The O'Brien column : Iraq holds financial wild card

By Peter V O'Brien

Friday 27th September 2002

International financial markets will want to forget the past three months when they enter the year's final quarter on Tuesday. Major sharemarket indices were close to their (then) 2002 lows toward the end of June but things were looking brighter for the July-September period.

The apparent brightness proved another of those clichéd false dawns. Investors thought US corporate and auditing scandals were over and the trading climate could only improve in the ensuing three months.

Then more revelations of corporate naughtiness and incompetence followed, not only in the US. The indices slid to the end of last week when there were the usual "triple-witching" aberrations in the US and UK.

Triple-witching is the term for the expiry of futures, market index and options contracts on the same day. That happened on September 20. Traders covered positions, causing technical changes that had little relation to fundamentals.

Similar aberrations are likely on September 30, including activity in New Zealand and Australian markets. Fund managers everywhere will indulge in "window-dressing" portfolios to make them look good at a quarterly balance and reporting date.

Markets in the past three months were concerned about apparent deterioration of economic conditions and corporate profitability. The latter was linked to growing cynicism that reported results may differ materially from reality.

US President George W Bush's verbal war against Iraq, coinciding with the anniversary of September 11, 2001, did nothing for confidence. His words have been interpreted as a prelude to a shooting war. Reports from the US estimated the cost of a war against Iraq at $US130 billion. That figure might be another typical American underestimation.

The US approach to the monetary cost of conflict was summarised in an anecdote from a now-deceased New Zealand World War II veteran, who dealt with US supply ships (effectively floating warehouses) in the Pacific.

He asked the commander for appropriate documentation for goods supplied so it could be sent to Wellington, probably in quintuplicate, although the suggested multiple was not part of the anecdote. The response was: "When we issue something we take it off the list. You seem to put it on the list."

The US report said there would be an additional cost of about $US100 billion for "economic strain" resulting from an exercise against Iraq. Apart from the expenditure of $US230 billion to get one person Saddam Hussein, probably history's highest bounty the "economic strain" factor stretches credibility.

A short-term strain is obvious but destroyed military hardware, missiles, bombs and even relatively cheap ammunition would be replaced, to the financial benefit of US military contractors and the companies' share prices. It has been distasteful fact since the days of flint-axe fashioners that military conflict was good for business, provided plants were unscathed in counterattacks.

A US attack against Iraq is unlikely until the end of the year or in early 2003. Sir Winston Churchill once referred to Hitler failing to learn a lesson from Napoleon or from his school days. The Russians had a winter, their great ally. The Iraqis have a summer and a subsequent period of harsh weather that Europeans gently refer to as autumn and Americans as "fall."

The rights and wrongs of US rhetoric are outside this column's brief but investors can expect volatility until the US-Iraq standoff is resolved, irrespective of how. Remember the other investment cliché: markets hate uncertainty.

It has been well reported that June-balancing companies overall produced their best results for years.

The main sharemarket indices this were lower than in June but had massively outperformed other leading markets in both the latest quarter and in the nine months since the end of last year.

Comments from our readers

No comments yet