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S&P SEES TROUBLE IN U.S. MARKET BUBBLE

By JOHN CRUDELE

WHAT do Cyprus, Panama, Egypt and the U.S. have in common? The Standard & Poor's rating service recently said that the economic systems of these countries are vulnerable to problems. This isn't the kind of company that the U.S. would like to be in, especially since the politicians say we're in the best economy this country has ever had. Also in this group of vulnerable countries is Ireland, New Zealand and Norway -- none of which has been ever been mistaken for a financial powerhouse.

Why has the U.S. been slighted?

Because companies and people here are spending much more than they should be, and S&P is afraid the whole financial system could come tumbling down. It says that credit to people and non-financial companies rose from 101 percent of the nation's gross domestic product in 1995 to 136 percent by the end of '98.

"A recent review of large syndicated loans at banks by the Federal Reserve suggests a two-year trend in increased problem loans, albeit off of historically low levels," says S&P in a report titled Global Financial System Stress.

"Nevertheless, given the extended duration of the economic expansion, commercial portfolios are likely to have overly optimistic projections in their repayment scenarios," it added. "These portfolios are not likely to perform well in a weakening economy."

Standard & Poor's also said that it was worried about the stock market, "which is being driven, to a degree, by optimistic projections on technology stocks. The resultant asset valuations have been driving high levels of consumer spending. A sharp correction in the stock market could lead to a hard landing for the economy and, thus, for the banks."

If the stock market suddenly stops rising or doesn't rise as quickly, people and companies won't be able to pay off their bubble debt with bubble money. It's like when you're playing Monopoly and you land on Boardwalk. Suddenly, that pile of pretend money in front of you doesn't look that big.

Blame anything bad that happens to the stock market this week on Larry Summers.

The press has been picking on the Treasury Secretary for a couple of weeks now, and I've gotten in a few jabs. But the full damage from Summers' statements that riled the bond market probably won't be felt until this week.

As you already know, the Dow Jones industrial average fell 218 points on Friday to the 10,425 level. And with inflationary fears growing as fast as the price of a barrel of oil, it wouldn't surprise anybody on Wall Street if the Dow tested its technical support at the 10,000 level in the near future.

The blue chip index hasn't closed that low since April 6, when it finished the day at 9,963 -- and that's when the Dow was still on the way up.

Why blame Summers? First, there was no obvious reason for Friday's sell-off except a general feeling among traders that nobody is in charge in Washington. So let's blame Larry for effectively undermining the Federal Reserve's authority by doing what he did.

Before Summers spoke, the 30-year bond was yielding about 6.75 percent in anticipation of a Federal Reserve rate hike. The markets were calming down a little, knowing that Alan Greenspan was on the job fighting inflation.

When Summers' Treasury said two weeks ago that it was thinking of eliminating 30-year bond sales because of the (yuk, yuk) budget surplus, he caused an extraordinary drop in interest rates, an inversion of the yield curve and a general feeling of panic among bond traders.

That sense of unease was evident in last Thursday's Treasury bond sale, when big investment firms -- having lost billions on Summers' statements -- generally said "no thanks" to what Washington was selling.

Stock prices usually rise when interest rates decline. But that didn't happen this time. Summers' antics caused rates to drop, but stocks didn't see any benefits.

Where does that leave us?

Interest rates will likely go back up to the 6.75 percent level where they had been. Greenspan addresses Congress on Thursday, and that's likely to cause a lot of trepidation.

And as rates climb back toward the pre-Summers level of 6.75 percent, that should put more pressure on an already fragile bubble.

Had the Treasury left well enough alone, Wall Street would have been a much more tranquil place.

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-- Maher Shalalhashbaz (mahershalalhasshbaz@mail.com), February 15, 2000

Answers

Hey Maher thanks for the posts~ very informative.

-- kevin (innxxs@yahoo.com), February 15, 2000.

S&P's concerns were recently echoed by Michel Camdessus, the soon-to-be-retired head of the IMF. There was also much discussion in some stock b'boards during last week's volatility of the sense that Summers ain't no Robert Rubin and that the Fed may not be able to engineer that "soft landing" after all. If gentle pressure on the economy's brakes doesn't work, Mr. Greenspan will have to tap 'em harder (i.e., a .5 boost instead of just .25), and that won't help financials and cyclicals at all. High oil prices and rising interest rates will not make for a very soft landing, methinks.

Markets volatile today (wow, news flash there.) Nasdaq COMP rose 1% from 1:30-2PM, then fell out of bed at 3:30, falling 1.2% in less than 15 minutes. Dow and S&P500 have been trending lower all day. Folks must be getting nervous about tomorrow's Humphrey-Hawkins testimony by Mr. G.

-- DeeEmBee (macbeth1@pacbell.net), February 16, 2000.