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Final Round To The Bear

Posted on: November 12th, 2007 2 Comments

The markets are tanking. The end of the world is nigh. Doomsday is bad enough – but far worse, I am really missing all those happy-clappy emails from Robbie Kelleher, head of research at Davy Stockbrokers. Robbie and I developed quite a relationship last year. Not a very cordial relationship, but a relationship all the same.

In May 2006, I rashly gave Robbie a bit of stick for calming his clients’ nerves on RTÉ after stock markets had crashed. I rabbited on about stockbrokers’ judgment being flawed; how they are frequently conflicted; how they always talked the market up; and how they are as likely to be right about future market direction as a spaniel on speed.

Robbie was indignant.

He sent me a series of emails, some of which we published. After Robbie’s attempts to reassure investors, Irish shares promptly fell. He was silent. Then stocks began to climb and the emails started. In May, at the time of Robbie’s finger-in-the-dyke broadcast, the Iseq stood at 7,667. When it rallied to 8,000, he dispatched a missile in my direction.

Robbie was cock-a-hoop. His email was triumphantly headed: “ISEQ back above 8,000.” It read: “Shane, I am sure you noticed that the ISEQ is back above 8,000 again and has more than retraced all the losses that occurred in the latter part of May and early June. I somehow remember a well-known stockbroking strategist predicting on an RTE interview at the time that this would happen and being ridiculed by a well-known business journalist for so doing.

“But, as ever, I am sure such facts will be of no interest to the increasingly debased Sindo business column.” Fair enough. Robbie was well ahead on points. I was a wrong-footed bear.

Last December, Robbie returned to his computer. His year-end email was even more self-confident.

Headed “ISEQ above 9,000″, he wrote: “Shane, I see that the ISEQ broke above 9,000 today. That leaves it up 23 per cent year-to-date and up over 30 per cent since the sell-off in May/June last.” A bayonet in my already bruised ribs. And a pat on the back for the head of research – from the head of research. Round two to Robbie.

And then, in a sentence dripping with sarcasm, he mocked: “You’re very good at calling these markets, any thoughts on prospects for 2007? Happy holidays.” I was taking a mauling, down for a count of nine.

As it happened, I remained pretty bearish for 2007.

Robbie’s mockery was fair enough. Especially as markets stood aloft on December 31. But whatever about my own instincts, let me share with you humble Robbie’s forecasts for the market in 2007. Let us see how the great guru’s team is doing.

First, I hate to remind the man who so modestly dubs himself a “well-known stockbroking strategist” that the ISEQ is now uncomfortably below the 7,667 mark reached back in May 2006, the crucial moment when he dismissed the collapse as a short-lived “setback.”

Last week, the index dipped below 7,000 for the first time since that distant day. Robbie’s setback was not so “short-lived.” It is now a fully fledged rout. But what of Robbie and his research team’s outlook for 2007? What were they themselves forecasting for the year on the very day that he was challenging me to test my ideas against his? Their forecasts make riveting reading.

Now, where shall I start? No better place than the ISEQ index of Irish shares, Robbie’s area of expertise. On December 31, 2006, it closed at 9,408. Robbie and his lads predicted that it would increase by 15 to 20 per cent in 2007. A 20% rise would send it to 11,300. Not too close to last week’s 7,000 level. A 36% margin of error. A little off-target for Ireland‘s top brokers.

Well, they may have boobed on the big picture, but perhaps they had some specialist advice to offer on specific sectors? Maybe a few prescient warnings about the dangers of the big losers in the Irish market this year, the financial sector? What had they predicted for the banks?

Their forecasts were fulsome; the 2007 report enthuses: “All of the financials appear attractive with another year of strong earnings growth in prospect. We have a marginal preference for Anglo Irish Bank and AIB.” This year Anglo and AIB have been leading victims of stock exchange carnage.

Anglo Irish is the dog of the sector – it has bombed by 36 per cent from €15.71 to €10.20. AIB has imploded, diving by 34% from €22.50 to €14.80 this year. So Davy were bulls of the banks – without qualification. They rated all financials a “buy” and even ventured to set out price targets: They suggested that Irish Life & Permanent would rise from its year-end level of €20.90 to €23.50. On Friday, it was €14.20. They saw AIB hitting €24.70.

And where else did they advise their poor clients to sink their money? Grafton at €12.66 (now nearly halved at €6.78), CRH at €31.54 (now €24.40) and Kingspan at €20.07 (now €14.41) were the pick of the construction sector. In housebuilding shares, they insisted that McInerney and Abbey offered “excellent value in a sector context.”

And wait for it, the verdict on the bum steer of the year, poor Maurice Pratt’s C&C, is the peach in the pile. Top of the Davy list for its key themes for 2007 in the food sector is a headline, ‘Continued share price outperformance for C&C’.

The rhetoric was euphoric: “The best example of a very good marketing opportunity in the UK is cider . . . C&C’s strategy in this market, very much like its Irish model for Bulmers, is a winner [sic]. Unambiguously C&C has great marketing capability and executes well. The Magners story may not remain linear in its progression; the share price may falter on apparent wobbles in the data (such as happened with the October data). However, underlying growth prospects remain robust, and we expect continued share price outperformance in 2007.” What a puff.

On December 31, the date of the C&C eulogy, the share price was €13.40. On Friday, Davy’s fallen star was languishing at €4.74. C&C has haemmorhaged. It has lost 65% since December 31.

Good idea, Robbie. Bet the bank on C&C. Sadly there is nothing left in the bank because your clients heeded your advice, took their money off deposit and bought AIB, Anglo, Irish Life, CRH and the rest. They should have stuck to cash.

Let us hope none of them went the “Contract for Difference” road, the wheeze peddled by brokers to encourage clients to borrow today and repent tomorrow. Do brokers really charge commission for this advice? In your own words, Robbie: “You are very good at calling these markets. Any thoughts on prospects for 2008?”

I hope the market recovers. I am missing the emails.