Long-term Treasury rates broke 4 percent this week (barely, at 3.98-.99), which dragged 30-year mortgages to a six-month low of 5.69 percent with a modest “origination” fee, as reported by Freddie Mac, its time-lagged survey correct for once.
The market drivers, in order of forcefulness: a fading stock market, $55/bbl oil, an economy losing forward momentum, and a growing belief that the Fed’s next expected 0.25 percent hike (taking Fed funds to 2 percent on November 10) will be its last for quite some time. That said, it is almost impossible for mortgage rates to fall to the 5.25 percent record low unless the economy stalls out altogether.
The stock market’s woes may begin with $55 oil, as so many claim, but the most recent sag coincided with the New York attorney general’s discovery of disgusting business practices among the nation’s largest insurers (not all, by any means, but too many). Marsh & McLennan has dumped its reputation, $11.5 billion of its stock market value (46 percent), and shortly will dump its CEO, previously one of the Street’s sharp-elbowed darlings, now known to have been a pinstriped bid-rigger.
The New York Attorney General Eliot Spitzer–with thin staff and budget–has exposed the nation’s bank, securities and insurance regulators as inept and sound asleep. If this one energetic guy can discover so much wrongdoing so quickly and so easily… it does not inspire faith in the actual businesses supposedly regulated, as opposed to their claimed performance.
Another nervous-making stock market element: the techie speculators are baaaack.
The new kid, Google, announced that it had earned $52 million in the third quarter, 19 cents per share. The share price jumped to $149, for a capitalization of $41 billion, and a trailing P/E of 196. The company is so secretive about its plans that more than one analyst has said that it’s impossible to know if Google is over-valued because we don’t really know what it does or plans to do.
Old-time techies are still in the hunt. Amazon said it earned $54 million in the third quarter, 13 cents per share (a lot like Google), but its stock trades at $39 (at that, the company is “worth” $16 billion), and a P/E of “only” 75 — a tad rich for a business model yet to prove itself.
EBay is a real business, made $189 million in Q3, 27 cents per $91 share, for a P/E of 95. However, would you rather own eBay–the company–or have the $62 billion its stock is worth?
Everybody asks about economic and interest-rate consequences from the election. I can’t find any–at least not any that flow directly from changes in policy. Neither man will have any particular mandate, and it will take time to see if either has the serious intention and ability to address the budget deficit, over-promised entitlements and the dollar-threatening trade deficit.
However, the credit markets improve when the world is scary, and very shortly after the election the fright index is going to rise. The Bush team has clearly delayed until after the election an offensive in Iraq to re-take several provincial capitals now held by insurgents. The offensive should begin shortly after the election, and will be unpredictable and threatening to peace of mind (what little there may be).
Two other elements may make Iraq more dangerous: First, if John Kerry is elected, will the two deeply hostile camps cooperate on policy until the inauguration? What of the offensive, then? Second, if instead of a clear winner we have a long interval of election-deciding lawsuits, how will markets react to a very violent pre-Iraq-election interval during an impaired Presidency?
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
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