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May 2, 2003
Mortgage rates fell below 5.75% this week for the first time since early March (the ten-day stretch then was the first so low since the 1950s), pulled down by the economy's lousy post-war results, and uninspiring testimony by the Chairman.
Since the fall of Baghdad on April 9, the only suggestion of a post-war victory party has been a rise in measures of consumer confidence.
We may feel better, or relieved, but the sensation is not affecting our wallets. The two flash reports on the April economy, released yesterday and today, were awful and poor, respectively. The purchasing managers' index (now "ISM") fell for the third month in a row, to 45.4, just above the level congruent with recession. This morning's payroll data were not quite so bad, indicating a net loss of "only" another 45,000 jobs in April. However, the newly rising applications for unemployment benefits suggest that the Main Street job market experience is darker than the payroll figures say.
The Chairman, on Wednesday: "...I continue to believe the economy is positioned to expand at a notably better pace than it has during the past year, though the timing and extent of that improvement remains uncertain."
Damned by faint praise. We're going to do better, but we don't know when or by how much.
The news deepened the divide between the stock and bond markets.
In the last two weeks the trading tone in the stock market has visibly changed from heavy, sagging back from gains, to light, tending to positive follow-through. The reason: pretty good corporate earnings reports for the 1st quarter of 2003 -- not as good as hoped last fall, but not as poor as feared in February. The optimists see an upward earnings trend which would push business spending, and in turn would pick up the economy, and then we'll have a New Bull Market!
They sound a little like Belushi talking toga party, but everybody has to dream. They could be right -- will be, someday.
On planet bond market, this week began with fear of the Treasury's auction of $58 billion in new bonds next week. The new data and the Chairman's remarks more than removed fear; they motivated buyers, even at these yields, supply be damned.
To bond people, corporate earnings optimism is completely misplaced: earnings grew by squeezing the life out of the economy. Connect the dots: earnings rose by 10% or so in the quarter, but the economy grew hardly at all, and the job market contracted. There is a limit to growing earnings by cutting costs and firing people.
If the Treasury auction goes well next week, mortgage rates can stay low.
Pin-striped looters are getting away clean in the latest exposure of post-bubble regulatory failure. Ten firms gave up two toadies (even Charles Dickens might have needed a weekend to come up with "Grubman" and "Blodget"), some pocket change, and did not even have to admit wrongdoing. These firms were not hyperventilated nerds who made bad guesses about the world's need for their dot-coms. These are the licensed, NASD- and SEC-regulated guardians of our economy, who made fortunes by mocking due diligence, and at every sign of an incipient bubble did all in their power to inflate it further and profiteer on the fools who trusted them.
This week the Justice Department dragged away a few Enron losers, but not one Wall Street chief executive has been so much as reprimanded for bubble behavior. No board of directors has demanded that a CEO pay a part of his company's fine from his compensation hoard, instead leaving the tab to their own stockholders.
Perhaps the growing awareness among stock investors that they are on their own in a rigged game may explain some of the persistent flow of money to bonds.
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