All Fizz, No Sparkle

Money Morning: All fizz no sparkle - at - the best of the week's international financial media.

*** A boom in bubbly...a frenzy in the City...

*** Where did Cairn's oil go *** Housebuilders rocket...fear stalks the HighStreet...interest eats 8.3% of income...and more!

- Drowning in Christmas spirit yet? Apparently, weBrits got through 1 in every 8 bottles of champagnesold worldwide this year.

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- The Interprofessional Champagne Committee, whichrepresents champagne producers, says global saleshit a record 305 million bottles in 2004. TheBritish have doubled their consumption over the pastfive years alone.

- The City's festive mood goes beyond champagne,though. Diamond retailers in the Square Mile arealso reporting soaring sales. Forty-month highs inthe FTSE, plus the non-stop boom in bonds andcommodity prices, have pushed City bonuseshigher...helping drive Britain's average earningsgrowth rate to a four-month high in November.

- The world's investment bankers have also gotthemselves into a frenzy of equity-buying. Globalmergers and acquisitions activity topped $100bn lastweek, reports the FT, with US firms sealing dealsworth over $85bn. Here in London, there is plenty oflast-minute corporate Christmas shopping going on aswell.

- M&A excitement was reflected in strong tradingvolumes all last week, with over 3bn shares changinghands every day between Tuesday to Friday wellabove the average for this time of year. Despite allthe activity, however, the City hasn't been loadingup on blue chips.

- The FTSE100 index finished the week at 4,696, amere two points up on last week. An initial uptickspurred by the banking sector - especially thisweek's top moneybags HBoS, which gained 8.9% afterannouncing a share buyback programme and anunexpectedly upbeat earnings forecast - was negatedby a lousy session on Friday. The FTSE100 wasdragged 0.8% lower, as AstraZeneca said its clinicaltrials of the 'Iressa' lung drug had failed. A 20%plunge by oil and gas group Cairn Energy didn't helpeither!

- Cairn's shares had trebled over the past year, andthus joined the FTSE 100. But now the explorationfirm is learning the hard way that blue chips needto walk the walk, as well as talk the talk. Theshares first rocketed on high expectations forCairn's oil fields in India - a possible 1 billionbarrels were found in January. But this week, thegroup failed to strike oil in a new field inRajasthan.

- Don't expect Cairn to make a quick recovery untilit finds more black gold. As Merrill Lynch put it:'the market will no longer be prepared to pay up forfuture exploration success'.

--- Endorsement -- - Ironically, crude oil itself was on the boil lastweek, with Brent bubbling up 16% - including a 7%rocket on Wednesday, the biggest daily gain in 14years - to $43 a barrel. Colder weather, low heatingoil stockpiles, and news of a tape of Osama binLaden urging extremists to attack Middle East oilfacilities all pushed up the price.

- Meanwhile, gold made a slight recovery from theprevious week's plunge, rising from $435 to $440 perounce. The pound was the top-performing majorcurrency, hitting a new 12-year high against thedollar of $1.955 mid-week.

- Back in the stock market, the FTSE 250 mid capindex gained 1.4% over the week to 6,767, having hita three-and-a-half year high of 6,793 on Thursday.The All Share edged up by 0.35 to 2,352. Marketwide, the worst sector was electronic and electricalequipment, declining by 3.4% thanks to sharp fallsby penny stocks such as Image Scan Holdings, whichslid by 20%.

- The automobiles sector zoomed to the top of thescoreboard, climbing by 6.81% as GKN said it shouldmeet the City's profits forecast. Investors alsopiled into housebuilding shares last week, makingthe Construction & Building Materials sector thethird-best performer with a 3.7% gain, helped byunfounded rumours of consolidation.

- Perhaps all that champagne is going to Cityinvestors' heads. To the naked eye, the Constructionsector would seem to be on a price-earning ratio of10. But as MoneyWeek's Euan Stuart pointed outrecently, these shares are not as cheap as theylook.

- 'Construction sector earnings are heavily gearedto house prices. So even if we have a soft landing(0% house price inflation over the next two years)earnings will contract by 42% as cost inflationrises,' notes Euan. 'What's more, appreciating landvalues, which aren't actual economic profits, alsoinflate earnings. Account for these factors, and thesector's PE is considerably higher.'

- And why would a sober investor want to grab retailshares right now? This strong sector enjoyed a 2.3%upswing last week, even as pre-Christmas discountingon the High Street reached new cut-price levels.

- Granted, retail sales rose by a larger-thananticipated 0.6% in November, according to thelatest government data, pushing the annual rate ofincrease to 4.4%. But as Richard Ratner of SeymourPierce notes, the survey only goes up to November27, and since then 'anecdotal evidence, coming fromall directions has been poor'.

- 'There is pain and fear' on the high street, asPatience Wheatcroft said in Friday's Times. Priceshave fallen by 1.5% over the past year, and highstreet retailers are rattled by the supermarkets'invasion of the non-food sector - especially theall-conquering Tesco as well as the mountingpopularity of Internet shopping.

- What's more, UK consumers' 'long spending spree isover,' says Wheatcroft, thanks to higher utility andcouncil tax bills and the effect of 5 interest ratehikes. Total mortgage and debt interest paymentsrose by £3bn in the year to November, up to 8.3% ofhousehold income, with a third of the increase theresult of higher interest charges rather than newborrowing.

- No wonder many retailers are insisting oncomparing their week-by-week sales data to 1999, thelast time there were five full shopping days beforeChristmas, says Wheatcroft.

- But investors might regret holding shares in theRetail sector when the final Christmas figures comeout in the New Year.

Your locum correspondent, off to a champagnebreakfast,

Andrew van Sickle Money Morning