Contributed by Bill
Publisher of: The
Fleet Street Letter
FRIDAY, 21 SEPTEMBER 2001
A New Era of Uncertainty
|A New Era of Uncertainty|
by Dan Denning
All of France observed 3 minutes of silence today.
No phones. No faxes or e-mails. No traffic.
Just "le son du glas" � the tolling of the bells � in the
Along with our French colleagues, we prayed for our country
and for the victims of Tuesday's tragic attacks. I
especially prayed for a friend of a friend of mine, an
accountant with Cantor Fitzgerald. Cantor is a bond trading
firm that had offices on the top floors of Tower One.
We only know that Jason kissed his girlfriend goodbye at
approximately 8:30 am on Tuesday, then boarded the subway.
>From there, it's just a 5 minute ride to the World Trade
Center. And another few minutes in the elevator to the
104th floor. We have heard nothing from Jason since.
In the coming days and weeks, the personal dimensions of
this tragedy will emerge. Unimportant matters have faded
away. The focus now, for all of us, is on essential human
values. Compassion, courage, strength.
Together, we'll grieve. But, because we are Americans and
because we are human, I believe we'll find strength in that
grieving -- strength to look ahead, to rebuild, and
ultimately to discover what we must do next, now that the
world has forever changed.
Though it's hard to think in these terms at the moment,
it's especially important for you to regain your focus when
it comes to financial markets.
There have been other markets that reacted favorably when
America went to war. Our current conclusion is that this
will not be one of those times. Not in the long term.
If I'm right, the decisions you'll make in the weeks and
months ahead will be significant indeed. Here's a brief
summary of what I expect:
Impact #1 - On September 17th, U.S. Markets Will Reopen and
On Monday, both the Nasdaq and the New York Stock Exchange
are scheduled to re-open.
Ash and debris still clog the ventilation systems in the
AMEX building. So the AMEX may be forced to do its trading
from the NYSE floor.
When the markets do open, you'll see that stock traders
don't like uncertainty. They have not priced in this
tragedy. When they do, the resulting decline will be swift
and large. Circuit breakers will slow the declines, but
not control them altogether.
NYSE rules call for a 60 minute halt on trading for any
fall of 550 points or more. 550 is about 5% of the Dow. If
more pent up selling drives down the markets more, circuit
breakers will kick in again.
The actual functions of the market are safe. After the
1993 World Trade Center bombing, firms spent millions of
dollars building redundant systems. Data is backed up in
Just the same, lots of panic selling has built up over the
last several days. Airlines, insurers, and financial
companies, especially those located in the Trade Center,
will all go down.
Cantor Fitzgerald alone has over 900 employees missing.
Cantor is indispensable to the trading of U.S. government
bonds. They handle nearly 25% of the $3 trillion dollars in
As the picture gets more clear, I'll be able to update
readers of the Daily Reckoning Investment Advisory.
Impact #2 - Gold Rises, Bond Prices Soar, Stocks Rally
When trading in U.S. bonds resumed on Thursday, the yield
on the 10 year note fell to its lowest level since it began
trading in 1972.
Expect it to fall even lower -- perhaps under 3% -- as
investors flee to safety.
The greater the perceived risk, the more investors will
want to own high-grade debt. The government will issue
billions in new bonds to finance a ramp up in defense
spending. Global investors will scoop them up as the
safest investments in the world.
Gold rallied sharply on Tuesday, but gave back most of that
gain Wednesday. Look for it to move higher from here. On
Thursday in closed up US$6, or 2.3%. A handful of gold
stocks will benefit from a higher bullion price.
For instance, we had already added to our gold stock
holding last Friday. Since then, we've seen one of our
picks rise 1.5% in one day.
By the way, from it's declines, I do expect the stock
market to roar back (although I believe the move will be
Even prior to the attacks, sentiment was building for a big
rally in stocks to compensate for a horrible summer. Now,
post-tragedy, the market will gain confidence simply
because it's again open for business.
