Outlook: Now there's a thing; Abbey gets stung by the banking cycle

At the annual general meeting on 25 April, Abbey National said trading was in line with expectations. Further back in October, when the bank fired its head of wholesale banking, Gareth Jones, Abbey insisted that there was nothing untoward about the shake-up. "There are no black holes," said the chief executive, Ian Harley. Well, a £400m plus write-off on high-yield securities, private equity and telco lending may not seem like a black hole to him, but it sure does to everyone else.

At the time, it seemed like the right thing to do. Determined to diversify away from its traditional reliance on mortgage lending, Abbey expanded hell for leather into wholesale banking, some of it at the cutting edge of finance, and for a while the bank made hay. Wholesale banking became the strongest contributor to top-line growth. Now the chickens are coming home to roost and, with no prior experience of the banking cycle, Abbey finds itself underprovisioned across a whole range of exposures to the business downturn. When it admitted an Enron exposure earlier this year, analysts were charitable and largely put it down to bad luck. Now the bank admits that its expansion into areas beyond its expertise went much further.

The bulk of the new writedowns are unspecific, Mr Harley says, and should be seen more in the context of a catch-up with provisioning practice among more experienced commercial lenders. What's more, wholesale banking is now under new management, providing a ready excuse for a general clean out of the stables. Even so, this latest disappointment is bound to put a further question mark over Mr Harley's so far lacklustre reign as chief executive. He was always going to find his predecessor, Peter Birch, a hard act to follow, and in his early years he was the unlucky victim of some vicious boardroom infighting.

None the less, the City has never entirely forgiven Mr Harley for the very public way in which he lobbied against the Lloyds TSB takeover approach – worth about £14 a share against today's price of little more than £9 – nor is it entirely convinced by Abbey's independent strategy, which looks too much like a pale imitation of what HBOS is doing. Abbey's warning that sales of with-profits bonds are lower than expected because of the poor stock market, and its general nervousness about the state of the domestic property market, underline these concerns.

This latest débâcle won't of itself sink Mr Harley, but the man with the charisma bypass desperately needs something to go his way.

BAE Systems/TRW

BAE Systems may have a new pilot at the controls following John Weston's abrupt departure by ejector seat two months ago. But its chosen destiny, which is to become a major force in the US defence industry, remains unchanged. Yesterday the new chief executive, Mike Turner, was smoked out of his foxhole and forced to confirm that BAE has TRW, America's eighth-biggest defence contractor, in its sights. Any such takeover would greatly increase BAE's bargaining power with the Pentagon.

It would double BAE's presence in the American market, making it, as Hanson once used to boast, bigger over there than it is over here. More importantly, it would put BAE it right up there alongside the likes of Boeing and Lockheed Martin when the US Defense Department is looking for a prime contractor to hand the next juicy arms contract to.

There are just two logistical problems for the military planners back at BAE's Farnborough base. One is that TRW is already under siege from another hostile bidder, Northrop Grumman. The other is that TRW is actually bigger in cars than defence and the last thing BAE wants is to own another automotive business after the chastening experience of Rover.

The collateral damage to the BAE share price yesterday, on fears of a bidding war with Northrop, would hopefully have been enough to convince Mr Turner of the need for caution. He would much rather TRW succeeded in spinning off its automotive interests as a separate business, allowing BAE to pick off the remaining space and electronic systems businesses at will.

It is unlikely he will get that chance. Northrop has been tracking its target since March and shows no signs of removing its tanks from TRW's lawn without a battle. BAE has the balance sheet strength to make a fight of it, and Mr Turner has friends in the Pentagon who might prefer to see BAE become a genuine fifth force in the US defence market rather than allow one of the big four to become bigger still. BAE is also thought to have a good war in Afghanistan, which may bolster its chances with the Pentagon.

It would be ironic if the conflict opening up on another front entirely – the threatened trade war between the US and Europe over steel imports – torpedoes BAE's designs on TRW.

Ten-year drought

Andy Brough, an equity strategist at Schroders, reckons the FTSE 100 share index will remain below 6,000 for the next 10 years. If that sounds alarmist, just remember that something like it has happened before, and in recent times too. The Dow Jones Industrial Average first broke through the 1,000 mark in 1965, and there it stayed with various ups and downs for the next 17 years. It wasn't until 1982 that it decisively broke through that level again.

As it happens, Mr Brough was not trying to make a general point about the future direction of stock markets. It is just the FTSE 100 that he doesn't like. Because of the way stocks are weighted according to market value, a 20 per cent collapse in a really big company such as Vodafone needs a smaller one like Gallaher to triple in value to counteract the effect. Mr Brough thinks anything that attempts to track the index will struggle to make progress. The best value, and the better outlook for earnings growth, he believes, lies outside the FTSE 100. He may be right. Unfortunately, the FTSE 100 accounts for the great bulk of the total value of the stock market (83 per cent), so if the FTSE 100 is going nowhere, that means our pensions and other equity-linked savings products won't be going anywhere either.

History should never be taken as any sort of a guide to the future, and it scarcely needs saying that the factors that depressed stock prices during the 1970s – the oil price shocks, high levels of inflation, soaring interest rates, industrial unrest – are almost entirely absent today.

None the less, there are parallels. The effect of all that turmoil in the 1970s was stagnant or falling corporate profits. For an entirely different set of reasons, some of them to do with the transparency of the modern economy and the now global level of business competition, corporate profits are again under pressure today, and by the look of it, highly likely to remain that way for some time to come. No wonder everyone's spending like there is no tomorrow. The idea that there is no point in saving for retirement is gaining currency all the time, and deeply worrying it must be for anyone who takes an interest in the long-term future.

jeremy.warner@independent.co.uk