Stocks Drop on Greenspan Comments

Talk of inflation upsets the market.
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Unlike other deities and near deities,

Federal Reserve

Chairman

Alan Greenspan

needs no mountaintop to speak from on high. At the

Federal Reserve Bank of Chicago

(

Chicago!? Why, it couldn't be! Dirty Turtle.

) today, Greenspan spoke the words. And it wasn't what Wall Street bulls wanted to hear.

The beauty of Greenspeak is it can be parsed in a variety of ways, and there's something for everyone in today's speech. But inflation hawks were no doubt excited by the chairman's comment: "There are imbalances in our expansion that, unless redressed, will bring this long run of strong growth and low inflation to a close."

Potential rekindlers of inflation's flame mentioned by Mr. Greenspan include the recent sharp rise in the price of oil, the "tentative signs" of recovery in world economies and tight labor markets.

Bond prices, both in the cash and futures markets, improved a bit as the speech unfolded but quickly and sharply reversed course. Equity gauges followed directly, although have since bounced off their lows.

The price of the 30-year Treasury bond was lately down 28/32 to 92 20/32, its yield rising to 5.77%.

The

Dow Jones Industrial Average

, which approached breakeven during the speech after a weak opening, was lately down 46 to 10,909. The

S&P 500

was down 9 to 1338. The

Russell 2000

was down fractionally at 434.

The

Nasdaq Composite Index

was down 11 to 2523 after briefly trading in positive territory this morning after Greenspan made his almost de facto comments about the productivity gains generated by technology.

TheStreet.com Internet Sector

index was off 3 to 634.

"I don't think what he said was wildly negative. But he's well aware the debt markets have been on the ropes, and he hardly alleviated any of those fears," said one bond trader of Greenspan's speech. "The market has been fretting he'd say something that was negative. He didn't say anything horrendously negative. But when he says things like, 'Of most concern is how long this remarkable period of prosperity can be extended,' you have to start to say to yourself, 'Is he going to an asymmetric bias in May to set up a tightening in June?'"

The trader, who requested anonymity, observed the Europeans have taken steps to improve the euro in recent weeks.

Still, the trader does not believe the Fed will raise rates this year. "Inflation is under control, the economy is growing, so let sleeping dogs lie," he said.

However, that does not mean he's betting against the rising negativity in the bond market.

If the jobs data tomorrow are weaker than expected, the unemployment rate rises and there's no wage pressure, bonds will rally a "point, point and a half, no problem," he said. "But if it's strong, we'll get hammered. There are sellers in the marketplace.

ECI

flushed out the shorts.

GDP

was horrendously strong. Greenspan is not doing anything to make people feel they want to be buying dips."

10:16 a.m.: Stocks Mixed in Early Volatile Trading

Volatile stocks were bouncing back after a plunge at the open as

Fed

Chairman

Alan Greenspan

was delivering his latest Rorschach analysis of the U.S. economy at the

Chicago Fed

.

The

Dow Jones Industrial Average

was south 15 to 10,941. The

S&P 500

was off 2 to 1345. The

Nasdaq Composite Index

was up 6 to 2541. The

Russell 2000

was up 1 to 435.

TheStreet.com Internet Sector

index was up 5 to 643. The 30-year Treasury bond had slipped 18/32 to 92 30/32, yielding 5.75%.

Most Up at Open -- NYSE

AT&T

(T) - Get Report

, up 4 1/16 to 61, fresh off its successful bid for

MediaOne

(UMG)

and news of a $5 billion investment by

Microsoft

(MSFT) - Get Report

.

Most Up at Open -- Nasdaq

Gemstar International

(GMST)

, up 14 9/16 to 125.

Most Down at Open -- NYSE

Aegon

(AEG) - Get Report

, down 3 11/16 to 90 1/2.

Most Down at Open -- Nasdaq

Knight Trimark

(NITE)

, down 2 15/16 to 146.

--

Thomas Lepri