Brick dropping in the Market
Nicholas Davenport
The end-January 'account of 1973 will always be remembered on the Stock Exchange as the one which got buried under a fantastic fall of bricks. The heaviest brick was dropped by the Prime Minister who turned anti-capitalist in Phase 2 of his prices and incomes policy. To the vulgarians of the City who had contributed hugely to his election expenses it seemed like a betrayal of contract. The next heaviest brick was dropped by a merchant banker, Jim Slater, who allowed the City editor of the Daily Mail to quote him as saying that the market was much too high or that the only good investment today was cash. The final brick was dropped by the Governor of the Bank of England who kept his ' Bank rate' of 8i per cent and allowed seven-day money in the Street to rise to over 91 per cent and play the Slater game. No wonder the small investor got into a panic and threw his shares overboard regardless of price.
Since Phase 2 was announced the FT ' Thirty' index has fallen 46 points or 9 per cent and since the top — 543 in May — it has fallen 84 points or over 15 per cent. This seems reasonable enough in percentage terms but in money terms it is formidable; 9 per cent represents a loss in market values on the Stock Exchange of E12,000 million and 15 per cent about E20,000 million. I hope dear Vic Feather will see these figures. He was recently complaining about the unfairness of the freeze which stopped a worker getting a rise when the fortunate holders of equity shares had enjoyed a rise of several hundreds of million pounds. Poor fools! They subscribe to the issues of risk capital on the Stock Exchange, which help to employ more of Vic Feather's union brothers, and then see hundreds of millions lopped off the market value of their investments when Mr Heath, Mr Slater and Sit Leslie O'Brien and all drop their load of bricks on the market.
So far the only one to apologise is Jim Slater. Not before it was time. He told the City editor of the Daily Telegraph that he realised that it was an unwise thing to have done and wished he had not done it and that in future he would not make public statements about where he thought the market was going. You may ask why Jim Slater is not entitled to say that the market is going lower when Davenport told readers of The Spectator to take their profits on January 6 and subsequently warned them that the index would fall to 450 and perhaps stabilise around 430.
The reason is very simple. First I am not sitting on E100 millions of cash, as Jim Slater is, and although he would be the last to talk his own book, a lot of people will not believe that he is so disinterested. Secondly, I am not the head of a merchant bank selling unit trust units and bonds to the small investor who will suffer when the head talks the market down in public. Bankers must keep their mouths shut when they play the money game. One cannot imagine the Governor of the Bank of England warning the misguided people who subscribe to National Savings that their 'certificates will have less than half their present purchasing power in five years time. He wisely says nothing when he speeds up the depreciation in the value of money by putting his Bank rate up to 8i per cent.
I venture to suggest that if Jim Slater wants to prove that he is not just a jobber in shares he should now come to the help of his young friend John Bentley, the so-called asset stripper, who has just become the victim of a bid for Barclay Securities from Vavasseur anxious to get at his cash and strip him of his assets in
pharmaceuticals, film and poster advertising and Lion International. I look forward to a new headline in the Daily Mail—' Slater the Lion-hearted.' Whether the FT ' Thirty ' index will now fall to the 430 level, as I suggested, or drop to the 350 to 400 trading range as Jim Slater predicted, will depend on the estimates of company profits under Phase 2 which the analysts will eventually present to the institutional investors. The reason why the index dropped like a stone in the last Stock Exchange account, without any of the usual rallies, was because it is impossible to tell how company profits are going to be hit. So none of the 'institutional investors felt able to come to the support of the market as they should have done. But I think it Was pretty feeble on their part. One enterprising firm of brokers actually got their computer to work out some estimates of profits within a day of the publication of the White Paper. Of course they showed that profits as a whole would have to be revised downwards but they found a number of companies in engineering, textiles and chemicals which would gain from the choice of the best two out of the past five years for profit margins. Which is exactly what I suggested in this column last week. Perhaps it was because the overbought market favourites — the brewery stores, builders and electrical companies — would
come off badly that the market took such a toss.
Companies which draw over half to three-quarters of their profits from overseas, like ICI and Bowater, are outside the restrictive profit clauses of the Bill but I have to revise iny view that the oil companies will likewise benefit. The Shah of Iran has given notice that the 1954 agreement which expires in 1979 — under which the foreign companies have the right to produce in Iran — will not be renewed. They will then have to take their chance of buying Persan oil in the open market which is likely by that time to be in short supply. Alternatively, they can sign a new agreement now, hand over their local assets, and gain the right to buy Persian oil on favourable terms for the next twenty or twenty-five years. It is an awkward choice and it comes at an awkward time when the oil companies are having more trouble with their Arab hosts in the Middle East. It looks as if the Shah has taken unfair advantage of the fact that American politics have held up the Alaska pipeline and so increased the chance of an energy shortage in the US by 1979, which most people expect After an index rise of nearly 80 per cent in a bull market it is quite normal for equity shares on the Stock Exchange to lose nearly a half of it in the following bear market which would bring the index to 430 They have so far lost a little more than a third of it. There is nothing sinister about that. It does not denote wicked "insider dealing" which Sir Martin Wilkinson, the chairman of the Stock Exchange, has rightly described as "no better than theft." Lord Shawcross, the chairman of the City panel on takeovers and mergers, has suggested that "insider dealing" should be prohibited by law but it would be an extraordinarily difficult offence to define legally. The trend of equity markets is often decided by the selling or buying of businessmen Who have a more expert or inside knowledge of the trend of trade than the man in the street. As one who professionally examines the share charts I would feel at a loss if I did not think that some inside knowledge was dictating the course of the share price.
If I were to pick out any culprits for the recent had behaviour of the equity markets I would not name Jim Slater but the faceless unit trust managers whose advertising has overdone the cult of the equity share.
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