Jeremy Warner's Outlook: Where now for the Dow as this all-American index once more enters record territory?

Tesco juggernaut just keeps rolling on; Online gaming: clutching at straws; Airbus: a big loss for 'a small problem'
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The Independent Online

As the Dow Jones Industrial Average plunged precipitously on the first trading days that followed the terrorist atrocities of 9/11, Paul O'Neill, the then US Treasury Secretary, ridiculously attempted to reassure investors by predicting that prices would recover and that within a year the Dow Jones Industrial Average would be back in record territory.

Well, at least he was right about one thing. Prices have indeed recovered. The Dow is again trading at record levels. It's just taken five times as long as he said it would. Nearly all confidently made predictions about the future of the Dow turn out to be hopelessly flawed.

In the fevered environment of the late 1990s, a couple of American academics wrote a book arguing that globalisation and technology had removed the risk premium traditionally attached to equities and, in these circumstances, the Dow should be valued at 30,000, not the lowly figure it then stood at. That assertion is going to take even longer to come to fruition than Mr O'Neill's.

The Dow, of course, is not a particularly representative index. The total value of publicly traded shares, both in the US and Europe, remains quite a long way below its turn-of-the-century peak. Yet with corporate profits at record levels, company finances never stronger, and the world economy apparently heading for a soft landing, not the hard landing you might expect after such a prolonged period of monetary tightening in the US, it is perhaps a reasonable guide to the true state of global economic affairs. Despite the dangers, the outlook for share prices looks a good deal more rosy than when the Dow was last trading at these levels.

Tesco juggernaut just keeps rolling on

It was another day of disappointments for those who live in hope of seeing Tesco slip on a banana skin. First-half profits were even better than expected, while, despite a resurgent Sainsbury's and Wm Morrison, like-for-like sales growth continues to power ahead. Internationally, there was a blip in Hungary, but otherwise little sign of the disaster that tends to overtake retailers that spread their message overseas. By the end of this year, more than 60 per cent of the group's selling space will be based outside the UK and still growing fast.

Carrefour, Ahold, even the mighty Wal-Mart - they've all in one way or another come a cropper overseas, but not yet Tesco, the misadventure in France now belonging to ancient history. Somehow or other, the Tesco juggernaut just keeps rolling along. Success breeds complacency, and even the best-managed companies will eventually take a tumble, brought low by delusions of grandeur and the belief they can walk on water.

Yet this executive disease does not seem to have afflicted Tesco, whose steady, low-risk approach to business, its unfailing determination to put the customer first, seems to have created something near to the perfect corporate growth machine. More volume equals greater efficiencies and buying power, equals higher quality and lower prices, equals higher volumes. The virtuous circle that drives the Tesco business model has yet to be broken.

What might finally break it? Online competition? Tesco already has the largest online shopping site in the country. Overseas calamity? Few companies are as careful in their research of international markets as Tesco. Execution risk? No British company has a better record on execution than Tesco. Management failure. Well yes, but who would yet think Sir Terry Leahy, the chief executive, capable of that.

You always have to pinch yourself the moment you start to think a company has discovered the secret of everlasting success. It is as silly as thinking there will never be another recession. People once used to say it of Marks & Spencer, and look how quickly that company managed to lose the plot. You can only judge a company on the basis of what you see, and there are as yet none of the warning lights that were perhaps clearly visible at M&S before its fall. Will the US finally bring Sir Terry down? Or perhaps his known ambitions for the Indian market? For those that look for possible fault lines, these are obvious ones. Yet I wouldn't bet on it.

Online gaming: clutching at straws

One of the characteristics of the consummate gambler is eternal optimism. You might be on a losing streak today, but there is always tomorrow or the next day. Somehow or other, you, the punter, will eventually beat the odds. That characteristic was out in force yesterday among online gaming sites as they came to terms with the nuclear bomb dropped on them over the weekend by the US Congress. In every cloud, even a nuclear one, there is apparently another business opportunity waiting to get out.

Thus it is that at PartyGaming, the decision to axe a previously announced dividend payment is because it will allow the company "to take advantage of the many attractive opportunities in the sector that will emerge over the coming months". For putting a positive spin on unalloyed disaster, this surely deserves some kind of an award.

At 888, the chief operating officer, Gigi Levy, claims that the company's core capability is not gaming at all, but website expertise. 888 is an online entertainment site, he insists, with plenty of opportunities to pursue in fantasy sports and so on. He surely doesn't mean pornography, does he?

Desperately clutching at straws, others looked for possible loopholes in the new US law banning payments to online gambling sites. One exemption, presumably designed to allow for the continued existence of online state lotteries and horserace betting, is that in states where gambling is allowed it will continue to be lawful for state located servers to take bets from state residents. This might allow for online betting sites to set up separate companies to serve particular states. It would be costly and complex, and, without interstate and international liquidity, small beer against what these sites have been used to.

In any case, none of this gloss disguises the underlying horror story, which is that the industry has just lost 75 per cent of its revenue base. It is no wonder PartyGaming has had to cancel the dividend. To survive, it now needs every penny it can get. Given what's just occurred, no bank will lend for the process of cost cutting and consolidation that must take place. Already planned acquisitions elsewhere in the world, now all the more necessary with the US removed from the equation, will have to be funded from the company's own resources.

The rank hypocrisy of America's position in all this is still the most shocking aspect of the whole affair. The US cries foul when China tries to censure its search engines yet it thinks nothing of clamping down on the internet threat to its own physical gaming industry. In gunning these largely London-listed invaders down, America none the less expects Britain to welcome Harrah's and other US gaming groups with open arms when they bid for London Clubs or for the opportunities being opened up by gaming deregulation.

As with Prohibition, the effect of the new US gambling legislation will not be to kill off online gaming, but to drive it underground, where it will become subject to criminal infiltration.

The first big scandal is probably no more than a year or two away. Legislators will then set up a Congressional Commission and eventually the industry will be re-legalised in licenced, regulated form, with the great bulk of the licenses doled out to American players. Free trade? Fine and dandy if it works to America's advantage. Globalisation? Call it Americanisation and that's acceptable. Try using it against American economic interest and expect to feel the backlash.

Airbus: a big loss for 'a small problem'

The €4.8bn cost detailed by Airbus last night of further delays to the superjumbo is an awfully big number for what the chief executive, Christian Strieff, attempted to brush aside as "one small problem" with the wiring. Despite insisting that this financial calamity was not symptomatic of wider management failings at Airbus, he then pretty much admitted that it was by describing cash controls as close to non-existent. With customers threatening to cancel orders, Airbus has been plunged into a crisis scarcely imaginable when the company last year triumphantly announced it had overtaken Boeing in terms of sales. As justification for the decision to sell out of Airbus ahead of today's shareholder meeting to vote on the matter, BAE Systems couldn't have hoped for better. Last night's news will snuff out any last pockets of resistance.

j.warner@independent.co.uk

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