A. Oh, definitely! First, I'm going to question whether there is anygain to be made by supposedly "anticipating" something that the whole worldalready anticipates. Just because someone heard on Tuesday afternoon thatthe Iraqi parliament voted unanimously to reject the U.N. resolution, doesnot mean that the chance of war is "new news" to the market. This has beenbuilding for several months now.
A. I believe they generally do. Look at Wednesday, when Saddam Husseinpulled a surprise and said it was OK to send the inspectors. Energy stocksdeclined immediately. To me, that means the market had already priced animminent invasion IN. You have to be a little more sophisticated in yourtiming than to think an invasion is a new idea no one else has acted on.You only get paid big for expecting the UNexpected.
A. I think that no one should buy a mutual fund with the idea of using itas a short-term investment. And I believe that is what a war-drivendecision represents. Many funds have adopted escape fees that gettriggered when you hold for less than 90 or 180 or even 365 days. And somefund companies will black-list investors for making several short-termsales inside of a year. So, to me, a mutual fund is not the instrument ofchoice.
A. I would be more inclined to buy an exchange-traded fund, or ETF, thatspecializes in such an area -- IF you want to try to play the war idea.At least with an ETF you can use a limit order, or get in and out duringthe trading day, rather than only after the close at an unknown price. Theones focused on natural resources are:
OIH - Merrill Lynch HOLDRs Oil Services SectorQ. You seem fairly negative on doing this at all, not just via funds, Don.
A. I just think it requires a lot of expert, or very lucky, timing to getit right. People tend to follow the news and that means they buy after arise or sell and hold back from buying after a decline. You really need tobe a contrarian and have good discipline to get it right and make a profit.If you really want to add to positions in energy, I guess the best betmight be domestic producers, in case OPEC limits production once a warbegins.
Q. Can you give an example of that contrarian approach?
A. Sure. You need to be very disciplined and believe in anaction/reaction world. When you get brief peace news and energy stocksfall, THAT is when you jump in and buy, NOT when it is running hot and aninvasion seems imminent. In the age of the Internet and instant worldwidenews (and information) dissemination, the market's reaction to any changeis swift and sharp. You can't be a follower. And again, funds are notdesigned for short-term trading decisions.
Q. What happened in energy and related funds back in the Gulf War, Don?
A. There had been some rise in oil prices in anticipation of thatinvasion. Then there was a very brief spike once the shooting started.And the high in oil and in energy stocks came VERY early in the war, andthings declined after that.
Q. Do you think there WILL be action in Iraq?
A. Just a personal expectation, of course, but yes. I don't believe thatMr. Hussein's announcement Wednesday will prove to be sincere. I believehe is buying time to move and hide more things and prepare better for theinvasion. But I also believe that Mr. Bush will not be faked out, soaction seems inevitable.
Q. What other kinds of investments do you think may be affected?
A. I'm imagining forward scenarios here, just possibilities. I believethe effect on the domestic economy will be moderately negative. People maystay home and watch a war on TV, as they did in 1990. That depressesspending. If the war drags on, that depresses the public mood and againthe retail side takes the hit. And if things should go really badly, aswith nerve gas or other terrible weapons, it could scare the publicgreatly. Not to mention the chance of a domestic terror attack inretaliation. I think the new Osama bin Laden tape's timing is nocoincidence. It is meant to raise the risk ante. So I see not a greattrack for the market in an Iraqi war.
Q. Well, are there some safe ways to use the situation?
A. I would suspect, perhaps surprisingly, that bond funds would do well inthe short term. If stocks fall, people run for the cover of "safety" inbonds. And I would see a back-to-basics look at stocks: Grocers and foodproducers, which have been weak lately, probably do well as people look forstaple parts of the economy. But again, these are short-term swings ofmood, so I would not try to use funds to participate in them. Balancedfunds may fare well, as people decide they don't really know WHAT to do,and stay in a mixed, cover-my-bases, position. Defense stocks, and fundsthat might hold them: surely there are no secrets here, so I bet a war isalready priced IN. Similarly, gold and gold funds are usually viewed asplaces to go in time of war. Well, gold had a big run earlier in the yearand I suspect the buyers on war speculation have already anticipated a warscenario, so I would not want to be a late buyer.
Q. So what should fund investors do then, nothing?
A. I'd say relatively little if anything. Dollar cost averaging throughequal monthly purchases should work if we see a little weakness. But asfar as trying to time the sharp ups and downs, I would not try that withfunds. That's strictly for traders. If a person does anything, it shouldprobably be to react as a disciplined contrarian and NOT do what seems easyor obvious. In the week right after 9/11, people thought the world mightend and they sold out. That was badly timed, as we got a 5-month rally fromthat point. So I would not jump in any direction with more than maybe acouple of percent of assets.
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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).
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