Monday Afternoon Rally
Jude Wanniski
July 16, 2002


Floyd Norris, the chief financial correspondent of the NYTimes, writes on page one today that it is hard to say why the market rallied yesterday afternoon after plunging 440 points. You really had to be watching C-SPAN`s coverage of the Senate and another screen showing the market rally to realize that Wall Street was exulting over the defeat of Senator Carl Levin`s amendment that would require the expensing of options. It is no wonder that NASDAQ`s high tech stocks rallied the most, as the Levin measure would have cut the heart out of the New Economy -- which is fueled by  brainpower willing to take big risks in exchange for big payoffs when Wall Street marks up the value of their equity. Senate Majority Leader Tom Daschle says he will bring up the Levin proposal again, but it will have even less success when he does.

It was easy for Coke to grandstand by saying it will expense options, as Coke is probably the best example of a company that LOSES value when it departs from its century old recipe for Coca Cola. Warren Buffett hates the New Economy. He is an Old Economy "value" guy, so he joins Coke in recommending the expensing of options. The Washington Post will expense options too, because it doesn`t use them for growth and because it is essentially anti-entrepreneurial in its outlook.

Senate Minority Leader Trent Lott gets credit for his strategy, which I doubted would work in the feeding frenzy of the sharks eager to prove they can "fix capitalism." Unable to stop the frenzy, he arranged for a unanimous vote to give his Republicans political cover, where they could protect options, derivatives and pensions from the sharks.

The second part of his strategy is still in doubt, as he hopes to delay the conference report with the House long enough to let the political pressures cool down. The market was definitely helped by Lott`s statement that the criminal penalties in the Senate bill should be reviewed. He would of course like them to be stripped out completely in the conference report, as they are totally unnecessary. The penalties for accounting irregularities are already as high as they can go. Arthur Anderson was summarily executed. Worldcom is on life support. Dead corporations litter the landscape. House Speaker Denny Hastert has not helped the market by announcing he favors the Senate penalties, but what do you expect from a former wrestling coach who is trying to figure out how capitalism works?

There are plenty of problems that remain facing Wall Street and the economy. The governors meeting in Washington report they have run out of rainy-day funds and are being forced to raise taxes and fees and cut spending. Both public and private pension funds are underwater and cannot revive without a market rally. Foreign markets are sneezing with the bad cold Wall Street has caught. It gets tougher and tougher to correct for the problems now accumulating because of the monetary deflation the policy makers and the financial press has ignored. Somebody at high levels has to start talking about a monetary reform and a gold-based dollar, which would be the quickest way to reverse the market declines around the world.