-->The Capture: What's It Mean for the Markets?
By David Morrow
Editor in Chief
12/14/2003 03:22 PM EST
URL: http://www.thestreet.com/funds/editorsdesk/10131854.html

Updated from 1:49 p.m. and 12:42 p.m.


It's rare that we see a day as historic as this one. The capture of Saddam Hussein will be remembered for decades as a triumphant success for the U.S. and its allies.

Here's a compilation of opinions from our commentators on the TheStreet.com network -- TSC, RealMoney and Street Insight -- about what the capture means politically and economically, and its impact on the markets.


RealMoney

James Cramer weighed in early with two columns: Happily Long on Saddam Capture News and Saddam's Capture: How the Game Might Play Out. Essentially, he's glad that he's not short, and he parses out how the news might play out at Monday's open.


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At 9:50 a.m., Chris Edmonds offered his thoughts on the market, particularly oil:

"This is a major victory for the effort to return democracy to Iraq, American and coalition forces and, certainly for President George W. Bush as we enter an election year. Conversely, it is likely to dampen some of the enthusiasm behind the Dean campaign. While politics should be the least of it, it is already turning out to be the most analyzed impact of the capture.

From a market perspective, there are likely to be global rallies come Monday morning, beginning in the Far East and continuing through the opening bell in the U.S. And, while enthusiasm should be strong, it is important to be realistic. The capture of Hussein is huge but it will not immediately end violence and resistance to U.S. and coalition action. There is also the real risk to other terrorist groups may take this as an opportunity to attempt to"fill the void" left by Saddam. There have already been signs of Al Qaeda moving into the country.

There will also likely be modest pressure on oil prices as the capture will be viewed as a positive for production and supply from Iraq, as stability will lead to more assistance in the Iraqi oil patch from Western companies which will lead to increased production as infrastructure is improved.

No doubt, a proud day for the U.S. Yet, in Iraq, it simply means the real work now begins."

Chris also expounded on the oil sector further, including some energy companies that could benefit from Iraq's re-emergence in the market, in an afternoon column.


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At 11:06, Alan Farley noted what a great time it is to be long:

"Could you write this script any better? Capture Saddam over the weekend before the start of a triple-witching week with huge downside hedging out there? Sounds like we could see a melt-up AND melt-back-down before the week is over. Anyway it's nice to be holding long this weekend. Just wish I was longer."


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In early afternoon, Paul Kedrosky offered his spin on the capture in his always-excellent Weekend Reading column:

"Well, that changes everything. With Saddam Hussein captured, it puts a different complexion on what already was a good week for the major markets.

His capture has many implications, both political and economic. On the economic side, it will likely be bad for oil, good for the dollar and good for the markets. Who knows how much the markets will climb on Monday, but Israel's market was open on Sunday during the news, and it bumped up 3%. The dollar is similarly likely to take back some recent losses against the euro, but it is less certain it will hold on to it, given the widely held view that the U.S. is fond of a low a dollar right now. This will, of course, be seen as being good for oil, with perhaps a greater supply flowing sooner from Iraq, but who knows whether that oil optimism will hold as the next inevitable round of attacks against the U.S. happen in Iraq.

This has equally important political implications. President Bush has been on shakier ground than many of his supporters would ever concede, with his approval ratings low and many concerned about losses in Iraq. Saddam's capture gives Bush a huge boost, taking away a major plank in his political competitors' campaigns. Yes, there is still ammunition on the economic front, including runaway spending, but most of the Democrats have focused unduly on Iraq and now have themselves in a more difficult position."


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Dan Fitzpatrick adds a few words on potential action in the gold and the dollar:

"I would assume that any strength in the dollar would be met by a corresponding dip in gold on Monday, since they have tended to trade inversely.

No doubt about it, Monday should be very, very volatile as we will likely see a massive short squeeze. I had planned on laying low for the remainder of the month, but those plans are shot to smithereens now. Last word on the matter: Be careful at the open! All is not what it seems."


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Cody Willard reports that most of his hedge-fund contacts are planning to short the open:

Man, oh, man. In my mind, the capture of Saddam isn't just bullish for equities, but as Grant Gates from Street Insight points out, there are plenty of fundamental positives about the capture too. As far as shorting the market tomorrow -- let's put it this way: The first IM I got over my Treo this morning was from a bear wondering if the market would pop in the morning. And out of the subsequent conversations I've had with several hedgies since, NO ONE HAS CONSIDERED ANYTHING BUT SHORTING THE MARKET TOMORROW. That, despite the fact that they're mostly short already anyway!

