The stock market will jump and swoon for a while, based on the daily perceptions of a war with Iraq. This latest rally started last week, amid the U.N.'s wishy-washy report, the ever-screwier terror alerts by Attorney General Ashcroft and Homeland Security Secretary Ridge, a big snowstorm, and a run on duct tape and plastic wrap. The foundations of that rally were the dubious propositions that panic is a growth industry, and an uncertain prelude to war is better than a certain war. Don't be fooled.
All this emphasis on being prepared for a terrorist attack is not cool. Back in the Sixties, when they taught schoolchildren to survive a nuclear attack by hiding under their desks -- thus answering the question of why they slathered those desks with toxic lead paint -- at least we presumed Russian schoolchildren were similarly being menaced. I'm in favor of reasonable precautions (i.e., having law enforcement do its job) but I can't help but think the terrorists are laughing in their caves that they are making our lives resemble, even in a slight way, their own.
Do you know what losers we look like for stocking up on duct tape and plastic? I get all the safety catalogues, and it isn't pretty. (The anesthesiologist from my wife's last childbirth, apart from hiring a collection agency that implied I would need an epidural if I didn't pay the bill, sold our name to every catalogue mailing list in Creation.)
Ever see the Life Hammer? That's the little plastic hammer you can use to chop through your windshield or cut through your seat belt if you are trapped in your submerged or rolled-over car. When I'm upside down or underwater, how am I supposed to access the Life Hammer, unless I had it gripped between my teeth while driving (while being careful, of course, to avoid contact with the part that can slice a seat belt to ribbons)?
The Escape Hood is even sillier. It's a baggie with a little filter you seal around your head to escape a fire. Once you get around teaching your kids to use it (while telling them not to put "unfiltered" plastic wrap around their heads) and the possibility you'll die of embarrassment if someone spots you wearing the thing, the amount of protection it provides is probably equal to the amount of time it takes to put on. Then you have to subtract for the difficulty of escaping a smoke- or gas-filled room with your eyes covered by dry-cleaning wrap.
Duct tape and plastic wrap are for uninsured drivers with broken windows, not for a nation fighting terrorists. If you are going to join the panic, you might as well align your financial interests: some of the companies leading the latest rally include 3M (Scotch duct tape), Gillette (Duracell batteries), Energizer Holdings (Eveready batteries), and Dial (Armour canned meat). You entrepreneurs out there might want to go on eBay and bid for the domain name DuctTapeAndPlastic.com, which some patriot just put up for auction.
Bet the War
Assuming you haven't sold all your stocks and taken to hoarding gold bullion, how, as an investor, should you react to the stock market's gyrations? As a pure, long-term investor, you shouldn't do much of anything. But if you make some moves -- either making short-term plays in the market or executing your long-term strategies in concert with getting the best possible prices -- I recommend contrarian thinking. The market, I think, is reacting in a very irrational way.
In general, markets favor information and certainty, and fear ignorance and uncertainty. The market can survive even negative developments better than it can handle not knowing. The latest movements in the major indexes defy this reasoning. The market seems to go down when war seems more likely, and it rises when war seems less immediate.
If we evaluate the probable outcomes, we can outsmart the market over the long term, assuming our estimates are correct. First, anyone bidding prices up because war seems less immediate is living in a dream world. There are outcomes other than war -- Hussein's exile or a coup -- but those are not very likely. (I say this because one of Bush's reasons for telegraphing his punches to Saddam for over a year has been to allow anyone who wants to overthrow him, or any country that wants to accept him in exile, to step forward.) George W. Bush, however, has crossed the Rubicon. Failing to proceed now would be political suicide. As for the "allies," I bet they eventually go along. Russia and China will trade their Security Council votes for things they want. France and Germany are too weak to stand up to rabble-rousers in their own countries, but they're also too weak to be on the outside of this one. And odds are that Bush will attack without the Security Council anyway. Any short-term rally based on war being postponed should be a reason to sell.
Second, any drop in stocks related to potential war should be a buying opportunity. Once the market tries to factor in the "negatives" of a war, there are numerous positive things that can trigger a rally: Hussein in exile or toppled by a military coup, cooperation among our allies, a successful air attack, a quick surrender, or conclusion without chemical or biological weapons (though Hussein's use of such weapons would prove our allegations correct, validate our actions, and force our allies into action, which would be positive developments).
I haven't put numbers on these developments, but they seem a lot more likely, in the event of war, than Hussein having more military success than he had in 1991. In addition, a website called Tradesports.com has done some of the number crunching for us. You can open an account at Tradesports, with real money, and trade contracts on the likelihood or outcome of future sporting, political, and financial events. These markets are not as efficient as the U.S. stock market, but tens of thousands of contracts per day trade on the most active issues. As of February 19, the last trade on Saddam Hussein no longer being the President of Iraq by June 30, 2003, is 77. (The contracts expire June 30, so if Hussein is still President, they will be worthless. If he is not President, they will be worth 100.) The market, therefore, puts a 77% chance of Hussein being out of the picture by the end of June. Similar contracts placed his chance of being gone by the end of March at 30%, April at 60%, and May at 68%.
If you're not in a betting mood, how about this as an alternative to panic: go to a movie or, better yet, take a vacation and relax. These ideas would, incidentally, benefit AOL Time Warner and Disney, two stocks that should rise after the resolution of this Iraq business. AOL is cleaning house, advertising is starting to rebound, and Disney just reported people are returning to the parks. Doesn't that sound more fun than duct-taping yourself a fallout shelter?