Declan's week: Cloudy weather

Why the 4000 barrier matters to the market

You might well be wondering whether now is a good time to invest in shares as the markets show signs of a recovery. Our Business Presenter Declan Curry investigates.

Sunny periods, but mostly overcast with scattered showers. Not the weekend weather forecast (after all, when do we ever have sunshine when we're off work?); it's the mood of the stock market.

A little over two years ago, the index of the UK's top shares was close to 7,000. Since then we've had a long spell of dark clouds and heavy gloom - as the overall value of the FTSE 100 index fell as low as 3,800.

As the lovely Carol Kirkwood would put it, the stock market forecast has been 'dreich'.

But in the last few weeks, we've had some rare bursts of sunshine. After a long time of doing not very much, the FTSE has made a few attempts to break through the magic 4,000 barrier.

It doesn't take much to bring the storm clouds back again - the smallest item of bad news from the other side of the Atlantic, or the tiniest whisper of gossip here in London will do it.

The City attaches great importance to these big, round numbers. This might strike you as ridiculous. After all, can there really be that much difference between 3,999 and 4001?

Well, it's like the difference between 31st December 1999 and 2nd January 2000.

You probably still lived in the same house and had the same job on the other side of the millennium, but I hope that on the magic day itself, you felt a small tug of history... and had a good party too.

It's like that with 4,000 on the FTSE. Crashing through it when share prices are rising makes investors feel good. It re-opens the hope that the long, miserable decline in the value of our savings will soon be at an end.

You start to dream that the crisis in pension funding might be eased, and that our investment and insurance companies might start to rebuild their financial strength.

But it doesn't take long for that dream bubble to pop. Every time we've risen through the 4,000 barrier, we've fallen back below it again pretty soon afterwards.

Investors are still very jumpy about the state of the economy, the weakness of company profits and the smaller size of the annual payment we get for owning shares.

It doesn't take much to bring the storm clouds back again - the smallest item of bad news from the other side of the Atlantic, or the tiniest whisper of gossip here in London will do it.

But the fragile state of the stock market doesn't mean people are unwilling to put money into shares.

There's plenty of investment cash sitting on the sidelines, and every so often someone will pounce on attractive looking stocks.

Just last week, the new Northumbrian Water company turned up at the stock exchange, and raised £389 million in a single morning. It was the biggest ever sale of new shares in the history of London's junior stock market, AIM.

The day before, the AIM market pulled off the biggest sale of biotechnology shares this year, offloading £5 million worth of shares in the gelatine-free tablet maker, Bioprogress.

So far, more than a dozen brand-new companies have sold off new shares on the AIM market this year.

They weren't the only ones to raise money through share sales. New shares have also been sold on the main stockmarket (the home to the FTSE's top 100 companies).

Almost 50 new and established firms have sold new shares on AIM and the main London stock market this year. Between them all, more than £500,000 in new shares has been snapped up by hungry investors.

That's much less than has been raised at this stage in previous years. The market for new shares is still very weak. But it shows that the stock market is far from dead.

Other big buyers of shares are company directors who put their money where their mouths are. Just this week, two directors of Mothercare spent £100,000 on the company's shares.

The week before, there was an even greater spending spree. 18 directors of the company behind the Independent newspaper bought £44 million worth of their company's stock between them, while one director of the software company Emblaze invested £16m in the firm.

But again, these numbers aren't as impressive as they first appear - as there are also plenty of directors who are selling shares too, for a variety of reasons.

In the last fortnight alone, directors of the drugs firms AstraZeneca and Acambis, the Bradford based supermarket Morrisons, the high street chain Next and the pubs groups Enterprise Inns and Punch Taverns have all sold up - just to name a few.

The sure sign that the stock market is still weak is the large number of firms that are about to leave it. By far the biggest buyers of shares are the private money firms that want to take some of our best-known companies into private hands.

Takeover bids for the Anglian water company AWG, the department stores Debenhams and Selfridges, the health clubs Fitness First & Holmes Place, the restaurant Pizza Express, the smallpox vaccine company Powderject, the supermarkets Safeway and Somerfield, and the tabloid newspaper group Trinity Mirror would - if they all came off - rub out more than £8 billion worth of shares.

And there could be many more. Among others, WS Atkins, Austin Reed, Chubb, Cordiant, Hamleys, JJB Sports, Mitchells & Butlers, Sainsbury, and West Bromwich Albion have all either admitted that they're received possible takeover bids, or are seen as vulnerable to one.

The big worry for small shareholders is that these companies are being snapped up on the cheap - with investors taking the hit in their wallets.

We shareholders have suffered from the fall in these companies' share prices. If business picks up, the private money firms that got our companies for a song will pocket all the gains.

The one hope for shareholders is that the sheer number of private bids might be a sign that this is the last rummage in the bargain bin.

The theory is we've got a multitude of takeover bids now because the private money gurus think stock prices might pick up again soon, and make the companies they want more expensive.

The City's been wrong about this many times before, and might be wrong now. But fingers crossed, the next big number we break through might be 4,500 rather than 3,500.

Declan Curry is Breakfast's regular business presenter, bringing you live updates from the London Stock Exchange every weekday morning from 6am.