Jeremy Warner's Outlook: The bull market looks mature to some, but here's the case for remaining optimistic

Britain's energy policy: Mind the gap; Katie: More sorcerer than apprentice
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The Independent Online

Sell in May and go away. There are still plenty of days left to prove the old stock market adage right, yet so far, investors haven't heeded its advice. Despite rising interest rates, sentiment remains fundamentally bullish, with deal frenzy further fuelling the onwards and upwards march in share prices. We are now into year five of the bull market with European equities around 150 per cent higher than at their 2003 trough.

Even so, in real terms, share prices are still quite a bit below their turn of the century, bubble inspired, peak. Growth in corporate profits has also far outstripped the rise in share prices, making traditional valuation yardsticks look relatively modest. Unfortunately, this doesn't necessarily tell you that prices are cheap. If corporate profits were to go into a nosedive, those undemanding earnings multiples would soon start to look stretched.

The bear case for equities lies precisely in the possibility of this event. Multiples look cheap in nominal terms, but if profits are cyclically adjusted to take account of the ups and downs of the economic cycle, then they look extraordinarily high by historic standards. Indeed, corporate earnings as a proportion of the economy have never been as high as they are at the moment. To many, this is powerfully suggestive of them riding for a fall, or at least further growth being severely constrained.

The reason I don't personally buy this argument is that I've never been able to get my head around the idea of cyclically adjusted profits. To assume that corporate profits are inevitably condemned eventually to return to the same bombed out state they hit in past economic troughs strikes me as illogical and flawed. I'm not arguing here that there will never be another recession, but only that the world economy is now a lot bigger than it used to be, which automatically puts a higher floor under corporate profits than was observed in past cycles.

Things are different this time? Again, I'm not arguing the case for a new paradigm or any such nonsense, but there are plainly very significant structural changes taking place in the world economy, as well as some likely permanent improvements in corporate efficiency and productivity. Both these factors support the idea that present levels of profitability can indeed be sustained. Bull markets always eventually come to an end, but this one has yet to run its course.

Britain's energy policy: Mind the gap

Energy policy under Labour can be roughly summarised by the following dictum - let the market provide. Belatedly, ministers have woken up to the fact that unless given some pretty strong incentives, they are pretty unlikely to, and they are especially not going to provide the sort of "clean", carbon-free, electricity generation that the Government's targets on greenhouse gas emissions demand. Without urgent action, the Government faces the prospect of severe upcoming supply shortages.

Blackouts and brownouts would become commonplace, and what was once one of the finest and most reliable electricity networks in the world would become an international laughing stock. In the circumstances, the Government's White Paper on energy comes not a moment too soon. As reported here yesterday, publication has again been delayed, probably until the first week of June, and officials warn not to expect too much of it. One describes it as more an exploration of the issues than a prescriptive list of solutions.

The challenge is certainly a formidable one. Over the next 10 years, around 20 per cent of Britain's current generating capacity - equal to around 15 large power stations - is to close, either because of nuclear decommissioning, or because of the EU's "Large Combustion Plants Directive", which will severely constrain the use of ageing coal-fired power stations.

Only a part of this "energy gap" is likely to be filled by renewables, such as wind, and in any case, renewables cannot be relied upon to provide base-load capacity. Wind farms produce no electricity in the absence of wind.

Whatever the Government does to encourage new nuclear build, it will be at least 10 years before it is up and running, and that assumes a decent following wind. It scarcely needs saying that beyond the early Magnox stations, following winds are virtually unheard of in the troubled history of Britain's nuclear power industry. Dungeness B took an astonishing 18 years to build.

In any case, no privately funded nuclear power station is going to get built at all in the absence of market subvention and/or a very considerable increase in the price of carbon emissions. The same goes for so called "clean coal" which, unless dirtier forms of electricity generation are made more expensive by increasing the cost of emissions, would not be economically viable.

A number of major corporations, including EON, RWE, Scottish & Southern and Centrica, have announced plans for new "clean coal" power stations, but they are all predicated on the assumption that the price of carbon as determined by the EU's emissions trading scheme will roughly double from current levels. For that to happen requires a much tighter allocation of emission permits among member states than currently exists.

There is some chance of these constraints being imposed for the third phase of the scheme, which comes into operation in 2012. But there are no guarantees and it requires a degree of co-operation and goodwill among member states which has been lacking on these issues in the past.

What's more, clean coal technology is far from being an ideal solution. It emits a lot less than former generations of coal-fired electricity generation, but without "carbon capture", which is as yet an unproved technology, it remains a sizeable polluter. Only one of the "clean coal" stations so far mooted contains a binding commitment to "carbon capture", whereby emissions are collected and stored in expended North Sea oil and gas fields. Both nuclear and "clean coal" with carbon capture are highly capital intensive forms of power generation. To fill Britain's energy gap with environmentally friendly substitutes, we have to reconcile ourselves to paying more for our electricity.

Of the 15 large-scale power stations that Britain needs, only two are at this stage definitely lined up, and both of these are relatively conventional gas-fired stations. As things stand, gas is both the cheapest and cleanest form of fossil-fuel power generation around. It is to this source of electricity that we must turn to if all other options fail. But do we really want to make ourselves beholden to Vladimir Putin?

To date, Gordon Brown, the Chancellor, hasn't taken a great deal of interest in energy policy. Britain's gaping energy gap stands to make it one of the most pressing issues in his in-tray once he finally makes it to Number 10.

Katie: More sorcerer than apprentice

Sir Alan Sugar's The Apprentice is about the only thing worth watching on TV at the moment. A kind of Jeux sans Frontières meets Simon Cowell, it makes for riveting television. As a series about business, and the skills needed to succeed in it, the programme is almost completely worthless. Yet it does offer some amusing insights into workplace psychology and relationships.

The biggest mystery is why Sir Alan hasn't yet got rid of the odious Katie Hopkins. She's an undiluted piece of poison who nobody in their right mind would have on their team, still less work for. No serious work is ever going to get done as long as she's around; everyone is too busy watching their backs.

So why hasn't Sir Alan seen through her and already sent her packing? The answer is easy enough. Apart from Sugar himself, she's the entertainment. You see it in corporate life all the time. There are those who quietly get on with it, and those who spend all their time in office politics, trying to knife anyone they see as a threat to their own ambition. The grafter may be less fun to prop up the bar with, but there is no doubt who is the more useful to the organisation.

j.warner@independent.co.uk

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