What a Month!

By Duru

August 1, 2004


Who would have "thunk" it? All those early (earnings) warning signs at the end of June and early July truly meant a little something. Those earnings warnings by all sorts of small technology companies preceded a sickening 7.8% drop for the Nazz for July. The losses would have been worse if not for some end-of-month "bargain"-shopping. One of the excuses for the overall market malaise in July was the fear of terrorism. I find this ironic since just two months ago or less, everyone was looking at June 30th as if it would mark the END of churn and uncertainty.

Well, instead of June 30th marking the beginning of major relief, the government has seen fit to constantly remind us of the domestic terrorist threat. Everything from the presidential nominating conventions to the presidential elections have been painted in dark colors. Given that the market has been in a near freefall in parallel to these warnings, it is easy to assign blame to these fears. But now Mr. Ridge and company have FINALLY come up with a very specific warning. We are now told that specific financial icons in NYC and DC could be under threat. With this directive, the market has perhaps received the "certainty" it supposedly has longed for. Be careful what you wish for, right?

The problem with all this thinking is that the threat of terrorism never receded one inch since September, 11, 2001. The market has chosen to care about terrorism from time-to-time. As I have argued before, the market has pretty much ignored the threat. The threat is easy to ignore because it is hard to quantify, and it is an event to which we can only assign remote probabilities. Can it be quantified now? Time will soon tell, but I doubt it.

In my missive where I pondered whether the market has properly discounted the threat, I argued that the promise of a robust economic recovery (globally even) was previously strong enough to wrestle for the mindshare of Wall Street. Now that the economic boom already seems to be grinding to a gradual flatline, all sorts of fears will seep back into the market's consciousness. Terrorism will be first and foremost since the unwinding of the economic recovery is still quite debatable. Also, tales about historical tendencies for the market to rally into elections mean so much less when larger contingencies loom overhead. Ridge and company have now made a terrorist act much less an exercise in theory and hypothesizing. The remaining question is whether the market is truly aiming to return to the lows of 2003 or has it truly turned the corner to resiliency and boundless hope.

We should soon find out. The key will be finding positive catalysts for the market to hold dear. I am having a hard time thinking of any - the Bushies better hurry up and produce bin Laden in shackles… Barring that, we could always see one of those classic counter-event rallies where the news itself of a specific threat provides the relief the market has been seeking. This one is truly tough to call. So, be careful out there!


Ó DrDuru, 2004