April in the stock market - Fred gets shredded

The FTSE 100 index closed at 6087.3 on 30 April 2008, picking up 385.2 points over the month.

Royal Bank of Scotland CEO, Sir Fred 'The Shred' Goodwin, has a justifiably fearsome reputation for cost cutting (which usually occurs after his latest acquisition). To his friends he is the instinctive 'man for the deal'; to his enemies an acquisitions junkie bordering on the megalomaniacal - his cash-draining purchase of a 5% stake in Bank of China back in 2005 commonly offered up by his critics as evidence of the latter.

Yet Sir Fred has always managed to dodge the bullets many of his more hapless rivals have abjectly failed to avoid. The question though is for how much longer, now that Britain's second largest bank is in the middle of a £12 billion cash raising exercise as it seeks to repair its balance sheet following £5.9 billion worth of fresh 'toxic debt' write-downs.

April's decision to write-off 'dodgy loans' came as no great shock to the markets. Neither did the 2 for 5 rights issue. Indeed, institutional shareholders were pressing the bank back in February to launch a cash call as the full impact on the firm's balance sheet of its purchase of Dutch rival, ABN Amro, coupled with the ongoing credit crunch, became all too obvious to see. Except, seemingly, for Sir Fred. Or, more likely, it was a simple case of denial.

In any event the huge dollop of humble pie Sir Fred is now having to eat may yet come back to haunt him. Markets are unforgiving and if Sir Fred's board is backing him for now, the longer term prognosis for his stewardship of RBS is far from certain.

In contrast, HBOS's subsequent £4 billion cash call - despite confirmation of £2.8 billion worth of write-downs - seemed almost minuscule by comparison. But miniscule or not, the announcement by CEO, Andy Hornby, will come to be seen as an opportunistic move to make the bank one of the best capitalised in Europe when all is said and done.

If the banks were strapped with cash in April the same couldn't be said of the oil majors - Royal Dutch Shell and BP - both of whom posted record profits as the price of crude headed north of $115 a barrel. Royal Dutch Shell made profits of £3.9 billion in Q1, while BP posted £3.38 billion - up 48%.

Lawmakers, led by the Liberal Democrat Lord Dykes, had called for a windfall tax on oil companies to fund wind farms, back in January. Any renewed calls may be likely to be dismissed by the Government (which has already benefited from 'windfall' tax revenues as the oil price has risen) as further evidence of hot air from their lordships.

Martin Morris
14 May 2008 © Moneyextra.com

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