As expected, the final week of August was quiet in terms of trading activity. Still, this week was chockfull of notable developments, including many that contradicted some commonly held beliefs. The week snapped winning streaks for major averages. The Dow Jones Industrial Average fell 2.4% for the week after rising five weeks in a row, the S&P 500, also on a five-week roll, lost 2.6% and the Nasdaq Composite shed 4.75% after ending higher for three weeks straight. The weekly setback didn't prevent the S&P from rising 0.5% in August, its first monthly gain since March. However, the Dow shed 0.8% in August and the Comp dipped 1%, undermining hopes the rally from the July lows would continue unabated. Additionally, anticipation for a rebound -- or at least a bottom -- in the tech sector was quelled this week by cautious comments from Intel ( INTC) CEO Craig Barrett on Tuesday, profit warnings by Nortel ( NT) and Semtech ( SMTC) on Wednesday, plus red flags from Sun Microsystems ( SUNW)and Novellus Systems ( NVLS) Thursday evening. (Notable nontech blowups this week included Healthsouth ( HRC), Roadway ( ROAD), and BellSouth ( BLS), which fell 3.8% Friday after issuing a warning of its own.) In economic news Friday, the Chicago Purchasing Managers Index was stronger than expected, as was personal spending. Conversely, the University of Michigan Consumer Confidence survey fell further than economists' predicted, as did personal incomes. The mixed data mirrored Tuesday's much stronger-than-expected durable goods number, offset by a weak consumer confidence report by the Conference Board.
Where Have You Gone, Sir Maestro?
Friday's, and perhaps the week's, most notable event was a remarkable speech by Federal Reserve Chairman Alan Greenspan at a symposium in Jackson Hole, Wyo. Greenspan, who's never tried to disabuse people of the notion that he is "the maestro" (a la Bob Woodward) and/or "the greatest central banker ever" (a la Sen. Phil Gramm), effectively sought to avert blame for what transpired under his watch: In the 1990s,"we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact -- that is, when its bursting confirmed its existence," Greenspan explained today. "Moreover, it was far from obvious that bubbles, even if identified early, could be pre-empted short of the central bank inducing a substantial contraction in economic activity -- the very outcome we would be seeking to avoid." Greenspan argued that the experience from May 1999 to March 2000 (among other periods when Fed tightening didn't stem a rise in equity prices) showed that modest Fed tightening can't stop a bubble.
Alan Takes a Bubble Bath
"Nothing short of a sharp increase in short-term rates that engenders a significant economic retrenchment is sufficient to check a nascent bubble," the chairman said. "The notion that a well-timed incremental tightening could have been calibrated to prevent the late 1990s bubble is almost surely an illusion." (Another illusion is that Fed easing after the bubble burst could prevent a harsh fallout. This truth should be self-evident by now but apparently isn't, given that anticipation of yet further Fed easing has been partially responsible for the market's recent rally, and why optimists are hoping for more.) Basically, Greenspan wants us to believe he didn't know the daytrading mania of the 1990s was a bubble until after March 2000, although, he knows, for certain, there's no housing bubble now, as per recent comments . The Fed didn't know there was an asset bubble in the 1990s even though Greenspan famously warned about "irrational exuberance" in 1996 and expressed concern about the bubble in Fed meetings at that time, as was recently revealed. The chairman "recognized that there is a stock market bubble problem," in September 1996, according to the transcripts here of the Sept. 24, 1996 FOMC, meeting. At that time, Greenspan also observed: "We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it." Those statements contrast starkly with Greenspan's speech on Friday, in which he suggested the Fed was powerless to stop the bubble, and his more public comments in recent years about bubbles and margins, as well as the Fed's lack of action regarding same. "In the end, the lesson is painfully obvious," Morgan Stanley economist Stephen Roach observed in a February report that's quite timely given Greenspan's comments on Friday. "From tulips to Nasdaq, the record of economic history is littered with the rubble of post-bubble economies. It takes both wisdom and courage to avoid such tragic outcomes. Sadly, as the full story now comes out, we find that America's Federal Reserve had neither. " We also found out Friday that Greenspan has neither the wisdom nor courage to admit he might have erred and contributed to the boom and its resulting inevitable bust. "Bubbles thus appear to primarily reflect exuberance on the part of investors in pricing financial assets," the chairman said Friday. True, but so is the fact that a much-heralded Fed chairman who helped support the "New Era" economic theories by talking endlessly about the benefits of tech-led productivity (and again today); engineered various bailouts during his tenure (thus engendering moral hazard ); and, effectively stopped trying to stem the mania after he was ( egads) criticized for the "irrational exuberance" comment, played some (major) role in the mania. He also could have done more to try and prevent it from reaching critical mass. Perhaps the most troubling aspect of Friday's speech is that in avoiding blame for what has happened, Greenspan offered little insight into what the Fed can and will do to help clean up the postbubble mess. "Is there some policy that can at least limit the size of a bubble and, hence, its destructive fallout? From the evidence to date, the answer appears to be no," Greenspan said, evincing a helplessness that's out of step with his oft-described role as the most powerful man on the planet. So rest up and enjoy the long weekend, September could get very interesting.