Saturday, December 29, 2007

Terrorism is Alive, Dangerous, and Impacting the Markets.

The death of the former prime minister of Pakistan Benazir Bhutto's and the subsequent decline in the world equity markets should serve as a wake up call to all of us that the Taliban is serious about what they want to do to us. One of the reasons she was attacked was because she was a woman and in a leadership position something the Taliban cannot accept. In covering this horrific event the press, at least what I saw in the US press, was more concerned about how it happened and was less concerned about the message from the terrorist.

The coverage on CNN was so focused on how that they actually brought in an expert to review the film frame by frame to try and figure out if she died from a gunshot or something else. The constant playing of the frames, reminded me of the Zapruder Film of the John F. Kennedy assignation. The attention to detail of how it was accomplished ignored the real issues.

No matter how much we want to ignore terrorism it is still out there and impacts our lives and our investments. Just when we think things are moving the right direction an attack like this one sends a message that takes away our confidence. As much as we would like to think we have terrorism under control we don’t. We have been successful in keeping attacks out of the United States but they continue in other parts of the world,

I thought it was interesting to watch the presidential candidates reaction to the assignation or perhaps the lack of reaction. Perhaps the shock of the act has stunned the candidates to rethink some of their positions on terrorism and how to deal with this serious problem. With the Iowa primary in a few days’ comments about the attack will be muted at best from the Democrats. On the other hand Republicans may be more aggressive on the subject.

We have one last trading day in 2007 I don’t expect any significant rally. What I’m concerned about is how will this terror event impact the first weeks of the New Year? We still have the problems of the sub-prime issue. Housing continued to deteriorate and more banks will have to report losses on SIV’s. Stock prices may look cheap based on projected earnings for 2008 if those earning due in fact materialize.

In mid January the retail sales for December will be reported and most of the banks will report any write-downs from housing and other loans. I would be surprised if the Holiday sales were much improved over last year. In addition we will want to see fourth quarter earnings for the retailers to get some idea of the markdown necessary to attract buyer. Rumors on the street suggest that Merrill Lynch my report as much as an additional $15 billion in write-downs, and a major European bank is in trouble.

I don’t think we are out of the wood and most of the talk in the coming week will focus how slow will the slowdown really be and for how long. I wish I had better news to start the New Year but I’m afraid that many of the problems we discovered in the last 4 months of 2007 are still unresolved. I expect that 2008 will be a year of continued volatility and that being paid interest and or dividends will be a great thing for investors.

Dan Perkins