Irish Stock Market Plummeting

I think there has rarely been a better time to buy the ISEQ or components thereof. The prices of all our major banks has effectivley halved in 6 months against a backdrop of a marginal predicted detereoration in our unemployment prospects (still exceptionally low by international standards) and a broadly positive economic environment. The PEs were fairly in line with EPS growth over all that time so we're not witnessing the inevitable implosion of and unhealthy and unjustified price bubble. These earnings forecasts have been or are suspected to be slightly trimmed by a few percent. The crashes in share prices don't remotely reflect the reality of these companies which operate in a mature comprehensible and tradtionally blue chip industry.
Now I.m not calling this the bottom, think pessimism has taken over and it will take considerable good news consistently over time to bring it back, a lot of people have been burned. But It's at such times fortunes are made. Witness Warren Buffett
 
tyoung said:
35% fall in about 9 months while most other markets are flat to up. Even for the volatile Irish market this is extraordinary.
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I agree, extraordinary. The stockbrokers use "volatile" as a euphenism for a collapse. Irish banks are down 50% since the summer and are getting back to post 911 levels. That is a collapse or a crash. Let's say it out loud - its a crash. And its ongoing. And all the while the calls to "buy" from financial services industry become increasingly shrill.

What if you assume the market valuation of Irish banks is correct? (Always a good first assumption, put aside stories about nasty foreigners, hedge funds etc.) Then what is the market pricing? Just a mild economic slowdown? A full-blown recession? Or are there bad loans or worse being priced, possibly connected with the end of the building boom?

You can't say Irish bank stocks are cheap unless you know which of these scenarios the market is pricing and why. What scenario is being priced and why is it wrong.
 
The falls over the last while have wiped out the valuations of the last two years, however i think those valuations were unrealistic and are not going to be revisited in the near future. Those valuations should not be seen as a benchmark in which the iseq is bound to return those valuations are now history, todays valuations are the reality. Those valuations were caused by hedge funds and foreign funds buying into the irish market because of the growth here and because they had cheap money and liquidity looking for a home. I don't think there were any long term legendary investors like the much quoted buffet buying into ireland over the last 2 years. Those funds have left the irish market en masse and they won't be returning because they now don't have the money. However i think the market maybe nearing equilibrium and may bop around the 6000 mark for a long time. However i would not be buying into the iseq because it will rebound quickly to the 10,000 mark it reached in february. If you are to buy you will have to be prepared to wait for the slow steady growth and because you think the huge selling pressure maybe coming near its end.
 
Am I right in thinking that for some of the equity-based SSIAs, people were advised to leave their money in for more than the 5 years? If so, those that followed this advise have not got on as well as they could have. If they closed it off between May 2006 and April 2007 they would have done nicely, however after this their returns would have dropped considerably.
Any chance that people pulling out of such equity-based SSIAs over the last few months have partially caused the current slump.
 
I'm not suggesting for a second that the ISEQ wasn't overvalued at 10000 or that the economic environment has only temporarily dipped and will resume the same blistering trajectory of the last few years. What I'm saying is that the Irish banks have suffered declines in price totally out of proportion to their earnings.
If you look at their PEs over the last 5 years they have been roughly on average 11-12 some higher, can't mention names. Now they are trading at 5.5-7. of course tey shoud be lower but half. The construction industry, which accounts for roughly 25% of our economic activity has started to slow, not collapse. Unemployment MIGHT creep up to 5-5.2%. Still very very low and compatible with very strong economic growth. House prices got ridiculous and now are correcting - that was always going to happen but thtnkfully our developers pulled their horns in quickly so they won't go bust and fire everybody leaving a bigger unemployment problem.
So, while there are bound to be bonus hungry fund managers around the world running scared of a double whammy of undisclosed losses on subprime investments and a declining property market that doesn't mean that the earnings of these companies are going to suffer in the same degree. The dust will settle and value will be recognised. These same fund managers hunting fat bonuses won't ignore earnings forever. When they feel the downside trajectory is gone they'll be back. Why? Because one of our banks when it last traded at this price had earnings less than half what they are today. I would agree with you if I thought the banks' earnings were going to fall by half. I don't think so do you?
 
joe sod said:
Well the iseq has been falling pretty steadily since summer now at 7,500. however it was at this level at the beginning of 2006 at the height of the property boom therefore i think it has some way to go yet, maybe 6000 or 6500 will see resistance and buyers attracted back into the market
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Well Joe Sod
I must congradulate you on the above forecast of the trading range of the iseq which you made on the 6th november, it will be interesting to see at what level it will bottom out.
 
