COMMENT : Wall St isn't crashing. It's just got the hiccups

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The Independent Online
Are equity markets at a turning point, or is the present turmoil going to prove just another of those irritating little hiccups in the ever onwards and upwards march of US share prices? This column has been pretty much consistently bearish - and wrong - about Wall Street for more than a year, so it would be silly to change our stance now that shares have begun to falter. Even so, there's a good case for believing the hiccup theory for, notwithstanding last week's jitters about short-term interest rates in the US, little has changed fundamentally.

There's been no great world event or crisis to shake investors' faith in Wall Street's extraordinary ascent into the heavens, nor is there any obvious spoiler on the horizon, unless it be the nightly appearance of Hale- Bopp, an astronomical event which once upon a time would have portended the death of princes. As for the change in the US interest rate cycle, that has been something so long in anticipation that it seems astonishing it had any effect at all.

None the less, when markets become seriously out of kilter, as Wall Street is at the moment, it sometimes takes little more than the actuality of an anticipated event to shift them. To believe Wall Street is sustainable at these levels is to believe there has been a paradigm change in the global and US economies, which in turn allows for a fundamental rethink of traditional asset valuations. It is to believe the business cycle in the US is dead, that America's undoubted world lead in IT, its deregulated labour and capital markets, its low-interest and inflation-rate economy will persist for ever, allowing corporate US of A to cream off economic wealth in ever greater quantities. This is, of course, largely illusion - so much hogwash.

These conditions may have a bit further to run yet, but nothing is for ever and to think the business cycle has been abolished for good is to abandon all reason. This in itself is cause enough to be cautious about Wall Street. The fundamentals may also be starting to work against it. Wall Street is being fed at present frothy heights by a continued high flow of funds into equities. If last week's rate increase is followed in short order by another, and another, then the delicate eco-system which sustains the flow will be undermined. Another half-point rise in interest rates would almost certainly cut it off altogether, since rates available for cash on deposit and on bonds would begin to become attractive once more.

It can readily be seen that the Fed's next move becomes even more decisive than usual for Wall Street. There's no predicting what Alan Greenspan will do; there are few clues in what he says. Those who believe in the bull case for equities insist he won't have to do anything since the Fed has at long last succeeded in setting the US economy on a sustainable glide path of low inflation and reasonable growth, requiring only minor adjustments to the controls every now and again (more of the death of economics here).

Those who don't point to recent revised GDP figures showing growth of 3.8 per cent in the last quarter. That's too high for a developed economy of the US's size and undoubtedly inflationary. A full-blown crash continues to look highly unlikely but a period of adjustment to reality very credible.

Buying ban would not help takeover process

David Morris, former chairman of Northern Electric, raises a good talking point by suggesting the cards are unduly stacked against defending companies in the takeover code, even if there seems no immediate possibility of reform. By choosing the election campaign to launch the debate, he's also given it a political twist, for it is well known that Labour, even in its new form, abhors the culture of takeover that permeates British industry and commerce, blaming it largely on City money-making short-termism.

But Mr Morris is wrong on his specific grievance - the ability of bidding companies to buy shares in the target after the bid is launched. Mr Morris claims that without this concession, CalEnergy would not have won its bid for Northern Electric last year, and that the practice should be banned, as it is in the US. The trouble is that the situation is not made any better by its illegality in the US, where the fate of takeover bids is largely determined by arbitrageurs and those with a vested interest in the outcome of the bid. Is this what Mr Morris wants?

Certainly the ability of advisers to buy shares in either party in an attempt to swing the result would also have to be banned if we went down this route. Indeed, in the Northern case it was rather a question of six of one, half a dozen of the other, for Northern's own advisers engaged in precisely this sort of market operation with disastrous regulatory consequences.

It seems quite wrong that the ability of investors to buy and sell shares should be curtailed so as to enhance the difficulties of a successful takeover. The logical conclusion to this line of thought would be to ban all dealings during the course of a bid; few people would support that. Labour will no doubt try to make takeovers more difficult one way or another - whether it be through regulatory means or competition policy. But this kind of meddling with the market doesn't seem the appropriate way.

Sugar has met his match in the City

It is not by chance that Amstrad's acronym stands for Alan Michael Sugar Trading. Ever since he started business life flogging car aerials from the back of a van in his native Hackney Mr Sugar has always prided himself on his ability to make a quick turn. From the outset, his ability has been that of making a fast buck out of a gap in the market - whether it be no-frills hi-fi, cheap and cheerful word processors or aesthetically challenged satellite dishes.

The great wheeler-dealer once said: "We're interested in mass-merchandising anything. If there was a market in mass-produced nuclear weapons, we'd market them too." Mr Sugar's trick is to get out as soon as the big players in the consumer electronics world move in with their greater marketing clout and distribution power.

So the decision to sell loss-making Dancall - the jewel in what's left of Amstrad's crown - comes as no surprise. Mobile phone hand-sets have become a commodity, selling for as little as pounds 10. It is now a market for the big boys. That the Dancall deal nets Amstrad's investors a six- fold return on a pounds 16.3m investment over three-and-a-half years speaks volumes for Mr Sugar's trading instincts.

Mr Sugar has met his match in the City - the supposed citadel of short- termism. Five years ago institutional investors blocked his plans to take lowly-rated Amstrad private, describing Mr Sugar's bid as an attempt to buy the company on the cheap. And last year a merger with Psion broke down over price. His latest move, coupled with talk of returning value to shareholders, looks like controlled liquidation of Amstrad. It is also a further indication that Mr Sugar, 50 last week, wants to spend more time with Tottenham Hotspur, the under-achieving Premier League club he controls.