Markets Gripped By Terror
This cannot be a usual SPECIAL REPORT. An act as dramatic and
unthinkable as Pearl Harbor has brought us to the brink of another world
war. Global structure has
changed and the political landscape is far different from sixty years
ago. Yet, the potential for
world conflict is every bit as potent…
if not more so.
Terrorism is not a
new tactic. It is simply
more visible and identifiable. Perhaps
the quintessential form of terrorism was exercised by the United States
when the Pacific conflict was ended with two atomic bombs. Trust me… the
world was terrified! Of
course, we were clearly at war back then.
The destruction of the World Trade Center has taken place during
a presumed peace and represents a catalyst.
All we need are the volatile materials to engage us in a global
conflict.
As usual, this
conflict is a clashing of ideologies.
The enemy is radical Islamic Fundamentalism.
America is shocked. We
have presumed that the focus of hostility is Israel and America’s
support for the Jewish state. Suddenly,
the predominantly Christian West is the target and we are all perplexed.
What has the
Christian world done to deserve this?
Here is where the apparent ignorance of the media and
“experts” amazes me and boggles the rational mind.
Undoubtedly, the struggle between Israel and
Palestinians has taken center stage in the Middle East.
But, this is not the source of the terrorist attack upon the
United States. Western
Europe and we have been targeted because Islamic fundamentalists
begrudge Christians for the crusades against Muslims and Islam.
Their memories of the white Russian military’s invasion of
Afghanistan are vivid. Christians
committed the most recent Muslim genocide in the Balkans under
Milosovich. It is not
Israel that holds the ultimate threat against Islamic fundamentalism.
It is Western Christianity.
When our citizens were held captive by Iran it was because we
tried to impose our Western concepts.
The hostages had nothing to do with the Arab/Israeli conflict.
Interestingly,
President Bush doesn’t get this message.
In his second speech after the attack, Bush alludes to the need
to adhere to our standards of morality.
These standards are primarily Western Christian morays that are
viewed as another Christian crusade.
Thus, Israel has
simply been a convenient diversion… a distraction while the master
plan against the Christian West was being designed and implemented.
To the newest anti-American breed of terrorist, even Arafat is a
joke.
The attack on the
World Trade Center is designed to disrupt our economic system. It is not a coincidence.
Islamic spokespeople have flatly stated that The New York
Mercantile Exchange cannot dominate world oil prices.
Downtown Manhattan cannot be allowed to dictate world equity,
debt, and currency values. The
United States must be put out of business! This
is their mandate.
So far, the attack
is estimated to cost more than $100 billion.
More than $30 billion represents direct property damage and
salvage operations. Another
$10 billion covers surrounding infrastructure.
$30 billion has been lost in revenues.
Another $10 billion represents loss of life claims.
Approximately $20 billion will be required for immediate security
measures. There goes any
anticipated surplus.
Consumer
confidence has been stunned. Radical
Islamic leaders understand that 33% of U.S. Gross Domestic Product (GDP)
comes from consumer spending. Approximately
one third of that spending is condensed into the “retail season”
from Thanksgiving until Christmas.
Another 10% is made up in post season bargain purchasing and
special events like white sales and spring clearances.
This is why the
first attack was timed for the second week following Labor Day.
They were looking for maximum damage and maximum exposure.
Unfortunately, the job is not finished.
All indications point to selected terrorist incidents to keep the
fear at a crescendo. It is
virtually impossible to protect against random violent acts.
We live in a diverse population where the alleged enemy is not
identifiable. Thus,
Americans have already expressed reluctance to visit shopping malls and
even movie theaters. Every
gathering place entails risk. Subways,
bridges, tunnels… all are
vulnerable.
Market Impact
The immediate
reaction was expected. Equities
and interest rate vehicles dropped.
Oil soared and gold jerked upward.
Astoundingly, market participants did not panic.
Once again, our modern information delivery system held the lid
on investor emotion.
This proves my
theory that the Information Age has structurally altered financial
markets. Our ability to
receive information and analysis “live” on television, radio, and
through the Internet has alleviated our former propensity to panic.
Confidence in the “system” has never been better.
U.S. citizens are inclined to trust government action.
This is the good news.
Unfortunately,
other aspects of investment markets have not changed.
Those companies located in downtown Manhattan are going to face
extreme hardship. Although
the government may step in to protect the financial footings, lost
business cannot be easily recaptured.
Not only are the businesses in the Trade Center impacted, but all
those who conducted business with them, too.
The ripple effect is significant.
Out On A Limb
It is not wise to prognosticate with so many
uncertainties. However,
that is what market letters are about.
I will go out on a limb and make some predictions that I hope
will be helpful during the trying months ahead.
OIL – As anyone can
imagine, Arab OPEC members are scared.
