Outlook: A collapse in confidence that could take years to overcome

Souter's US nemesis
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The Independent Online

A year ago, this column reflected on what was then the unthinkable proposition that the S&P 500 might fall as low as 800. If it did, we said, then it wouldn't really matter what the underlying strengths of the US economy were; in the round it would be in serious trouble since the effect would be to make people feel a great deal poorer, they would then stop spending and an economy already racked by overcapacity would grind to a halt. Well now the unthinkable has virtually happened. The US economy has not yet ground to a halt, but unless shares rebound soon, it surely will. In Britain, higher public spending and an export-led recovery in manufacturing will protect us to some degree but there will be no escaping the harsh winds that will blow across the Atlantic if America really does slip into a second business and consumer downturn.

A year ago, this column reflected on what was then the unthinkable proposition that the S&P 500 might fall as low as 800. If it did, we said, then it wouldn't really matter what the underlying strengths of the US economy were; in the round it would be in serious trouble since the effect would be to make people feel a great deal poorer, they would then stop spending and an economy already racked by overcapacity would grind to a halt. Well now the unthinkable has virtually happened. The US economy has not yet ground to a halt, but unless shares rebound soon, it surely will. In Britain, higher public spending and an export-led recovery in manufacturing will protect us to some degree but there will be no escaping the harsh winds that will blow across the Atlantic if America really does slip into a second business and consumer downturn.

Feeding the latest sell-off in equity markets is growing concern about the outlook for corporate profits. The WorldCom insolvency, widely inspected as it was, hardly helped sentiment. In theory, this sort of event is meant to draw a line under a stock market collapse by making investors believe the worst of the bad news is over. In this case it plainly hasn't. In the US at least, the fear is that the bad news has only just begun. Whether or not shares have fallen so far that they are now fair or good value, investors are in no mood to listen. People believe they were conned during the exuberance of the boom, as indeed they were, and confidence will take a long time to recover.

The general run of results coming out of the US second-quarter reporting season has so far been no worse than might be expected, but almost without exception chief executives have referred to a deteriorating outlook. This is not what the doctors said would happen. Sharply improving productivity was meant by now to be delivering an equally sharp rebound in corporate profits, but it isn't happening.

President George Bush was at it again yesterday attempting to act as a cheerleader for the stock market. From what he hears "corporate profits are improving, which means value will be available for those who invest in markets". You have to wonder who he is talking to. That's not the word coming down the line from most companies. If Mr Bush's purpose is that of attempting to bolster confidence, he should take note of how little good came of it when his Treasury Secretary, Paul O'Neill, did the same thing. All Mr O'Neill's unswerving optimism about US equity markets has succeeded in doing is making him look a fool. The same thing is happening to Dubya.

Political leaders would hardly be thanked for saying the market is a screaming sell when asked for their opinion, but judging by reaction so far, their opinions don't count for anything anyway. They could save themselves much embarrassment by keeping their mouths shut.

If markets continue to fall at their present rate, the policy response is going to have to be more interest rate cuts. Falling share prices matter less in the UK than in the US, but even here they cannot but eventually dent both business and consumer confidence. Inflation has all but vanished from the UK economy, and although the still strong housing market remains a cause for concern, even on this front, the worst of the housing bubble seems to be over. There's plenty of scope for a further cut in interest rates without taking undue risks with inflation.

The same is beginning to be true of the US too. Alan Greenspan, chairman of the Federal Reserve, last week made it plain as a pikestaff that the next move in interest rates would be up, but he may have to rethink that position. With the Fed funds rate already at just 1.75 per cent, the scope for further cuts is obviously a good deal more limited. It might also smack of panic. But something has to be done to halt the slide. The fundamentals for US economic growth may be as real as Mr Bush believes, but if the stock market keeps falling like this, they soon won't be. The summer holidays will provide some respite, but even so the next few weeks could be crucial. It is as if some ghastly meteorite is heading towards us. Will it hit, or is there to be another narrow miss? Recent history would point to the latter outcome. On the other hand, we haven't had a serious economic catastrophe for an awfully long time now.

Souter's US nemesis

Brian Souter is back in control of the reins again at Stagecoach and if anymore wheels fall off the wagon then he will have no one else left to throw to the Cherokees but himself. Keith Cochrane yesterday became the latest Stagecoach chief executive to bite the dust. You can almost hear Mr Souter belting out the lines of the Queen song. And another one down, and another one gone.... Like Mike Kinski, his predecessor, Mr Cochrane has been reversed over by a runaway North American company called Coach USA.

Stagecoach and its shareholders have had nothing but grief since it splashed out £1.2bn for the family-run business three years ago. Yesterday there was more pain in the shape of a halving in the final dividend and yet another Stagecoach profits warning. Larry King, the founder of Coach, departed soon after the takeover and a new chief executive, Randy West, left just six months later. It was at this point on the journey that Mr Cochrane decided, unwisely as it turned out, to take personal charge of the North American operation, spending two weeks in every four in the States trying to fix what now looks like the unfixable.

He thought he had cracked it by sacking half the staff at the Houston head office, mothballing 330 of Coach's buses and writing down the value of the business. No such luck. Trading results for May and June showed that far from putting a brake on Coach's problems Mr Cochrane has merely accelerated deeper into trouble. This is not just a fan belt job. It looks as if the big end has gone.

The Stagecoach board suspects that Coach's problems are just too deep-seated to be explained away any longer by the US economic downturn or the collapse in the American leisure market post-11 September. As chairman and chief strategist, Mr Souter is ultimately responsible for the disaster that Coach has proved to be. If the result of his review is that the business should be sold, then his own position is going to look untenable too, notwithstanding his still considerable shareholding. Any sale would have to be for a fraction of the price Stagecoach originally paid.

As Stagecoach circled the wagons yesterday, investors were invited to believe that the latest set of results would have represented a creditable performance were it not for the cut in the dividend, the decline in profits, the loss of another chief executive and one more profits warning. The claim is so ridiculous as to be laughable. For shareholders, there is still the slender hope that Mr Souter might be persuaded to take the company private again, but could he really get away with buying the business back for less than the £1.50 he issued stock at to fund the purchase of Coach? Down another 27 per cent yesterday to just 38p, the shares seem only ever to travel south.

It's a long time since Mr Souter used personally to turn up to hand out free "softies" for those taking the booze cruise from Aberdeen to London, one of his first coach routes. The way things are going, he may shortly find himself needing to do it all over again.

jeremy.warner@independent.co.uk

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