Despite an impressive list of pro-growth initiatives that should have cheered investors, President Bush's State of The Union address did not provide an antidote to the anxiety that continued to plague the markets throughout February. The month concluded on a more positive note after a Government report revealed that consumer prices rose less in January than had been forecasted earlier.

Although investor sentiment remained negative, some Wall Street gurus believe that the market is overly nervous--stirred up by some of the political issues that the President proposes to address. The bulls believe that the President's ambitious economic agenda, though consistently pro-growth, contains proposals that augur some major changes, and that the markets tend to prefer stability over change - even positive change. They suggest that this fear of change - especially Social Security reform - has cast a pall over news that would be a positive boost to investor confidence under any other circumstances.

Inflation Jitters Soothed
The bulls believe their optimism is shared by big business. They are cheered by the recent flurry of merger announcements from leading corporations in a variety of industry sectors-merger proposals that include Proctor and Gamble acquiring Gillette and SBC acquiring AT&T. They contend that executives at major companies don't embark on big deals like these unless they are reasonably confident in the overall economy. However, it took the consumer price index (CPI) month-end data for January to give the moribund market a boost, as shares gained on the news that the CPI numbers indicated that the Federal Reserve would not need to accelerate interest rate increases to keep inflation at bay. With inflation jitters soothed - for the moment - analysts gave a sigh of relief. Moderate interest rates help buoy the markets.

For their part, the bears regarded the Federal Reserve Chairman's inability to explain why longer-term interest rates remain low as a bad portent. Noting, in remarks delivered in mid-February, that "Other things being equal, increasing short-term interest rates are normally accompanied by a rise in longer-term yields," Federal Reserve Chairman Greenspan defined the current longer-term rates situation as a "conundrum."

In response to his comments, many analysts advised caution and suggested that when Greenspan is at a loss to explain why the rates remain so low, investors should play it safe. Greenspan's "conundrum" was a "red flag" for many mutual fund managers who, made wary at the suggestion that their asset prices may be aberrant, began backing away from long-term investments.

Reform Urged
Calls for reform certainly seemed to be in the air in February. Investors with positions in energy companies should be aware of a report "In Search of Reasonable Certainty; Oil and Gas Reserves Disclosure" released in February by a prominent energy research firm. This lengthy document calls for major reform in the way that oil companies account for their oil and gas reserves. The report, issued by the well-respected Cambridge Energy Research Associates, urges the Securities and Exchange Commission (SEC) to update the disclosure rules to reflect technological advances in exploration activities and the impact of non-traditional sources of oil - like oil sands or gas-to-liquid and deep water drilling - that cannot be accurately assessed under the current regulations. The current SEC guidelines, which have been in place since 1978, also preceded major technological advances that permit oil and gas companies to conduct deep-water drilling. The Cambridge report, which was funded by some 30 oil companies, investment groups, and law firms, as well as auditors and accounting firms, noted that the energy industry will need an estimated $6 trillion over the next 25 years to finance projects to meet increasing consumption. The report stated that sustaining the confidence of the financial markets is crucial to the oil companies' future funding efforts, and that accurate data on reserves is key. The recommendations come on the heels of last year's SEC investigation of the Royal Dutch/Shell Group, following a sharp downward revision in the company's stated proven reserves.

Perhaps March will bring resolution to Greenspan's "conundrum" and more reassurance for investors who stay the course. The partisan debate over President Bush's Social Security reform looks certain to stir up more anxiety... but as old Wall Street hands love to say, "bull markets climb a wall of worry."