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April 12, 2002
The substantial drop in mortgage rates last week has held: the lowest-fee thirty-year loans are close to 7.00%, and an "origination fee" will buy high six-something.
Economic data were below expectations, and each day brought another sordid revelation of corporate mis-governance and poor prospects for authentic earnings. Palestine hangs over everything.
March retail sales rose .2% versus the .5% expected, while the Michigan survey of consumer confidence fell to 94.4 against a forecast gain to 96.
The producer price index leaped a full percent in March due to increased costs for energy. Bond market reaction is divided: some fear traditional oil-linked inflation, but others see the rise in price as a kind of tax which will limit economic growth and reverse the inflation effect.
I suspect that oil-price fears in general are overblown: the production, refinery, and inventory data suggest a normal pattern of pre-vacation-driving-season gouging rather than the beginning of another oil "shock." Oil prices briefly rose above $25/bbl, but last night's coup in Venezuela has released backed-up supplies there; and the Saudis promised to make up any supply shortfall caused by Saddam Hussein's shut-off.
Palestine could result in an oil-supply disruption (a flash of overthrown governments followed by region-wide war), but a '73 or '80-style Arab-led embargo is not likely. Today, their bloated and impoverished populations need our money as badly as we need their oil.
In the harrumphing irritation common to those awakened unwillingly, the Securities and Exchange Commission is settling accounts with those who misbehaved during its ten-year nap. (The SEC sleeps well through boom markets: when everyone is getting rich, who cares about accounting?) The SEC has opened a record 51 cases in 2002, adding Qwest last week; this week IBM, Xerox and its accountant, KPMG.
New York authorities are prosecuting Merrill Lynch, having found e-mails confirming that "analysts" under duress from management recommended stocks to investors while in full knowledge that the companies were toast.
In this week's dance of no-clothes emperors, AOL Time Warner's stock fell to $19.60, driven down in part by an immense block sale by the bonfire-of-technology Janus funds. AOLTW stock is now worth about out one-third of its value at the time of the great merger, begging the question, what would Time-Warner be worth today without the AOL anchor? Or USWest without the dead weight of Qwest?
Overall, this is not an environment conducive to rapid economic growth. Without it, the Fed funds rate at 1.75% quietly exerts a powerful downward pull on long-term rates.
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