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April 26, 2002
Mortgage rates made it back into the sixes (even with the lowest fee packages, 6.875%) for the first time in two months, taken there by a new verse in the April song: stocks, economy, and Palestine.
At this writing, the Dow is losing its battle with 10,000. Stocks have lost more than that: poor earnings and price performance aside, investors have reason to lose faith in the large securities firms at the heart of the market.
Yesterday, the SEC announced a formal investigation into the supervision of stock market "analysts." This, after the New York Attorney General, Eliot Spitzer, has caught Merrill Lynch -- caught 'em cold -- with an investigation no fancier than seizing Merrill's internal e-mails.
Where has the SEC been? For two generations, in-house "analysts" have been the croupiers of the market, recommending red, then black as prudent investments, but never ever advising an investor to back away from the table.
The only four-letter word forbidden among stock analysts: "Sell."
Any breach in stock market value (or confidence) helps bonds and mortgages, but weakness in the actual economy is even better. All fresh data this week describe an economic recovery flattening to insignificance -- not a double-dip to recession, just flat.
Orders for durable goods faded .6% in March, down from the inventory rebuilding binge in the 1st quarter (we won't soon see anything like the 5.8% GDP growth in 1Q'02). The University of Michigan confidence index slid again in April, hurt by Palestine and a tough market for jobs. The index of help-wanted advertising is stumbling along at the November '01+ pace, as are new claims for unemployment insurance.
Both new and existing home sales fell in March, and by significant amounts: 8.3% and 3.1% respectively. The housing market is not in trouble, though soggy in areas especially hard-hit by technology failures. There is one essential strength that makes it difficult for the housing market to get in trouble: the population of the U.S. is growing by better than 30,000,000 people each decade... a quarter of a million people each month.
However, the rapid appreciation of the late 1990s is missing. MGIC, the mortgage insurer, divides the country into 73 market areas; in 1Q'02, MGIC found seventeen softening areas versus only eight improving, and only six "strong" markets in the whole country.
The economy isn't going anywhere without a restoration of profits and capital spending, and rising asset values renewing the "wealth effect."
As mortgage rates edge into the sixes, remember that unsatisfied demand from refinancing will prevent any move below 6.75% -- the limit for bottom-fishing.
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