Evening Fool

Thursday, 8 October 1998

Market Close
FTSE 100 4698.90 -130.00  (-2.69%)    
FTSE AS  2178.23  -58.13  (-2.60%)

Hurrah -- Interest Rates Down

But... the 0.25% cut is not enough for the markets.

Yesterday we asked Fools if they'd like to see a quote start every Daily Fool. The response was an overwhelming "yes," so here goes with today's effort:

"Uncertainty actually is the friend of the buyer of long term values." -- Warren Buffett

The quote is rather appropriate given the current state of the world economies. Try as we might, it is quite difficult to find much positive news stemming from the pages of the financial press. Even Alan Greenspan, chairman of the US Federal Reserve, said he'd never before seen anything like the events in the financial markets we're now experiencing. And believe me, Mr Greenspan is not a young man.

I somehow suspect that the world has actually been through some pretty tough times over the last 50 years. Yet the stock market has consistently returned an average of 12.2% per annum since 1919. Since then, money invested in shares has outperformed cash in 82% of consecutive 4 year periods (e.g. 1919-1923, 1920-1924... ) Over a 10 year time scale, the chances of success increase to 97%.

These statistics back the Foolish mantra of long-term investing. It's not something we're saying only now and just because the market has selected the reverse gear. From the year dot, we haven't changed our tune. Always invest money in the stock market that you don't need for at least 5 years, preferably 10. It hurts when you see your hard won gains disappearing in the space of a couple of months. And it could yet get worse before the inevitable recovery begins. But nothing we've seen in the past couple of months has shaken our belief of the stock market being the best vehicle for long-term wealth creation.

The Bank of England Monetary Policy Committee are obviously avid readers of the Daily Fool. Yesterday we pleaded with them to drop interest rates, and lo and behold, our wish was their command. A quarter of a percent was shaved off the top, leaving the UK base rate at a still high looking 7.25%. The market, which started off in negative territory, as it feared Eddie George would do the dirty on us, spiralled out of control after the midday announcement of the easing of monetary policy. There's just no pleasing Mr Market at the moment, and he showed his anger by falling over 200 points in midafternoon trading.

The usual reaction to a lowering of interest rates is a market rally. Money gets cheaper to borrow, consumers have their monthly mortgage payments reduced, and sterling eases. This scenario usually adds up to good economic news, and share prices often rise. But Mr Market worked himself into such a lather in advance of the Bank's decision that when the quarter-point cut was announced, he still wasn't happy. He wanted half a point as a minimum. In fact, he probably would have found something else to be angry with had rates been reduced by 5%.

Anyone who's followed the minutes of the Bank of England Monetary Policy Committee will have seen how cautious they are and realised the best we could hope for at this stage is a quarter-point fall. Remember that it was only 4 months ago that they raised interest rates. If interest rate cuts are supposed to send the market up, then the opposite should also be true. Yet the period following June's rate rise saw the Footsie soon hit its all time high. Has Mr Market lost his marbles?

Before moving on to today's winners and losers, I urge you to reread the quote at the top of this report.

Now, here's one of my very own:

"When opportunity knocks, don't be afraid to open the door."

A pale comparison when compared to Mr Buffett's effort, but you get the idea.

Conquerors

Standard Chartered, the bank with extensive Asian interests, bucked the market trend and rose another 29p to 470p. It wasn't so long ago that the shares hit a low point of 355p. On Monday, the company gave investors a reassuring 3rd quarter trading update. Standard Chartered have been the subject of takeover rumours for almost as long as I can remember, and that no doubt helped the share price move higher. At 470p, they trade on a trailing price to earnings ratio (P/E) of 7.6 and a 1998 forecast P/E of 9.2.

Marketing company WPP Group rose 5p to 236p on further reaction to yesterday's one year price target of 375p placed on them by Merrill Lynch.

Vanquished

Qualiwatch (tm Qualiport) member PizzaExpress lost a little spice today, overcooking for a 41p loss to 638p. Whilst that is not the most welcome of news for current holders of the shares, potential shareholders will be a little happier. That presumes, of course, that the underlying economics of the business haven't changed overnight. In usual circumstances, companies like PizzaExpress would expect to benefit from a drop in interest rates. The doom-and-gloom mongers will have you believe that these are far from normal circumstances.

Qualiport laggard EMAP today announced a new management structure that they hope will lead them into a new phase of international expansion. The new Chief Executive, Kevin Hand, was previously heading the French consumer magazine division, and under his leadership EMAP has grown from nothing to number three in that market. He is clearly keen to use this successful experience as a springboard into other international markets. EMAP also is appointing a single head to oversee the development and cross-promotional opportunities of their UK radio, magazine and television areas. An example of the possibilities is the FHM Preview television programme, adapted from EMAP's number-one selling men's magazine.

As the economic environment becomes tougher, companies reliant on discretionary advertising spend are often the first to suffer. The fact that EMAP didn't accompany today's announcement with a bleak trading update should provide shareholders with some degree of comfort. In a sharply lower market, the shares fell a respectable 9p to 846p.

After a brief rally over the past two days, today many Information Technology stocks resumed their downward spiral. The theory goes that the financial sector, and in particular, banks, will start to cut back on discretionary spending as they batten down the hatches in anticipation of Hurricane Cessy (short for Recession). I don't know about you, but I reckon banks will have to be more wary than ever of making poor loan decisions, and complex software developed over the past few years will still be in demand. The year 2000 problem cannot be deferred, nor can the introduction of the Euro. The fall guys today included:

CMG down 350p to 880p (ouch). Shares in this company hit a peak of 2245p not so long ago. At that level, they traded on a trailing P/E of 116! Not bad for a company operating in a competitive environment and with operating margins of 12.3%.
Logica down 192p to 1426p. Peak 2313p.
Misys down 36p to 332p. Peak 745p.
Admiral down 95p to 698p. Peak 1483p.

Pub group J D Wetherspoon continued their long summer hangover, as they emptied another 13p to 148p. In a move that will anger members of CAMRA (the real ales campaigners), Wetherspoon is abolishing its oversize pint glasses. Apparently, after 18 months in action, the average punter is still puzzled as to why her pint is not full to the brim. She doesn't realise that there is a line near the top of the glass marking the true pint level, and that she is getting about 5% more beer in her glass than she would at the pub next door. Anyway, Wetherspoon have had enough complaints and are spending £200,000 replacing all pint glasses in their pubs. Investors marking down the shares for that reason alone are taking a very short-term view of events, for over the long run Wetherspoon will actually save money by giving drinkers shorter measures.

And Finally...

Every Thursday we have our new Polling All Fools question. You can access it from the link on the right hand side of the main web page. It's free, it's easy, and involves no registration process. Go ahead Fools, vote and make our day.

Also, don't forget to check out another cracking Compleat Fool from Yvonne. It covers the year 2000 problem.

Anyone needing cheering up should get hold of Gary Larson's Far Side desk diary. The cartoon for today is yet another classic. How does the man do it?

See you on the message boards. It's your chance to tell the world what do you think of the latest market's fall. Have you spotted any bargains yet?

Bruce Jackson (TMF Googly)

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