Outlook: Fears of a 'profitless recovery' holds the stock market back

Sky One/Channel 5; Andersen on trial

It's been a funny old stock market so far this year. The indices, both here and in the United States, point to continued gloom, but once telecommunications and technology are stripped out, the picture really isn't too bad. Broadly speaking, old economy companies have done well again this year, with particular strength assigned to consumer stocks and cyclicals. Banks too have been surprisingly firm. The real damage has been inflicted by Vodafone, which despite its fall from grace, still accounts for a significant chunk of the market as a whole. Other shares linked to the telecommunications industry's nuclear winter – Logica, Marconi and CMG to name but a few – have also done fantastically badly.

It's been a funny old stock market so far this year. The indices, both here and in the United States, point to continued gloom, but once telecommunications and technology are stripped out, the picture really isn't too bad. Broadly speaking, old economy companies have done well again this year, with particular strength assigned to consumer stocks and cyclicals. Banks too have been surprisingly firm. The real damage has been inflicted by Vodafone, which despite its fall from grace, still accounts for a significant chunk of the market as a whole. Other shares linked to the telecommunications industry's nuclear winter – Logica, Marconi and CMG to name but a few – have also done fantastically badly.

The picture is much the same in the United States. It is on Nasdaq and the technology parts of the Dow and the S&P 500 that the pain continues to be felt. The rest is broadly fine. Which is, of course, not at all how the pundits predicted it. Everyone thought the recovery would come from technology and telecommunications. There's no sign of it yet.

Once these sectors begin to turn, then the market as a whole will start to seem firmer again. As ever, the question is when. There is not much around at the moment that seems likely to bring about the required change in sentiment. Indeed the worry must be that the rebound in cyclicals and old economy stocks has run its course too. The big fear is that of the "profitless recovery", or perhaps no recovery at all. Admittedly, those that think the US is about to sink back into a second business downturn remain quite thin on the ground, but it is certainly true that the US no longer holds the same investment attractions as it did when American technology looked destined to conquer the world, and there are big problems in store for the US economy as a whole if investors turn off the flow of foreign capital.

Even if the recovery is sustained, it's a moot point as to how strongly it might be reflected in corporate earnings. Post Enron, the suspicion is that corporate profits were inflated all over the shop as the last boom reached its zenith. That excess has still fully to work its way out of the system. Over capacity remains rife in many industries and pricing power weak. Unemployment is rising and, in Britain at least, so are taxes. It's easy to see why investors remain so wary.

Sky One/Channel 5

There follows the transcript of a telephone conversation held yesterday between Rupert Murdoch and the Prime Minister, Tony Blair, leaked to us by our mole in the British security services. "Hi, Rupert. Hope you liked it. You see I got you Channel 5 in the end. Phew! That took some doing I can tell you ... Rupert? ... Rupert? ... You're not saying anything ... Now look here Rupert, I'm putting my hide on the line here for you. Even Silvio Berlusconi would be hard pressed to get a favour like this out of his legislature, and we are not yet Italy for heaven's sake."

An Antipodean grunt of displeasure emanates from the phone. Mr Murdoch: "Maybe it would be better if we did things like they do in Italy".

"OK, OK, now look I'll just conference in Alastair, who will explain the situation more fully to you. Alastair, just tell him how difficult all this is for us. We're going out on a limb for you here. We've really struggled with this one. Tell him, Alastair."

"Yes, Alastair here. I think what Tony means is that eventually you will be able to do whatever you like, but we've got to go through a softening up exercise first. Once Sky One becomes Channel Five it will all be so much easier. Wall to wall Buffy and The Simpsons, it'll be great. I'll be watching it, Tony will be watching it, ITV will soon be as dead as that stupid monkey. By the time you've finished with Granada it won't be worth buying."

Another grunt followed by sound of receiver going down. "Now look here, Alastair, that's not what I meant to say at all. It's definitely not Government policy to let Rupert close down ITV." Mr Campbell: "No, but the way things are going it might as well be."

Andersen on trial

The speed with which the American judicial system is dealing with the fall-out from the Enron affair is a quite remarkable thing. For Andersen to be standing trial less than six months after the balloon went up would have been almost unthinkable in Britain and completely unconceivable in Europe, where years after the event, the scandal of Crédit Lyonnais still sails majestically on with few of us any the wiser as to the corruption and criminality that lay at the heart of the affair. The whole thing has been swept under the carpet.

Appaling though the Enron collapse was, the American system is moving swiftly both to punish its perpetrators and to learn its lessons, as indeed it did in the immediate aftermath of the Savings and Loans débâcle. That Andersen has so quickly been put up before the beak is partly down to the partnership's own calculation that if it went for a "quickie" it stood a better chance of being acquitted and saving the business. The gamble has proved ill-judged, since the business has already essentially gone and the trial looks like turning into something akin to a public lynching.

Even so, if it is going to be done, it best be done quickly. You can imagine how the situation would have been dealt with here. Lifeboats would have been launched, the accountancy profession would have rallied round to Andersen's support and, for fear of some terrible miscarriage of justice, it would have been years before any criminal case came to court. Meanwhile, everything would have been made sub judice. In the US, Enron's dirty linen is being washed in public right down to the smalls, and the experience is proving a cathartic one from which the economy will undoubtedly emerge strengthened and reinforced.

The US Treasury Secretary, Paul O'Neill, has shown his usual way with words by describing the Enron affair as "part of the genius of capitalism", but in the way he meant it, he's absolutely right. Expose the mischief, close it down, and move on. The US seems to be much better at dealing with its rotten apples than others, which helps in part explain the success of its economy.

Watery end in sight

You would have thought Vivendi Universal has quite enough on its plate already without wishing to add Southern Water as well. But then Vivendi Environnement, the outpost of empire doing the acquiring, is one of the more solid parts of Vivendi right now, and to add Southern to its existing portfolio of British water assets makes perfect sense. After the deal goes through, more than half British households will have their water supplied by foreign companies. Nothing wrong with that as such. The position is much worse for electricity. But it scarcely needs saying that British companies still cannot own any part of either the French power or water market. Not that it bothers the City, which stands to profit handsomely from the agreement it struck with ScottishPower to warehouse Southern Water while regulators pore over the Vivendi plans to acquire it.

jeremy.warner@independent.co.uk