Companies? lack of credibility fuels market?s volatility

Fed Watch Fever is over. The entertainers on CNBC will now have to focus on something beside the thickness of Greenspan's attach case, since he has stopped the cuts in interest rates. This time he got it right. The interest rate hikes that he carried far too long in fighting, Don Quixote-like, the perceived windmills of inflation, and which exacerbated if not caused the recession, have been corrected with the 11 aggressive cuts made in 2001.

Does that mean that rates are headed up again? Not likely, or at least not anytime soon. Here's why. Inflation remains tame, removing concerns bond investors have about higher rates being necessary to compensate them for the impact of inflation on their returns.

International competition (it really is a global economy) has kept low the costs of producing goods and services. The consumer psychology of the '80s of "buy now before it goes up in price," has been replaced with "wait until it goes on sale."

Unemployment levels limit costly wage increases, as labor availability is high and job security is still tenuous for many.

Although the Fed has ended the interest rate cuts, longer term rates remain high relative to the historic 3 percent pre-mium over inflation we have written about several times because of corporate bond issuance that has been extraordinarily high. In January approximately $130 billion of corporate bonds were brought to market.

That's an annualized rate of $1.6 trillion, well above the past year's issuance average. That magnitude of issuance will eventually slow, bringing prices up and bond yields down, but it is impossible to tell when that will happen.

Corporations will continue raising capital in the bond markets as long as rates are attractive relative to the corporations' return on those borrowings. (The alternative, issuing additional equity, is less attractive for many companies be-cause of the decreased value of their stock caused by the impact of the recession and Sept. 11.)

For those reasons, we recommend in-termediate-term investment-grade corporate bonds in appropriate quantities for asset allocation portfolios.

Run, run! The crooks are coming

Remember the days of handshake deals, your word being your bond, and being responsible for your own actions? Think we are going back to those values? Was President Bush right when he said in his State of the Union address that the days are over for "if it feels good do it"?

I sincerely hope so, but it will mean driving through the value fogs of corporate honchos tip-toeing back and forth across the lines of ethics and legal legerdemain; of those charged with oversight of such corporations not kowtowing to protect huge fees; of Wall Street firms with corporate finance and re-search interests that are self serving; and with politicians who assure us that they are putting country before party.

(In those situations have you ever heard anyone say, "It was my fault, I was wrong?" I haven't. Instead, they have practiced finger pointing as though it were an Olympic event.)

Credibility, or rather the lack of it, now is becoming a concern for many, not because corporate American is rife with fraud and skullduggery, but because of the perception being shaped by the media's daily bludgeoning of the public with the wrongdoing of a few and the corporate or political conspiracy they would like to find in every action.

This concern is evidenced in the stock markets by the Tsunami-strength selling that hits any firm that is even rumored to have "accounting irregularities."

As a consequence of the Enron collapse, energy companies are under the magnifying glass; several pharmaceutical companies' accounting practices are being questioned; and woe to any corporation that has, as a part of its financial structure, any off-balance-sheet partnerships ugly!

(Not to worry Washington will fix everything with some new laws. Yeah, right! Sort of reminds me of Gov. Hol-den, who, after Ford announced its intent to close the Hazelwood plant, said, "I will talk to them about it, because we have to be proactive on this.")

Until the accounting irregularity panic dies down, market volatility will continue, with rumors about such and such a company causing further confusion, un-certainty, and more credibility concerns. It will end, but for the time being, it is helping fuel a correction to a market that made a very rapid recovery from the 9/11 sell-off and was over-bought.

Stay the course.

(Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money management company. Ques-tions or comments can be directed to him by mail via The Springfield Bus-iness Journal, 313 Park Central West, 65806 or by e-mail at sbj@sbj.net.)