Wednesday, August 18, 2010

Bears Watching

THE TROUBLE WITH REALITY IS that it lacks heart and soul. It hasn't a flicker of interest in empathy, compassion, hope or any of the precious filigree of feeling that separates us from the brutes. To the exclusion of everything else, it embodies that old Dragnet mantra of "Just the facts, ma'am." Which more often than not makes it as popular on Wall Street as ants at a picnic.

And last week reality reared its uncompromising head and scared the daylights out of the stock market, choking off a promising rally and sending stocks plummeting. Reality's unwitting (only the incurably cruel would say witless) agent in this instance was Bernanke & Co.

For what issued from Tuesday's regularly scheduled rendezvous of the Federal Reserve's Open Market Committee was a somewhat grudging admission of the obvious: that the recovery was laboring and its pace "likely to be more modest in the near term than had been anticipated." And just to demonstrate that it was on the case, that august body announced it would fool around a bit with its swollen balance sheet by using the cash thrown off by existing holdings to buy long-term Treasury bonds

Investors were underwhelmed by the remedial action proposed by the Fed and thoroughly shaken by its admission that the recovery wasn't as advertised. On both scores, their reaction was eminently sensible.

The rejiggering by the Fed of its bloated portfolio mainly demonstrates, with interest rates at ground zero, how few and feeble are the options left to it to provide a jolt to the economy. And the acknowledgment, however weaselly the phrasing, that the recovery is losing traction, stoked immediate fears that, in truth, things are worse, maybe much worse, than the Fed perceives (to be kind) or is willing to admit (to be, well, realistic).

More telling than either the sotto voce concession that the economy isn't as buoyant as anticipated or the latest mostly-for-show effort to keep it shuffling along was a recent Reuters dispatch that a woman robbed a McDonald's in Oklahoma using a pair of men's underwear held in place by paper clips to hide her face. When a hard-working bandit can't scrape up a couple of bucks to buy a decent mask, you don't need Mr. Bernanke to inform you times are tough. The story neglected to say, incidentally, whose underwear it was and how the perp came into possession of it.

What's more, in just the past week or so, we've had a downpour of depressing news that even the most unobservant citizen of this fair land couldn't help being made aware of. For openers, there was the doleful July jobs report, followed by the unexpected rise in new weekly claims for unemployment insurance—to 484,000, the most since February.

And then, to make a sore point even sorer, the Bureau of Labor Statistics' Job Openings and Labor Turnover Survey (Jolts, to the cognoscenti) showed fewer company job offerings in June for the second month in a row. That's a discouraging portent that the current ratio of one job opening for every five people currently out of work isn't about to suddenly change for the better.

Retail sales in July, except for autos and gasoline—the former sparked by a bevy of promotional lures, the latter fueled by higher prices—were nothing to write home about. They were up 0.4%, but excluding autos and gas, they were down 0.1%. With employment still punk and housing still mired in foreclosures, which, according to the authoritative RealtyTrac, were up nearly 4% in July over the previous month, prospects for a serious rebound are not, to put it mildly, promising.

Unexpected and unsettling, too, was the Commerce Department's revelation that the trade deficit in June widened by a formidable $7.9 billion, to $49.9 billion, the biggest monthly jump since 1992, when the official numbers crunchers started keeping tabs, and the largest gap between exports (which declined) and imports (which gained heartily) since October 2008.

That was a downer on several scores. One was that exports had been one of the few bright spots in the recovery. And given the lackluster pace of sales, the rise in imports suggested a palpable portion of them were destined to wind up in already-hefty inventories.

No sooner did the less-than-inspiring trade data come out than estimates for second-quarter gross domestic product fell like dry leaves in autumn. The preliminary seasonally adjusted annual growth rate of 2.4% was shaved by pencil-wielding Street savants to as low as 1.3%. And the redoubtable John Williams, chief cook and bottle washer at Shadow Government Statistics, reckons there's fair chance that GDP in the current quarter could be negative.

