Too soon to take Footsie plunge

WITH the FTSE 100 closing last week at another five-year low, is this the right time to plunge back into equities? Probably not. The UK market still looks overvalued.

The best starting point is to work out what sort of return investors ought to expect from shares. As good a guess as any is 7% - in real terms. That's about 4% more than the real return you'd get after buying longdated Government bonds. At the peak of the bull market, some enthusiasts argued that this extra return - which is needed to compensate-shareholders for the risks they are running - should be as little as 1%. That never looked realistic.

If one accepts that 7% is the right real return to expect, the question then is what level of the FTSE 100 can realistically deliver that return. Here there are two main approaches.

One is to look at dividend yields. If you assume dividends can grow in line with the economy - say 2.5% a year in real terms - a fair dividend yield would be 4.5%. The snag is that Footsie currently yields only 3.4%, according to JCF. To get up to 4.5%, it would need to fall another 25% - to about 3200.

A less pessimistic approach is to look at earnings yields - earnings divided by the level of the index. Currently, the FTSE 100's earnings yield is 6.8%. That's a touch less than the magic 7%, but not much. To get to fair value, Footsie would need to drop to about 4100.

Either way, it is still too early to take the plunge. Mind you, at the current rate of decline, it may not be long before shares are a buy again.

Stage set for more US casualties

HAS Corporate America swept its closets clean of skeletons? It would be nice to believe scandalous accounting and rotten corporate governance was limited to the likes of WorldCom, Enron and Qwest.

However, many investors fear these high-profile cases represent the tip of an iceberg. The only way to find out will be to flush them out.

The almost-certain passage this week in the Senate of the Sarbanes Bill, which includes a raft of changes designed to punish corporate evildoers, may do just that.

The Bill would increase jail time to up to 10 years for executives found guilty of defrauding investors through accounting chicanery, artifice or misleading financial statements. It would also toughen penalties for other types of whitecollar crime, ranging from shredding documents to violating securities laws.

Once passed by the Senate the Bill goes back to the House of Representatives, which passed a much weaker version earlier this year, before reaching President George Bush.

Given the mood of the American public towards corporate malfeasance and the November Congressional elections, the Bill is almost certain to pass through the House after its August recess.

With President Bush's own share-trading history being scrutinised, there is every reason to believe he will sign the Bill into law. That gives Corporate America two months of amnesty before the tougher laws hit the books. Expect more skeletons to tumble between now and late September.

Rob Cox

'Fone bashing

THE latest spurious reason for bashing Vodafone shares is that the mobile phones giant might buy SFR from Vivendi. True, Vodafone's Sir Christopher Gent covets France's second-largest mobiles operator. But he is right to.

Vodafone already has a minority stake. But that's not the same as control. And France is the biggest hole in Gent's European footprint. Given Vivendi's financial plight, Gent may even be able to get a bargain price - or at least gain control without much of a premium.

Of course, Gent must secure a good price. But there really is something badly wrong with the markets when a financially sound company's shares get knocked on the basis that it might buy a strategically-compelling asset from a distressed seller.

Hugo Dixon is Editor of www.breakingviews.com