Wall St heading for a crash, says Kleinwort

Yesterday brought a fresh warning that the US stock market is heading for a crash, with investment bank Kleinwort Benson sending a warning to clients to take "extreme care" with regard to share prices around the world during the next few months, writes Diane Coyle.

Equity strategist Albert Edwards advises, in the latest circular: "We are maximum bearish." Kleinwort has raised its holdings of cash to the maximum permissible level of 15 per cent of the total portfolio.

Kleinwort is the latest to join the growing list of financial institutions in its caution about Wall Street - Philips & Drew Fund Management is the most prominent amongst them because of the scale of its bet against the US market.

Although worried about slow growth in Germany and Japan, it is the US that gives Kleinwort most cause for concern. Mr Edwards writes that US share prices incorporate extremely buoyant expectations of company profits. With the market priced at 16 times prospective corporate earnings in the next year, it is very vulnerable to a fall in the US bond market, he argues.

A reversal of the US bond rally could be triggered by Japanese investors pulling out due to fears that the dollar's period of strength against the yen has come to an end. Eisuke Sakakibara, director general of the Ministry of Finance, said this week financial markets had underestimated the strength of the Japanese economy.