When news hit the London market, stocks dropped 5.7%. In
Frankfurt, they were down 8.6%. Paris slid 7.4%. Since
then, all have stopped declining and have recovered some of
The same should happen in the U.S. I expect at least a 5%
initial decline followed by a short-term rally.
Unfortunately, it will be temporary.
Impact #3 � You'll remember that U.S. markets were on shaky
ground even before Tuesday's attacks. Corporate profits and
corporate spending were down. Layoffs were up, as new
jobless claims hit their highest level since July.
Unemployment is now at 4.9%. You can't spend if you don't
have a job. This combined with lower business spending
could lead to full-blown recession.
The Fed has vowed to open the money spigots to help banks
and financial institutions. But in the long run, this won't
Even before Tuesday's events, the problems in the financial
sector were already severe. What's changed? Now those same
indicators have reached crisis levels. Our calculations
show the Dow could fall as low as 5,000, while the Nasdaq
may fall to 800. Grim, yes. But entirely possible.
The War Bounce
If we do go to war, what effect will that have on the stock
That very question is a matter of great debate.
We have seen several studies this week which show that
buying stocks after the initial shock and declines have
subsided is profitable. Our friend Gibbons Burke shows
that in the year after each event, the Dow rallied an
average of 18.4%. In all 6 cases, the market went up for
the following two years, averaging 30.7% returns.
Our friend Steve Sjuggerud, Ph.D. of the Oxford Club
reports similar findings. (You can view Dr. Sjuggerud's
report by clicking here:
As Steve points out, after the initial uncertainty of the
beginnings of both World Wars, Korea, the Cuban Missle
Crisis, and the Gulf War, U.S. markets surged.
This would suggest your best strategy is to ride out the
initial uncertainty, wait for an overwhelming U.S. military
response, and buy stocks aggressively.
But this time around, this may not be the case. This time,
U.S. stocks will not rally for the long-term after the
shock wears off. This is not the time to be aggressively
long in the stock market. Let me explain:
Perched On The Edge
The difference between now and other crisis events is not
just the severity of the event itself. But the
fundamentals firmly in place before the attack.
Five months ago, we published a report for our subscribers
titled "The Fall of the Last Superpower." It seems all too
The report outlined what our analysts believed to be
overwhelming evidence that the U.S. stock market was headed
for a protracted bear market, perhaps as long as 17 years.
As we saw it, the market was already headed for a "tipping
point." Consider: The peak PE ratio on the S&P 500 in 1929
and 1964 was 21. Following both peaks, the market endured a
grinding 17-year bear as stocks and valuations reverted to
the mean. Today, the PE on the S&P stands at 26.
The report also pointed out how decades of personal and
corporate debt had ravaged balance sheets, both of private
citizens and public companies.
Corporations had borrowed to pay for expansion in the tech
and telecom sector � a bubble that has long since burst.
The amount of exposure U.S. banks had to the telecom bubble
isn't clear. But the telecoms themselves have already lost
nearly $4 trillion in capital.
If corporate debt was a cancer on the economy before
Tuesday, personal debt was an even greater one. None of
that has changed.
American's burned through their savings in the 1990s. They
borrowed to the hilt. They never expected to start losing
their jobs. They never expected stock market gains to
In our report, we had already concluded � long before the
planes cracked the glass and steel of the Trade Center
towers � that the U.S. market was headed for trouble. It
was, even then, more overvalued than at any time in
history. A correction was, even then, inevitable.
We also concluded, long before Tuesday, that the largest
credit-financed bubble in the history was about to pop.
Economic growth in the U.S. was about to go flat or turn
negative. And America's economic dominance of the
globalized world was already in question. Tuesday's
tragedy only compounds the effect.
The Economics of Terror
In past crises, decisive military action helped bolster
public confidence. Markets responded in kind. I fully
believe confidence will eventually return to America's
markets, too. Eventually. But not without complications.
First, there is the situation I've already described: Debt
burdens are at record highs. This week's job report shows
jobs at risk. And large, automatic stock gains are � by now
� barely a memory. The American consumer has a very
slender reed to lean on.
