Third Quarter Thoughts
Jude Wanniski
July 2, 2003


In our business, we seem to no longer think in days, weeks, months or years, but in “quarters.” The first quarter of 2003 was not so hot, DJIA down some, NASDAQ up some. The second quarter was golden, DJIA up 14%, NASDAQ up 20%. The financial press still hasn’t figured out what happened, although a Wall Street Journal editorial last week did note that the first glimmer of hope for a supply-side tax cut showed up in the House Ways & Means Committee in mid-March, about the time the market hit bottom and began its upward trajectory. In the first day of the third quarter, we find commentators noting investors are reluctant to pull their money out of the market out of fear of missing another golden quarter. This is analysis? Here are some Q3 thoughts that have been rattling around in my head:

Merrill Lynch: Q3 got off to a nice start thanks to a 96-year-old federal judge, who threw out the class-action suits brought against Merrill Lynch by investors who said Merrill defrauded them because they lost lots of money on two Internet stocks that Merrill had touted. Judge Milton Pollack did the national economy a big favor by heaping scorn on the plaintiffs, who he said hoped “to twist the federal securities laws into a scheme of cost-free speculators’ insurance.” He said “they would have this court conclude that the federal securities laws were meant to underwrite, subsidize, and encourage their rash speculation in joining a free-wheeling casino that lured thousands obsessed with the fantasy of Olympian riches, but which delivered such riches to only a handful of lucky winners.” This is exactly what the market needed to cut against the corporate-governance legislation Congress passed to punish the greedy rich of the Enron/Qualcomm world. At the time Oxley-Sarbanes passed into law, we noted it took between 800 and 1000 points off the DJIA, sharply increasing the risk of doing business as a corp or an individual. The Pollack decision was not simply a benefit to companies in court, but a systemic relief, as it is being assumed other suits of the same flavor will have a tougher time -- given the weight of Pollack’s ruling. The market will not get the 800-1000 points back anytime soon, but this was clearly a cut in the regulatory terrorist tax that grew out of the Fed’s monetary deflation. Remember the business community was given repeated assurances that the recession was “V-shaped,” when it was “L-shaped.” Plenty of CFO’s juggled the books believing things would get better before they actually did.

Bush and Iraq: Q3 should provide a clearer picture of how much trouble President Bush will be in over his pre-emptive war in Iraq to save the world from Saddam Hussein’s weapons of mass destruction. He is by no means out of the woods personally, by which I mean it is still possible he could be seen as 2004 loser if there are certain dots that can be connected. The core of his difficulty has not yet been touched by the Democrats, including Byrd of Virginia, who has taken the lead so far in peeling the onion to get to the core of truth. We are not talking about sex in the Oval Office or a Watergate burglary here, but an ugly war and its ugly aftermath. The President, remember, only gave ONE reason to the Congress when it asked for its support last fall. It was to disarm Iraq. Not to save little Iraqi children from Saddam’s tortures and deprivations or to bring peace and prosperity to a rich nation that has been impoverished for a dozen years with UN sanctions. In order to get that congressional support, Bush had to agree to put the issue into the UN and if the UN failed to disarm Iraq, he said he would so certify in letters to both House and Senate that “diplomacy had failed.” As an extremely close observer of how all this has happened, until very recently I was absolutely sure Bush had been misled by the Pentagon intellectuals who wanted war, no matter what. Suppose he knew he was not telling “the truth.” Now I am approaching the frame of mind of a Grand Jury member who does not need enough evidence to convict, only enough to indict. I genuinely hope it does not get to that point in my own mind, because if it does, it will cut the same way with the electorate.

Howard Dean: Q3 either should propel former Vermont Governor Howard Dean into “front-runner” status in the race for the Democratic presidential nomination, or reveal fatal flaws that are not now apparent. He did not raise $7.1million in Q2 because of his good looks, which he has, but because the electorate sees him pointing in the general direction of where it thinks the country has to go. I’ve written about him recently on my public (free) website, “,” as a serious contender, after watching him grilled by Tim Russert on "Meet the Press" two Sundays past. He “speaks his mind,” the way I’ve only seen in my experience from Barry Goldwater, Ross Perot, George McGovern and Ronald Reagan. Voters love political leaders who speak their minds, except for those who are not mindful of what the voters want. Of the four I mention here, Reagan was the only one who connected with the electorate’s “sweet spot.” Dean is as good as it gets on national security and foreign affairs – from a Democratic perspective. If President Bush did consciously mislead the nation into war, Dean is in the best position to capitalize on that. He is not so hot on macro economic policy, putting budget balance front and center as he did (successfully) in Vermont. It’s early though, with time for Dean to figure out a better way of approaching economic issues. If he does, it will be in Q3. If he does not, we can expect other candidates to get into the race, Ralph Nader, Gen. Wesley Clark, Sen. Joe Biden, all of whom have been looking over the other cardboard candidates in the field. A Dean/Clark ticket is a possibility as Clark, No.1 in his West Point class, is a fast learner and impressive too. Forget Rep. Richard Gephardt. When he said this week he would trump any Supreme Court decision he did not like with a presidential executive order, he was practically saying he knew he should not be President.

Bull Market: Q3 should confirm the baby bull by edging upward in sawtooth fashion. The superior tax climate for capital formation is now showing up at the edges as we have said it would. The business galaxy is beginning to build inventory in anticipation of increase consumer demand. The lower tax rates on capital are enticing what Keynesians call “stagnant pools of capital” to flow into the system. It is a gradual process, something like knitting an economy expansion, but I’m confident it is there. A client (and old friend) told me last night that my 2001 warning, “No Reason to Hold Equities,” was the “greatest call of my career.” I’ve had myriad great calls, and some bummers, but that call was the best because Poly was absolutely alone on Wall Street in seeing the monetary deflation. We did not have another supply-sider anywhere who agreed with us. Why mention this? Because I feel almost as strongly now that we are back on track. I’d be surprised if the DJIA finished Q3 over 10,000, because too many good things would have to happen, too many bad things not happen. But I would be greatly surprised if Q3 was a loser on Wall Street.

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