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War isn't the only bearish factor

By Neville Bennett

Friday 7th February 2003

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The Iraq situation is taking a toll on markets. The protracted uncertainty and rising price of oil are causing jitters.

These may be increased by rumours that, after Saddam, US forces will be actively engaged against other members of the "axis of evil," namely Iran and North Korea.

US sharemarkets fell in the month of January. This is significant as history shows, almost without fail, that January is an excellent predictor for the remaining year.

If markets are down, they tend to bleed for the rest of the year. If markets rise, then the year becomes a good one.

January was influenced by war preparations. While the Venezuelan general strike interrupted oil supply and caused rising prices, the magnitude of the overall increase was influenced by a war premium of at least $US5.

Nevertheless, it could be argued the turmoil is not solely attributable to war fears. Indeed, the markets have lost ground since the tech wreck three years ago and now stand at six-to-seven-year lows for the US and UK and 20-year lows for Japan.

Momentum has been maintained by scandalous behaviour. Confidence in the system was dented by the Enron and Arthur Andersen fiasco.

The bankruptcies of notable firms have also created alarm. The losses of AOL Time Warner of $US95 billion are staggering.

In short, the decline was an established trend before the Bush administration adopted a firmly bellicose stance against Saddam's regime. This is apparent in charts.

But it is also obvious in the relative lack of merger activity. It is especially clear in the lack of new listings. In New Zealand, the decision of Jade, the software maker, to postpone listing, is eloquent testimony of hard times.

There is also evidence of business caution. While the latest US Federal Reserve survey found many firms' confidence depressed by war worries, there is longstanding evidence of a lack of capital spending, depressed manufacturing prices and a general economic slowdown. Growth rates are regularly being re-rated downward.

The evidence suggests bear markets are the dominant feature of the present era. This is not unusual, although many people expected the bull market to never end.

Actually, there were some 30 times in the 20th century when the market declined more than 30% in 50 days.

The worst started with the 1929 crash, when the Dow declined from 300+ in 1929 to 44 points in 1934. It took 20 years for shares to recover their pre-crash values.

Things are not so bad now but some caution is advised as the Nikkei fell from 39,000 in 1989 to its 20-year low now of 8000+. The FTSE100 has halved: from its high of 6930 in 1999 to around 3400 now. The Nasdaq has fallen from 5000 to its present 1300.

There have been rallies since April 2000, but each time these have been followed by further plunges. Each fall burns some investors, especially those who pinned their faith in companies like Enron, WorldCom, Tyco and, more recently, United Airlines and AOL. Experts see the recent decline of the broad Russell 5000 as evidence of investor burn out.

Obviously many funds are pulling out of equities in favour of "safe havens." While fixed interest has an appeal, those who plumbed for gold are reaping the greatest rewards. Gold broke away from its lows at $US260 and has advanced, at an accelerating rate, to $US375. It still has a head of steam.

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