By Neville Bennett
Friday 28th March 2003
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These are probably the most volatile market days in history. Naturally, all investors are wondering what they can do to preserve their wealth.
Equity markets usually do well in war. World War II pulled the US out of its deepest recession. The Korean War added 36% to the Dow. The Cold War rewarded investors in steel, copper and aircraft. Eventually consumer stocks forged ahead, especially automobiles and appliances.
The Vietnam War and the Gulf War had not seemed relevant to investing as one was too long and the other too short.
Wall Street analysts essentially decided the war would be over in a few days. Their advice was to short gold, oil and defence stocks because there was going to be a quick surgical victory.
The problem, in the view of analysts, was what the ordinary investor would do when the "CNN effect" eroded -- that is, when the average citizen was less glued to the television.
The analysts may be disappointed. The average investor has been wary of equities and has been allocating new money to their deposit accounts. This is clearly indicated by a massive rise in deposits to a grand total of $US 2.8 trillion.
This is entirely rational and it mirrors what the mutual funds are also doing. Merrill Lynch reported an amazing fact: for the first time since 1993 mutual funds have more cash (40.3%) than equities (39.9%).
People turn to cash in periods of uncertainty. And these are uncertain days. The public faces continual terrorist alerts and an unpopular war of uncertain duration to be followed by a commitment to build a representative government in Iraq. At home the economy is stuttering, there is job insecurity and many observers claim the housing market is also in bubble mode and heading for a fall.
While the average investor and mutual fund manager is in cautious mode, large amounts of money are being staked on the peace. Some is going into companies such as Halliburton, which is expected to win huge rehabilitation contracts. Construction giant Fluor's shares have zoomed upward.
The previous week saw substantial rises in heavy industry, semiconductors and software. These plays are consistent with a belief in stronger economic growth.
If the price remains in the low $US20 range, it will create a degree of optimism, especially for those industries that are large oil consumers, such as airlines and transport. Moreover, hotel, fast food, entertainment and retail all benefit when less of the discretionary dollar goes toward fuel or heating costs.
Caution seems to be the appropriate stance for investors. It is appropriate to recall that fundamental problems have not gone away; they include an economic slowdown, high unemployment and high P/E ratios.
The direct cost of the war is also mounting. The US has asked for another $US75 billion in funds and the UK costs are enormous too. There is a risk the cost of occupying Iraq will be so high the allied governments will have to slash some of their spending plans.
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