Now, most of those richly paid economists (John and a handful of others are exceptions) are no better than Mr. Bernanke at divining the future. But that scramble to lower their estimates for GDP, both for the second quarter and for the second half of this year as a whole, suggests they, like the Fed chairman, felt an urgent need for a reality check.

No list of causes for investor fear and loathing would be sufficient without taking note that, Germany apart, reports of a brisk European recovery and with it the vanishing of the threat of sovereign-debt default appear to have been more than a little exaggerated.

On this score, even a permabull like MKM Partners' Michael Darda, who has been pretty much on the money in calling the stock market since it hit bottom in March '09, warns in his latest epistle that while short-term funding markets in Europe have shown some stability of late, "sovereign-debt spreads in the periphery have begun to widen again, a potentially threatening sign."

A tally by the World Bank dug up by our crack researcher Teresa Vozzo showed that in 2009, the U.S. chipped in $14.3 trillion and Europe $12.5 trillion of the $58.1 trillion of the global GDP (the only other significant chunks were accounted for by China's $4.9 trillion and Japan's $5.1 trillion). So investors quite properly have been worried by indications that all's still not quite well on the Continent.

And to contend that the so-called developing nations can blissfully "decouple" for any length of time from economic drag in the world's two biggest markets strikes us as the ultimate in wishful thinking, and all the more so with China's growth slackening, and Japan being Japan.

We don't think Armageddon is right around the corner (if we're wrong who'll be left to complain?). We do think it's imperative that every now and then, investors, by nature an upbeat group, step back and take a hard look at the way things—which emphatically includes the economy—really are. This is definitely one of those times.

SPEAKING OF DECOUPLING LEADS US to the heart-rending story of Mark Hurd and Jodie Fisher. In so many ways an intriguing tale that ended, as our quip-meister colleague, Randy Forsyth, put it, with Hurd on the street.

Mark Hurd, as you doubtless know thanks to expansive public notice and comment, is the recently defrocked CEO of Hewlett-Packard. We regret not having met Mr. Hurd, but we've been an admirer for the great job he did at HP after taking the reins from Carly Fiorina, who didn't quite wreck the company, but it wasn't for lack of trying.

Ms. Fiorina, we would be derelict in failing to note, is following a well-trod path of execs who were unstintingly rewarded for leaving the company still standing and decided to seek public office. She wants to be a U.S. senator, a reasonable desire considering, as the vast majority of that body illustrates, there are no qualifications necessary to become a member, although money helps.

But we digress. Ms. Fisher worked for Mr. Hurd as a corporate consultant (a title that covers a lot of sin). Aside from wearing a perpetual smile and looking pretty, it's hard to know exactly what her chores were, except apparently to be a gracious hostess at corporate parties for clients. Her qualifications include a resume as an actress, which, according to one film buff (or perhaps he's a connoisseur of films whose characters tend to run around in the buff) is "soft core adult" stuff, bearing (or is it baring) titles like "Body of Influence II" and "Intimate Obsession."

In any case, Mr. Hurd and Ms. Fisher seemingly worked amiably together, and Mr. Hurd, for reasons not articulated so far as we know, compensated her generously— even, it emerges, fudging his expense account to do so. And then one day, Ms. Fisher sued Mr. Hurd for sexual harassment.

And here the tale turns mysterious. For both Ms. Fisher and Mr. Hurd deny there was any sexual element in their relationship. Crude minds like ours naturally find sexual harassment without sex difficult to fathom.

Why, for heavens sake, didn't she sue for nonmarital, nonsexual harassment? Was she teed off at Mr. Hurd because he told her in a post-mortem discussion of one of those corporate hootenannies that she didn't smile enough? Moreover, Mr. Hurd settled the suit on terms all parties refuse to reveal. And Mr. Hurd agreed to pay HP back the $20,000 he had fudged to fatten Ms. Fisher's paycheck. And Ms. Fisher says she's sorry he was forced to resign because of little ol' her.

Since sex is out, just what did they do in the many evenings they spent together after work? Watch some of her old flicks? Or play chess, maybe?