Bracing for the Storm

By Igor Greenwald September 15, 2001

THE PATRIOTIC THING TO DO would be to buy stocks in defiance of murderous madmen. What better message to terrorists and to the world than to bid the Dow and the Nasdaq higher when trading resumes on Monday? But markets are not known for their courage, and what they muster will at some point next week turn to calculation aimed at preserving capital.

So don't expect our rediscovered solidarity to translate into an instant bull market. Refusing to bow to terror is one thing, refusing to acknowledge reality another. This is a new world where a handful of men armed with homemade knives can devastate lower Manhattan and set the Pentagon ablaze. Here, paper stock certificates may not be worth what they were before Terrible Tuesday — perhaps even in the long run.

Though World War II helped end the Great Depression, consumption didn't really recover until peace returned. Federal spending like the $40 billion down payment approved this week will help — to a point. The net domestic product, which excludes output used to replace depreciated investments, is already contracting. Rebuilding New York will boost the gross, less so the net.

Consumer confidence plunged sharply in the days immediately preceding the attacks. And just about the only item selling really well right now is Old Glory. SmartMoney.com readers have a remarkable optimism about the ability of the economy and the market to overcome this calamity, according to an unscientific poll. The question is, once the adrenaline wears off, how many will be in a market for a new house, a new car, a new mutual fund?

Wall Street, companies and securities regulators are said to be hatching plans to buy shares in order to prop up prices Monday. That may help markets stage an orderly retreat, but Japan's experience with similar gimmicks suggests they cannot help in the long run. And no buyback plan can truly cushion the sectors that will bear the brunt of economic pain.

The airlines have effectively been nationalized at a stroke, condemned to months, probably years as impoverished wards of the state. Closer to home, the financial sector been devastated physically and emotionally, and now faces a pitch-dark roller coaster ride followed by a drop in business (trading, deals, what have you) that will make the even the past year seem like one nonstop party.

-------------------------------------------------------------------------------- The airlines have effectively been nationalized at a stroke, condemned to months, probably years as impoverished wards of the state.

-------------------------------------------------------------------------------- Auto makers? Ford (F), its sense of public relations as acute as ever, issued a profit warning Friday. Conglomerates? General Electric (GE) expects $400 million in after-tax reinsurance losses, leaving its September-quarter earnings four cents short of analysts' estimates. Other insurers, media giants and hotel chains will also pay a heavy price. The usual safe havens in times of trouble — suppliers of drugs, food, weapons, alcohol and tobacco — stand to be the primary beneficiaries. And processing all these capital transfers will be markets whose previous boasts of virtual trading and extensive backup systems ring awfully hollow after four days of paralysis.

European and Canadian investors tried the stiff upper lip, then dumped homegrown stocks on Friday. And bonds rallied again for a second day, suggesting many expect nothing good from stocks. Oil and gold are up sharply even before likely U.S. retaliation.

Not everyone fears the worst. Briefing.com equity analyst Robert J. Reid expects "a patriotic rally to unfold over the next few weeks" as short-sellers refuse to profit from the misery of others, the Federal Reserve cuts interest rates and corporations announce new share buyback plans along the lines of the new $3 billion commitment by Cisco Systems (CSCO). But even Reid is cautious both for the very short term and the long term.

The more conventional view belongs to Salomon Smith Barney strategist Tobias Levkovich, who rates a retreat of 4% to 7% the likeliest outcome on Monday, ahead of a major 10% correction and, least probable of all, flat trading. If stocks crash, buy them, he suggests; otherwise start playing defense.

And the rest of the week? Well, it's prime warnings season. First up: software maker Oracle (ORCL), which beat the Street by a penny when it reported earnings without any comment Thursday. Its managers will hold a conference call Monday to discuss the unknowable: How the aftermath of terror strikes will shape the purchasing decisions of its customers.

Finally, a personal note. I never met Bill Meehan face to face. He was a voice on the other end of a telephone receiver — smart, insightful, irreverent, but still a voice. No one has heard that voice since Tuesday. Many voices were stilled that day — but that of Cantor Fitzgerald's market strategist was the one I knew, however briefly. The silence has been deafening.

http://www.smartmoney.com/weekahead/index.cfm?story=20010915

-- Martin Thompson (mthom1927@aol.com), September 15, 2001

Answers

With the rigged market coming up--restricting shorts, tons of extra liquidity, permitting companies to buy back unlimited amounts of their own stock, etc.--the power brokers may be able to create an artificial market that will limit the initial damage.

But. . .not for long. Japan proved it doesn't work.

-- JackW (jpayne@webtv.net), September 16, 2001.