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Beyond the Disaster: What Will the Markets Do Monday?

Wall Street is set to open Monday, and Americans everywhere are worried. This attack was carefully timed; it came at one of the most fragile points for US markets and the US economy in many years. European markets fell sharply after the attack, then slowly rose and are now falling again. Asian markets dropped, then held steady and have begun to stabilize. US treasury yields have dropped to a fifty year low, to rates not seen since the 1930s. Gold has risen dramatically.

So, what will we see on Monday? The first thing we will see is fear--a week of waiting as people with already-damaged portfolios begin to think that the hopes they have been clining to for a recovery are now baseless. We will see greed--there will be those who are positioned to take advantage of a fall. Short-sellers, who are actually providing an important source of market stability, will be blamed for a lot of the problem.

However, one of the things that stabilizes free-falling stocks is short covering--when people who have sold stock they don't own must, in effect, buy it back at a lower price, lending some stability to markets.

All transportation stocks are going to take a serious hit. The airline industry was already suffering, and the declines in this sector are going to be dramatic and long-lasting. Travel-related stocks will take a hit, in general.

Retailers will also suffer, but it will be shorter term. Oil stocks and gold mining stocks are going to thrive on Monday. However, there will not be panic buying of oils because OPEC ministers this week announced that they would not be raising prices.

Unfortunately, crucial indicators were badly off in the days after the catastrophe, based on measurements taken before it happened. On September 13, initial jobless claims were reported to have reached their highest level since July. The airline shutdown has caused production problems due to nondelivery of goods, checks and all manner of materials. This is liable to lead to further manufacturing layoffs.

Consumer sentiment was also well below expectations when reported on the 13th, and this was prior to the terrorist attack. Given that a Gallup poll plublished a few days ago indicated that 87% of Americans thought that the events of the 11th were the most tragic event of their lifetimes, consumer confidence is liable to fall further.

Higher food and energy costs drove prices up slightly in August.

Probably the worst, and most foolish, thing that happened this week was that the European Central Bank did not lower its interest rates. This is a major negative, and the reason that European markets are continuing to slide.

On October 2, the Federal Open Market Committee will meet. There will be a US rate cut then, and there is a reasonable chance that an unannounced cut will take place before then.

The Fed has provided massive liquidity to world markets, and will continue to do so. The closing of the corporate bond markets required the Fed to infuse $100 billion into the US banking system and $50 billion abroad in the past week. The fed will continue extraordinary support of the markets.

In past disasters--the sinking of the Lusitania, Pearl Harbor, the Kuwait invasion--there have typically been two days of extreme losses, followed by slower change. After Kuwait, there were three down days, and within three months, stocks had dropped an overall 20%. Five months after Pearl Harbor, stocks were down 20%.

However, within a year of all these past national catastrophes, stocks were well recovered and higher than ever.

On Monday and Tuesday, there may be panic selling. There has been a lot of bad economic news in addition to the disaster. Clearly, the terrorists have thoughtful planners, and they timed this strike to coincide with market weakness.

Futures traders should be aware of fast market rules. This means that, if you buy or sell into a market that has been declared a fast market, you have no way of controlling your fills. You might put in an order at one price and find it filled hundreds of points away from where you expected. The lesson: stay out of the markets if they are fast, if you are not already in them.

Stand aside until the markets cease to be emotional.

Many people who have substantial losses in their stock portfolios may conclude that there is no chance of recovery in the foreseeable future. This is, of course, not true. In the end, America will go on to meet its great destiny, and those who stick with her now will be there also in the future, on her long and prosperous journey to a world that, if past is prologue, is far beyond our imagination.

Whitley Strieber

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