Digdeep, I would largely agree.
In Oct 06 in this thread,
http://www.askaboutmoney.com/showthread.php?t=38721
I wrote this:
Avoid property. Avoid bonds. Both all risk no reward.
large cap blue chip stocks reasonable. Divesify out of Ireland. Too dependent on property market. Modest overweight Asia/Japan.
I don't own gold silver or any commodities but I am interested in oil. The projected supply/demand Nos suggest higher prices ahead. I would buy the oil majors.
I'm very bearish on the dollar longterm But I think the main beneficiaries will be Asian currencies which will add a tailwind to their stockmarkets.
The pound is also way overvalued.
The major bet is whether we have a global recession(hard landing) versus a slowdown(soft landing) and how the US imbalances get unwound(if they get unwound at all)
I don't know the answer but a mainly large cap stocks with an modest overweight in energy and Asia with a decent dollop of cash offers a reasonable balance.
If we did get a selloff I'd be looking to buy stocks.
Regards

Apart from Japan most of that was pretty good particularly "Divesify out of Ireland. Too dependent on property market."
For 08 I'd stay with Japan but get out/avoid China/ India and buy the Irish market. I wouldn't put new money in emerging markets.
The dollar is nearly finished correcting against the euro. I think the pound still has along way to fall(UK Buy to Lettors beware!)
 
digdeep said:
I'm not suggesting for a second that the ISEQ wasn't overvalued at 10000 or that the economic environment has only temporarily dipped and will resume the same blistering trajectory of the last few years. What I'm saying is that the Irish banks have suffered declines in price totally out of proportion to their earnings.
If you look at their PEs over the last 5 years they have been roughly on average 11-12 some higher, can't mention names. Now they are trading at 5.5-7. of course tey shoud be lower but half. The construction industry, which accounts for roughly 25% of our economic activity has started to slow, not collapse. Unemployment MIGHT creep up to 5-5.2%. Still very very low and compatible with very strong economic growth. House prices got ridiculous and now are correcting - that was always going to happen but thtnkfully our developers pulled their horns in quickly so they won't go bust and fire everybody leaving a bigger unemployment problem.
So, while there are bound to be bonus hungry fund managers around the world running scared of a double whammy of undisclosed losses on subprime investments and a declining property market that doesn't mean that the earnings of these companies are going to suffer in the same degree. The dust will settle and value will be recognised. These same fund managers hunting fat bonuses won't ignore earnings forever. When they feel the downside trajectory is gone they'll be back. Why? Because one of our banks when it last traded at this price had earnings less than half what they are today. I would agree with you if I thought the banks' earnings were going to fall by half. I don't think so do you?
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I couldn't disagree more with you, but, the posting guidelines do not allow me to give my reasons.

What I will say is:
Finfacts reports:
"The Irish construction labour force in Q2, 2007 is estimated at 415,900 persons, including an estimate for indirect employment and assuming an unemployment rate in line with the national average (4.6%). This estimate corresponds to almost 19% of the national labour force of 2.21 million (sa). There were 126,100 directly employed in construction in early 1998 compared with 282,000 in late 2006."
If you think the extra 130,000 people between late 2006 and Q2 2007 is anything other than residential, please let me know.

88,219 houses were built in 2006. Maybe 77,000 will be built in 2007. The CIF is saying that 33,000 will be built in 2008. Homebond registrations tend to support their figure (unreliable as they are). How you can say that unemployment will only reach 5.5% without massive net migration, I don't know. If there is massive net migration, it will not do much for either house prices or rents.

Add to this declining competitiveness with the rest of the world (outside the EU) for our products prices in dollars and you have exporters suffering a squeeze.

