City and Business: The end may be nigh for the bull run

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The Independent Online
Will the last great bull market of the millennium end at 7.15pm on Tuesday, British Summer Time? That, approximately, is when the US Federal Reserve Bank is due to make an announcement following the meeting of its policy-setting Federal Open Market Committee.

Since the last FOMC meeting, US economic growth "has surprised on the upside", as economists say. On Thursday, the US government reported a jump in April consumer prices and the Dow duly slumped - leaving investors to twist in the wind over the weekend pondering the Big One. Has the low inflation trend run its course and, if so, what does that mean for share prices?

By 7.15pm on Tuesday, we shall know what Fed chairman Alan Greenspan thinks. The Fed will signal how likely it is to raise interest rates to combat resurgent inflation. The odds are that Greenspan will "move to a tightening bias". Last year's crisis has lost its power to frighten the markets. The legacy of this crisis is now a flood of liquidity. It seems obvious the Fed must sooner or later move to mop this up.

The question is: what effect, if any, will reduced liquidity - less money sloshing around - have on the stock market? A lot of people think the effect will be minimal. Millions of internet day traders may take the fall of the Dow and the Footsie on Friday to yet again buy on the dip tomorrow.

The bull case is that, whatever happens to the money supply, the world is in the grip of an historic shift. People are moving savings out of banks into the stock market.

But no one knows for sure what relative weightings should be attached to various factors underpinning the bull market. It would be some kind of poetic justice if the bull market that began with the arrival in Washington of former Goldman Sachs trader Robert Rubin ended at the moment of his resignation as Treasury Secretary.

Telephone numbers

Meanwhile, investors will wake up on Wednesday to a local event. BT announces its annual results. Williams de Broe analyst Nigel Hawkins forecasts pre- tax profits of pounds 4.124bn. Stripping out pounds 1.1bn in capital gains from the sale of BT's stake in MCI, this would mean a flattish performance for the year.

Looking ahead, the City will be waiting to hear what chief executive Sir Peter Bonfield has to say about BT's operations in such far-flung trouble-spots as Spain and Japan. Investors want BT to buy the 40 per cent stake in its mobile phone affiliate, Cellnet, which is currently held by Securicor - so that BT is free to expand in the wireless world. Investors will also keep an ear cocked for any sign that BT might jump into the messy battle in Italy for Telecom Italia, which is pitting hostile bidder Olivetti against white knight Deutsche Telecom.

Value investors, however, will make a crucial further judgment. Looking 12 to 18 months down the road, where does BT stand in the world of convergent telecoms, computer, and media companies? How does it rate against Microsoft, BSkyB, and US internet giant Cisco?

Of all the former European telecoms monopolies, BT has positioned itself best in the convergent technology battle. It has effectively protected its core UK residential market (some 20 million lines) while repositioning itself to face tougher competition for the telephone business of companies. So far, it has kept up to speed on the exploding internet.

But the world moved under the feet of BT two weeks ago. AT&T made a go- for-broke move to get into the US cable television business, through which the company hopes to supply not only cable television but also local phone services to American homes.

Meanwhile, Microsoft made a move. It invested $5bn (pounds 3bn) in AT&T. It will now acquire 30 per cent of UK cable operator, Telewest, in addition to its stake in NTL. It is moving behind the scenes to merge these two cable companies with the number one UK cable company, CWC. On Friday, Die Zeit said Microsoft was in talks to buy Deutsche Telecom's cable operations.

Microsoft and AT&T both think a threshold is just now being crossed. We have the technological capacity to link computers, televisions, and telephones. Now, the two US giants think, consumers are ready to pay for the services flowing from this linkage.

Over the next 12 to 18 months, the US giants believe that millions of homes in the US and Europe will sign up to "broadband" - enhanced lines into their homes permitting faster and richer access to the internet and digital television.

Cable companies already have enhanced lines into a small number of homes. BT must invest in a technology called DSL to put their copper wires in a large number of homes on a broadband footing. Oftel must set the ground rules under which the battle between cable and phone companies will be fought. How BT fights this battle will fundamentally affect its future. If it invests too much too soon, it risks taking its eye off the ball in other areas of its business. If it gets in with too little, too late, it will miss a crucial evolution in its business.

Smoke signals

Meanwhile, investors who like serious contrarian plays should consider BAT, the world's second largest tobacco company and the unloved child in the UK's back garden. On Tuesday, BAT's shares rose on news that a jury in Memphis, Tennessee, had decided that three cigarette companies, including BAT's Brown & Williamson, weren't to blame for the deaths of three smokers.

The case set no real precedent, because US product liability law is based on the particular facts of each case rather than precedent. Nonetheless, it heartened investors disturbed by the recent loss by tobacco companies of two smoking-and-cancer cases on the US West Coast. Since August 1996, the tobacco industry has won eight out of 12 such cases outright, another two on appeal, and it's now appealing the two West Coast decisions.

What contrarians need to assess is whether US culture is undergoing an interesting change. For much of the past two decades, many Americans have signed on to a "victim" culture in which losers played the blame game. Now there are signs that the US is moving toward a culture of "personal responsibility". This is partly a backlash against the excesses of self- described victims and their supporters. But it is also a function of good times. Americans increasingly feel they can afford to take responsibility for themselves.

The upshot is that US juries may be less sympathetic to smokers who have died as a result of cancer. The next test case will come from a trial underway in Mississippi. In this case, the family of a barber named Burl Butler is seeking $650m (pounds 400m) in actual and punitive damages from cigarette companies. Mr Butler's family says that, although he rarely smoked, he contracted lung cancer as a result of the cigarette and cigar smoke in his barber shop.

BAT and its co-defendants deny this. They claim there wasn't enough passive smoke to cause cancer. They suggest that Mr Butler's cancer may have resulted from the asbestos in the talc he used and the methylene chloride in the hair spray.

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