After months of
preparation, the US is on the brink of ground war in Iraq.
US and allied planes
have sharply increased raids in the no-fly zones in the last several days, with
up to 1000 sorties/day against command and control facilities, anti-aircraft
weapons, and more recently, artillery capable of threatening Kuwait based troops
with conventional and chemical shells.
The actual start of
ground operations is widely expected by the end of the week. In last
night's ultimatum, the Bush administration gave Hussein and his immediate family
48 hours to leave Iraq. Iraq is 8 time zones ahead of Washington (3 zones
ahead of London,) so the dead-line expires 4 AM, Thursday March 20th in
Iraq. However, US forces are not likely to strike just before dawn, so
following the expiration of the deadline, 8PM (just after dark in Iraq), noon
EST on Thursday, is a more likely G-Hour. Hussein has already
rejected the ultimatum and may attempt a pre-emptive strike against
Kuwait. If so, US forces would jump
off immediately.
US forces are
arrayed primarily in Kuwait, Qatar, Persian Gulf, Red Sea and
Mediterranean. However, additional forces will jump off from Saudi Arabia
and Jordan, and it appears that Turkey, at the last moment, will allow US troops
to pass through to Northern Iraq.
In a time of great
international tension, increased risk of terrorist counter-attacks and the
likely deaths of hundreds if not thousands of Iraqis and Americans, it may seem
callous to focus on investment strategy but focus we must:
US markets staged
two monster rallies in the last 4 days, cutting the loss in the S&P 500 to
-2.1% YTD and pushing the NASDAQ to a gain of 3.7%. However, volume is
running 25-35% below the averages of last quarter, so this buying represents
primarily "short-covering," not new money flowing into stocks. Why would
the declaration of war cause short-covering? For weeks, investors
have held back from buying stocks because of the uncertainty regarding the
"war/no war" question. In that environment, hedge funds can take advantage
to borrow stocks, sell short with the expectation of buying back these stocks at
lower levels later. The risk is that, if the war goes well, those stocks
will be bought back at a loss, hence the rush. Actual new buying of stocks
depends ultimately on consumer confidence which is currently in the
doldrums.
Other markets are
weighing in with their analysis of the War. The prices of gold and US
Treasury bonds, traditional safe haven investments, are falling. The
dollar is gaining against the Euro after months of decline. The price of a
barrel of oil, which touched $40/barrel a few weeks ago, has fallen sharply and
is currently trading at $30.60/barrel. International traders, therefore,
are betting on a short war with minimal casualties and limited disruption to
world oil production. Gosh, we hope so.
Many corporations
depend on the signing of contracts near quarter end to make revenue
estimate. With all eyes focused east over the next few weeks, it's very
likely that many of these contracts will be postponed until Q2. Already,
negative pre-announcements are running at a higher rate than last quarter, and
peak pre-announcement season is still two weeks away. First Call
estimates S&P 500 earnings growth at 8% for Q1, 5% for Q2, 9% for 2003
vs. a 12% growth rate for 2002. Given current interest rates and
expectations about earnings for this year, the S&P 500 remains undervalued
by 25-40% (40% undervalued if current estimates are met, 25% undervalued if
actual earnings are lower than estimates.)
Strategy
As we mentioned in
our last commentary, stocks are too risky to buy and too cheap to sell.
We're still sitting on cash that we've held since December and January.
With luck, there will be an opportunity to invest this cash
shortly.
Yours sincerely,
David Edwards, President
Heron Capital Management, Inc.
(800) 99-HERON http://www.HeronCapital.com