Good Afternoon ,
The market reaction in Europe following on from the Intel numbers and the JP Morgan numbers was muted to say the least. Stocks opened higher but pretty much immediately gave up the gains.
I have been getting some interesting negative reaction to my comment the other day that the crowded trade may be the long trade. Saying this does not make me any less of a bull or any less committed to the names I like.
What I would say is that the currency movements have been much more sudden and dramatic than any one could have dreamt and the sterling weakness has presented a big challenge to the performance of some of the Irish Stocks such as Grafton , DCC , Total Produce , C&C and Ryanair to name but a few. The market has also been dealing with the Q3 reporting season across Europe which is still showing little signs of an increase in underlying demand. The Question the market faces is how long the current level of share prices will be sustainable without a follow through in terms of real economic growth coming through.
Ireland had been one of the real outperformers and It was getting harder to aggressively point to real value in the market. At this stage a few weeks into this consolidation period and there has been some significant moves and retracements. The Irish financials now look very oversold on a relative basis compared to the UK and European bank sectors. Strange given the news of the survival of the government and the successful passage of NAMA through first reading of the legislation in the Dail , I thought might have triggered some positive reaction. The market is well aware of the funding requirements so there maybe an element of selling now by holders with a view to getting back in a t lower levels but Irish Life which is unlikely to have to raise capital has also been a very significant laggard compared to the European and UK Banks and also the European Life assurance sector. This one is due a catch up bounce from here.
The stocks have been sold off though on reasonable volume. I have mentioned that there has been some snippets in terms of company statements and increasing forecasts for the economy from the central bank which while not very strong certainly point to a shift in direction and maybe this economy could surprise on the upside. Ireland was and will continue to be a leveraged play on our largest trading partners namely the UK and the US.
We met Fyffes yesterday, A very relaxed meeting , Looks like they are very comfortable with their earnings for this year and I certainly got the impression that while Fuel costs might go against them that shipping is locked in for next year and there is the prospects of an ok pricing environment which should see them through next year. The Dole IPO which is due next week may also highlight the low valuation of this stock.
I have also noticed a big pickup in the price of cheese and dairy commodity prices in the UK and Europe and Glanbia is looking very interesting. We did write about Glanbia plans to cut prices on branded milk (2 litre packs of Avonmore, Premier, CMP and Snowcream) with the price cut being a minimum of 10% or 20c per 2 litre pack. There is currently a c.33% premium on the retail price of branded milk over private label in the ROI market, where branded share has held up very well over the past years (compare to say the UK market where branded milk consumption has declined dramatically in favour of private label consumption). The recent economic decline in ROI and weakened consumer demand is likely to accelerate the shift towards private label milk. We would assume the reduction in price will lead to reduced advertising and promotional activity by the brands in a bid to sustain margins in the division. This may be a drag on the Glanbia share price reacting to the improved dairy commodity prices but It is another stock which looks attractive at this point.
Tullow has announced the drilling results of two significant wells this morning. The Mahogany-4 well offshore Ghana (22.9% TLW) has discovered 43m of net oil pay including 15m in the main Jubilee reservoirs, 20m in a new sand and 4m each of gas and net oil pay in Mahogany Deep reservoirs. The success in the previously known reservoirs continues to de-risk the 1.8B upside potential of the existing discovery with the move from 1.2B to 1.8B bbls adding up to 40p to our net asset value per share estimate. The thickness of the main payzone is encouraging. Further details are necessary (we understand it is on the limits of seismic interpretation) but the new reservoir indicated could also be significant for Tullow; it may be additive to the upside case of 1.8B bbls. The Mahogany Deep-2 well is currently drilling with the M-5 to be drilled in Q1 2010 as well. The South Grand Lahou well offshore Cote d'Ivoire (TLW 22.4%) has found the anticipated reservoir structure to be water bearing. The disappointing result for one of the Jubilee type prospects along the West African coast will reduce our NAV by 6p per share, but we would consider it an independent event along the string of prospects. We have a BUY rating on Tullow
At 5.15pm , after a day when European markets traded down but not a lot , Wall street is almost flat and holding just above the 10000 level . Lets see how it closes this evening.
Have a good one ,
Liam
___________________________________________
Liam Boggan
Merrion Stockbrokers
Tel.: 353-1-2404171
Mob:353-87-2313505
www.merrion-capital.com
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