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Eddie's Rocket Free ad hoc bulletins from Eddie including hot tips on property investments, trouble spots and trends. |
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Welcome to the second edition of EDDIE’S ROCKET. If you’d like a copy of the first issue its here. In the meantime I hope you find the bulletin useful and that it helps you inform yourself about what moves you should be making with your own balance sheet. Eddie Armageddonists got it wrong - again! 
That the Irish residential property market is midways through a correction at a time when the banking market is recovering from the virus created by the US sub-prime fiasco, isn’t cause to believe that the sky is falling in. Time instead to stick to basic principles of investment like, diversification to avoid over-concentration on any one asset class, like buying well and roughing out the ups and down over the long term, like ignoring some of the stuff that passes for financial analysis in the media like Shane Ross getting windy in the SINDO, essentially telling readers that deposit accounts would outperform European Commercial property over the next ten years! The SINDO Business Editor must know something that has passed by professional property investors who are buying close to €200 billion European commercial property this year including nearly half a billion by Quinlan Private and Ballymore in Germany over the past few weeks. So ignore the Armageddonists, these may be dangerous to both reasoned judgement and to your balance sheet. If you were to believe them you’d go 100% into gold and start loading up on DIY books in the expectation of a general business collapse. You’d also need to move next to your bank manager to get to him first before he does a runner with your loot. So look beyond the headlines and to your own balance sheet to ensure you’ve filled your boots with a common sense mix of uncorrelated assets from low risk to high and you can’t go too far wrong. 
The City Hall in Cork might have seemed a strange setting for an international conference on peak oil and gas, but, hosted by ASPO which was set up by Ireland’s Colin Campbell, it was chock full of seasoned experts from the global energy sector. These aren’t the suit and sandal types but heavy weight experts including Edward Shreyer former Governor General of Canada, Michael Meacher former British Environment Minister and our own Minister Eamon Ryan for whom I had the privilege of chairing a lively session. The consensus from the two day gathering is that oil production will peak at between 90 million and 100 million barrels of oil a day. Global demand accelerating at 4% pa within oil producing nations like Russia and from behemoths like China is swamping 0.5% pa growth from the USA and Europe. The result is adding 1.5 million barrels of oil per day to demand, so we are on the cusp of peak oil when it will rise on a steep if uneven curve. The model used to, correctly, forecast oil at $80 per barrel by the end of 2007 forecasts prices over €100 per barrel by the end of next year. Some believe that its fundamental value is closer to €250 per barrel. One thing is clear vast sums of money will continue to be pushed into new drilling, new technologies from automobile engines to clean coal and, of course, into alternative energies like nuclear, wind, ocean, solar, fuel crops and synthetic fuels. The dawn of a new energy age is upon us but the transition from the old cheap oil age is not going to be smooth. Boom and bust cycles as oil prices rise and fall while replacements play catch up is the landscape against which I believe all balance sheets now need to be adjusted. Great fortunes will be made and great fortunes will be lost in this, most fundamental shift in the global economy since oil was first discovered in 1859. Asset positioning in High Inflation 
While the underlying trend will be sharply upwards, the tightening production / demand gap will, most likely, oscillate leading to potential boom and bust cycles. The 1970’s is the only recent economic period upon which we can rely for guidance – much like grit on an icy road. Conventional asset mixes, heavily weighted in cash deposits which account for over €70 billion in Irish banks will take a pounding, shedding huge amounts of its real value. Non-indexed Government Bonds will similarly be exposed as will oil dependent stocks like airlines, pharmaceuticals and tourism. General equity portfolios should be readjusted to feather-bedded sectors, less exposed to high energy input costs but the real star will be those businesses that either straddle existing energy supplies like the oil and gas majors or are working on the solutions in the alternative energy sector. Fill
your boots with these now. If you are not a stock picker, use funds. The embryonic energy and commodity fund sector is growing wider choices for Irish investors. KBC funds that are normally only available to institutional investors and that specialise in water and in renewable energy are now available to retail investors through New Ireland at an extra cost. You’ll find details of these funds here. Dolmen stockbrokers have opened a Green Effects Fund where the largest holding is Vestas Wind Systems, a Danish turbine maker whose stock I own myself; (www.dolmenstockbrokers.ie ) You can cover the supply side by investing in a perennial favourite, the Natural Resources fund
from JP Morgan who’ve been managing oil, gas and metal mining stocks in this sector since the mid 1960’s Note; The New Ireland and JP Morgan funds are available through our firm at deep discount terms – send us an email to info@eddiehobbs.com if you’d like to invest much more cheaply than going directly. 
