Market Report: Trader's diary sets record straight on millennium madness

Market Report
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The Independent Online
SPOT THE mistake in this excerpt from a trader's diary, secretly obtained by The Independent.

"November 1999. Dear diary, the market is hovering around its all-time peak with volumes topping 1bn shares on a daily basis".

Eagle-eyed readers would have noticed that the dealer has written the wrong date at the top of the diary entry. The idea of a booming and lively market in November 1999 on the verge of the millennium is preposterous. Surely the City's dealers must have closed their books and gone home in a bid to avoid the expected pre-millennial squeeze.

Or have they ?

The evidence so far is that the much-feared lull before the millennium has spectacularly failed to materialise, with the market soaring to new highs in huge turnover. An inspection of trading patterns reveals our trader's diary is absolutely authentic.

Two weeks ago, volume in London was consistently over 2 billion shares compared with a yearly average of a mere 1.3 billion. And even last week, when trading was reduced by a Thanksgiving-shortened week on Wall Street, turnover was around 1.5 billion per day.

Flotations have followed a similar path, with a flurry of companies coming to the market, especially in the highly sought-after hi-tech sectors.

All this in a period when, according to most market watchers, trading was supposed to slow down to a trickle as the markets were gripped by fears of the millennium bug and a liquidity squeeze.

The issue is much more than a wrong prediction by some market strategists. Investors, especially retail punters, need to know how much liquidity is available in the market before plunging into stocks. There is nothing worse than trying to buy shares where there are no sellers around or to sell when there are no buyers. When liquidity dries up, prices move sharply and investors are often caught with unwanted stock or unable to buy the desired share. So it is important to know if and when trading is going to slow down.

In typical fashion, the wrong-footed pundits have come up with two, conflicting, explanations for the current buoyancy.

On one hand, the unrepentant doom-mongers maintain the spike in activity is actually a sign of an imminent slowdown. They say that the pre-2000 trading truce has merely been delayed from the past three months to the last month of the century and the current strength is just an earlier end-of-the-year rally. In this view, the arrival of the year 2000 has simply prompted fund managers to bring forward the yearly ritual of pushing up stocks to flatter their returns before they close their books.

If the doom-mongers are right, volumes (and listings) should fall off the end of a cliff before the end of November and grind to a halt during December.

The problem with this theory is that if trading continues to be strong for another couple of weeks, there will be very little difference between the millennium and any other year-end. Trading always slows down in December and the millennium apocalypse could turn out to be a very ordinary affair.

The second school of thought, the optimists, argue the markets' millennium fears were more froth than substance. According to them, dealers will always deal when they spot an opportunity and the current burst of bids proved just the thing. Once again, one could argue that the millennium bug has persuaded many captains of industry to strike deals now rather than in the first months of the new year and that the takeover wave would soon stop. But there is little doubt a number of bid stories are here to stay and it would be surprising if traders did not dabble in the likes of Vodafone, Mannesmann, Carlton, United News & Media and NatWest for a little while. While that lasts, there's a good chance the run-up to the millennium will be much more lively than first thought.

Next week will be a test of doom-mongers' and optimists' theories as figures from six blue chips and a host of smaller companies should provide plenty of opportunities to trade.

Retailers are well represented on the result schedule, with interims from Great Universal Stores and a trading statement from Tesco. GUS's results, due out on Thursday, should contain no major surprises.

The company already told the market that sales in both the mail-order division and the Argos chain were down on like-for-like sales. This disappointing performance, especially from the mail-order division, should translate in pre-tax profits of pounds 175m compared with pounds 190.8m last year. The current trading statement will be mixed. Home shopping is set to have continued to slump under the heavy discounting of its high street rivals. However, Argos should have fared better, thanks to the introduction of a single catalogue across the whole chain.

Chairman Lord Wolfson and chief executive designate John Peace will be asked what they intend to do to reverse the collapse in the share price, which has lost more than 50 per cent over the past 12 months. A partial float of the credit arm Experian will inevitably be on the agenda.

As for Tesco, the UK's leading supermarket will have to reassure investors that the price war launched by Wal-Mart/Asda has not affected sales and margins. News on further expansion will also be sought.

A couple of utilities will also be in the spotlight. Tomorrow, the electricity group National Grid will report interim pre-tax profits of around pounds 252m compared with pounds 221m a year ago.

Most of the analysts' question will focus on the progress of the company's $3.8bn purchase of US utility New England Electric System. National Grid is still waiting for a settlement with the Massachusetts regulator which would allow the UK group to recover some of the money spent on the acquisition. The sale of the Grid's 48-per-cent stake in the high-flying telecom group Energis will also entertain analysts.

Water group Severn Trent will unleash its interims on Friday. Pre-tax profits should come in at pounds 171m slightly below last year's pounds 176.5m. The company is expected to use the results to respond to last week's regulatory review and to reassure the market that it is not planning to cut the dividend to meet the watchdog's requirements.

The management will also be quizzed on rumours that Severn Trent wants to expand its Biffa waste management system by buying rival UK Water.