Calling the shots is harder with the economics of war


January 20, 1991|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

NEW YORK — New York--It is one of the most enduring market legends: Nathan Rothschild, standing at the fringe of trading on the London Stock Exchange, the focus of attention because of his unsurpassed intelligence on the outcome of the Napoleonic Wars.

Quietly, his agents received discreet instructions and were soon detected to be selling, triggering a panic. The British, it was assumed, had lost Waterloo, and therefore, everything. As prices cratered, the legend holds that Rothschild became the unknown (and eager) buyer of last resort, scooping up a vast fortune in minutes for, as he knew, the British had won.

The smart money is no longer so smart, and calling the economics of war are less certain. As last week began, the mood on Wall Street was bleak and getting bleaker. A Wednesday survey of market newsletters by Investor Intelligence, a New Rochelle, N.Y., firm, showed a steady decline in optimism since the beginning of the year, with more than half of the opinion writers becoming outright pessimists in the preceding week.

A single night of combat made a mockery of those opinions, all probably sent out the preceding Saturday. For a moment, the U.S. appeared able to believe all its fondest hopes. Sophisticated technology worked, and international unity prevailed. Optimism became infectious.

The Dow Jones industrial average made its second-largest gain in history on Thursday, rocketing upward 114.60 points.

The powerful rally leveled off in the afternoon. Following the close of the market, William Donaldson, Chairman of the New York Stock Exchange, urged investors to be "calm on both sides of the equation," meaning in terms of their enthusiasm as well as their concern. Similarly, President Bush Friday warned "against a mood of euphoria."

Many on Wall Street agree. "We are telling customers to be cautious -- don't overreact to yesterday's market," said Richard Sichenzio, president of Prudential Bache's retail brokerage company, on Friday. "We don't see a clear direction in the world situation." Instead, the brokerage firm continues to recommend conservative investments such as government bonds, shares in food companies and the like.

Merrill Lynch brokers are hearing the same. Richard Farrell, chief market strategist at Merrill, spoke twice on the huge brokerage firm's internal communications system on Thursday to argue the sudden rise in prices was "a news rally" that could take the market higher a little longer but would likely leave it much lower. Professionals monitored by Merrill were selling shares and buying options benefiting from the market's going down, an unusual move during a market rise, said Steven Shovin, an associate of Mr. Farrell. "Traders," Mr. Shovin added, "do not believe this rally has staying power."

Perhaps so, but this may be a period when caution is warranted merely because no one can get the direction of the market right. Anyresidual foreboding from Thursday's rally became justified Thursday evening when Iraq's missile attack on Israel exploded illusions about an easy war. Friday morning, the numerous computerized message boards posted around the New York Stock Exchange carried a news report noting that analysts believed the market was headed lower.

Within a half minute of the opening bell, that seemed to be the case.The first posted numbers indicated the Dow Jones industrial average had slipped 0.74, a negligible amount given its Thursday close of 2,623.51, but nonetheless a disconcerting sign.

Within a minute, the Dow had fallen a point, within three minutes almost 10. Volume was heavy, and it appeared possible that Friday could be the reverse of Thursday, when a decisive movement upward in share prices at the opening produced the Dow's second-largest gain ever. A debacle loomed.

But as the initial wave of transactions concluded, the Dow began to waver and then recover. Within a quarter-hour, it was above its prior close and headed up steadily, if gently, for the rest of the day. That echoed the pattern established in overseas markets, where bad openings were followed by good sessions.

Certainly, a few optimists remain, and they appear willing to step inwhen others stepped out. "It seems to be the tenor of the times to be gloomy about the future, and any war is unsettling, but my hunch is that this story could turn out very well indeed," said Lawrence Kudlow, economist with Bear Stearns & Co.

He made that statement Tuesday -- a notably contrarian opinion at the time. For him, the economic issue in the Middle East is just oil -- and oil supplies would become stable following successful raids on Iraq.

Shearson Lehman Bros.' strategist Michael Sherman has recently been delivering a similar message to the firm's network of brokers.

Still, a few devastating missile attacks from Iraq could dishearten all but the most confident. Wars do that. But historically, that creates striking opportunities for the astute -- or the fortunate. Mr. Rothschild's real fame, after all, came from a simple horrible utterance that may nonetheless be correct: "The best time to buy is when blood is running in the streets."

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