Outlook: California dreaming, on such a winter's day

Monetary dilemma; LogicaCMG

OK, so here's the choice. Do you, A, opt for a plumb job heading an established and growing international credit card and payments organisation based in groovy San Francisco, with an American style, executive pay package to match, or B, labour on in the dark, satanic mills (well, almost) of Bingley, West Yorkshire, on a fraction of the salary, hoping against hope that a sticking plaster strategy for rescuing the also-ran of the British mortgage market from obscurity eventually comes up trumps? Tough one, eh?

Amazingly, Christopher Rodrigues, the engagingly enthusiastic chief executive of Bradford & Bingley, has gone for option A, even though he knows he'll be accused of disloyalty for doing so. Presumably, he'll also never get that gong, which for a member of the winning boat in both 1970 and 1971 Oxford and Cambridge boat race (light blue) will be hard to stomach. But the Napa Valley beckons and nobody's gong to blame him too much for opting for a Californian salary while he's still young enough to command the attention of the headhunters.

By quitting, Mr Rodrigues doesn't leave Bradford & Bingley completely rudderless. The top job now falls to his trusty coxswain, Steven Crawshaw, who some in the City regard as a safer pair of hands anyway. None the less, with margins under pressure and growing questions over the company's viability as an independent player, B&B has rarely looked more vulnerable. One view would be that Mr Rodrigues is getting out while he's still ahead, before the real problems emerge. A touch unfair, as well as unkind, I think.

When he floated the former building society nearly four years ago, few thought that life for B&B as a publicly quoted company would be anything other than nasty, brutish and short. Yet the stock surged, and the City seemed to take kindly to Mr Rodrigues' plans to turn the company into a financial adviser, acting as a mortgage broker and seller of other people's products, rather than its own. In the event, the traditional mortgage business has continued to dominate, but B&B has struggled to keep up in the highly competitive remortgaging market that now rules the home loans landscape.

Repeated rumours that Barclays is about to pounce have failed to come to anything. It would have been nice for Mr Rodrigues to go out on the high note of a decently priced takeover bid, but it was not to be.

Monetary dilemma

The Monetary Policy Committee is unlikely to vote for another interest rate rise when it concludes its latest two day meeting tomorrow, yet at least some of its members must be champing at the bit to do so. The economy is booming again, and although inflation appears tame, you don't have to look far beneath the headline numbers to see that price pressures are building all over the place. Most surprising of all for those of us accustomed routinely to writing about the ravages of the bear market, the stock market is once more flying.

As our news analysis shows, once the boom and bust sectors of technology, media and telecommunications are removed, American and world equity markets are again at all time record highs, in dollar terms at least. Even here in Britain, the stock market is not so far off these elevated levels. Were it not for the relatively high exposure of the UK market to financial services and oil, we too would be at record levels, ignoring the candy floss sectors of the bubble. Irrational exuberance is back, and though it is hard to believe it can last, it certainly adds to the suspicion that there's a big inflation brewing somewhere down the line.

Since the last interest rate rise a month ago, most indicators have turned sharply upwards. The only obvious negative is that the pound has appreciated a bit more too, which has the effect of dampening the countervailing inflationary pressures. Most worrying of all for the Bank of England, it's the wrong kind of recovery that's going on. Consumption, borrowing, housing and public spending have all returned to boom levels. Private sector business investment has not. The Bank is faced with the old policy dilemma, but in more acute form than ever; if it fails to take the heat of the debt fuelled boom in housing and consumption, it risks a much worse demand shock down the road when eventually rising inflation forces much harsher policy action.

There are only three reasons for holding fire. One is that the Bank hasn't properly prepared the market for further immediate action. Everyone knows that rates will rise again soon, but few believe it will be quite yet. Another is that the European Central Bank might cut interest rates tomorrow, which in combination with a rise from the Bank would put a rocket under the pound.

A third is the impending Budget. With a general election due in little more than a year's time, it would be odd for the Chancellor to raise taxes, but given how close he is to breaching his own golden rule on the public finances, he'll also be keen to avoid any further fiscal easing. A neutral Budget seems the most likely, but unless the MPC knows that to be the case, it may be tempted to adopt a wait and see approach.

Personally, I think that would be a mistake. The housing market is now quite plainly out of control, and unless something is done swiftly to cool it down, it's almost bound to end badly for many people. The MPC would do well to heed the old saying; a stitch in time saves nine. Not that it will, this time at least.

LogicaCMG

He's merged the company with his largest competitor, he's slashed the costs, he's won lots of contracts, yet still he's denied re-entry into the FTSE 100. Yesterday, LogicaCMG was one of the biggest fallers in the stock market, after its chief executive, Martin Read, declared that the benefits of the merger had exceeded all expectations, the wireless networks division had returned to profit, and that he was confident of a successful 2004. Come again?

Well, yes, it does seem perverse, doesn't it, but the problem with LogicaCMG is that although the shares are today worth only a small fraction of what they were at the height of the bubble, they have none the less tripled over the past year, and in order to justify the valuation they have returned to, things have got to go not just well, but exceptionally well over the next two or three years. Dr Read's appraisal of the outlook seemed a long way short of the extreme bullishness demanded of him by investors.

LogicaCMG is Britain's second largest IT/software house and, in Dr Read's eyes, it should by rights be a member of the FTSE 100. Yet every time the valuation gets large enough to gain entry, along comes another piece of negative news, the shares fall back and Logica once more goes to the back of the queue. I doubt Dr Read was expecting yesterday's clobbering, for this hardly looked like negative news, but the City is divided into two distinct camps on Logica, and the bearish one is proving hard to vanquish.

One of the problems with LogicaCMG's relationship with the City is that Dr Read has "history". As boom turned to bust in the IT and wireless software market, he repeatedly overestimated his likely revenues. Rather than admitting that the market was falling off a cliff and he hadn't a clue where it would land, he kept on merely trimming his forecasts of revenue growth, until eventually he was forced to concede his revenues wouldn't be rising at all, but would plummet along with everyone else's.

In the ensuing meltdown, there were many who said Dr Read was lucky to keep his job. Yet Logica is essentially a sound company with excellent long-term prospects, made the stronger still through its merger with CMG. Dr Read has learned his lesson from the over optimism of the bubble years, and the caution of yesterday's statement is to some extent a reflection of that. Investing in LogicaCMG remains an act of faith in Dr Read's ability to deliver on his ambition of making the company one of the world's leading wireless software and IT services companies. It's a gamble, but the stock market is filled with much riskier punts than this one.

jeremy.warner@independent.co.uk