March 26, 2003
Blood in Basra Leads to Stock Market Gains?
Sometimes investors can ‘accurately speculate’ why the stock markets rise and fall. For example, when the markets began to rally in October 2002 the logical assumption was that short sellers were covering, and that this activity alone – regardless of the economic headlines or corporate earnings reports – would lead to even more short covering (more stock market gains). As it turned out, this speculation proved prescient as reported record short interest in October dropped in November, again in December, and again in January -- short covering was one of the reasons why stocks were able to rally off of an October ‘bottom’.
By contrast, consider this headline from Dow Jones yesterday:
“Stocks Climb on News of Popular Uprising in Basra, Iraq”
Yes, reports of a civilian uprising could be construed as being a stock market positive (especially given that US and British troops have said that they do not want to get in a street fight in Basra). However, to argue that the markets rallied yesterday because of one word – ‘uprising’ - may also be overly presumptuous. Quite frankly, if the markets had declined yesterday, which they nearly did during a late afternoon sell-off, a different tidbit of news would have been picked from the war journals to somehow justify why stocks dropped. What might this bad ‘news’ have been if stocks had declined? How about the fact that the estimated Iraqi military force in Basra continues to escalate (Basra has gone from being ‘captured’ to simply ‘surrounded’ and the estimated Iraqi military force in Basra has climbed for much of the last week, from 100-200 to more than 1,000)?
The realization for the investor is that trying to make sense of the day-to-day movement in stocks is impossible to do. Quite frankly, if stocks do not drop today or tomorrow it is because bad economic and earnings news is being ignored.
Focus on Basra
As for the reported Basra ‘uprising’ – which, if true, would be terrific news given that it would suggest the Iraqi people (Shia) hate Saddam more than they do Americans – there has been no reports whether or not the civilians are winning. This may seem like a crude question. Nevertheless, if the civilian uprising in Basra is being squashed by Iraqi forces as British troops surround Basra and watch, would this not be bad news for the markets?
"We have seen a large crowd on the streets. The Iraqis are firing their own artillery at their own people. There will be carnage." British Officer
Not being a military strategist, it is difficult to speculate why Basra is not being captured by force so that needed humanitarian aid can be dispersed to the populace. However, as the markets appear hinged to Iraqi developments a horrific series of questions – questions which the popular media ignores - are worth pondering: is it a stock market positive if allied forces surround cities and watch outmatched civilian populations get massacred by Saddam loyalists? Does the Basra situation foreshadow what awaits Baghdad?
To note: an encouraging signal was reported by CNN this morning: “British troops have amassed outside Basra to prepare for urban warfare in a city that once was not even labeled a military target.” Suffice it to say, real ‘progress’ is not how quickly troops can drive across a desert but how quickly towns (ultimately Baghdad) can be secured by allied forces. In this regard, that troops appear ready to move into Basra is real progress (real progress: Allied troops have secured Umm Qasr).
As for the reported ‘uprising’ in Basra, was this just another buzz word the media overzealously latched onto? Was the word planted by allied forces? Al-Jazeera, which may be promoting government propaganda with the same zeal as CNN (but nonetheless has a correspondent in Basra), says ‘there is no signs of a Basra uprising’.
Victory Will Take Away (Some) Uncertainty
To be sure, the end result of operation ‘Iraqi Freedom’ is not in doubt: Saddam’s regime will be removed. Yet how Saddam is ousted seems to be nearly as important as when. To put it another way: we are told, both by Wall Street and the media, that success for the US stock markets and economy hinges on how quickly Saddam can be removed. Yet the argument can also be made that how Saddam is removed – how many Iraqis are ‘liberated’ versus killed, how accepting the Iraq population is of their new temporary leaders*, etc. – is nearly as important as when. Yes, the word ‘nearly’ is worth remembering. After all, when Saddam is gone many potential threats (chemical weapons, possible massacres, etc) will also be gone. And when this happens the stock markets will temporarily rally (justifiably so).
That said, what level this ‘victory rally’ will begin at (i.e. Dow 7,000 or Dow 8,000), and how sustainable this rally will be is another question altogether. The ‘Basra rally’ headlines make for interesting reading, but the only ‘accurate speculation’ in today’s marketplace – given ballooning US deficits, rich stock market valuations, the bleak outlook for corporate profits, etc – is that there is a lasting ‘uprising’ of ‘uncertainty’…
* U.S. Is Assembling a Civilian Team to Run Iraq NY Times (R)
The United States is preparing to establish immediate sole control of postwar Iraq, initially without recourse to the United Nations, with a civilian administration under the direct command of the military.
|
|
All data and information within these pages is thought to be taken from reliable sources but there is no guarantee as such. All opinions expressed on this site are opinions and should not be regarded as investment advice.
Copyright © 2000-2003. FallStreet.com