The buy to let market has disappeared. Property investmentment is a loss-maker at the moment. Until it become profitable again, the banks are going to suffer reduced earnings.

Yes, I think banks will be trading at half their current profits in a years time.
 
Actually I disagree that that was all construction in residential. Huge infrastructure projects like roads, office blocks massive mixed use complexes and several new towns in the greater dublin area would be a few of the other things that contributed to it and will continue to contribute to it. Of course residential was a significant part of it but that activity isn't going to just halt. Do you really think that so many developers who probably know a hell of a lot more about property than you or I, bought land at record prices in the last few years and watched interest rates rising on huge loans can just afford to stop building. Some of those who owned land banks they bought cheaply will hold back to see how all this pans out but the margins are still there and there is still a huge predicted population growth expected in our cities especially dublin.

And we have been uncompetitive compared with other countries for years. We have a 12.5% tax rate. Some may move operations abroad but Google hiring 800 more people recently is a pretty good sign for me. AS to the banks income, as a nation we now owe nearly as much on personal debt as we do on mortgages. Entrepreneurship and business start ups continue to boom. While of course the banks will react to changes in the property market and the news there is somewhat negative I think suggesting that their profits in a years time will half, in a first world economy that is performomg well is ridiculous. I'd love to know how often a retail bank's profit has ever fallen by 50% in a year anywhere. That would imply an economic implosion 1929 style. This is not that. or do you think we're heading for a depression nest year?
 
Its' interesting how uncertainty always produces views to extremes. This can of course be exploited. I have seen those extreme views before. One recent example is the dot com bubble. People who didnt know what they were talking about were buying into the sales talk too late in the game and suffered as a result.
I think the possible benefits weighed against the losses for staying out of the stock market until after christmas exceeds the possible returns versus risk for going in.
No investor should have a gambling mindset. That is plain stupid. The question I would have is why are we going to enter a depression ?
 
stir crazy said:
Its' interesting how uncertainty always produces views to extremes. This can of course be exploited. I have seen those extreme views before. One recent example is the dot com bubble. People who didnt know what they were talking about were buying into the sales talk too late in the game and suffered as a result.
I think the possible benefits weighed against the losses for staying out of the stock market until after christmas exceeds the possible returns versus risk for going in.
No investor should have a gambling mindset. That is plain stupid. The question I would have is why are we going to enter a depression ?
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Depression? I don't know:
From wikipedia:

"In macroeconomics, a Recession is a decline in any country's Gross Domestic Product (GDP), or negative real economic growth, for two or more successive quarters of a year. However, this definition is not universally accepted. The American National Bureau of Economic Research defines a recession more ambiguously as "a significant decline in economic activity spread across the economy, lasting more than a few months." A recession may involve simultaneous declines in coincident measures of overall economic activity such as employment, investment, and corporate profits. Recessions may be associated with falling prices (deflation), or, alternatively, sharply rising prices (inflation) in a process known as stagflation. A severe or long recession is referred to as an economic depression. A devastating breakdown of an economy is called economic collapse. Newspaper columnist Sidney J. Harris amusingly distinguished terms this way: a recession is when you lose your job; a depression is when I lose mine."

The US seems set for a recession. Whether that will prolong into a depression is difficult to say (I'm not a 'leading' economist!).

What I think are key events:
1. If, as has been put about, there is $500bn of worthless commercial paper, then the lending cost to the financial system will be $5tr.
2. If that amount of liquidity (money to you and me!) dries up, don't expect to see the banks lending much for the next while.
3. If the other mortgage resets over the next three years are even a little bit as bad as sub-prime has been, the American consumer will have other things on his mind than buying Asian/European produce. This will surely put the US economy into a severe recession.
4. If the oil price is kept artificially high despite the fall-off in demand due to economic slowdown, inflationary pressures will limit central banks ability to reduce interest rates.

There are many more ifs that could be added to the list. It could all just blow over like the 9/11 recession that never was. Like stir crazy, I am not willing to take a punt now, as it would be just a punt. I can see no evidence at the moment that this will be a short-term event.
 