I've been quietly and sacrilegiously writing about Dow 11k for a while. Can you imagine a better setup to get there?

Now all that said, I will be doing some trimming and hedging tomorrow.

none mentioned"


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Street Insight


Doug Kass -- Merger Monday?
Posted at 1:58 p.m.


Tomorrow would be a great day for companies to announce merger/takeover deals, as the almost assured market strengthen might dullen negative responses to transactions.

Among"the things I have been hearing" are a number of high profile takeovers/mergers.

Only another 18 hours to find out if there will be impeccable timing!

Come on WB, FITB, JPM and WFC -- lets hear about those Tennessee banking and mortgage banking deals on Monday!

LONG FTN NCF, SHORT WB JPM WFC


Doug Kass -- Political, Economic and Investment Thoughts
Posted at 11:06 a.m.

Several political, economic and investment thoughts come immediately to the fore in the aftermath of Saddam Hussein's capture.

Political: While the capture is a win for the Iraqi people and a defeat over terrorism, this is a huge, huge win for President Bush and his team as well as for Prime Minister Tony Blair. There will be a growing consenus -- despite horrible deaths of U.S. military in our occupation of Iraq -- that the means of the coalition's occupation might have justified the ends with the capture of Saddam Hussein. Contributors (me included) understandably should not offer political views on Street Insight. However, I do have one observation. I am a Democrat and carefully listened to Senator John Kerry's interpretation of the event (as well as other Democrats and Republicans), and I have to offer quite candidly that he sounded disingenuous and his responses were quite transparent and politically motivated (look for his Democratic rivals AND Republican rivals to replay his conversation with Dan Rather).

That said, regardless of my interpretation of Kerry's comments, the fact is that the capture of the Iraqi dictator virtually guarantees a landslide victory by the incumbent President -- almost regardless of the vicissitudes of the economy as we move closer to the November election. The same applies to the Prime Minister's popularity in England, which has been somewhat on the wane as casualties began to accumulate in Iraq this year. And, fortunately, the indignity of a desheveled Saddam Hussein being examined by a medical doctor will weigh on whatever supporters and followers he has in Iraq and outside the country.

Economic and Investment: From my perch, the immediate reaction on Monday will likely be a short squeeze on the U.S. dollar and a marked decline in energy prices. Currently the short U.S. dollar and long crude oil trades are extremely crowded -- which will serve to exacerbate the opening trades on Monday. To be sure the immediate response in the equity markets will be positive and that of fixed income negative but it is less apparent what the investment implications might be after the initial responses tomorrow -- especially in light of the recent equity rally leading up to yesterday's capture. In terms of market sectors, transports should be the greatest beneficiary, with financial, energy and dollar beneficiaries the least to be favorably impacted.

In the final analysis, Saddam Hussein's capture will have little impact on my negative outlook for equities as the dictator had no relationship at all to the structural issues I have repeatedly mentioned over the last several months (a spent-up consumer, sharply higher twin defcits, a world without stimuli, etc.).

If anything, the euphoria created by yesterday's capture of Saddam Hussein might create a degree of complacency and confidence on the part of equity investors, which might set the stage for a more consequential intermediate-term top than most expect.

Posted at 11:35 a.m.

The first indication of the possible investment implications of Hussein's capture is the Israeli markets.

Up by about 1.8% before the news -- the Tel Aviv Index of Blue Chips closed up 3.3% after the announcement.


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James Altucher -- Economic Implications Could Be Significant
Posted at 12:52 p.m.

Clearly the market implications of this capture are immense, otherwise we wouldn't be posting on this snowy Sunday morning. A couple of points:

a. Doug, I'm not so sure the economic implications are small. Some of the possible economic implications include:

- Continued fighting and support of military just got cheaper.
- Consumer sentiment just got better. Why is this? For one thing, sentiment goes hand in hand with terrorism fears. With all the news that Al Quaeda was turning its focus to Iraq, I, for one, was getting nervous that this was going to continue to get uglier. Now its very unclear.
- Dollar will definitely get stronger, at least temporarily. A strong dollar will at least initially be good for any US asset (stock market and bonds) and bad for Gold, Euro, Crude Oil.

b. Jeff, I'm not so sure a 1% gap up is a sell. Let me just mention that I'm not long or short and there's nothing I'd like to do more than short an exuberant gap up and make some money. That said, lets look at a few patterns and examine historically what's happened:

- 1% gap up on the S&P. Since 1993, shorting the open and holding for the day has resulted in 43 out of 103 successful trades with an overall negative return of -0.22%. Instead of holding for the day but just holding for 1% has only resulted in success in 51 of the cases.
- 2% gap up on the S&P since 1993, shorting the open and holding for the day has resulted in 7 out of 15 for a basically flat return.
- In both of the above patterns the situation gets slightly worse for the short if the day before was an up day, as Friday was. One can argue"this time things are different." But every time there is a huge gap up one can say that.

