The huge rally on Wall Street that began yesterday is being attributed to good news on the war front, but in reality it is the news on the tax front that is the primary motor. Treasury Secretary John Snow is today reported to be asking the House-Senate conference on the Budget Resolution for the entire $726 billion that was approved by the House, with the Democrats still thinking they can make the argument for $350 billion. Senate Finance Chairman Chuck Grassley of Iowa is now predicting that there will be AT LEAST $550 billion in a compromise plan. This would be enough to end the double-tax on dividends if the taxwriters truncate the tax legislation at eight years instead of ten, as I suggested might happen in our Monday brief. It will not really matter if the war extends for another two months and becomes must costlier once the Budget Resolution is agreed upon, as the administration would be able to get the 50 votes plus a tie-breaker from Vice President Cheney to enact the supply-side tax cuts at the heart of the plan. The fact that the President retains great public support for his decision to use force in Iraq should get him the public support he needs to enact serious tax cuts during a period of rising deficits.
Ending the double-taxing of dividends would easily add a thousand points to the DJIA and cut against my forecast that the DJIA will hit 7000 before it hits 9000. But it will still take some months for the taxwriters to use the elbow room they get for tax cuts to actually get a bill to the President`s desk. It is in this same period that a war going less well or a fresh outbreak of political terrorism would cut in the other direction. It is really not possible to tell how the war is going because it is being represented by authoritative figures on both sides as going well and not-so-well. That issue should tilt in one way or the other in the next two weeks as the battle around Baghdad takes place. The political developments in Israel become more critical in this equation, as the "road map" toward a Palestinian state is laid down by the U.S. government and the Arab/Islamic world sees whether or not a genuine breakthrough takes place. If it does, the likelihood of political terrorism aimed at the U.S. homeland drops accordingly.