Anglo Irish Bank Nationalized – Equity Worthless

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Yesterday January 16, 2009 The Government of Ireland nationalized the Anglo Irish Bank. The shares were suspended from trading in all the exchanges. Anglo Irish was listed as a sponsored ADR with the ticker AGIBY. The ADR last closed at less than a dollar at $0.12.The Department of Finance of the Irish Government says:

“The Government has today decided, having consulted with the Board of Anglo Irish Bank Corporation plc (“Anglo”), to take steps that will enable the Bank to be taken into public ownership. This decision has been taken after consultation with the Central Bank and the Financial Regulator which has confirmed that Anglo Irish Bank remains solvent. Anglo Irish Bank is a major financial institution whose viability is of systemic importance to Ireland. Anglo has a balance sheet of some €100bn with a substantial deposit base which the State is determined to safeguard. The Government has made clear that it will ensure its continued viability. Anglo Irish Bank will continue to trade normally as a going concern, with appropriate Government support as necessary. All Anglo employees remain employed by the company.”

The government backtracked on its earlier proposals to bail out the plan. The authorities took the drastic action state take over of the bank since Anglo Irish was the most exposed to the commercial real estate market which collapsed with the downturn in the Irish economy. Officially the government statement said:

“The funding position of the bank has weakened and unacceptable practices that took place within it have caused serious reputational damage to the bank at a time when overall market sentiment towards it was negative. Accordingly the Government believes that the recapitalisation is not now the appropriate and effective means to secure its continued viability. Therefore the Government must move to the final and decisive step of public ownership.”

Until a few years ago the Irish economy was growing at an astonishing rate among the EU countries that it earned the nickname “Celtic Tiger” since the country grew from being one of the poorest in Western Europe to one of the most successful.

Anglo Irish’s reputation was seriously damaged when it was revealed last month that the Chairman Sean Fitzpatrick took loans of €87m from the bank secretly in the past eight years. He was forced to resign as well.

Hence the bank’s funding position and the chairman’s scandal which lead to the loss of confidence in the bank sealed its fate. The government decided that the best thing to do to protect the financial system was to nationalize the bank .

Incidentally Fitch downgraded five Irish institutions – Allied Irish Banks, Anglo Irish, Bank of Ireland, Irish Life & Permanent and Irish Nationwide Building Society on January 15th. Allied Irish Bank (AIB) and Bank of Ireland(IRE) ratings were dropped from AA- to A. The ADRs of AIB and IRE share prices are $4.05 and $4.07 respectively as of yesterday’s close. While each of these two banks are set to receive a bailout of €2bn each it is still very risky to invest in them at this time.

European Food Company ADRs List

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During recessions food sector is one of the sectors that look attractive to investors since food is a necessity and people will have to buy them. While they may cut down on unnecessary expensive or luxury items they will still buy basic items needed.

The profit margin in the food industry is very small.However its one of those industries that is not affected by the subprime crisis in that they have not suffered any huge losses like banks or other financial institutions. Not many European food companies are listed in the US exchanges. Just 3 stocks are listed in the NYSE and the remaining trade on the OTC markets.

The following is a list of all the food companies available as ADRs in the US:

Companies like Nestle, Unilever, Cadburys own many globally popular brands. Nestle has been one of the stealth stocks that was not followed by many US investors until recently since it trades on the OTC.

Dig Holes and Fill them

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Day after day we are bombarded with stories about the recession, job losses, the TARP bailout program, companies going bankrupt, store closures, etc. In times like these it is tough to makes sense to take a step back and try to understand where we are and what should happen in order to get ourselves out of this economic downturn.One way to analyze the situation from a Keynesian perspective.Deflation is finally here. The classic Keynesian problem of production cuts due to lower demand which in turn was caused by lower salaries that curtails reduced spending. When this disastrous cycle begins Keynes mentioned that the only solution to this problem was the government to invest in infrastructure even if it means hiring people to “dig holes and fill them”. This is one of the solutions proposed by our President-Elect Barack Obama. Under a section title “New Jobs Through National Infrastructure Investment” his site says

“Create a National Infrastructure Reinvestment Bank: Barack Obama and Joe Biden will address the infrastructure challenge by creating a National Infrastructure Reinvestment Bank to expand and enhance, not supplant, existing federal transportation investments. This independent entity will be directed to invest in our nation’s most challenging transportation infrastructure needs. The Bank will receive an infusion of federal money, $60 billion over 10 years, to provide financing to transportation infrastructure projects across the nation. These projects will create up to two million new direct and indirect jobs and stimulate approximately $35 billion per year in new economic activity.” (emphasis added)

Usually policymakers use monetary and fiscal policies to increase economic growth. With the current Zero Interest Rate Policy (ZIRP) since Dec 16,2008 is not working just like it did not work in Japan. The logic behind keeping interest at 0% is encourage investment and increase economic activity. So far we haven’t seen any new major investments happening with thousands of jobs created as a result.