I don't think this is a short term thing either. I'm not expecting to see prices doubling in 6 months or a year. Undoubtedly it isn't justified that they would go back to where they were. But the Irish Banks stayed out of the subprime credit thing. they have all said so openly and wouldn't play with fire by trying to fool the investor. That leaves the impact of the property market. So far there have only been modest SLOWING OF GROWTH in earnings NOT losses or no gains at all. so lets assume that EPS stands still for a year or 2 and doesn't grow at all, many of the banks are still trading at a pe of around 6. If they were averaging recently around 12 and you even knock 25% off their PEs to account for a thus far moderate property and economic downturn that would put them around 9. That leaves 50% upside potential in the price purely on the basis of increasing PE before any earnings growth. It might take 2 years to get there. Thats 25% per annum. I'd take that. Thats the essence of value investing - you wait because 50% of market gains in a 20 year period take place durig 7% of the time. How does anybody know really when the bottom will be so buy when valuations look really cheap and shares oversold and wait until the guys whose jobs depend on hitting quarterly or yearly returns targets (and who can't afford to take a long view) feel its safe to go back in. If you're not in you can't win but if you can't afford to stay in for the long hold stay out. thats the discipline and it works better than any other and there are any number of stats to back it up.
 
Brendan said:
Hi Joe

One broker says he would not be buying bank shares.
Two brokers say that they would.

It seems to me to be news reporting and not advice.

They give further information:
Irish banks don't punt much with their finances.
AIB reported buying some distressed loans recently at good prices.


Brendan
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.. that was august 10 ..ouch!

if they liked those distressed loans in august they must love them now.
 
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nad said:
Well Joe Sod
I must congradulate you on the above forecast of the trading range of the iseq which you made on the 6th november, it will be interesting to see at what level it will bottom out.
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i am no forecaster, it was only a two years ago the iseq was at the 6000 level , however noone can predict the future, if there is more bad news it may fall further than this noone can tell, however i think the big sell offs in the iseq maybe nearing its end, i think next year will tell the real story on the banks and how there earnings have been affected. The bank of ireland may have had record profits but alot of those earnings were earned in the still booming economy, next year will start showing the trend for the future. It is the foreign funds that have had such a dramatic effect on the iseq, therefore it is the value of the iseq in comparison with other world markets and the risks in the iseq in comparison with other world markets that will determine if it recovers or how quickly it starts going positive again. The foreign funds will not re enter until they know how much the irish economy has been affected by the housing slump, dollar and oil.
 
"Do you really think that so many developers who probably know a hell of a lot more about property than you or I, bought land at record prices in the last few years and watched interest rates rising on huge loans can just afford to stop building. Some of those who owned land banks they bought cheaply will hold back to see how all this pans out but the margins are still there and there is still a huge predicted population growth expected in our cities especially dublin."

Im not so sure about this alot of the property developers bought their land with huge loans, therefore they may not have much of a say, it takes more borrowings to build the houses, will the suddenly cautious banks be willing to lend out even more money on risky developments. The banks themselves are suffering from a contraction in credit.
 
One of the key long lasting problems with the iseq is its lack of diversity, there are no big commodity stocks or technology stocks. While the government could do little about commodities it could have done alot about technology. It has done little to encourage indiginous technology companies, the baltimores of 2001 were allowed to go bust, and the government went back to what it loves most banks and builders. In fact third level funding for research and development was cut in 2002 rather than increased in response to the dotcom slump. This shows how fickle and short termist the government is. It is interesting that the big technology stocks like microsoft have been unaffected by the current turmoil in the stock market.
 
The present set of circumstances are unique in Irish stockmarket history- interest rates set externally, major currency realignment, bursting of an insane property bubble, fallout from dodgy lending practices, global credit crunch, inflationary commodity prices. Have I forgotten anything?

In my opinion technical analysis is useless until these events play out a lot more. Looking at a "long term moving average" now is a bit like checking your GPS when the car is hanging over a cliff..
 
Dinarius

I shouldn't have to keep reminding people that we don't discuss individual shares on Askaboutmoney. We will allow some discussion of shares to illustrate a point, but your post is a major breach of the Posting Guidelines.

Brendan
 
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