A posse of regulators pursues the short sellers

Substance or hype?; British Telecom
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The Independent Online

You can never see the bottom until it's past, goes the old stock market adage, but the sense of relief in the stock market yesterday as equity prices steadied and then rallied was palpable. After the panic selling of last week, a semblance of calm returned. This may not be the bottom, but the near universal gloom of the weekend press seems to have convinced investors that things may not be as bad as all that.

You can never see the bottom until it's past, goes the old stock market adage, but the sense of relief in the stock market yesterday as equity prices steadied and then rallied was palpable. After the panic selling of last week, a semblance of calm returned. This may not be the bottom, but the near universal gloom of the weekend press seems to have convinced investors that things may not be as bad as all that.

Whatever it was that helped steady nerves, we can be pretty sure it wasn't the announcement from HBOS, the recently merged Halifax and Bank of Scotland, that it was ceasing all equity stock lending with immediate effect. Stock lending is an integral part of short selling, since few brokers are prepared to sell short without the certainty that the client can deliver the stock. Most big organisations that hold shares engage in it to some degree, and then split the fees so earned between themselves and the owner of the underlying securities.

HBOS is a tiny player in this market and its statement yesterday that the profits made from stock lending "are dwarfed by the damage that short-selling activities are inflicting on the life savings of ordinary investors across the UK" was, in the circumstances, a touch over the top and sanctimonious. None the less, it is true to say that hedge funds, through their short selling strategies, have been much better over the past turbulent couple of weeks at protecting their clients' capital than have ordinary long-term savings institutions.

More pension funds now invest directly in hedge funds than they did, but on the whole hedge fund investment remains the playground of the ultra-rich. While the already rich have been profiting or, at least, not suffering from events over the last two weeks, the rest have been taking a beating through their pensions, ISAs and other long-term savings products

What's more, because hedge funds use borrowed money to leverage their positions, they have been both a central element in the selloff and they have managed to do it with a comparatively small amount of capital. They've made a bad situation worse.

HBOS's stock lending activities wouldn't have made any difference one way or the other, but there are plenty of bigger players – Barclays Global Investors, for instance, or the big custodian banks – that could. During the emerging markets crisis of 1998 hedge funds were widely condemned for their "wrecking ball" activities, but little was done to curtail them. This time around, they'll be lucky to escape so lightly. A posse of regulators is already bearing down on them and the business of stock lending will be a key area of scrutiny.

Substance or hype?

Overhyped, overtraded and over here. That ought to be the slogan for a new Japanese retail concept which invades these shores this week. It is called Uniqlo and its first five UK branches open this Friday. Up to 50 are planned within five years with longer terms ambitions for 100-150. Uniqlo has been dubbed a "phenomenon" even before it's arrived, so what's the reality?

Certainly the concept has grown like topsy in Japan, where it now has 500 stores. They sell cut price basics such as T-shirts at £5 and jeans at £15 . And its parent company, Fast Retailing, was for a while a stock market darling. But a few serious issues appear to have gone unnoticed.

The first is that Uniqlo has just tanked in its home market and Fast Retailing's shares have halved in the past six weeks. The main cause was a trading statement earlier this month which showed like-for-like sales in August were down by 1.9 per cent on a year ago. That compared with 13 per cent sales growth in August and 28 per cent in June.

Uniqlo's UK management, led by a former Marks & Spencer executive, Steve Pomfret, gets rather tetchy when all this is mentioned. Some of it was down to shops being just too busy for their own goods. But there were stock problems too, and financial targets have been missed.

Despite the hype, it remains questionable whether Uniqlo can cut it over here. The prices certainly look attractive. Some 90 per cent of its goods come from low-cost producers in China. But Uniqlo will need to shift huge volumes to offset expensive high street rents. Though it plans to open mostly in suburban locations rather than city centres, it will find many of its rivals, such as Matalan and the supermarkets, will have an even lower cost base.

Uniqlo says it has done its homework. It won't, for example, repeat the mistake of Muji when it opened here a few years ago only to find that its Japanese sized garments were too small for us Brits. But this "cheap Gap" from Japan will need to offer merchandise that is sufficiently differentiated to tempt consumers in an already tough market. It'll be a struggle.

British Telecom

Investors must have thought things couldn't possibly get any worse at British Telecom. Unfortunately they just did. Yesterday's near 300 pages of documentation detailing BT's plans to break itself in two might seem bad enough; contained within them is some of the densest prose known to man. But there's also a fair old smattering of unwelcome news to go with it.

If you'd thought the decks had been pretty much cleared at the time of BT's rescue rights issue last May, you'd have been wrong. Another £500m is being written off against investments, including AT&T Canada. What's more, the terms of the original agreement could require BT to spend another £720m raising its stake in AT&T Canada from the present 9 per cent to 30 per cent. Presumably the person responsible for laying that particular man trap is no longer with the company.

Meanwhile, talks on what to do with the group's loss-making Concert joint venture with AT&T look no closer a resolution. All we do know is that when finally the impasse is broken, they'll be another gigantic write-off. On top of it all, there's a £1.6bn deficit in the pension fund, though BT is not alone in these markets in chalking up a big pension deficit. The question is whether this further raft of bad news will come to mark the bottom.

The parallel is with the former British Gas, which by the time it was broken up, could scarcely have gone much lower. At BG, the demerged allowed the main pipeline business to disentangle itself from the disaster of take-or-pay contracts by hiving them off into Centrica, where they were either renegotiated or eventually lapsed. At BT, it's not nearly so simple.

The problem of 3G has been split between the two halves; BT Group is left with the debt, but mmO 2 is saddled with the cost of the buildout. Moreover, both companies are left facing some key strategic issues. BT Group has the problem of what to do about Concert, as well as the separation of wholesale from retail. Debt remains high. BT's financial problems have also left mmO 2 a weakened player in the mobile market. BT was forced to sell its mobile interests in Japan and the still nascent mobile business in Germany needs huge investment. No wonder analysts cannot agree on what mmO 2 might be worth. The range is as wide as from £8bn to £15bn.

The demerger marks a new beginning for Sir Christopher Bland, the BT Group chairman, but the journey has only just begun and the final destination for British Telecom's two offspring is still far from clear.

j.warner@independent.co.uk

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