The markets are sure to enjoy the weekend capture of Saddam Hussein. The big market winners in the Middle-East were the Tel Aviv 25 Index – up 3.4% yesterday – and the Egyptian bourse, up a similar amount. In Asia, the Nikkei gained over 3% (but the Hang Seng lost 0.59%). The beleaguered dollar enjoyed a relief rally, rising 1% against other currencies, while gold slipped $3.
A more muted response came from the European Bourses, up 1% or so, and that may very well color the reaction here. We should expect similar gains in the U.S., from 1-2%. With the markets already up so dramatically since the start of the Iraq war back in March 2003, its fair to say that the vast majority of investors have already discounted the likely capture or elimination of Saddam. Thus, it is mostly baked into the cake already.
Thinking beyond the initial euphoria, what has changed fundamentally since HVT1 was captured? Economically, the first data point to see any improvement will be the Consumer Confidence readings. That’s a sentiment issue, and the casualties in Iraq have been wearing down both this number, as well as the President’s approval polls. We should expect both those readings to strengthen – even if only temporarily – as the Saddam loyalists realize the futility of their battle. If Saddam was taken without so much as firing a shot, why should they give their lives for him?
But buying the market’s exuberance on Saddam’s capture looks easy – and the “easy trade” is usually the wrong one. Over the weekend, I heard from the same players who wanted to short stocks after 9/11, and they now want to buy today’s opening with both fists. That’s something to consider before getting swept up in the “euphoria.”
In our opinion, the more relevant issue is how this applies to a potential combination of factors we mentioned in this space last Thursday:
“What would be of greater concern to us is a new high accompanied by a strongly overbought condition, which might set the market up for a more serious 5% correction. But we have yet to see this combination of conditions occur all at once . . . ”
That is what we will be watching for, as the market digests this important – but essentially already digested – news. If buyers get silly, all the elements will start falling into place for that correction early 2004.
We sure do live in interesting times.
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Chairman Greenspan Before the World Affairs Council, 12/11/03
Quote of the Day
“The opposition must answer the question: If Saddam would not give his life in the struggle against the Americans, why should ordinary Iraqis? And they must acknowledge that his capture would have been impossible without Iraqi cooperation.”
–Rex Nutting
