President Carter may not be happy with the direction interest rates are going , but according to Wall Street analysts, rates will continue to rise in the fourth quarter. And, ironically, the pressure on rates will come from spending in Washington.
The Treasury will be financing $29.2 billion in new cash outlays as a result of a whopping budget deficit for the October-December period. In the July midsession budget review Congress estimated the budget deficit for the total fiscal year 1981 at $29.8 billion.
Admittedly, the fourth quarter (which is the government's first quarter), always looks bad on the government's ledgers. Spending is accelerating while tax revenues are lagging. But this year's last-quarter deficit should break the existing record deficit of $26.8 billion set in 1975.
What this all means is that competition for money could get nasty. William V. Sullivan, senior vice-president at the Bank of New York, concludes: "If coupled with a continuation of the recent strengthening in the private sector's demand for credit, the Treasury's slate of financing could be a source of extreme pressure on interest rates as 1980 comes to a close." With most major banks heading for a 14 percent prime interest rate, the prospects for a cold, high-interest rate Christmas seem to be increasing.
Already, rising interest rates have put a crimp in the housing markets. It's not that money is not available for new housing; it's just that it's too expensive. Home mortgage rates are exceeding what bankers term the "affordability threshold" for most people.
For example, the Chicago-based United States League of Savings Associations figures that for an individual who wants to buy a house, this is what it will cost at the following interest rates:
$50,000 mortgage Principal Taxes & Gross income & interest utilities required added 9% $402 $536 $21,456 10% $438 $585 $23,401 11% $476 $634 $25,395 12% $514 $685 $27,429 13% 553 $737 $29,498 14% $592 $789 $31,596 15% $632 $843 $33,718
Gross income required is figured on the basis of 30 percent of an individual's gross salary going towards housing costs.
Mortgage rates in California now exceed 14 percent. Although most economists don't expect to see mortgage rates hitting 16-17 percent like they did this spring, they also point out that rates are close to the level where most people won't qualify for a loan.
Investors last week apparently could't decided if rising interest rates and Middle East wars were a permanent fixture, or just a temporary inconvience. After falling sharply the previous week, and continuing the plunge on Monday, stock prices recouped the rest of the week. When the market finally closed on Friday, the Dow Jones industrial average registered a gain of 10.58, closing at 950.68.
Volume remained high. Oil stocks continued to dominate the trading, spurred in part by the continued uncertainties in the Middle East. Thus, oil companies with strong domestic production were active, including Exxon Corporation, which announced a discovery of oil in the Beaufort Sea off of Alaska.
What stock has the highest price-earnings multiple on the New York Stock Exchange?
If you answered Computervision, you're right.
According to a list maintained by Evelyn Feit, an analyst with Kidder, Peabody & Co., Computervision has been just about the "hottest" stock on Wall Street since December 1979, maintaining the highest P-E of any other Big Board stock.
Computervision, now selling at 45 times earnings ($61 per share), is a Bedford, Mass., based company that specializes in Computer- Aided design/ Computer-Aided Manufacturing (CAD/CAM) systems. According to one analyst on Wall Street, Stuart A. Lippe of The Value Line Investment Survey, "The CAD/CAM industry now has the glamour other 'high tech' groups had 10 years ago."
CAD/CAM allows engineers to save weeks of design work by projecting into a cathoderay tube complex drawings that engineers used to do by hand. Naturally, says analyst Lippe, Computervisions's success is attracting a lot of other companies.
But, he adds, "Computervision's research and development has stressed software more than hardware, and its programming library is tremendous."
Such advantages haven't escaped the attention of Wall Street. The stock was selling at $42 in mid-August and at $20 per share (after a 2-for-1 stock split) earlier this year. In early 1978, the stock was selling for $3 per share.