War Overshadows the Fed Chairman, Too - TheStreet

Major stock proxies were higher before and during

Federal Reserve


Alan Greenspan's

congressional testimony Tuesday. But the dollar started fading during Greenspan's address and stocks followed suit as the specter of Osama bin Laden re-emerged in late morning.

As of 3:09 p.m. EST, the

Dow Jones Industrial Average

was down 1.2% to 7827, after trading as high as 7985.52. The

S&P 500

was down 1.1% to 826.88 vs. its earlier best of 843.02, and the

Nasdaq Composite

was down 0.6% to 1289.20, after trading as high as 1315.

In his

prepared testimony, Greenspan reiterated past observations that geopolitical risks are the main obstacles to U.S. economic growth, while again lauding the resiliency of the economy, which he attributed to increased productivity.

Discerning the economic path ahead is "especially difficult" because of the "intensification of geopolitical risks," the chairman conceded. However, the Fed's "more probable expectation" is that the economy is "poised to grow more rapidly," if and when those uncertainties diminish vs. being "one that is still laboring under persisting strains and imbalances that have been misidentified as transitory."

Citing lower Treasury yields, narrowed spreads between yields on corporate bonds and comparable Treasuries, lower premiums on credit default swaps and improving liquidity conditions in capital markets (aside from equities, one supposes), "financial conditions would not seem to impose a significant hurdle to a turnaround in business spending," Greenspan argued. "These factors, if maintained, should eventually facilitate more vigorous corporate outlays," the absence of which remain the economy's main anchor.

The Fed projects real GDP will grow between 3.25% to 3.50% in 2003, and for the unemployment rate to be between 5.75% and 6%.

Stocks rose at the opening of trading and then dipped when the chairman's testimony began at 10 a.m. EST. But shares recovered quickly and hit intraday highs an hour later. The dollar was also higher at the onset of New York trading, but struggled to recover from a drop timed with Greenspan's speech. The U.S. Dollar Index was lately up 0.19 to 100.46 after trading as high as 100.80 early on.

Stocks soon followed the dollar's trend after Secretary of State Colin Powell said in separate congressional testimony that he viewed a transcript of a message from Osama bin Laden in which the terrorist says he "is in partnership with Iraq," according to



The transcript was aired through an interpreter on the Al-Jazeera network around 3 p.m. EST, and carried by American television, although the Arab news network earlier denied it had had any new message from bin Laden. (Meanwhile, Middle Eastern Web portal

Al Bawaba

reported that the statement was released by British-based news agency



Regardless, the mere mention of bin Laden's name (something administration officials have been loath to do) unnerved traders, as did CIA Director George Tenet's testimony. Recent reports of potential terrorist attacks -- leading to Friday's heightened terror alert -- are "the most specific we have seen" and consistent with previous al Qaeda activities, Tenet said, citing the amount of activity being observed by intelligence agencies is the highest since prior to the Sept. 11, 2001 attacks.

As if that weren't enough, tensions between North Korea and the U.S. remain high, as do tensions within NATO over Turkey's request for assistance in preparation for possible attacks by Iraq. Separately, France, Germany and Russia issued a joint statement Monday that called for increased inspectors in Iraq, heightening the possibility of the U.S. leading a coalition against Iraq without United Nations' support.

"The use of force can only be considered as a last resort," the statement said. "Russia, Germany and France are determined to ensure that everything possible is done to disarm Iraq peacefully."

On a more technical note, traders said the S&P's inability to hold above the 840 level -- the lower end of its recent trading range -- was a key (and bearish) development in the session, thus far.

All Greenspan, All the Time

There was a political element to Greenspan's appearance before the Senate Banking Committee. While that's almost always the case, the rhetoric was ratcheted up several notches Tuesday, given the ongoing debate about President Bush's proposed $674 billion economic package and corresponding projections for rising budget deficits.

In light of the "major budget issues now confronting the Congress and their potential implications for the economy, I thought it appropriate to devote some of my remarks today to fiscal policy," Greenspan said, stressing the comments were his and not the Fed's.

Regarding the most crucial element of Bush's proposal, especially to Wall Street, Greenspan said he supported the elimination of the double taxation of dividends. However, he'd prefer the tax be eliminated at the corporate vs. individual level.

In keeping with his view that geopolitical events are the main restraint to economic growth, the chairman also questioned whether additional fiscal stimulus was necessary at this juncture.

In general, Greenspan was pretty hawkish on the budget front.

"There should be little disagreement about the need to re-establish budget discipline," he said, calling recent projections of deficits "sobering." In conjunction with the projections, "looming demographic pressures, underscore the urgency of extending the budget enforcement rules," he continued, citing statutory limits on discretionary spending and the so-called PAYGO rules. Enacted in the Budget Enforcement Act of 1990, these rules expired in the House last September and have only been extended in the Senate through mid-April.

"I am concerned that, should the enforcement mechanisms governing the budget process not be restored, the resulting lack of clear direction and constructive goals would allow the inbuilt political bias in favor of growing budget deficits to again become entrenched," Greenspan warned. "We are all too aware that government spending programs and tax preferences can be easy to initiate or expand but extraordinarily difficult to trim or shut down once constituencies develop that have a stake in maintaining the status quo."

Greenspan recommended the adoption of policies that are more flexible, including that the federal government switch from a cash-based accounting system to an accrual-based one. That "would allow us to keep better track of the government's overall accrued obligations and deferred assets," he said.

It's often hard to keep track of Greenspan's comments (or the meaning therein). Arguably, there was something for both sides of the aisle in Tuesday's testimony, although not enough to keep financial markets from fretting about the two-headed hydra of geopolitics and terrorism.

After trading as low as 99 28/32 early on, the price of the benchmark 10-year Treasury note was lately up 2/32 to 100 11/32, its yield at 3.96%. However, traders said the early drop was more about the government's two-day auction of $24 billion of five-year notes Tuesday and $18 billion of 10-year notes Wednesday vs. anything Greenspan said. The late rise was mainly about weakness in shares and concerns about terrorism.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.