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June 28, 2002
For an hour on Wednesday morning, the WorldCom revelation provided sub-6.50% mortgage money, and took the 10-year T-note into the 4.60s for the first time since 9/11. However, the week's good economic data quickly returned the bond market to baseline: mortgages 6.625-ish, the 10-year back to 4.85%.
New orders for durable goods rose .6% in May, the second-straight solid gain. Although measures of consumer confidence tailed off in May, consumers of homes must feel fine: sales of new homes rocketed to an 8.1% gain in May.
The data are good, but not great, showing no acceleration in the economy, as confirmed by the Fed's tepid view on Wednesday: "...inventory investment and growth in final demand appear to have moderated. The [Fed] expects the rate of increase in final demand to pick up over coming quarters...."
Plural quarters. Maybe this year, maybe not. Maybe next year, maybe....
There is something important lost in the coverage of the Baddies: Enron, WorldCom, Tyco, and all. The media continually refer to "accounting fraud," pointing to pathetic Arthur Andersen and manipulation of financial statements.
Accounting is just a form of score-keeping. The real problem in the stock market and economy today is the failure of business plans... hundreds and hundreds of them. Paper shenanigans hid failure for a time, but concealment merely delayed the Baddies' inevitable reckoning (and unfairly re-allocated losses to investors who could not have known better).
Bad businesses.... Level 3's accounting has been straight, but its business plan, stock, and bonds are dead as a hammer. Executives in pirate eye-patches aside, Enron's real problem was a failure to make any money. Had WorldCom's CFO not cooked last year's books, its bonds and stock would have been worth what they are today, just one year earlier.
People ask all the time, how much more of "this" is out there, undiscovered? Of grotesque accounting fraud and outright looting, not much more. How many more bad businesses will be exposed, and stock re-valued? Lots.
Is "this" a systemic problem? You bet. "This" is not just the aftermath of a stock-market bubble, but the hangover from a business bubble, best evidenced by the number of CEOs who still want to talk about their "operating earnings."
In his 1996 "irrational exuberance" speech, as the Dow rose above 6,500, Alan Greenspan noted the difficulty in detecting and deflating a stock market bubble. Then and since he has expressed faith that if there were a bubble, the Fed could make credit so easy that the economy would survive the experience.
So far, so good, but there are still far too many people looking for a post-recession, easy-Fed rebound in the stock market and economy, which they see as an automatic, mechanical entitlement. Easy credit appears to have put a floor under the economy, but excessively tight credit did not puncture the stock market bubble, and easy credit cannot restore stock prices.
Only one thing can restore rising stock prices, and the economy: good businesses making good money.
The Fed can prop the economy, but it can't make a bad business a good one.
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