By Alan Oscroft (alanoscroft)
Bournemouth, Dorset -- The market re-opened today after the long Easter weekend, and the crowd went wild. With the Dow Jones Industrial Average having closed at over 10,000 yesterday, for the second time in its history, British investors didn't want to be left out and went shopping for shares in their hordes (or maybe they went on the bus).
Today is, in case anyone had forgotten, the first day of the new post-PEP world. I, for one, don't expect ISAs to add much except confusion to the investment scene, but at least there'll be one beneficial effect -- we'll finally see the back of all those irritating "Roll up, roll up, get yer luvverly last PEP here while stocks last" adverts. The billboards at Waterloo station can come down, and my mail will revert to being only 50% junk.
Conquerors
Shares in British Telecommunications (BT.A) rose today after the company announced its intention to make a joint bid, with Telesystem International Wireless Inc, for Hungary's third mobile telephony licence, with BT itself looking for a 48% share. In other news, which also helped to push the share price up, Cellnet announced its first quarter customer figures for 1999. During the quarter, a further 369,000 prepaid customers were added to the network, with the total number of prepaid customers now standing at 910,000. A further 110,000 contract customers were also added during the same quarter. The price ended up an impressive 54p, on 1082p.
Dixons Group (DXNS) did nicely, reflecting newfound enthusiasm for the electrical retailing sector. Retail consultant Verdict apparently believes that we are in for a golden era for electrical appliances over the next year or two, with new product developments pushing the sector forward. Digital television is expected to lead the way (though they'll have to sort out those funny squashed pictures before this Fool will buy one), closely followed by mobile phones and games consoles. Being seen as high street leaders, Dixons' shares were pushed up 111p by this optimism and ended the day at 1416p.
Things were looking a bit brighter for troubled high street giant and Qualiport constituent Marks & Spencer (MKS) today, as their share price recovered a little to finish up 30.75p to 436.25p. The first contributing reason, and this really must be a first, was that a broker didn't change its recommendation! No, CSFB just included the company in its recommended list of European shares without changing its "buy" recommendation. The other news is that the company has turned to innovation to get out of its current sea of troubles and is about to introduce a new line of, wait for it, non-iron T-shirts. I don't see what's so new there -- I've got lots of non-iron T-shirts myself, though I admit they are a bit wrinkly.
In a bit of good news for followers of biotech companies, SkyePharma (SKP) has confirmed that it has received US Food and Drug Administration approval for its chemotherapeutic agent DepoCyt. This drug is used in the treatment of patients with lymphomatous meningitis, which is described as a serious complication of non-Hodgkin's lymphoma. Well, that sounds serious to me, and I'm glad they've got some nice medicine for it now. The share price was in buoyant health and ended on a perky 64p, up 3.5p on the day.
Vanquished
Infrastructure and construction specialist Jarvis (JRVS) was one of today's biggest fallers after the company released a profit warning. With intermittent industrial action having been afflicting Jarvis Rail since June 1998, the company now expects pre tax profit for the year ending 31st March to fall below current market expectations, though still ahead of last year's figures. Railtrack's (RTK) decision to defer a number of railway infrastructure renewal projects for the time being didn't help, either. Jarvis' share price hit the buffers and was shunted down 64.5p to 478p.
Germinator wannabe Cammell Laird (CMM) has completed the expansion of its yard at Birkenhead, Merseyside, by purchasing additional adjacent land and facilities. The company has said that the new facilities will increase its capacity for ship conversion and refit work and will allow it to expand its cruise ship refit operations, with immediate effect on the current cruise ship contract for Airtours (AIR). The share price, strangely, sank a little, falling 7.5p to 847.5p, though it was up earlier in the day.
IMI (IMI) announced today that its Annual General Meeting, to be held on 7th May, will include a proposed resolution to grant a general authority for the company to purchase its own shares. There is apparently no current intention to exercise this authority, but the board believes such flexibility will be beneficial in the future. This seems like a perfectly harmless proposal, and it is not quite obvious why it should have a negative effect on the share price -- but the price did fall, down 8.5p to 251.5p.
Previously known as British Gas, BG (BG.) fell 15.5p today to 353p after buying back 250,000 of its own shares for cancellation late on Thursday.
Fresh from the confirmation of the recent merger, AstraZeneca (AZN) posted a 91p loss today, falling to 2946p.
Fool's Eye View -- '29 Crash
(Or "Why 1999 won't be the same as 1929")
Whenever stock markets are on a long bull run and people with bearish tendencies start getting worried, comparisons are always drawn with the "great crash" of 1929. People start worrying that we have forgotten the lessons of the past and that it will all go horribly wrong again. The most ardent bears often accuse the bulls of burying their heads in the sand and blindly assuming that "things will be different this time." Well, at least as far as comparisons with 1929 go, this Fool most firmly asserts that things are indeed very different this time.
