March 31, 2003
Market Momentum is Still Alive, But For How Much Longer?
“However long it takes to win…This isn't a matter of timetable, it's a matter of victory.” Bush
“There is absolutely no point, in my view, of trying to set a time limit or speculate on it, because it's not set by time. It's set by the nature of the job.” Blair
Some would argue, with a French accent no doubt, that the UN’s mandate should not have been set to timetable. Regardless, less than two-weeks into the Iraq war and already Bush and Blair are being forced to deal with a flurry of unexpected problems. And while Washington has tried to put a positive spin on situation – ‘war is unpredictable’ and we are seeing ‘progress’ – the discouraging set of facts and questions continue to pile up:
1) Driving across a desert quickly – what soldiers referred to as the ‘Baghdad 500’ - does not mean the war will over quickly. Many nameless sources have accused Rumsfeld of trying to wage war on the cheap, and some have suggested that he continually argued that more troops were not needed.
2) Iraq resistance has been tougher than expected. By some estimates, more than 70,000 Iraqi soldiers surrendered after 1-week of Gulf I, versus less than 4,000 today.
3) The reported (by allied forces) uprising in Basra has not developed into much. Allied troops are slowly working their way into Basra. Does Basra foreshadow what lies ahead in Baghdad?
4) The US initially accused Russia, then Syria of giving Iraq military equipment. Iran has also been warned not to interfere.
5) Why are refugee camps that were prepared to receive tens of thousands of Iraqis sitting empty in places like Jordan? Why are jihad fighters coming to Iraq to fight for the likes of Saddam?
To note: all the above questions and concerns could be incorrect (most of the information presented by both sides during this battle has been just that). Nevertheless, the likelihood of allied forces moving into Baghdad tomorrow and the Iraqi military crumbling – based on both allied and Iraqi information – appears remote.
In short, Iraq is not likely to be ‘liberated’ for many weeks, or even (potentially) many months. Furthermore, unless allied forces find WMD global opinion is likely to continue to build against America as the causality figures pile up. This is not good news for the stock markets.
Market Action Follows War Headlines
The markets declined last week, yet the action felt more like that of non participation rather than a ominous bear bite. To be sure, the Dow reached a low of 8,166.78 last Monday and closed the week at 8,145.77 – a mere 21 point differential. Didn’t the war outlook become increasingly more negative as last week dragged on?
After a choppy week, both the XAU and HUI rallied by more than 7% last Friday.
Dependent upon how the Iraq war progresses this activity could mark a near-term ‘bottom’ for gold stocks. The XAU hit an intraday high of 64.91 on Monday and closed at 66.74 on Friday (+2.8%) while the HUI hit an intraday high of 119.74 on Monday and closed at 123.39 on Friday (+3%). These are strong gains in the context of a weakening market, yet these are not ‘panic’ type gains.
As for last weeks winning industries, of which there was only 11 (of 102), most industries were directly related to the war: gold stocks are the only true equity safe haven, healthcare facilities stocks are generally non cyclical, oil stocks have benefited from higher oil prices/industry activity, Security Systems stocks are expected to receive more government capital, etc.
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For comparison purposes consider the top 11 losers last week: Airline stocks (which rallied by 17.7% the week before last for virtually no reason) lost ground because flight traffic has been hit by the Iraq (American bankruptcy?), Forestry and Wood products stocks have been warning for weeks of missed EPS estimates because of escalating energy costs, Tobacco stocks are being smoked because of a massive MO court loss, and hotels (obviously). As for those industries shaded in green, last week the WTO ruled that the US decision to impose tariffs on steel imports broke global trade rules. The US is set to appeal the WTO decision, and it remains to be seen what actions, if any, will be taken. As Dow Jones noted this morning ‘WTO has ruled against U.S. in the last six steel cases; none of those rulings prompted U.S. to scrap tariffs and quotas’.
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Suffice it to say, economic and stock market fundamentals (beyond expected strong earnings in energy/oil related stocks), has not been dictating trade. Rather, and as the last two weeks of action in the markets suggests, stocks are caught between a flight to ‘safety’ and a rush to ‘recovery’ -- the general feeling being safety now and recovery later (or once Saddam is about to ousted).
For the investor that elects to take part in this momentum game profits can certainly be made. However, the investor should realize that the fundamentals underpinning gains in specific industries are largely illusionary: last weeks winners are this weeks losers, not because the corporate fundamentals have been seriously altered, but because an Iraq town has been captured, allied forces are unable to penetrate into Baghdad, troops are being delayed, etc.
With this in mind, the danger for any equity investor today can be surmised with 3 little words: ALL STOCKS DROP. To be sure, during both ‘new bottom’ sell offs last year no one industry was saved from decline; no single industry, including gold and silver, could combat losses when capital moved away from stocks altogether. As the Iraq war lengthens and the US economy slips even closer towards recession, remembering these three words could prove valuable.
Focus On Iraq Distracts Investors from Recessionary Type Numbers
Many reports this week will be released for the month of March. And although nearly every report is set to highlight economic weakness and/or every report could be regarded as a stock market negative, the key report is Friday’s payrolls number. Also to note, the ISM Manufacturing Index is expected to dip below 50.
How long can the stock markets continue to absorb bad economic news without correcting below October’s lows?
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