Outlook: A bullish mood returns to equity markets, but is it for real?

Stelios overhang; Eckoh outrage
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The Independent Online

The London stock market was off a bit yesterday, but there's no doubting the bullish nature of the underlying mood among traders and fund managers. After the doom and gloom of recent years, there is an almost tangible optimism in the air, with many City pundits confidently predicting that the FTSE 100 index might finish the year north of 5,000.

This would amount to one of the most sensational rallies of all time, being a rise from the trough in early March of 56 per cent. Who knows? There is such momentum in City opinion right now that it might even happen. But personally I don't buy the logic of it.

OK, so I may be guilty of what Warren Buffett, the investment guru, has called a "rear view mirror" perspective of the world in cautioning against the latest stampede in sentiment - that is of allowing the immediate past, which has been dire, to instruct my view of the future. Look instead through the wind screen before you, argue the bulls, and there are bright new pastures ahead.

My concern is that the rear view mirror fixation is not mine but that of the bulls. The road immediately behind is filled with wreckage and storms, true enough, but the optimists seem to take their view of the future from further back still, from the mentality of the bubble, where a rise of more than a half in the stock market in less than a year, although extraordinary even then, would also have been regarded as perfectly realistic.

Some of the most sensational gains in the stock market over the past few months have come from the TMT sectors, the telecom, media and technology stocks that fed the mania of the bubble. The reasoning is little more sophisticated than it was then. Since these sectors have suffered the most, they should logically also bounce the most. Mmmm.

There is a yearning to believe that the destruction of the last three years was just an aberration, a pause for breath, and that normal service is about to be resumed. How credible is this view? Up to a point, the bounce is justified. Since March, stock markets have returned to where they were when war against Iraq was still little more than a gleam in the eye of the more extremist Washington think tanks. It wasn't until the late summer of last year that everyone came to appreciate that the US Administration was in deadly earnest.

That's the point at which stock markets began to plumb the depths. Since then the war has been won, and although no one could claim a successful resolution, at least most of the military and geo-political uncertainty has been removed. Ergo, it seems reasonable for stock markets to return to where they were. Just remember, even after the rally of recent months, equity prices are still on average lower than they were in the immediate aftermath of 11 September, when it was widely thought the world was about to fall in.

Underpinning the return in sentiment is the belief that exceptionally loose monetary and fiscal conditions will eventually work their magic in bringing about the looked for recovery in the real economy. Already, there is some evidence of that happening in the US, though it remains thin on the ground in Britain and more especially Europe. None the less, all equity markets have risen in tandem. From the S&P 500 in the US to Britain's FTSE 100, the Dax in Germany and the Nikkei in Japan, they are all up by a similar order of magnitude. Particularly hard to understand is how recovery in the US is going to help sclerotic Germany, yet even in the US, the recovery is far from assured.

In the US, as in Britain, the economy is growing again, but only thanks to a massive consumer credit boom. Meanwhile business investment remains deep in the doldrums. The Bank of England and the Treasury are convinced that eventually it will return, as surely it must. But how quickly and to what extent are different questions and in the meantime policy makers may only be storing up big problems for the future by encouraging such a build-up of household debt.

Stock markets are some of the best forward looking indicators we have. And despite signs of a revival in bubble mentality, they are not yet indicating another boom, only a resumption to something like trend growth. On the other hand, the statistics don't yet support aspirations even as limited as that. For evidence of just how wrong markets can be, look no further than the repeated rallies in the Nikei during the last, 14 year, bear market. The domestic stock market is very probably past its worst, but it is not yet clear we are at the start of another prolonged bull phase. In the meantime equities remain a gamble.

Stelios overhang

Stelios Haji-Ioannou is one of Britain's most charming as well as talented entrepreneurs, yet by persistently selling off his past to finance his future, as he puts it, he's doing his original and so far most successful creation, easyJet, no favours at all. Ever since he was forced to step aside as chairman of easyJet, Stelios has been entirely open in stating that he intends progressively to flog off his shares in easyJet in order to fund his various other easyGroup ventures, of which there are a further four pending.

None the less, each time it happens, it comes as a surprise and knocks the share price, as occurred yesterday when he unexpectedly dumped another 2 per cent of the stock on the market. Stelios was hugely successful with easyJet, but his repeated attempts to apply dynamic demand management techniques to just about every other business under the sun have so far only eaten money, which in turn makes his remaining 17.8 per cent shareholding in easyJet a continuing and formidable overhang for the share price.

There is no obvious solution to the problem. Stelios has severed all ties with his creation and is therefore entitled to do what he likes with the shares. That he will soon be selling more seems not to be in doubt given the fun he's having blowing his fortune on the dream of duplicating easyJet across a whole spectrum of transport and consumer industries. It's great for him, but with the share price still languishing close to its Iraqi war lows, it's not much fun for easyJet investors.

Eckoh outrage

"Dear shareholder, Would you please just b***** off. Kind Regards, the chairman". This is not the sort of missive investors are accustomed to receiving through the post, yet for all the difference it made, it might well have been the letter penned by David Best, chairman of the strangely named Eckoh Technologies, the company formerly known as 365 Corporation. The letter starts with the usual guff about "a year of considerable achievement", which though apparently contradicted by a reported loss of £7.5m is the sort of thing chairmen feel obliged to say in their annual statements.

Then comes the bombshell. Since the company listed at the height of the dot.con rip-off, it had attracted a substantial base of shareholders with fewer than 1,000 shares which it no longer wants. The proposal is therefore a share consolidation of 1000 shares into just one, with fractional entitlements sold in the market and the proceeds returned by cheque. Following this mass execution of shareholders - about 7,000 of them in all - the company then shamelessly proposes to revert to the pre-existing position by subdividing each share back to 1,000.

Shareholders might reasonably think a better way of achieving the consequent £50,000 cost saving would be to dispose of the chairman, but this is perhaps too gentle a fate for such cavalier disregard of shareholder rights. Certainly it is hard to imagine a more crassly thought out piece of cost saving. Small shareholders might seem like a pain in the neck, but they are often the only investors prepared to back the sort of high-risk technologies that Eckoh has identified as its future. Oh, and just in case you wondered, there is no free dealing service to allow shareholders to top up their holdings should they want to stay in. So there.