Fiscal policy is the changing of taxes by the government to reduce or increase demand. Currently no changes in taxes have occurred.However President-Elect Obama has promised to make many tax changes including a tax cut for middle class families and the elimination of “all capital gains taxes on startup and small businesses to encourage innovation and job creation.”

In situations where deflation and high unemployment persist, the final solution of government spending on infrastructure may have to be used as Keynes proposed. As mentioned above Obama promises to implement this solution. Lets see in the next six months to a year where this strategy leads us.

However from a US perspective, implementing the Keynes solution of government spending to stimulate demand raises many questions such as:

1. Who will pay for the expenditures? Certainly it can’t be taxes from citizens.

2. Will the Japanese, Chinese and others continue to buy our Treasuries?

3. What will be the impact on the US Dollar?

4. What kind of infrastructure do we need to spend it on?

5. Finally what if this solution also does not work?

These are some interesting questions that I can think of. Comments welcome.

Two Ways to Invest in Italy

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US-based investors looking to invest in Italian companies can take the ETF route as only a few companies from there are listed as ADRs.

Two ETFs that are focussed on Italy are available. One is the iShares MSCI Italy Index Fund (EWI) and the other is the NETSâ„¢ S&P;/MIB Index Fund Italy (ITL).No closed-end funds exist for Italy.

1. iShares MSCI Italy Index Fund (EWI)

EWI has 38 stocks with financials accounting for about 45% of the portfolio. In the current economic situation this high allocation to financials is not smart. Energy takes up 25% of the holdings with Eni Spa (E) the top holding in the ETF.

Total assets in this ETF is $104 M and the expense ratio is 0.52%. The dividend yield (30-day SEC yield) is 9.86%.

EWI was down 48.93% tracking the meltdown in global markets last year.

2. NETSâ„¢ S&P;/MIB Index Italy Fund (ITL)

ITL was launched by Northern Trust who was one of the late entrants to the world of ETF last May.

NETS ETF Description:

“The S&P;/MIB Index (Italy), developed by Standard & Poor’s and Borsa Italiana, is the primary benchmark index for the Italian equity markets. The index captures approximately 80% of the domestic market capitalization and is comprised of highly liquid, leading companies across leading sectors in Italy. The S&P;/MIB measures the performance of 40 equities in Italy and seeks to replicate the broad sector weights of the Italian stock market. The index is market capitalization-weighted after adjusting constituents for free float.”

The ETF has assets of just $1.1 M and the expense ratio is 0.47%. ENI Spa is the top holding here as well. ITL contains more financial stocks than EWI at nearly 48% of the total holdings. Last year ITL was down 46.24%. This ETF has a very tiny asset base and so better to avoid it.

Europe Freezes – Time to Invest in European Utilities?

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Over the past few days temperatures in Europe plummeted to record levels. In Germany, temperatures fell below -25 C last Monday. People have been using record levels of natural gas and electricity to stay warm. Energy prices are soaring in UK as some of the gas companies export the supply to continental Europe to meet the demand at much higher prices. Gas supplies to many countries in Europe were severely affected recently due to the dispute between Ukraine and Russia. However Russia is set to restart the supply tomorrow (Tuesday) morning as per the BBC.

In light of the unfolding situation it might be a good idea to invest in utility companies of Europe. Some of the utilities are listed below with their tickers and link to Yahoo Finance:

1. BP PLc – BP

2.Royal Dutch Shell – RDS.A & RDS.B

3. GDF SUEZ SP ADR – OTC: GDFZY.PK

4. Eni Spa – E

5. E.ON AG – OTC: EONGY

6. RWE AG – OTC: RWEOY

7. Energias de Portugal – OTC: EDPFY

8.Iberdrola – OTC: IBDRY

9. Veolia Environnement – VE