Margareta Pagano: Stock markets declare war on the politicians
Optimistic investors force governments to act
Sunday 07 February 2010
Hold on to your hats, don't panic and don't sell your shares, yet.
In fact, this could soon be the time to dip back into the markets. That's certainly the line being taken by economist Chris Watling of Longview, who reckons the big falls across stock markets in the US and Europe over the past few days are a natural, but exaggerated, reaction to fears that problems over Greece's sovereign debt will spread to Spain and Portugal. Along with the decision by the Bank of England to stop the quantitative easing (QE) programme, it's perhaps not surprising that traders were running scared last week with some of the more extreme predicting another bear market if not Armageddon.
But Watling reckons that the bloodbath was only to be expected after January's highs and the squeeze on liquidity after the QE tap was turned off. Now we are entering phase two of what he calls the "stylised bull market": we've had stage one – that was the long run from last March when the bulls were rampaging. By his predictions, we are now in for a period of consolidation which will see more volatility in the markets but one in which prices move sideways over the next six to nine months. But, then the fun really starts with the bulls heading off again. If you look back, he says, it's a classic cycle after a recession and precisely what occurred in 2004, 1994 and 1983 to 1984.
Putting Europe to one side for a moment, Watling is certainly right that the fundamentals are starting to look pretty good – US companies are throwing off cash again and there are many indicators that the US recovery is under way despite some mixed employment numbers which showed a fall in overall unemployment but more job losses in January. And companies are starting to invest, neatly illustrated by John Chambers, the boss of the Cisco technology giant, who said last week that companies are coming out of hibernation to look at new software systems, a sure sign that confidence is coming back. Elsewhere, China and India are strong.
Watling is not the only jolly one. Schroder's head of UK equities, Richard Buxton, agrees that investors have overreacted to the Greek problem, more out of sentiment than fact. While he also sees a few more weeks of volatility – with the FTSE 100 index possibly falling to below 5000 – he's a buyer of stocks across a range of sectors, and likes mining and financial shares which have been hammered the most over the past few days.
Not surprisingly, it was the sovereign debt markets which took the biggest beating as fears grew over Greece's ability to restructure its fiscal deficit. At one stage, spreads on a credit-default swap index for the European countries rose about 90 basis points, the highest since it started last September, while the spread on the Greek debt jumped more than 400 basis points. What's interesting is watching how, once again, it is the markets which are forcing the politicians to get their act together. It would be foolhardy to bet against the professional investors, which is why last week's sea of red was really a declaration of war on the politicians. As one bond analyst said last week: "Democracy began in Greece, and the welfare state will end here."
Banker's bête noire Cuomo should aim for the traders
New York's Attorney General, Andrew Cuomo, has distinguished himself throughout Wall Street's banking crisis by rooting out bad behaviour, famously uncovering the billions of dollars in bonus payments to Merrill Lynch staff at the time of the Bank of America takeover. He's also taken a tough line on bosses and their bonuses, saying: "'Performance bonus' for many of the chief exec's is an oxymoron. I would tell them, 'a) you don't deserve a bonus, b) where are you going to go? and c) if you want to go, go.' " But I do wonder whether Cuomo hasn't overstepped himself by charging Ken Lewis, the retired boss of Bank of America, and other top executives, with fraud over their handling of Merrill Lynch. It's hard not to feel just the tiniest bit sorry for Lewis as he is clearly an easy scapegoat for the rest of Wall Street's excesses. If Cuomo, who is running for state Governor later in the year, really wants to make political capital with potential voters, he should be turning his gun on the crooked mortgage-brokers, CDO traders and others who were far more guilty in whipping up this crisis.
M&S has scored an own goal with Bolland's premier-league package
Investors have every right to be furious with Marks & Spencer over the football-style transfer payment which is being offered to its new chief executive, Marc Bolland. It's not that anyone doubts Bolland's star quality, or his potential to revive M&S's fortunes or, indeed, to take it back to the top of the premier league, but what is disappointing is the way chairman Sir Stuart Rose and his board have designed a package that looks more suited to a top striker than a top manager.
It's the way Bolland's pay has been structured which strikes me as being so out of kilter with our times, and odd, considering all the debate over how to align the interests of executives with risk, and for shareholders to operate more as owners than as passive bystanders. Two concerns come to mind. Why is Bolland being paid the £7.5m in lieu of losing his contract and share options at Morrison's? It's fair enough to pay out his outstanding contract, but not to pay out the options as it's his decision to leave, and, frankly, up to him to take that loss. It also defeats the object of firms paying out loyalty bonuses if executives can just be poached away with a better offer. Secondly, why is M&S paying such a whacking share award of £3.9m – equivalent to some 400 per cent of his £975,000 salary – which vests after three years rather than five? Have the country's top businessmen learnt nothing from a financial crisis in which some of our best brains have agonised over how to find better ways of linking risk and reward? It appears not.
But while I agree with the more outspoken investors, they have only themselves to blame. Share options are discredited as a means of rewarding executives and should be scrapped. Instead, top executives such as Bolland should be paid a bit extra above the agreed salary – say 20 per cent – with which to buy shares at the current market price on the day they start work.
Now that is aligning risk.
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