Vague Market Anxieties Jude Wanniski with Paul Hoffmeister May 12, 2005

The stock market has been bouncing around in an odd way I`ve rarely seen before in my 30 years of following it on a daily basis – persistent 1% moves up and down in a fairly narrow trading range. This surely reflects the multiple variables, pro and con, that are hitting Wall Street from different directions. It is also leading to a frenzy among market commentators to ascribe reasons for the gyrations. Here are a few of our thoughts:

HEDGE FUNDS: For two or three days market downdrafts were being linked to rumors that the problems GM and Ford are having with their outsized pension-fund liabilities were about to send a host of hedge funds belly-up, those with big holdings of GM`s "junk bonds" (according to Standard and Poor`s rating service). We could not see any such connection. Even if there were a host of hedge funds about to fail for having made bad bets, which there do not appear to be, they should have no adverse effects on the broad market. Hedge funds as much as mutual funds are "derivatives," and as such fail or succeed when their investments in the primary assets in their portfolios fall or rise. As for the unfunded pension liabilities of GM, all they need is a sweet 20% rally in the broad equity indices and they would be out of trouble. 

SOX: The Sarbanes-Oxley burden continues to weigh on publicly traded companies. Inside the new $295 billion highway spending bill expected to pass the Senate Friday, a provision exists requiring CEO's to personally certify corporate tax returns and ensure that procedures are in place to assure the returns' accuracy. This is one of the many bad ideas floated around when SOX was originally created in 2002 that didn`t make its way into law, bringing some relief to the DOW which lost 800 points during that time. There is still a chance the highway bill will be vetoed by the President, who has threatened to do so if the bill exceeded the $284 billion figure passed by the House. The SOX provision might also be stripped in conference. It's surprising this bum idea is still alive in a GOP government, with the U.S. Chamber of Commerce vigorously opposing it. There appears to be no leadership by the White House, Treasury, Congress, or the SEC to relieve public companies of the costly burdens of SOX compliance. Today, SEC Chairman Bill Donaldson even praised the infamous section 404 for having "the greatest long-term potential to improve the quality and usefulness of corporate reporting of this era`s corporate reforms."

FED: We never know from day to day what new bit of information will swing on when the Fed will find a "natural" funds rate to its liking. We`d of course like the Fed to stop raising rates now that funds are at 3%. We`ve been hoping the new Dallas Fed President, Richard Fisher, would take the lead in recommending a pause, but his maiden speech in Dallas last week, while superior in most particulars, at least hinted he may be happy on the current track. On the other hand, St. Louis Fed President Bill Poole yesterday told a St. Louis business group that because the 10-year note is even below where it was when the Fed last June began hiking funds, "that suggests that the market is confident of the FOMC`s resolve to keep inflation well-controlled." It is nice to see gold continuing to decline, which will lead more quickly to a flatter yield curve, further discouraging rate hikes. We will continue to examine these tea leaves. 

NORTH KOREA: For the last several weeks the possibility of North Korea testing a nuclear weapon has been another dark cloud over the market, with vague uncertainties on the consequences should they do so. The report last week that satellite photos showed evidence of preparations for a test were ominous, especially coupled with statements from officials in Pyongyang that they were processing spent fuel rods to add to their "nuclear arsenal." Now it turns out that other intelligence agencies in the government dispute the information coming from the satellites, saying there is nothing new in the photos. From reading the DPRK official statements in full, instead of the snatches quoted in our press, it`s just as likely that when the term "nuclear arsenal" is used it refers to the building of nuclear power plants. In any case, my sources who are experts in the field still believe it is highly unlikely that North Korea could produce an implosion-type nuke from the plutonium rods they have and there is still no evidence they have a uranium-enrichment program that would enable them to make a gun-type nuke, which is far easier to make. In other words, we don`t expect a test and do expect Democrats to press for bilateral talks with Pyongyang that would lead to a diplomatic resolution. 

IRAN: My personal opposition to the nomination of John Bolton as U.N. Ambassador is mainly based on the grounds that in his #3 position at State since 2001 he has undermined all the promising diplomatic initiatives that could have led to diplomatic solutions in both North Korea and Iran. He did great damage particularly by providing the Washington press corps "worst-case scenarios" from intelligence data and then "stove-piping" his findings past his boss at State, Colin Powell, into Vice President Cheney`s office and hence to the President. Based on that "worst-case scenario" for Iran, the Pentagon has been conducting exercises for the past year in the event the President decides to "take out" the Bushehr still incomplete power plant in a pre-emptive strike similar to the Israeli bombing of the Osiraq plant outside Baghdad in 1981. There is a slight chance this might happen, but inasmuch as the Bushehr plant is being constructed by Russia, and Iran to date has not come close to violating the provisions of the Non-Proliferation Treaty, we should also expect this dark cloud to be resolved by diplomacy, with Europe in the lead. As for Bolton, he may survive Democratic opposition and get to the U.N., where for the first time in his career he would not have to skirt his superiors to impact policy at the highest levels. He will have Cabinet status, with no Colin Powell to restrain him. The President might come to wish he had not been confirmed, if that`s what`s ahead.

IRAQ, ISRAEL, PALESTINE: We could use some good news from this corner of the Middle East and the news media is now doing its best to accentuate the positive. But I really don`t see movement toward solutions. My sources now expect stepped up assassination attempts against members of the new government in Iraq along with continued suicide bombings of police recruits. And by pushing the Gaza resettlement process into August, Israeli Prime Minister Ariel Sharon has raised new concerns on whether it will happen. I`m more optimistic about Israeli-Palestinian diplomacy than I am about Iraq, where the Sunnis and Shi`ite nationalists look upon the new regime as "a quisling government."