I have noticed over the past year a tendency on the part of certain commentators to suggest that the public finances are in the state they’re in purely because of the cost of bank recaps. While there is no denying that these play a role, let’s take a proper look at what the underlying fiscal position is, based on Exchequer Returns data for 2011.


  1. Total receipts for the year came to €36.8bn. Total current expenditure came to €48.0bn, leaving a deficit on the current account of €11.2bn.
  2. On the capital side, total receipts were €2.5bn and total expenditure came to €16.2bn. This produced a deficit on the capital account of €13.7bn.
  3. The total reported Exchequer deficit for the year was €24.9bn, which is the product of the result of (1) and (2) above.
  4. Contained within the Exchequer’s €36.8bn receipts for the year as a whole are the following: Income from the various guarantee schemes (paid by the banks) of €1.2bn; proceeds of €1.0bn from selling Bank of Ireland shares and bank recap fees of €0.05bn. So a ballpark €2.25bn in revenue came from the banks, leaving underlying revenues at €34.5bn. I am ignoring other taxes paid by the banks as these would have been paid anyway.
  5. Contained with the Exchequer’s €64.2bn spending for the year as a whole are the following: Acquisition of shares in IL&P €2.3bn; Promissory Notes €3.1bn; Bank Recap payments €5.3bn; Contribution to Credit Resolution Fund €0.25bn. This gives a ballpark direct cost of €11bn from the banks, or slightly more than one-sixth of total expenditure. Stripping out this leaves underlying expenditure at €53.2bn.
  6. Taking (5) away from (4) above produces an underlying deficit for the year of €18.7bn. Put another way, roughly 75% of the Exchequer Deficit for 2011 was not directly caused by the cost of bank recaps. Now, obviously, some of the deficit was indirectly caused by the banks e.g. interest payments on borrowings used to bail them out in previous years, while in addition the effect of the banks’ implosion on the state of the economy is clearly very material.


The above analysis is merely offered as a way of illustrating that there are more moving parts to our fiscal position than simply “bailing out the banks”.


Staying on the fiscal theme, Britain’s Defence Secretary says the debt crisis should be considered the greatest strategic threat to the future security of the West. Across the Atlantic, the US is reportedly considering ending its policy of having the resources to fight two major ground wars simultaneously, which is no surprise given the country’s ugly fiscal position. One of the most striking things about the US’ overseas military deployments is how lopsided they are – it makes no sense for the US to have 80 times more troops in Europe than it has in Africa, and neither does it make any sense to have nearly twice as many troops in Germany than in South Korea.


Following on from the bearish tack on Irish house prices I expressed in my last blog, here’s a fine piece by Cormac Lucey on the outlook for same.


Some 500 hedge funds have been attracted to Malta. Given our shared EU membership and the collapse in property costs here, there is no reason why Ireland shouldn’t be trying to attract these sort of companies to the IFSC.


This is an interesting article – Sweden shows Europe how to cut debt and weather the recession.


(Disclaimer: I am a shareholder in Ryanair plc) Switching to equities, Ryanair issued December passenger stats today. Reported traffic was -5%, in line with company guidance for winter of a decline of approximately 5%. However, given that November’s statistics were better than expected, at -8% versus company expectations of -10%, I wonder if there is some potential for outperformance on the passenger side as we head towards Ryanair’s financial year-end in March.


Finally, in the blogosphere John McElligott asks if Eurozone equities offer good value here. In the interests of transparency I should disclose that I own most of the stocks he identifies as being cheap in Ireland, namely: Bank of Ireland, Independent News & Media, Total Produce and Abbey.

Written by Philip O'Sullivan

January 5, 2012 at 5:32 pm

Market Musings 11/8/11

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With a grueling 20 hours of flying and two changes of plane out of the way, I’m finally back in Dublin. Given that there was a near total collapse in equity markets globally and social order in the UK while my other half and I were on honeymoon, I suspect that the moral of the story is to holiday closer to home next time!


So what has been going on? We’ve seen the US firstly lose its coveted AAA rating from S&P, and then go on to demonstrate that its leaders have learned nothing from other countries that have been downgraded by simply attacking the ratings agency while largely ignoring the ruinous policies that led to this ignominy. I was amused to see Tim Geithner accuse S&P of showing “terrible judgement”. This being the same Tim Geithner who as Treasury Secretary has watched the United States’ reported national debt increase from $10trn at end-fiscal ’08 to around $14.25trn today (he took over as Treasury Secretary in January 2009). Some readers may say “what about the debt ceiling deal?” in response to my use of the word “ignoring” above. I think that this word usage is perfectly fair, considering that, contrary to what some “nodding donkey” journalists would have you believe, the debt ceiling deal does little to arrest the US’ spiraling public debt. This article gives a good primer on why this is so. I highlight in particular this section:


An important distinction is that these cuts are not actually cuts in the budget, nor are they reductions in the deficit. The amount of government spending will, in fact, increase every year over the next ten years. Rather the cuts made in the deal are to future increases in spending.