So what was the crash of 1929, and what caused it? Well, for starters, it wasn't a crash. Or at least, the crash was not the root cause of the problems -- that was just an incidental and inevitable aftermath. No, what the latter part of the twenties really brought about was a bubble -- possibly the biggest since the seventeenth century -- and as all bubbles do, it burst. The reason it burst with such a bang was that it was so hugely inflated as to bring incredulity to the minds of anyone who cares to learn about it today. So let's not ask why the stock market of 1929 crashed, let's ask, instead, how it came to be so insanely overvalued in the first place.
It all started with the exuberance of the early twenties and the apparent belief that God intended all Americans to be fabulously wealthy without having to do any work. It was a good time for America -- the economy was growing, employment was rising, and the equivalent of a self-made middle class was emerging, but an increasing desire to get rich quick was also tagging along with it. Throughout the decade, the prices of common stocks were growing, but until 1928, not obviously in excess of rational expectations of genuine corporate earnings. By early 1928, though, things had begun to accelerate, with prices starting to jump by leaps and bounds, and the Wise of the day frequently pontificated on the great profits to be made from overseas, as well as domestic, manufacturing expansion. The election of the new president, Herbert Hoover, in November, set off a new wave of optimism, and by the end of 1928, the stock of many traditional, stalwart companies had risen many fold. Trading volumes had overtaken all records, with almost twice as many shares being bought and sold in 1928 as in the previous year. But such numbers tell only part of the story -- the real insanity can only be revealed by looking at the phenomenal increase in trading on margin....
A notable sign that a previously rational expansion is turning into a speculative boom comes when people start paying little or no attention to enjoying the actual fruits of the investments that they have acquired. They don't want dividends, they are not interested in any growth of the businesses that they own part of and they care nothing for regular, steady increases in earnings. No, all they want is the chance to sell their shares quickly, for a profit. The underlying assets themselves become secondary -- the piece of paper is all that matters. Trading on margin makes this approach so easy, at least for people who assume that prices will always keep rising fast (and that was a surprisingly common belief in the late twenties). Basically, what trading on margin allows speculators to do is borrow money to invest. Brokers and banks fund part of the purchases (often more than 50% of the investment cost in those heady days) and hold on to the stock certificates as collateral -- and safe collateral at that, usually, as it is worth perhaps twice the amount of money that has been borrowed. Sounds like a safe investment for the lenders, huh?
So what happens when stock prices start to rise? Well, speculators can borrow more money for margin trading, backed by the increasing value of the stocks that the brokers are holding as collateral, and can buy more stocks, thus pushing prices up further and increasing the value of the collateral that they can use for borrowing more money for margin trading... are you getting the picture? This only works, of course, when prices are rising at a greater rate than the interest payments on the margin debt. And despite the high interest charged for such loans in 1928 and 1929 (rarely less than 6%, but rising as high as 15% on occasion in 1929), speculative profit was there to be had, and gamblers piled in. The volume of margin loans rose from around a billion dollars in the early twenties to nearly six billion dollars by the end of 1928. And such was the attraction of lending money in this market that many companies actually forsook their usual businesses and instead lent their working capital to fund such speculation. At the height of the folly, even New York banks were borrowing money from the Federal Reserve Bank at 5% to lend at higher interest to speculators trading on margin.
There has to come a point, though, in any speculative bubble at which there are just no buyers left and the price rises slow down and stop. Then everyone wants out and tries to sell. But there are no buyers, and prices start to fall. Once the value of the collateral held by the margin lenders falls, they start calling in the loans, and the speculators have to sell more stocks to pay back the loans, and the prices fall further, and more margin calls come in and... well, the rest should be fairly obvious by now.
The apparent belief in a divine plan for all Americans to be wealthy, and the huge growth in trading on margin, were not the only ingredients that went into the great bubble of 1929, of course. They certainly helped to make the subsequent crash pretty much inevitable, though. No, it also took incompetence of heroic proportions on the part of the Federal Reserve of the day, and the rise of that new phenomenon the investment trusts, to compound the calamity, but that, perhaps, is a story for another day....
Margin trading is, of course, tightly regulated now, and central banks are far more careful who they lend money to and for what reasons. There may be another stock market slump in the near or distant future (though I have no idea if or when it will come), but it is unlikely that it will be anywhere near as big as 1929, because there hasn't been a boom anywhere near as manic as the one that started in 1928. The reasons for any future slump, if it comes, will be very different too, and 1999 won't be the same as 1929 simply because 1998 wasn't the same as 1928.
And Finally...
A curse of boils on Jim Courier for beating our man Greg on Sunday. OK, I know he's a decent sport and a nice guy, really, so maybe just one small boil -- one that doesn't hurt very much. Oh, all right then, no boils at all, just sporting congratulations to him and the rest of the American team. Seriously, though, wasn't it great to see some fine British tennis performances after such a long time in the wilderness? If there's more stuff like that to come from Tim and Greg, I'll be happy.
Well, we've let all you Fools out there have the weekend off, and we hope you enjoyed it, but we expect to see those shoulders back to the grindstone now (or whatever). We're looking forward to lots of exciting new posts over on the Daily Fool message board -- all the message boards, in fact. If you just feel like a chat about tennis, football, biking, or anything at all that's unrelated to investing, feel free to visit the Land of Off Topic Posts, which is settling down a bit now after some frantic activity in recent weeks.
