The Waiting Game

If you think the worst time for a stock market is wartime, think again. The worst time is the wait, as in right now, when you know there will be one, but you can’t predict when it will occur. That’s what’s ailing this stock market—not corporate earnings, not dishonest bookkeeping, and not the imbalanced budget. It’s the waiting for Iraq War II to begin. Most people involved in the stock market now weren’t too focused on the Dow Jones averages the first time we were about to go to war against Iraq. I, unfortunately, was running a hedge fund, and I can recall the constant rally-decline-rally-decline moments leading up to the confrontation. Every rumor of peace brought buying, every thud of disappointment brought selling, until the market simply caved in as even the longs figured, You know what, I will have another chance to buy after the war begins.

You didn’t, though. There was no chance to buy. Not for a moment. It was straight up once the shooting started.

Don’t I know it. At the time, I was trading with my wife, Karen Cramer, formerly known as the Trading Goddess but who now insists on being known as a homemaker—Homemaking Goddess? (Oops, taken by Martha Stewart.) Tired of my endless buying ahead of every Tariq Aziz meeting and my endless selling after every disappointing James Baker press conference, she finally banished us to the Hyatt at St. Johns with a vow not to return until right before the war began. “Apply No. 4 liberally and wait for the day before the war,” she would say each time I pestered her to do some buying from the Caribbean, harking back to a moment when we actually used No. 4 instead of No. 52 SPF sunscreen.

“We haven’t dipped all the way back to where we were in those bear daysof summer, somethingthat happened rightbefore Iraq War I in 1991 when we plunged back to our 1990 lows.”

Back then, we had a clearer timetable than this go-round, and we were able to arrive back in New York a couple of days before so we could buy with both hands. Why were we so certain that the market would go up? Because the market had discounted virtually everything negative before the war began—and had not discounted swift victory.

We aren’t exactly in the same position these days. We haven’t dipped all the way back to where we were in those bear days of last summer, something that happened right before Iraq War I in 1991, when we plunged back to our 1990 lows. But we did come tantalizingly close to it a couple of weeks ago, and I bet we get there again on the eve of battle. And we can’t be sure that this time we will have closure. In 1991, the world was united against Saddam and we didn’t have a holy war against us to contend with, replete with internal terrorism. At the completion of the war, we didn’t have to fight another one; we can’t be so sure that Iraq won’t be the first of many, as we will have taken out only a third of the evil troika. And there are just enough grizzled players like me around to remember that it was foolish to sell ahead of the war and think that you could get back in. In other words, there are too many bulls right now for my liking. The washout simply hasn’t been great enough. Yet.

But, as in 1991, we always underestimate how horrible the waiting for war is on the psyche of the market and on the world economy. We tend to think that the decline in our market is happening in a vacuum, perhaps as some sort of punishment for the weak earnings of the likes of AOL Time Warner and McDonald’s, or the incredible chicanery of the WorldComs and the Enrons. Lest you think it is our economy’s woes that are driving the Dow’s red ink, you should know that the overseas markets have fared every bit as badly—and in some cases, they have been worse. Lots of major decisions have been put on hold in America and the world because of the waiting for war. Big buying decisions both on the corporate level and on the consumer level have been shelved pending the outcome. Anticipating war is not the optimal scenario for strong retail sales anywhere in the world; in fact, the Christmas we just went through had more in common with the Christmas of 1990 than any of the retailers would like to admit.

But I am betting that once the war is over, the pent-up demand to buy stocks connected with consumer spending—the group that rocketed after Iraq I—astounds even the great optimists of the time. Yes, a well-fought victory can be that bullish, more bullish that most of the younger folks in the market can imagine.

“I’m betting that once the war is over, the pent-up demand to buy stocks connected with consumer spending will astound even the optimists.”

So what to do? For me, I have been committing my cash into this market, buying stocks as they come down in anticipation of the worst but keeping a small amount of powder dry for the last gulping decline before the shooting. I’ve been buying some Masco, the big cabinet- and faucet-maker, some Newell Rubbermaid, and some USA Interactive—consumer plays all—as well as a few bet hedgers like Royal Dutch and Raytheon. These have all been crushed as sales have paused worldwide in their industries, waiting for the war. As in 1991, many younger traders seem so confident that they will easily be able to get back in once hostilities break out that they have dumped these solid companies to levels that would normally seem like absurd bargains to even the perma-bears who live in cash at all times.

Somehow, though, as in 1991, we won’t get that exquisite moment to buy once the shooting begins. The cautious buyers won’t triumph now any more than they did then. Which means the time to buy is, alas, upon us, just as it was twelve years ago.

The Waiting Game