Second is the uncertainty principle. This will be a war
unlike any we have ever fought before. We are fighting an
enemy without borders. An enemy we cannot invade. An enemy
who does not distinguish between combatants and civilians
because in his view, we are all combatants.
The closest comparison is the designated "war on drugs."
The true enemies are hard to lock in the crosshairs. We
are essentially declaring war on thousands of private
citizens of dozens of different nations. This will prove,
as the drug war has, to be a difficult war to fight.
Public sentiment is strong right now. Americans are
understandably in favor of a decisive military response.
But commanding this war, winning it, or even fighting in it
will be more difficult that many people around the world
This prolonged uncertainty will prove a drag on the
markets. A war without clear results will only heighten
investor anxiety, reveal America's increasing
vulnerability, and frustrate the recovery of the stock
What's more, war or no war, America's economy will still be
left to work out the imbalances built up during the Great
Bull Market of the 1990s. In short, no amount of military
action can repair the decade-long damage done to America's
A Mean New World Ahead
Your best strategy right now is to secure and protect your
assets. There are steps you can take.
No Short-term Trading:
In the short term, avoid trying to "trade" the market next
week. It will be too volatile to do so. If the Dow moves
between 5% and 8% like foreign markets, it could close
anywhere between 8,836 and 9,124. The market will be trying
to reestablish a fair price for securities. And to do that,
it will move up and down rapidly between panic sellers and
buyers. It is tempting to try and trade these rallies and
sell-offs. But it's also costly. Avoid the temptation.
Buy Gold Stocks and Treasuries:
In the longer term, gold, bonds, select natural resource,
and foreign stocks should outperform battered U.S. stocks.
Already the flight to quality and safety has begun. The
yield on the 2-year treasury note fell five basis points on
Friday to 2.93%, the lowest level since 1958. The yield
moves inversely to the price, which means bonds are moving
up as investors look for a safe haven until the market
sorts itself out. Look for gold, big oil stocks, and some
foreign blue chips to match the gain in bonds.
Hedge Against The Dollar:
Readers of The Daily Reckoning Blue Service should stay
alert next week for e-mail updates on our Dollar and Euro
trades. The dollar has fallen 1.3% against the euro since
Friday. That brings it to a 6-month low against it's main
currency rival. We'll be looking to take profits as the
dollar reacts to the stock market's opening next week. We
may also add to our two gold positions as gold moves about
$280. A higher bullion price should directly benefit our
two main holdings.
In the meantime, there is quiet reflection.
In the three minutes of silence we just observed here in
France, I had time to collect my thoughts. Time to
prepare, perhaps, for a future that seems a little more
sinister, more daunting than it did just a week ago. I
hope you'll find time to do the same.
I also hope you'll have the chance � as I have -- to take
heart in the faith and perseverance of your friends and
neighbors; to remember that our country is stronger than
steel and concrete; and that our spirit can be stronger
than the swords of fanatics and madmen. We are made of
that quality which builds dreams and realizes
opportunities. We are optimists. We will not be stopped by
malice and terror.
Have a safe weekend and God bless.
The Daily Reckoning:|
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoninghis take on the financial markets and whats going
on in the worldand sends it off by e-mail before most Americans
alarm clocks have buzzed. Many readers say it's the first thing they want
to read when they get upnot only because it's informative and thought
provoking, but also it's inspiring, in its own quirky and provocative way.
Of course, there's
much more to Bill than his daily market commentary. He's also the founder
and president of Agora Publishing, one of the world's most successful
consumer newsletter publishing companies. Bill's passion for international
travel and big ideas are reflected in the company he's successfully built.
In 1979, he began publishing International Living and Hulbert's
Financial Digest . Since then, the company has grown to include
dozens of newsletters focusing on health, travel, and finance. Bill has
vigorously expanded from Agora's home base in Baltimore, Maryland since
the early 90sopening offices in Florida, London, Paris, Ireland, and
subsidiaries include Pickering
& Chatto, a prestigious academic press in London and Les
Belles Lettres in Paris, best known as a publisher of classical
literature in bilingual editions.