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June 7, 2002
Last week's odd pattern persists: good economic data should have blown up the bond market, but instead, long-term rates are fishing for a new bottom. Last week the threat of war pushed rates down; now the fading stock market is doing the work, as it sinks under the weight of distrust... turning to contempt.
Mortgages are holding near 6.75%. That rate defines a barrier separating mortgage investors willing to buy at higher rates from the infinite demand for refinancing at any lower rate.
The newest economic reports describe a recovery underway, and not likely to double-dip to recession. The Institute for Supply Management found both the manufacturing and service sectors in their best expansion in almost two years. Auto sales slipped as give-away incentives were repealed, but sales are still rolling along at a 15.7-million-per-year pace. Retail sales followed that okay-but-not-great trend, which also describes the new employment data: a 41,000-job increase in May was thin, but beats a decline; and, though 383,000 people filed for unemployment insurance last week, it was the fewest in thirteen months.
Strictly on that news of recovery in place, mortgages should be pushing 7.25%, and the Fed ready to hike .25% per meeting.
However, a revised forecast from Intel kicked the stool out from under hopes for a general recovery in technology, and without that, it's very hard to see how the economy will return to the heady growth-and-profit days of the 1990s.
Instead, we have growth and no profits. One algorithm troublesome for the stock market: the GDP grew 5.6% in the 1st quarter, will grow 3+% in the 2nd, and productivity is growing at an all-time high. If corporate America can't make good money in that environment, when can it?
Meanwhile, the S&P 500 trades at 30 times forecast earnings, the forecasts look shaky, and there's a new story every day which makes the Roaring Nineties look more like fraud than just a blown technology bubble.
Yesterday, Adelphia, the cable TV giant, already known to have failed to disclose billions in loan exposure through controlling-family stockholders, was discovered to have two sets of books. Neither its auditor, Deloitte & Touche, nor investment bankers, Salomon Smith Barney, had noticed either the loans or the inflated subscriber list. Chapter 11 awaits.
The CEO of Tyco, the immense, high-flying conglomerate, "resigned" after charges of tax evasion: a million bucks of NYC sales taxes from a $13 million art purchase, the art to hang in his $18 million apartment in NYC. Both art and apartment were bought with Tyco money, neither authorized or discovered by Tyco's board (the octogenarian NYC attorney general found the art, easy).
Tyco became immense through some 700 mergers, using its inflated stock to buy, most recently, CIT for $9 billion, which Tyco is now trying (and failing) to unload only one year later for $4 billion in order to avoid Chapter 11.
Until the Captains of Industry get their... stuff together, the stock market will remain under pressure. The Fed should not tighten now, lest it induce a new chapter in the "reverse wealth effect."
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