Sorting Out the Market Variables Jude Wanniski July 17, 2002

When Worldcom hit on June 25, it seemed likely Congress would fall all over itself trying to fix capitalism, and on June 26 we worried that unless he played his cards right, President Bush might become the Hoover of this era. For the next week, during the recess, the market did okay, finishing at almost 9400 on July 5. The pols then got back to town and rolled up their sleeves, so far knocking 1000 points off the DJIA – and they still have work to do. If the Senate version becomes law, we could see another 500 points off the blue chips, but I`m advised the House will at least hang firmly against including the stiff civil penalties contained in the Senate version. It is one thing for the feds to be snooping around looking for criminal fraud at Acme Widget, another for the trial lawyers to go on fishing expeditions.

The best thing that could now happen is another recess getting in the way of these eager beavers, but it is not yet clear the Republicans will be willing or able to postpone a conference report which President Bush has asked be on his desk next week. There was a minor suggestion of a GOP delaying tactic today when someone noticed the Senate bill contains "fees" that can be collected from the victims, which means they have to originate in the House for constitutional purposes. The Democrats screamed and the Republicans said this would all be smoothed out, not to worry. There are of course Republicans, like Treasury Secretary Paul O`Neill, who will argue that it is better to get this over and done with and out of the way than have it hang around into the fall political season. My guess is the President is susceptible to this line of reasoning, which is why we see no complaints from him or his economic team about the legislation going too far.

As we have been watching the interaction of the legislation and the stock market with some care, we could see the market does not like criminal penalties and it does not like expensing of options. The NYTimes this morning gave Fed Chairman Alan Greenspan credit for calming the markets yesterday when the DJIA rallied 75 points during his testimony. As we noted yesterday, the market declined as reporters warned the markets they would not like his prepared text and rallied when it did not say much. It rallied when he said the market should not worry about expensing options and it sank when he said he liked criminal penalties. We were not surprised the market fell sharply in the afternoon when the House decided to trump the Senate on criminal penalties, with 25 years for cooking the books compared to 10 years in the Senate.

It was puzzling, though, when the market shot up 200 points on the opening. All we could find was a WSJournal report saying the differences between Senate and House might cause delays to the end of the session. This would be wonderful if it happened, because there are positive variables in the economy trying to work, but they will be smothered by these added burdens. Helen Thomas, the queen of the White House press corps, on Monday openly speculated that if the economy sours further, the President may invade Iraq to distract the voters, wagging the dog. There are still some conflicting signals, but so far it seems Mr. Bush wants to sign anything that will get this issue off his back during his August vacation – protected against more bombshells.