Commentaries

Some months ago, I recalled in a letter to you the history of the last Gulf War and its effect on investment markets and the price of oil. While the market's anticipation of those hostilities and the uncertainty of the looming battle caused oil prices to double and the market to decline in the double digits, the start of the hostilities cleared much of this uncertainty. The six weeks of that conflict saw a decisive military victory but also a 17% rally in the stock market, and a decline in oil prices to levels lower than they were before the invasion of Kuwait. Most periods of uncertainty cause stock markets to price in the worst even while hoping for the best. When the uncertainty is to any degree removed, the market tends to respond favourably. Over the past few months in discussions with clients I have pointed this out and recommended patience - even in the face of disappointing returns and frightening headlines - and suggested that we would be well served by not taking any significant action in our holdings until the uncertainty of the war has lifted.

My expectation, my hope, for the markets is that they will rally on the removal of uncertainty, the cessation of hostility, and the removal of Saddam Hussein. I believe that oil prices will continue to fall from the unsupportable peaks of $39 per barrel they reached just a few weeks ago. This cut in energy costs is a massive economic stimulus and will lead to improving economic figures and should continue to "fuel" recovering stock markets. After many months, the improving fortunes of stock markets will eventually begin to draw in some of the trillions of dollars of cash now waiting "for things to look better" (that is to say, waiting for a time where stock buyers can pay more than they would today for the same stock). This buying, as has been the case with past market declines, will likely be spread over years, not months, and may sustain the next long bull market.

You will recall some of the scary headlines of just a couple of weeks ago. Not much time has elapsed. I will point out some of the current ones as we watch events in the war unfold in real time around us. I do this to point out the folly of making long-term financial planning decisions based on the hysterical outbursts found in the media.

"The war premium is diminishing on a growing certainty that coalition forces will prevail," said Peter Gignoux, head of the London energy desk at Salomon Smith Barney. As oil prices hit a three month low of $28 per barrel, down by more than a 25% in just a week. - Mar. 20. [Was there ever any doubt in any serious observer's mind that "coalition forces will prevail"?! Really, was this guy buying oil at $39 a barrel with that view??]. Oil prices have fallen today to $26.50 per barrel.

"Wall Street advanced for an eighth straight day Friday, pushing the Standard & Poor's 500 closer to its best winning streak in nearly six years as U.S.-led troops swarmed through Iraq and seized airfields." Associated Press, Mar. 21. Markets have, as expected, surged at the beginning of the military campaign.

"Dow rallies 200 points on 'shock and awe' bombing." Yahoo, Mar. 21

Contrast the above with this headline from nine days ago to prove the point that what markets hate most is uncertainty: "Wall Street extended its slump Tuesday after the United States said it would delay a vote on its U.N. resolution on Iraq. The U.S. move raised investors' fears of prolonged tensions with Saddam Hussein." - Mar 11. The Dow is up over 800 points in eight days from March 11.

In the months ahead I will continue and intensify the process of reviewing client holdings. I do this to see that individual holdings are performing as expected and to ensure that portfolio weightings do not depart sharply from the objectives we have set in the past. At times of market volatility and significant world events this becomes more important. However, it also ushers in a time where you and I should be reconsidering your objectives in light of both very recent events (e.g. from a few months ago until the conclusion of the war), and the less recent events of the sharp rise and fall of the stock markets over the past five years. I will be sending out some material on this soon and in all likelihood, calling to arrange a meeting along these lines over the next few months.

As is often the case, investors chasing returns find that they can never catch them. Some of last year's top performing asset classes are now among the worst and vice versa. By maintaining a longer-term view in line with our objectives, these pitfalls can be avoided. My goal is to maintain our discipline and our portfolio balance, in line with client objectives, to achieve our long-term results. My reviews of portfolios now are to monitor our holdings to see that they achieve their purpose. Our meetings over the next few months are to insure that your objectives remain the same.

I suspect I will have further comments for you shortly as events unfold in the Middle East. This can be considered my post-uncertainty, pre-victory statement! I am optimistic that my post-victory comments will discuss more good news for portfolios, and hopefully the world.

Alan Cameron

Commentaries

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