Sharply rising oil prices, higher inflation and the massive weight of US trade imbalance and current account deficits has inevitably given way to a policy to let the dollar fall in value, so the real cost of repaying debt declines while exports are boosted by a cheaper dollar. It’s obviously not without risks, most of all a falling confidence in the value of holding dollar as a currency. The result is a continuing rise in Gold prices as investors load into it as the ultimate safe haven.
Property is another asset class that weathered the 1970’s high inflation cycle with some room to spare but the trick is to get the highest rate of return at the lowest rate of risk. This means avoiding the riskier foreign residential market especially in economies and locations more exposed to job losses due to low cost Asian competition, favouring instead the upper end of the Pan European Commercial property market with a special emphasis on the reviving muscular German economy. This sector has, traditionally been closed off, except to very big investors until the advent of syndicates that pool capital to get in with the big boys. This is largely the reason I’ve put so much effort into launching Irelands first Property Investment PLC that complies with the onerous European Prospectus Directive 2005. Called Brendan investments you’ll find the full Prospectus here
together with an abbreviated brochure, updated 2007 research and application forms. (www.brendaninvestments.ie)
Second the strategy needed to be right. It has a heavy emphasis on the reviving muscular German economy which will absorb most of its 75% allocation to commercial investment properties, mostly offices, hotels and retail with careful selection of UK commercials given the high UK base rate at 1.75% above the ECB base rate. The 25% allocation is to development projects mostly in Portugal’s Algarve strong touristic market and where the first project is in a development syndicate building a 780 acre five star complex comprising a Formula 1 racing track, technology park, hotel and apartment units. Like any type of growth orientated property model it is leveraged using a combination of shareholder funds and banking finance in a ratio of 1;3 or, if you wish 75% leverage. The investment term is seven to ten years, long enough to weather short term property cycles. Third the team had to be right. Brendan Investment’s MD is Vincent Regan a former Revenue auditor, senior tax & property partner at Deloitte and developer with over €600m of gross development value experience across Ireland, the UK and Portugal. Chartered Accountant Hugh O’Neill who is also ex-Deloitte is similarly giving up his career to manage Brendan Investments full time and is moving to Germany to manage Brendan’s German assets and where he already has considerable market experience. The chairman is Senior Counsel Dermot Flanagan who has vast experience in infrastructural projects and planning from Adamstown to Spencer docks. Architect and developer Pat Owens joins the board as a non-executive director bringing over €1billion in development experience from Portugal, the UK and St Lucia with him. It’s a strong team by any standards. Ideally suited to investors (rather than savers) the closing date for applications is just around the corner, Wed Oct 31st. The minimum investment is just €5k opening up a play on geared returns from Pan European Commercial Property to just about everyone. The maximum investment limit, currently being processed by the regulator is €750k i.e. €1.5m for couples. Brendan investments website www.brendaninvestments.ie will give you lots more. 
The Northern Rock Bank confidence crisis is a timely reminder to all of us that there is no such thing as an absolute guarantee and that advertised deposit rates need to be read in conjunction with financial ratings. By that measure and given that there is no automatic right of access to its investor compensation scheme, the ten billion held in Irish Credit Unions sticks out like a sore thumb. Plans to link these deposits to the statutory saving protection scheme are long overdue and the Government needs to fast track this change to avoid the potential for a catastrophic run on Credit Unions if a few were to default. That a sizeable minority are already in breach of liquidity rules is a worry. Most Irish banks are quite safe and not as exposed as Northern Rock was to wholesale market finance. With its brand now tarnished and although its deposits are perfectly safe, covered four times over by its assets and underwritten by the UK Government, Northern Rock has fallen off its pedestal as the best offer on the market. New depositors should now seek out deals from Anglo Irish Bank. Where next for Interest rates? 
Borrowers were pretty sure that the ECB would lob another 0.5% or so onto the current 4% ECB Base Rate. This looks a lot less certain now since the US Federal Reserve cut borrowing costs in the USA in response to the liquidity crisis created by the sub-prime default debacle. The cut was just the fillip the US and global market needed but it also means downward pressure on plans to raise Euro interest rates since it could render EU exports too expensive as the Euro soars against the Dollar. So, for the moment it looks awfully like the ECB will stay its hand and watch events unfold over coming months. 
We’d be delighted to hear from you and you can email me at eddie@eddiehobbs.com. If you'd like to invest through us, or through our partners Liberty Asset Management, you can do so by first ringing 045-409364 or going through the website Invest with Eddie. We offer fund investments on discounted terms which adds lots of extra lolly to your money compared to normal retail pricing. A formal advisory process is required and that’s why we need financial profiles etc. We'll explain more when you ring us. |
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