Fasten your seat-belts the captain has told us that there is no cause for alarm
CHRISTOPHER FILDES
Now that is worrying. Downing Street has put out a statement, telling us not to worry about the stock market. In this country, says the Prime Minister's spokesman, the fundamentals are sound. At about the same stage of the great bear market of the 1970s, Edward Heath as Prime Minister was telling us that we faced the problems of success. Paul O'Neill as Secretary of the US Treasury always said that shares were cheap, and they were cheaper every time he said it. Official reassurances of this kind can be cheap, too. When did a prime minister or president last say that shares were overpriced and the economy was looking wobbly? Our own economy has been consuming more than it produces for the last six years, which is almost without precedent. Our dauntless consumers have financed themselves by borrowing, secured on the ever-soaring prices of their houses. It is not obvious that this process can go on, and it may have to go into reverse. This is what the Bank of England means when it says that the imbalances in the economy are unsustainable. In the world's biggest economy, the citizens seem to have given up saving. They will have to start again, which will leave them with less to spend. That economy has its imbalances, too. Getting back in balance is likely to be uncomfortable and awkward for all of us, but putting it off will only make it harder, and ignoring it will not help. I dare say that the market, in its inarticulate manner, is sending this message to Downing Street.
Yield and deliver
I HAVE been waiting for the return of the yield gap. We are nearly there by now. In the palaeolithic era (that is to say, before the 1960s) shares were supposed to yield more than government stocks. Higher returns went with higher risks because, after all, shares were issued by companies, which might go bust, whereas governments wouldn't. Then inflation swelled up and turned governments' IOUs into waste paper and, after all, companies might grow, and governments didn't. So the yield gap was blown inside out, like an umbrella in a gale, and blew away, not to be seen again — until this week, when the yields on government stocks and the FT-SE Index of leading shares were neck and neck at 4Y, per cent. That, indeed, is a sign of changed times, and it carries mixed messages. It suggests that few companies will, from now on, find growth easy to come by. It implies that some companies, with household names among them, are already under pressure and cannot sustain their dividends — even if nothing worse happens to them. Lastly, it hints that, by old-fashioned standards, with share prices at this level we can start to look for value.
Bargains in boredom
ABBEY NATIONAL's shares now yield 13 per cent, or they would if Abbey paid the same dividend this year as last year. The market assumes that it won't. Life assurers are under strain, the banks' bad debts are worsening, and Abbey is a bank which bought a life assurer. Another is Lloyds TSB, an erstwhile market leader fallen so far from grace that its shares yield 9 per cent — more, even, than BAE Systems, now at odds with its biggest customer, in Whitehall. Banks and insurers of all kinds have led the market's retreat. At the opposite end of the scale of yields is British Airways, whose shares yield nothing, for it pays no dividend at all. There was one, but it disappeared in an economy drive, along with the copies of The Spectator in business class. In the middle are boring shares in solid companies which can be expected to plug on through bad times and good. If there are bargains, this is where to find them. Shell, Rio Tinto and Land Securities all show a useful yield gap over government stock, and boredom, these days, is a recommendation.
The Golden Bear
FORTUNES have been made by selling stock markets short. Wicked old Joe Kennedy, patriarch of his clan, was said to have found it almost as rewarding as bootlegging. I have been looking for the Great Bear of this market and find it hard to ignore the claims of Gordon Brown. •This is the man who, with wireless licences to sell, invited bids from the telecom companies and ran them up to £22 billion: a record price, as we can now see, for boardroom wallpaper. On the other hand, this is the man who opted to sell half the nation's gold reserves when the price was at its lowest for two decades, and thus went short of an investment — one of the very few — which was about to take off. On our behalf, he got an average price of S274.98 an ounce. This week has seen gold above S365. I have decided to award him the Golden Bear, with knobs on.
Caution, Archie
MATILDA's aunt (in Belloc's Cautionary Tales) has trouble with the fire brigade, called out by the mendacious Matilda on a false alarm. They flood her house and run their ladders through the pictures on the ballroom floor:
And even then she had to pay To get the men to go away.
Archie Norman thinks that there ought to be a law about it. The man who revitalised Asda and hoped to repeat the trick with the Conservative party is trying to legislate against pay-offs for unsuccessful directors. If this quick fix ever reaches the statute book, it should be called the Dangerous Directors Act. Why should Parliament interfere between the willing parties to a legitimate contract of employment? If a company's owners do not like the agreements that are being made on their behalf, they have only to say so. They could require directors' contracts of employment to be subject to approval by shareholders in general meeting. If Mr Norman has to legislate, that is where he might usefully start, but he has been in business long enough to know that paying people to go away can be good value.
War song
THE Gulf war, last time round. inspired Alastair Ross Goobey to come up with a variant on Guys and Dolls. The markets, then as now, were choppy, he was writing an investment commentary for James Capel, so he headed it: The people all said, Saddam, Saddam, Saddam, you're rocking the boat.' When the boat steadied, the markets settled down to enjoy a prosperous decade, but to expect an encore might be asking too much.
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