Cash is such a comfort when the Dow hiccups

COMMENT

Is this the big one? With Wall Street down over 100 points by the close of play London time yesterday, it certainly looked as if that long-expected correction in US equity markets might finally be under way. Once again, it was the monthly jobs report that threatens to burst the bubble in share prices.

In the event, the day's fall in the Dow Jones index turned out to be less dramatic than its 171-point drop following March's strong employment figure. There were too few traders around for the half-day holiday session to make it the howler it might have been. But the bears could be out in force again come Monday, when the full complement of dealers return to their desks.

Their case is a mighty strong one. The bond-to-equity yield ratio matched its 1987 pre-crash peak yesterday, levels of new issues have set a record this year thanks to hi-tech offerings, and the flow of new investment in mutual funds has been unsustainably high. Furthermore, yesterday's employment figures make clear that the US economy is accelerating rather than slowing, and that wage inflation is creeping up not falling back. Other forward-looking economic indicators have been delivering the same message. It is a racing certainty that US interest rates must begin to move up again from here on in.

If you think the reaction of shares bad enough, just look at bonds which have taken on the pallor of the terminally ill. The benchmark Treasury long-bond yield returned to its May 1994 level. This is where the real danger for equities lies: the last time bonds were at this level, the Dow Jones index was more than 50 per cent lower than it is now. What that indicates is that equities have become seriously overvalued.

None of this necessarily means Wall Street is heading for a mini-crash, dragging London with it. Financially, the world is a more stable place than it was in February 1994 or October 1987. Inflation is lower, currencies have corrected their serious misalignment, and above all, the industrial countries have set their economic policies on a course of fiscal retrenchment and anti-inflationary rigour that will ultimately underpin the financial markets. None the less, being out of Wall Street is a much more comforting feeling than being in it right now.

Sumitomo's role raises serious doubts

It is easy enough to dismiss the claims of a couple of recently established copper trading firms that Yasuo Hamanaka did not act alone, and that other senior people in Sumitomo knew more than they care to admit about what was going on.

They would say that, wouldn't they, because both Hampshire-based Winchester Commodities and Global Minerals and Metals of New York have a lot of explaining to do about their close relationship with Mr Hamanaka. His business made the owners of these two recently established firms wealthy beyond a lottery winner's dreams in a very short space of time.

But the picture is transformed when the same claim about wider involvement by the Sumitomo hierarchy is made by the commodities subsidiary of one of the biggest banks in the world, Credit Lyonnais. Furthermore, the statement by Credit Lyonnais Rouse is only a more detailed version of what Merrill Lynch, another big name that must be listened to, said in a statement a fortnight ago.

Both have said that their dealings with Sumitomo, which have been central to the events in the copper markets over recent years, were authorised not just by Mr Hamanaka but at senior levels in the Japanese company, and with all the paperwork completed and delivered in proper order.

This is a serious blow to Sumitomo's credibility. The affair has come full circle from the company's original claim that Mr Hamanaka was a Nick Leeson-like rogue trader to an overwhelming suspicion that Sumitomo knew far more than it has so far admitted. It may well be that Mr Hamanaka did indeed go off the rails and attempted to defraud the company, as his employers have alleged.

But the charge Sumitomo must fight to disprove is that during Mr Hamanaka's long career it also approved of and financed his regular attempts to corner the copper market and manipulate prices. In the Barings case, the worst that could ultimately be said about Mr Leeson's superiors is that they were incompetent. They connived to give him as much finance as he needed for his wreckless trades, but they didn't understand the risks he was taking, or that he was trading on their account. The verdict on the Sumitomo lot, once the regulators have done their work, could end up a good deal more serious.

Posties lay a golden egg

A penny on postage may not quite cancel out a penny off income tax, but one glance at the Post Office's latest figures shows why it has become too much of a cash cow to be sacrificed on the altar of privatisation. Sir Michael Heron, the organisation's chairman, has a couple of other good reasons why the Post Office won't be privatised this side of the millennium. The way he figures it, either the Conservatives will be out of office shortly or they will be returned by such a slender majority that ministers won't be able to risk incurring the wrath of the Tory shires by refloating the idea of Royal Mail privatisation.

There is, however, a more compelling case for keeping the business in the state sector and it lies in the quite staggering contribution the humble postie now makes to the public finances. Over the next three years the Treasury will raise close on pounds 1bn from payments made by the Post Office through the mechanism of the External Finance Limit. These sort of cash- book financial controls may make the blood boil around at the Post Office. But since they are enough to finance half-a-penny off income tax or abolish inheritance tax altogether ministers are unlikely to want to alter things.

Do not be lulled into supposing that Post Office profits have peaked, just because they fell last year for the first time in six years. The fall is largely due to the decision to pump extra investment income back into the Royal Mail and take some asset write-downs in Parcelforce.

The 1p rise in postal prices being introduced on Monday will be enough to add pounds 150m to the bottom line alone, while the Post Office is about to be saddled with even tighter efficiency targets by a Government which should extract another pounds 500m out of the Royal Mail's cost base over the next few years.

Faced with those sort of sums, why should any government be in hurry to kill the goose that lays the golden egg? The Post Office learnt long ago not to expect too many favours from the present administration. Unfortunately for its executives, the Post Office may be an even more tempting target for Labour in its search for electorally pain-free ways of financing public spending pledges on health and education.