Since Monday, the Dow Jones Industrial Average has lost 7.3 percent, the Standard & Poor's 500 Index shed 5.5 percent and the Nasdaq Composite Index declined 8.3 percent on concern last week's attack will push the U.S. economy into recession. These numbers are within the parameters we outlined Sunday night. On Tuesday, US markets rose in the morning, but with more stocks down than up. By afternoon, the S&P 500 had given up .6%, the NASDAQ gave up 1.6%. Asian markets gained for a second day in a row, gaining back some of last week's losses. European markets were down 1% overnight. One hour into trading, markets are flat to slightly lower.
Political, military and law-enforcements are proceeding on broad fronts. These efforts have been reported elsewhere, so we thought we spend some time analyzing the current situation by drawing on historical parallels.
The "Attack on America" last week has been widely described as this century's "Pearl Harbor." Another historical analogy comes to mind: the sinking of the Titanic in April 1912. Then as now, Europe and the United States enjoyed unparalleled peace, prosperity and progress. The Edwardian society, with World War I not even on the horizon, took enormous pride in its technological and material accomplishments. The luxurious Titanic vessel was designed to be "virtually unsinkable" so the builders, to save costs, decided to install only a single line of lifeboats "to reassure the passengers" rather than the double line of boats in the original design. The ship's architect noted during the voyage that binoculars for the ship's look-outs had not been ordered.
The captain received multiple warnings of ice-bergs drifted further South than usual that spring, but, in his urgency to set a crossing record on the ship's maiden voyage, chose to ignore them. The ocean was unusually calm which allowed the Titanic to proceed at maximum speed, but the lack of moonlight and wave action against the base of icebergs made them virtually invisible to the look-outs. After the Titanic was holed (actually a gap several inches wide by 60 feet long which opened between plates in the hull) and started to sink, the Titanic's radio operators desperately tried to contact other ships using the new "wireless" technology. Unfortunately, the nearest ship, the California, did not see fit to post a radio operator all night long and did not receive the messages even though the ship was only 10 miles from the Titanic. The initial loading of lifeboats was haphazard, with many lowered half empty, because the crew had never been instructed in their use, nor had the passengers had ever been drilled in emergency procedures.
In the aftermath of the tragedy, which took lives across a broad strata of society, from first class to steerage, from captains of industry to the poorest immigrants, a Board of Trade Inquiry was established to investigate the cause of the disaster. As in most tragedies, no single factor was determinant but rather a combination of factors contributed to the outcome. The Board of Trade established new rules for the shipping industry including 24 hour manning of radio offices, lifeboats to accommodate all passengers and crew, drilling in emergency procedures. These rules, which seem so obvious in hindsight, were only shown to be necessary by the tragic loss of life.
In America in 2001, we had been lulled into complacency by our material and technological success. We have had warnings that terrorists wanted to sought to inflict civilian casualties (the 1993 bombing of the World Trade Center which failed to bring down the towers, the 1994 hijacking of a French plane which terrorists had planned to crash fully laden with fuel into Paris) but we thought that current law enforcement efforts were sufficient to keep terror in check. The Federal government, obsessed with reducing the deficit, mandated that airlines and airports provide security but failed to provide the funds to pay for this security. Airlines, facing pressure from passengers for lower ticket prices and faster check-ins, sub-contracted the security job to a handful of ill-paid, ill-trained security firms. Pilots have opposed making the bulkhead between the cock-pit and cabin more secure out of fear of being trapped in a crash landing. Border crossings from Canada are not necessarily manned 24 hours/day.
There will be a "Board of Inquiry" established to review what wrong last week. Thousands of ideas will be circulated, many implemented. Obvious ideas include Federalizing airport security, better coordination between the CIA (external information) and FBI (internal information), perhaps even the creation of a single agency to fight terrorism, photographing and fingerprinting all transients at border crossings, regardless of passport. Domestic air passengers will have to accept what European and Israeli travelers have experienced for years. The balance between civil liberties and personal security will have to be adjusted. It is our hope that Americans will never be so naive again.
Best regards,
David Edwards, President
Heron
Capital Management, Inc.
(800) 99-HERON
http://www.HeronCapital.com