Not even in their wildest imagination did rational heads of state
believe such an attack would be successful against U.S. citizens.
OPEC is in serious trouble.
After holding industrialized nations hostage to spiraling energy
costs, they have suddenly turned against us with unacceptable hostility.
Fearful of severe retribution, OPEC will try to ameliorate
Western perceptions by increasing quotas and lowing energy prices.
Assuming any military
action avoids Middle East oil fields, we should expect lower rather than
higher crude prices. The
problem may come from refining and distribution.
I have already seen reports concerning the lack of security at
our gasoline and heating oil terminals.
If we beef up security, there is likely to be considerable
downtime for trucking, tanking, and other deliveries.
Refineries will be on
alert and new security measures can slow production.
The reverse crack spreads are favored under these circumstances.
Crude oil could pile up while refineries back up.
This is why it is critically important not to jump into energy
markets until we see definitive trends.
Unquestionably, military action in oil producing regions will
spike prices. However, we
do not know where any actual conflicts will develop.
GOLD – For the second
time this year, gold has hope for a rally.
Any movement into gold will be as a safe haven rather than an
inflation hedge. Simply
put, investors could become wary of government monetary policy if we see
too much “printing of the money” to overcome the mounting liquidity
crisis. In usual fashion,
gold spiked as the Towers crumbled.
Then, prices retreated. If
gold is to regain footing, it must be steady.
Investors must perceive gold as “safer” by virtue of low
volatility relative to currencies and other paper assets.
Understand that gold’s
advantage in a deflationary period is stability.
Based upon consumption from 1929 through 1935, it appears gold
experienced its highest purchasing parity despite the Great Depression.
While the argument is that “gold was money” during the gold
standard, this is precisely the point.
Gold was chosen as money because of its perceived intrinsic
value.
A second advantage to
gold at present prices is the limited downside.
Under $300 an ounce, gold has far less downside exposure during
the current crisis. As the
chart demonstrates, gold is an instant reflection of panic and calm. After rocketing to $290, December gold settled back to
$280… retracing half the
previous session’s move.
I believe gold
represents a good crisis hedge over the next several weeks or months. Keep in mind that gold is not an “investment” since it
lacks yield or dividend. Gold
is a “trading vehicle.
LUMBER -
Understandably, lumber tumbled in reaction to the attack and a feeling
that the economy will be hindered even further.
No consideration was given to construction resurgence as the FED
loosens money even more dramatically over the next several months.
Once digested, lumber boosted $7.
Unfortunately, lumber remains thinly traded.
Volatility represents serious exposure.
INTEREST RATES –
The FED has announced its willingness to liquefy the system in response
to the billions that will be required to recover from the World Trade
Center disaster. This is a
signal to stay with the long side of interest rates and there is a
stronger possibility the yield curve could flatten as long-term
instruments shed yield in favor of increasing principle value.
I believe the true
indication of a turn in policy will come from the Treasury as opposed to
the FED. If we see a more
pronounced move to refinance Uncle Sam’s portfolio, we will know a
change in the yield curve is coming.
Ask yourself the question, “Would you raise interest rates on
yourself if you were about to take out a loan?”
In a sense, Uncle
Sam controls his borrowing and the rate at which he borrows. The FED does, in fact, take a cue from the Treasury.
If the Treasury sees an increase in borrowing needs, we are
likely to see a delay in boosting rates by the FED…
until Treasury financing is reasonably secured.
Obviously,
Treasury auctions are constantly offered.
It is the degree to which the Treasury alters its maturities that
we see where the yield curve is likely to go.
EQUITIES – The
adage, “Follow the FED” is stalled for now.
As mentioned in previous REPORTS, lower interest rates do not
raise economic activity alone. If
business is unwilling to borrow, low rates are meaningless with the
exception of home refinancing. This
time around, it is taking far longer for lower rates to stimulate
because falling equities have stripped wealth and people are scared.
News remains bad.
As unemployment climbs, the FED (and others) fear consumers will
withdraw. The World Trade
Center disaster is further impetus to pull in the horns and stop
spending. Corporate profits
are dismal and we will see a further depressing influence as recent
terrorism reverberates on Main Street, USA.
This is not to say we face total gloom.
The FED has an excuse to “super liquefy” and the Federal
Government is about to fire up a military response to a long-term
security threat. Nothing
stimulates an economy in the short term as much as war or preparation
for war. Military
industrial complex stocks will benefit.
Related industries will also benefit.
Investors who recognize the opportunities will benefit.
CURRENCIES - The FED’S plans suggest the
Dollar will yield further to the Euro as more than $20 billion in
Euro/Dollar swaps are set up for insuring liquidity.
Again, as the Euro Currency becomes a reality, acceptance will
lead to strength. Although
the chart hints that the Dollar is not willing to yield, I still see
potential for a more powerful Euro.
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