On QQQ the situation is more encouraging, particularly if going for a small move and if the gap up is huge. However, there are a couple of days in the data that are worrisome from a short point of view: like May 8, 2002. I have no idea what happened that day but the gap up was huge and it kept going another 5%.

So the odds are for tomorrow that we do not see a selloff. It could happen, sure, but I think more likely we see an exuberant market that closes near the highs because shorts who enter a gap up are going to get squeezed all day. Who knows, I might still end up being one of them but sometimes its just better to sit on hands and wait for a better entry point. Heck, maybe it's even better to chase this market up.


Jeff Macke -- Don't Be Short the Dollar
Posted at 11:41 a.m.

What a tremendous victory for America and the Bush administration. I'm finding it somewhat jarring to consider the reduction of Saddam from unlimited dictatorial power at the start of '03 to being dug up from a hole looking oddly like Jerry Garcia today.

To have captured a dictator on the other side of the earth in this manner, in a semihostile land the size of California, and bring him in safe is simply an overwhelming demonstration of projecting power around the globe. Coupling it with the fact that Saddam was captured clutching 3/4 of a brick worth of the currency of his enemies is historical in what it says about our current standing; tenuous as it may be.

Since no one pays to read my political musings here's my first cut on the market effect:

* Gap higher on the open... hasn't the rumor of this been the putative reason for dozens of rallies this year?


* I agree with Doug on the boost this gives to the administration in regards to the election. I believe that's marginally bullish with the rather large caveat that the capture will make the economy the likely focus of the election. The bigger-picture concern that stems from that focus brings us back to jobs; if the employment picture resumes the recently flagging improving trend the election is almost a market non-factor (akin to '96 & '84). If the employment picture isn't better by, say, February, however, the capture increases the likelihood of the Dems pushing for job and trading protections while the Republicans (if their White House control is threatened) will continue increasing the pressure on trading partners and the dollar, both of which are bearish (IMHO).


* Short term, I wouldn't want to be short the dollar. As Doug says, it's a very, very crowded trade. Looking at the EUR/ Dollar chart, it's quite extended. This is a perfect catalyst for a large pullback in the euro vs. the dollar.


* While this is likely to have a lasting effect on the perception of American involvement abroad, this isn't likely to reduce meaningfully the threat of terror or the spending towards these efforts, which is the fundamental issue in terms of national debt et. al.


* Short-term, this close to the end of the year there's no telling how long any igniting of bullish-animal spirits can take us. The very brave trade is"short the open if it's a large gap higher." Most bullish for a short-term trade is a muted open building higher. In my opinion, a greater than 1% gap higher is an invitation to sell.


Still much to ponder and discuss before the morning. I'll be back prior to that with any further thoughts.

Jeff Macke -- A Short-Term Rip
Posted at 1:30 p.m.

In reply to a couple emails and the mighty Altucher... I said shorting a big gap was the brave trade, meaning it's the one that's going to be calling out to the hedgies. Not the same thing as it being the Smart trade, necessarily.

Doug, to your point, I think the drop in the dollar has been second only to massive expense cutting as as a factor supporting EPS growth this year and I'm continuously surprised at how little mention this gets."Revenue growth" isn't even on the list. For the companies that are trying to hedge their dollar exposure, the likely reversal on the greenback is going to wreak some havoc.

In terms of a straight prediction/guess, I think the highest-percentage bet is that we rip tomorrow and that Monday marks the closing highs for the week. But, of course, we'll see...


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Herb Greenberg -- The Saddam Effect
Posted at 03:01 p.m.

Saddam's capture doesn't resolve other valuation issues

My simple take: Investors are sure to cheer his capture, but in the end it is an event that still doesn't remove uncertainties regarding the economy, bin Laden and other acts of terrorism that quite possibly may follow. Hate to be so negative, but you might say this is already priced into the market and any further upward climb will add to the froth.

Investor in several mutual funds, so I guess I hope I'm wrong, though I'd plan to add to any positions on a significant correction.
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