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November 15, 2002
In the last twenty-four hours, faint signs of economic recovery pushed low-fee, 30-year mortgage rates up almost a quarter-percent, from record lows just under 6.00% to about 6.125%.
Mortgages have porpoised along the 6.00% surface, skimming just above and just below for three months. The epic volume of refinancing applications exerts strong upward pressure on rates at any shred of good economic news, as each buyer of a new mortgage-backed security (Freddie Mac estimates $600-billion worth in each of the last quarters of '02) wants to avoid the honor of buying the last one at the lowest yield.
So, the market is touchy. The catalyst for the jump in mortgage rates this week was Thursday's report of October retail sales, which rose .7%, if auto sales were excluded. Then, this morning, a weird consumer price report (CPI up 1.1% in October!) and a modest up-tick in early-November consumer confidence completed the damage. A recovering economy coupled with rising inflation would be the worst-possible case for the bond market.
If the economic data is so red hot, surely the stock market is off to the races? Surely not, the Dow having fallen back below 8500 at this writing, looking more likely to slip again than to break through the magic, nine-grand level.
Enter the replay official... staring into the slow-mo camera, reviewing the CPI surge, as restless fans dump their bond positions. Then, "The initial call on the field is reversed...." Turns out, the CPI number is a fruitcake, as nil inflation was bloated by auto incentives withdrawn and reintroduced. Retail sales were also distorted: if you include auto sales -- which fell instantly upon temporary withdrawal of give-aways -- October retail sales were the same as in the sorry September preceding.
Further, the early-November improvement in consumer confidence recovered less than half of the fourteen-year record collapse in October. In late-arriving news, October industrial production fell .8%, the biggest single-month drop since September '01 -- 9/11 September.
In deconstructing economic data, the auto companies may be the most important component to watch. Sales incentives have now reached an end-stage, ridiculous level in new TV ads shouting, "Zero-Zero-Zero!!!!" No interest, no down, and now, no payments for half a year or more. The incentives have kept production lines open, retained whole workforces, and maintained suppliers' businesses. However, the incentive mania has failed to gain market share for the Big3 versus competitors, ruined the value of used cars, and wrecked the portfolios of the Big3 auto-credit subsidiaries. Ford is a junk bond. GM reported third-quarter earnings of $3.21 per share, but S&P's "core earnings" analysis says GM lost $4.22 per share.
If the Big3 have to retrench, the economy will follow.
Among bond market types, deconstructing Alan Greenspan and his most recent testimony is an acrimonious affair. Markets used to crash on rumors that the Great Man had the sniffles; today, many a trader would cheer his retirement. This reversal dates from his August insistence that he couldn't have known there was a stock market bubble, and even if he had, there was nothing he could have done about it.
In the last week, he has three times in writing referred to an economic "soft" spot. Professional response to this euphemism ranges from derision to... worse.
"Soft" aside, his most memorable words in some time came on Wednesday, as he mused that Fed stimulus is adequate, if recovery follows the most probable path. The next line: "But then you get to the question of what happens if you're wrong."
Yes, there is that.
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