Voice of America moves markets

PLAYED ad nauseum on American TV a couple of decades ago was a commercial that showed the world coming to a stop when a stockbroker whispered his words of wisdom. The punchline was: 'When E.F. Hutton speaks, people listen.'

That's the effect Alan Greenspan has on the world of investing today. The 74-year-old chairman of the Federal Reserve Board is indisputably the most powerful money man in the world. It is common for trading on global stock exchanges to slow while he is speaking in public as brokers and investors debate what weight to give biblical pronouncements from the great man's lips.

Greenspan, who is in his 15th year on the Federal Reserve Board and has spent most of his professional life as an economist advising Presidents in Washington, is acutely aware of how each single word he chooses can move markets. Hence, the development of what is known as 'Greenspeak,' an often convoluted form of speech in which the Fed chairman does his best to set out the pros and cons of an issue without ever hinting at what he really thinks.

But when he does say what he thinks, the markets listen. In 1987, he helped stem the biggest stock market crash ever with these few, well-chosen words: 'The Federal Reserve, consistent with its responsibilities as the nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.'

That was a rare direct statement from the chairman, saying, in effect, 'I won't let the market go down any further.' Shares rallied.

On December 6, 1996, he sent the markets into a tailspin when he warned against 'irrational exuberance.' Of course, back then the Dow was 40% below where it is today and we had not yet seen the full-blown effects of the internet bubble. But the fact remains that Greenspan was worried about stock market levels even then.

Last Friday he made a widely-heralded speech which brought the headline that Greenspan was warning of 'significant risks' to a recovery in the US economy, widely anticipated to begin early this year. Wall Street has been gambling not only that there will be a recovery, but that it will be huge. The Nasdaq Index has rallied 45% from its September lows. The Dow is up 25% in the past four months.

But what Greenspan had to say about share price levels was just as interesting - and more alarming. 'Although the quantitative magnitude and precise timing of the wealth effect remains uncertain, the steep decline in stock prices since March 2000 has, no doubt, curbed the growth of household spending.

'Although stock prices have recently retraced a portion of their earlier losses, the restraining effects from the net decline in equity values presumably have not, as yet, fully played out. Future wealth effects will depend importantly on whether corporate earnings improve to the extent currently embedded in share prices.'

In short, what Greenspan said was if company profits do not rebound to justify the recent rally in share prices, watch out!

And, near the end of the speech, he said: 'Profits and investment remain weak and, as I noted, household spending is subject to restraint from the backup in interest rates, possible increases in unemployment, and from the effects of widespread equity asset price deflation over the past two years.'

Profits do remain weak, as Greenspan noted, but you would not know that to look at some share prices, especially among high techs. Microsoft, Intel and eBay, leaders of the post-September revival, are all sporting price/earnings ratios of roughly 60 in hopes that profits are about to recover sharply.

IBM and General Electric, two of the Dow Jones Industrial's most powerful components, are at still healthy p/e's of 27 and 28. A profit disappointment or a caution about future earning potential at any of these companies and investors will be running for cover.

In the past when Greenspan spoke, people listened. But his message, as far as the stock market went, wore a bit thin when his 'irrational exuberance' warning was, in the fullness of time, made to look alarmist and just plain wrong.

Now, in his own obtuse way, he is warning investors to tread carefully. Let's see if they believe him this time.