Global equity markets have been in freefall as investors fret about a whole host of sovereign concerns, be it the US’ problems outlined above, Italian and Spanish funding worries and fears about France being the next country to be in the market’s cross-hairs. I do think some of the correction in the equity markets is overdone – at a time when corporate balance sheets have never been stronger, it makes no sense for funds to sell shares to buy the perceived “safety” of government bonds at a time when sovereign balance sheets have never been weaker. This is especially true when so many quality shares are trading on cheap ratings. Not that all of the money that has been pulled out of shares has gone into government bonds, mind you. Gold has continued to soar as risk averse investors flock to one asset Bernanke and Co. cannot print.


How does this end? Given the hysterical tone of much of the commentary out there, I wonder if we are reaching the point of capitulation in equity markets, which is when the smart money starts buying. Looking at the Irish market, data compiled by Sharewatch show that roughly a quarter of stocks have fallen by at least 20% in the past 30 days. Mike McDonough’s table shows that most of Europe’s largest share indices are officially in bear market territory, with declines of 20%+ from their recent peak. The backdrop is clearly horrible. But can it get significantly worse? I’m sympathetic to this view from Jennifer Hughes in the Financial Times:


Can [the market] fall further? Of course. But the market is not bottomless, if only that on a practical level fund managers cannot sit for very long on the cash they are pulling out. Looking at the sea of red, it will take guts to step in. But this is the time when reputations are made.


What I’m looking to add at this time are stocks with strong balance sheets and attractive dividend yields. On the latter, I was interested to read while on holiday that in the 3 months to July UK stocks paid out £19.1bn in dividends, a 27% yoy increase. Capita Research, which compiled this data, reckons that FTSE companies will pay out £66bn to investors this year, the highest level seen since 2008. One thing this pullback has given investors is a far bigger shopping list of inflation-busting dividend yield stocks to consider. This is something I’ll write about more once I’ve gotten over the jetlag! However, for now I’ll leave you with one other thing to consider. One of the things that featured on my honeymoon reading list was Joel Greenblatt’s “The Little Book That Still Beats The Market” (which I wisely concealed below a few Clive Cussler books in my suitcase while packing!) that included this line which I think is especially relevant in these troubled markets:


Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.

Written by Philip O'Sullivan

August 11, 2011 at 2:30 pm

Market Musings 13/6/11

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Haven’t been blogging for the past few days as my stag weekend successfully competed for my attention against the financial markets! While it was in London, I did my bit for Ireland Inc by flying Ryanair and staying in a hotel that is now under the control of NAMA.


As regular blog readers will know, I’ve been extremely cautious around equity markets for some time, and this caution has proved warranted. All of the ingredients remain in place for continued weak performance over the coming months, with concerns about the strength of the US economic recovery (not helped by weak jobs data), further evidence of a slowdown in China (note the decline in new loans in this article) and the ongoing European debt crisis showing no signs of going away. This is a good primer on the challenges the market faces.


In the US, I note that Fitch is threatening to downgrade its AAA rating if the country’s debt ceiling isn’t raised. I’ve previously noted that the Federal Government is running an unsustainable deficit of 10% of GDP, and again I ask how borrowing more is going to solve America’s debt problems. I suspect we’ll be hearing a lot more rhetoric like this before the year is out – not that America isn’t justified in complaining about its European allies. The Financial Times reported over the weekend that the US share of total NATO defence spending has climbed from 50% in 2001 to 75% today, with EU member states having slashed defence spending by $45bn in the past two years – that’s equivalent to Germany’s total annual spend. Elsewhere, expectations that QE3 will be launched by the Fed continue to rise, as evidenced by this chart.


The received wisdom about Spain being “different” to the rest of peripheral Europe continues despite alarming reports such as this.


The social networking bubble continues to baffle me, and I would concur with the views of Forrester’s Mulpuru about the valuation being applied to Groupon.


From an Irish corporate perspective, I note that shares in PetroNeft continue to drift after its disappointing operations update, following which Goodbody cut its NAV valuation (from 81.9p to 77.5p) and 2011 production (3.9k to 3.4k/day) forecasts.  I’ve been a shareholder in this stock for some time, and while I think it’s very cheap when measured on an EV/BOE basis, I can see from the share price that I’m not alone in being disappointed by poor production levels. Hopefully we’ll see improving output trends later on in the year.


Staying with corporate Ireland, I was pleased to see that the Irish Stock Exchange is to see its first new listing since – I believe – Merrion Pharma joined the market in December 2007. Continental Farmers Group counts Origin Enterprises plc as its largest shareholder and the board contains heavy hitters such as Peter Priestley and former UK Foreign Secretary Malcolm Rifkind. Given the structural drivers around the agri sector and with Origin’s agronomy expertise underpinning its assets, it looks like an interesting addition to the ESM. One to definitely keep an eye on.


I’m afraid to click on any links to stories relating to the Irish banks at the best of times, but this one is an important read.


And for the final corporate Ireland update, I note positive noises from Kingfisher and Michelmersh about Poland and the UK respectively, which bode well for CRH’s operations in those markets (Disclaimer: I’m a shareholder in CRH).


Finally, this is surreal – a James Bond parody featuring Tessa Jowell, Wikipedia’s Jimmy Wales & Ocado’s Jason Gissing

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