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February 8, 2002
In the absence of news of economic recovery, mortgage rates followed the stock market for the second straight week, staying just under 7.00% with minimal fees.
While beneficial for rates, the view from the north end of that south-bound mess was not a pretty sight.
The two pieces of hard economic data available were contradictory (as usual), but the weaker of the two was by far the more compelling. A drop in claims for unemployment insurance did not offset the Supply Management service-sector surprise: the index, reflecting about 70% of the total economy, slipped in January from December. Not much, and still close to break-even, but down to 49.6% from 50.1%.
The forward-looking components of the index -- new orders, inventories, hiring intentions -- all slid as well.
Every passing day brings additional confirmation that Enron was a rogue operation. Unlike so many tech companies (or S&Ls in the '80's), there was no misplaced faith in a hard-luck or dopey business plan. At Enron, the complicit officers knew they were engaged in siphoning and concealing losses. Ex-CEO Jeffrey Skilling's claim before Congress to have known "nothing" about Enron's financial difficulty is the most astounding testimonial whopper since John Ehrlichman in the Watergate hearings, which was followed by Senator Daniel Inoye's growl into an open mike: "What a liar!"
While there is no evidence of political assistance in this fraud, the embarrassment in the financial markets is well-deserved. The dozen Merrill executives who invested in Enron's absurd "partnerships", the mutual and retirement funds packed with Enron stock, the regulators... none can explain how a fraud on such a scale went undetected.
The more serious matter is the now-sensitized market's scrutiny of every new earnings report. As more big businesses stagger or fail, some exposed by surprise, re-discovered skepticism can turn to broken confidence.
Cisco. Once the largest company in the world by stock market capitalization, Cisco this week announced a modest surprise in earnings which bounced its stock price all the way back up to $18.50. In a conference call with Cisco officers the next day, analysts dared to challenge the firm's business performance. Such an impolite act a year ago would get you fired.
While no one accuses Cisco of anything like fraud or concealment, analysts successfully exposed a rosy accounting treatment of lousy performance. Cisco's "profit" came from booking sales of gear which it had written off as a loss last year, while in fact Cisco's new sales are shaky.
The leadership of corporate America needs quickly to get past this kind of crap, and stop undermining a recovery before it starts.
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