Stocks failed to sustain the initial enthusiasm that greeted Federal Reserve Chairman Alan Greenspan's
congressional testimony today, which may be the best news of all. That may sound strange, cruel, or at least contradictory, given my recent musings about the potential for a short-term rally. But any evidence investors' faith in Greenspan is waning is a healthy development. From the stock market crash in 1987, to the Mexican peso crisis in 1994-95, to Russia's debt default and the resulting implosion at Long Term Capital Management in 1998, to the bursting of the Nasdaq's bubble, to Sept. 11, Greenspan has been there to rescue investors in trouble with the same remedy: Print more money. Encouraged by the notion the government would bail them out if things got really hairy, investors understandably forgot about risk, until very recently. For fostering this moral hazard, I contend history will not be kind to Alan Greenspan. But only recently has it dawned on many investors and market participants that this "strategy" has its limits, as most clearly demonstrated by the stock market's losses last year despite 11 rate cuts. (Yes, many investors blame Greenspan for "taking away the punch bowl" with rate hikes in 1999 and 2000. But such analysis ignores the fact Greenspan crafted the punch bowl, made the punch and had every right to kick everyone out of the party when he felt good and ready.) Longtime readers will, I hope, recall that Greenspan rants were a mainstay of the column in late 2000 and early 2001, during a time when "everyone" was convinced Uncle Alan and his rate cuts would save, or revive, the bull market. I haven't gone down that road in quite a while, but the market's initial reaction to Greenspan's testimony today got my anti-Greenspan dander up again. In classic form, the chairman offered something for everyone today. Equity investors wanted to hear reasons for optimism and the chairman obliged, saying "increasing signs have emerged that some of the forces that have been restraining the economy over the past year are starting to diminish and that activity is beginning to firm." The economy is "close to a turning point," due to the dramatic liquidation of inventories in many industries, he continued. "Any slowing in the rate of inventory liquidation will induce a rise in industrial production if demand for those products is stable or is falling only moderately. That rise in production will, other things being equal, increase household income and spending." Greenspan also spied evidence that "a recovery in at least some forms of high-tech investment could already be under way." That view was supported by the release of today's durable goods report, which was overall stronger than expected. Orders for computers and electronic equipment rose for a fourth-straight month and are up 15.6% during that period, reversing its year-over-year trend of a (still) 3.4% decline, noted Tony Crescenzi, Treasury market strategist at Miller Tabak. Conversely, bond investors wanted reassurances the economy isn't improving so fast as to compel the Fed to tighten any time soon. The chairman came through for them as well, referring to the many "cross-currents" in the outlook for household spending, including: a likely drop in mortgage-refinancing activity; the end of steep incentives by automakers; the likely end of the decline in energy prices; the rise in household's debt burden (which many claim is an outcropping of Greenspan's too-easy policies); and, a likely resumption in the rise of the unemployment rate to as high as 6.25%. He also acknowledged that consumer spending did not experience the same slowdown as in past downturns, meaning "the potential for significant acceleration in activity in this household sector is likely to be more limited than in past cycles." Greenspan also suggested the recovery of capital investment by business, which will drive the "broad contours" of the economy's rebound, "is likely to be only gradual." In the wake of the testimony, major equity averages rallied to their intraday highs of 10,255.24 for the Dow Jones Industrial Average, 1123.05 for the S&P 500 and 1793.73 for the Nasdaq Composite. The bond market also rallied, and fed funds futures dramatically ratcheted downward expectations for a rate hike, previously expected to come as soon as the Fed's May meeting. "The Chairman expertly combined the picture of a remarkably resilient and recovering U.S. economy, with near-term caution that indicated that the central bank would be slow to reverse its substantial monetary easings of 2001," Peter E. Kretzmer, senior economist at Banc of America Securities commented. "Combining his considerable optimism about U.S. fundamentals with caution on the strength of the business cycle recovery was yet another expert balancing act by this Federal Reserve Chairman." Kretzmer's views echoed those of many on Wall Street. But one man's "expert balancing act" is another's blatant pandering to the financial markets. True to form, Greenspan once again can be interpreted as encouraging investors to put their faith in him and take more risk. As mentioned above, the good news is fewer market participants were apparently willing to play Greenspan's reindeer games. In the afternoon session, the Dow fell as low as 10,058.66 before closing up 0.1% to 10,127.58, while the S&P fell as low as 1102.25 before finishing up fractionally to 1109.89. The Comp ended down 0.9% to 1751.88 after trading as low as 1741.48. The price of the benchmark 10-year Treasury rose 30/32 to 100 10/32, its yield falling to 4.83%. The stock market's afternoon swoon was attributed to cautious comments by Cisco ( CSCO) CFO Larry Carter, who said the company is still in a cost-cutting mode. Prior to the market's opening, Wachovia Securities cut its earning estimates on the network-equipment maker, citing hesitancy among large corporations to proceed with large IT purchases. Cisco shares fell 8.1% So perhaps Cisco was the culprit or maybe it was simply investors' desire to book profits after the market's run, which began Friday. Maybe the market simply got "overbought." But perhaps Greenspan's waning influence was also a factor, which would be a healthy development. While no longer wildly adored, the chairman remains the last-standing icon of the 1990s bull market. A full-blown repudiation of his presumptive omnipotence is a necessary element for a new and sustainable bull market to begin. Any indication that's closer at hand should be a welcome sign for true long-term investors.