4 December 2008

Signs of a market top

Many business leaders seem also to have been caught unawares, as if the horrors of debt-propelled over-consumption had crept up on them, like a bogeyman in the dead of night.

"Nobody could have seen this coming," is a common excuse from those who are struggling with Swiss-cheese balance sheets. They are wrong. The looming crash of 2008 was a juggernaut with its headlights on and horn blaring, speeding past "Drive carefully" posters.

Common sense died in 2007. The FTSE 100 index hit 6,732, not far short of its all-time peak, 6,950 (reached in the dotcom mania of 1999). That in itself was not an indicator that the world was about to spin off its axis. It was, however, a measure of warped confidence in illusory prosperity.

In April 2007, the average house price in the United Kingdom was £209,454. Across the country, annual house price inflation was running at 11.3pc. In London, it was 14.7pc. House prices were holding up spending and debt was holding up house prices. But how would the debt be repaid?

In an interview with The Sun, former US vice-president Al Gore said: "The planet is in distress and all of the attention is on Paris Hilton. We have to ask ourselves what is going on here?"

Mr Gore was talking about global warming, but might easily have been referring to the debauched economies of Britain and America. Celebrity worship had replaced rational thought.

In business, the warnings were there; not subtle hints, but neon lights flashing: "This is the top of the market." Foxtons, the estate agency with just 40 branches, was sold for nearly £400m.

Bonuses on Wall Street and in the City – funny money – totalled about $80bn, sums greater than the output of some countries. A Ferrari Testa Rossa went at auction for $9.3m and someone paid David Rockefeller $71m for Andy Warhol's Green Car Crash.

Here are five other events from 2007 that signalled the end of the road for irrational exuberance:

1. Sports Direct is floated for £2.2bn.

Mike Ashley's rag-bag of leisure brands was not fit to be a public company. Mr Ashley is congenitally unsuited to be in charge of a business with outside investors. The shares, offered at 300p, started falling almost from day one. Five months after the sale, Mr Ashley said of Sports Direct's share price: "It may drop to 80p, but over three years I am betting it will be nearer 800p." Today it is 32p, and I am betting that 800p will not be achieved in Mr Ashley's lifetime.

2. Blackstone raises $4bn on the stock market.

The investment group that had made its partners fabulously rich in private equity suddenly fancied some of the public's cash. Co-founder Stephen Schwarzman trousered half a billion dollars from the sale. He was one of the smartest guys in the boom. On day one, the shares closed at $35. Today, they are $5.50. The debt upon which the vast majority of private-equity deals depended has dried up. It was, as Time magazine observed: "A classic case of selling at the top to the suckers, which would be us."

3. RBS consortium pays £50bn for ABN Amro.

One month after Barclays had agreed to buy Dutch bank ABN, RBS and its partners, Santander and Fortis, made an aggressive counter-offer. Even as the market turned against RBS, it ploughed on. The deal, which seemed over-priced at the time, now looks like an act of corporate madness, not least because RBS more than doubled its portfolio of mortgage-backed securities to £68bn. Few acquisitions are so incorrectly priced they cost the chief executive his job. This one did for Sir Fred Goodwin.

4. Cerberus buys Chrysler from Daimler.

The US car industry is hopelessly burdened by pensions and healthcare commitments. Daimler, which knows a thing or two about making cars, could not make sense of Chrysler. Cerberus, a private-equity firm, gave a notional $7.4bn for the business but, in effect, Daimler slipped it a hefty cheque to have the wreck towed away. Daimler had paid $36bn for Chrysler in 1998 and blew a bigger fortune trying to restore it. With Chrysler heading for the scrapyard, was Cerberus barking mad?

5. Gordon Brown's Budget speech.

When a chancellor starts with a long burst of self-congratulation, it's time to head for the lifeboats. This is what Mr Brown said: "My report to the country is of rising employment and rising investment; continuing low inflation, and low interest and mortgage rates... this is a Budget to expand prosperity... our fiscal discipline is the foundation of the strength of Britain's finances." We knew his claim was risible. Since then, it has become ever more ridiculous.

Readers are invited to submit their own top-of-the-market signals. A bottle of Champagne for the best.


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