Wed, Sep 19, 2001 page19

• Business Focus: Opening of NYSE on time neededa big effort

  • By Caroline Baum / BLOOMBERG
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  The US stock market opened on time Monday morning, the result of a Herculean effort to put in place the necessary infrastructure to light the lights, power the computers, wire the phones and shuttle tens of thousands of people to the New York Stock Exchange floor and its environs.

  The Federal Reserve cut interest rates by 50 basis points as expected, ratifying the huge addition of reserves to the financial system last week with a lower federal funds rate. The Bank of Canada, European Central Bank, Swiss National Bank and Swedish Central Bank all followed suit with a 50 basis point cut in their benchmark lending rates.

  US stocks, bonds and the dollar all fell at the outset.

  Life goes on, even as the impact of the tragedy lingers. Traders and investors clearly eschewed a patriotic statement in favor of a bet on the economy's future. (For the record, I did buy a basket of stocks that tracks the Dow Jones Industrial Average, known as diamonds, at the opening.) The reaction in the US Treasury market, where rates tumbled as much as 60 basis points last week as the attack on the World Trade Center was viewed as the final blow to an economy already on the ropes, was surprisingly negative. It was even more surprising to see bond and note prices sink further with the Dow Jones Industrial Average off 7.5 percent.

  Bond investors are eyeing the huge fiscal spending effort, only in its infancy, and deciding that the economy won't stay down for the count, that the surplus and bond buybacks are history.

  It didn't take long for the Treasury to validate those suspicions, announcing mid-afternoon that it would cancel its Sept. 20 and Sept. 27 buyback operations.

  Last week Congress unanimously passed a US$40 billion emergency spending bill. At least half of the money will be available for relief and anti-terrorism efforts in the current fiscal year, which ends on Sept. 30. The other half will be part of next year's budget.

  "The patience for waiting out the slow recovery has gone by the wayside," says Jim Glassman, senior US economist at J.P. Morgan Chase. "They're going to gun it. The `V' is back." Congress is considering legislation to help the airlines, for whom the loss of business is a threat to solvency. In authorizing the president to use military force in retaliation for the worst terrorist attack in US history, Congress has opened the door to increased defense spending as well.

  All this will boost economic activity in the short run, even as it allocates vital resources away from more efficient uses and productive endeavors. The increased spending as a result of the destruction wrought by the terrorists is akin to the gerbil running furiously on the wheel in its cage. He's moving fast but getting nowhere.

  As I wrote last week, it's important to distinguish between housing starts and the stock of new homes. The first will increase from the rebuilding effort (in this case it will be commercial real estate more so than residential). The latter won't. It's the difference between an increase in gross domestic product and a decline in net domestic product.

  All this will come at the expense of higher prices. With 30 million square feet of prime Manhattan office space or damaged -- about a tenth of the city's office properties -- prices for existing space will rise. If the 650 tenants needing to find temporary or permanent space were to find space in Manhattan, it would push the city's vacancy rate to a record low of 4.3 percent, according to a real estate data provider. While it's not evident in price action, there should be more demand for technology products and services than there was a week ago. After all, next to Silicon Valley Wall Street probably runs a close second when it comes to tech toys. "Wall Street probably has the highest concentration of IT infrastructure in the world," says Henry Willmore, senior US economist at Barclay's Capital Group. "It will all have to be replaced. The inventories will disappear quickly.
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