Rally Explained
Jude Wanniski
July 25, 2002


When the DJIA opened Wednesday, heading down by another 160 points, it had to be in anticipation of the conference report on the accounting fraud legislation that would be as bad as the Senate`s version. Early summaries was that the bill would be almost identical to the Senate bill. The rally began as the details began emerging and it became clear there were important differences, especially in the language that makes criminal fraud more specific. This of course does not mean the legislation that will become law this week when it gets to the President is sound. When World.com hit in late June, the DJIA was at 9200 and yesterday`s rally only brought it back to 8200. We had taken a horseback guess that the legislation would knock 1000 points from the DJIA and later took another guess that if the Senate bill passed "as is," the DJIA would fall another 500 points. All of what followed remained in this ballpark. The market`s weakness this morning reflects the adjustment to the bill that emerged. We are not accountants here, but it is clear the legislation will make it more difficult to do business. At least there are as yet no changes to the expensing of options that would lead to tax consequences at the bottom line and that non-executive chairmen of corporations will not have to swear oaths that the CFO`s work is accurate, or face 20 years in jail. 

We will have more to say when we`ve had time to get assessments on the legislation`s details.