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June 14, 2002
Mortgage rates broke through the 6.75% barrier on Thursday, and today are close to 6.50%. Excepting a wild, 48-hour stretch in November last year, today's rates are the lowest since 1966.
This decline looks more durable than the brief riot last fall: demand for refinancing has been worked off, and a rate hike by the Fed is inconceivable.
Why the breakthrough? Stocks, the economy, and integrity. Fear of terrorism is out there, of course, but the week brought a modest outbreak of peace on the Indo-Pak border, and a provisional Palestinian state is in the works.
A sour package of economic data catalyzed the worst-looking week in the stock market since last September. Retail sales fell .9% in May, industrial production sagged to .2% growth, its slowest rate during the recovery, and early-June confidence among consumers cracked badly. The S&P 500 fell below 1,000, approaching its worst level since 9/11.
Last week's May data were encouraging, especially the reliable series from the ISM (ex-Purchasing Managers), and consistent with the Fed "beige book" survey's "modest but uneven growth." This week's new data have done so much damage because they suggest the consumer is fading, and the resilience in consumer spending since 9/11 has been the only real strength in the economy. The grand hopes for a technology recovery are turning to grim realization that technology has yet to stabilize, and recovery is incompatible with sinking.
Stocks, the economy, and integrity are interwoven by a few unhappy equations. If the economy is flat, how will corporate America grow its earnings enough to justify still-high stock prices? Stock prices are falling because of the economy, but at what point will falling stock prices cause the economy to fall?
Suppose earnings grow enough to support stock prices... Can they do so according to Generally Accepted Accounting Principles -- no "operating earnings," no Earnings Before Bad Stuff, no fluff, not even GAAPable fluff?
Most people asked this question think it's a trick question, or possibly a violation of stock exchange rules, or burst into hysterical laughter, or seem to be overtaken by stomach flu.
Only one big-company CEO was hauled away in handcuffs this week, the former proprietor of ImClone, for trading on inside information. Dr. Waskal, upon pre-public knowledge that the FDA was going to can his new miracle drug, the one that had pushed the stock price to $70, advised his family to sell its stock, which they did, and tried to sell all his own holdings (Merrill refused for technical, restricted-stock reasons, but sold the rest of the family shares). ImClone trades at seven bucks today.
Oh, yeah -- one ex-stockbroker pal of Waskal's chatted on the phone with him the same day as the family sales, and dumped her quarter-million-dollars' worth. She says he didn't tell her to. The pal, Martha Stewart, may turn out to be unfairly accused, but the defense testimony could be fun: "You know how you wake up one morning and just have to clean the kitchen? Well...."
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