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By Rob Davies (TMFEssex)
Autumn is the time when leaves drop and share prices decline. No wonder the Americans call it the fall. Yesterday's sell-off on Wall Street didn't do the Qualiport any favours at all, as the data in the table below shows. Dell (NASDAQ: DELL) was an obvious casualty of the sell-off in tech stocks. Remarks by Steve Ballmer, President of Microsoft, that technology stocks are absurdly overvalued were blamed for the decline. In reality, though, the market is going through a weak period because of the rise, and fears of further rises, in interest rates.
The US and the UK have both begun the process of raising rates to slow their respective economies. Both countries have short term interest rates of 5.25% even though the US is growing at 4% while the UK is expanding at 1.5%. Quite why the US economy can sustain growth of 4% without overheating, while the UK blows a gasket at 1.5% is a question no one has explained to me yet. To this heady mixture of growth is being added a resurgent German economy growing at 2%. No one is expecting the European Central Bank (ECB) to raise interest rates from 2.5% just yet. But it is likely to happen some time.
All this growth means demand for money is rising and that takes money away from equities. The odd thing is that this rise in the cost of money -- interest rates -- has been underway in the US for the last 6 months without any marked effect on the equity market. What is happening now is essentially a catch-up process.
Apart from the stock declines the other big news today is the bid for National Westminster Bank (LSE:NWB) from Bank of Scotland (LSE: BSCT). As regular readers of the Qualiport will know, Bruce decided to buy a bank earlier this week. The bank he chose was Lloyds TSB (LSE: LLOY) for reasons he explained in the last Qualiport article. His new selection was under pressure yesterday as the market speculated that it was about to make another purchase. In the event the bid came from north of the border and all the banks, with the exception of Lloyds, shot up as consolidation became today's sector buzzword.
Rather surprisingly, the BoS bid is conditional on NatWest dropping its purchase of Legal & General (LSE: LGEN). NatWest bought L&G for the same reason Bruce wants to buy Lloyds; to get exposure to the growth in personal financial management that is typified by stakeholder pensions. The fact that BoS does not want L&G shows that they are only interested in squeezing more efficiencies out of the banking network. That means more direct competition for Lloyds on the banking side. However, as Lloyds are setting the agenda for the banking industry it is unlikely that they will have too much worry about on that score. Once Scottish Widows is embedded in the business it should create its own earnings momentum in the group driven by cross-selling from the Lloyds network. The argument for Lloyds is not changed therefore by today's events.
Last week in this slot I discussed Unilever (LSE: ULVR) and compared it with Procter & Gamble (NYSE: PG). It came across as considerably cheaper, but slightly less profitable. This week the Anglo-Dutch consumer products company announced its plan to change this. Its aim is to shrink its current range of 1600 brands into 400 "power brands" that will enable it to raise margins and grow more rapidly, at 8 to 9% a year instead of the 4% it is currently managing. The target it has set itself is an extra 0.5% a year on margins for the next 5 years.
More significantly, the company wants to expand its market by not just selling, say, washing powder, but by providing a "total clothes washing solution". In its view very few people will use its products in 15 years' time to clean their own clothes. Instead, it will be outsourced to service providers, which might include companies like Unilever. Ideas such as these came from Project Foresight, a scheme that took 20 young managers and let them loose to examine trends and identify opportunities for the group by thinking the unthinkable. Something must be working because the shares ended up in a day of red on the screens.
Two other Qualiport stocks that were hit by the market were Misys (LSE: MSY) and Independent Insurance (LSE: IIG). The fall in Misys is explicable by the general phobia of tech shares and is therefore not stock specific. However, the decline in Independent is probably related to potential insurance claims arising from the severe storms and heavy rain affecting much of the UK this week. The other reason insurance companies go down is because of weakness in their portfolios. That shouldn't affect IIG too much, despite the weakness in equities, because 60% of its investments are in bonds, and they have held up relatively well.
Next week Bruce will still be revelling at the Munich Oktoberfest (yes I know its still September, but they use the same logic as Oxbridge who hold May balls in June). So I will be giving you a roundup of the weekend's Qualiport news on Monday.
As ever, send your thoughts on the market, and how it relates to the Qualiport, to the Qualiport message board. And I'll see you there.
Company Change Bid DELL(US)-3.00 43.00 EMA -0.25 9.25 IIG -0.16 2.65 MSY -0.31 5.62 PIZ -0.20 8.00 RTO -0.06 2.20 ULVR +0.01 5.82 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 27/10/98 755 Indep Ins 2.58 2.65 2.7% 27/01/99 74 Dell (US) 44.63 43.00 (3.6%) 04/11/98 245 Pizza Exp 7.93 8.00 0.9% 22/04/99 347 Misys 5.76 5.62 (2.4%) 19/12/97 783 Rentokil 2.55 2.27 (11.0%) 17/04/98 169 EMAP 11.34 9.25 (18.5%) 17/07/98 266 Unilever 7.53 5.82 (22.7%) Last Rec'd Total # Company In At Value Change 27/10/98 755 Indep Ins 1972.64 2000.75 28.11 27/01/99 74 Dell (US) 2007.42 1928.48 (78.93) 04/11/98 245 Pizza Exp 1966.34 1960.00 (6.34) 22/04/99 347 Misys 2028.71 1950.14 (78.57) 19/12/97 783 Rentokil 2046.53 1722.60 (323.93) 17/04/98 169 EMAP 2341.32 1868.50 (472.82) 17/07/98 266 Unilever 2052.00 1548.12 (503.88) Cash: £3,433.46 Current Total : £16,412.06 Total Invested: £18,184.62 Profit/(Loss) : (£ 1,772.56) Value Per Share Day Month Year Qualiport -3.00% -2.45% -12.73% FTSE 100 -0.54% -4.94% 0.93% FTSE All Share -0.68% -5.08% 4.34%