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To: Madeleine Harrison who wrote (2843)	9/16/2001 4:40:17 PM
From: GARY P GROBBEL	Read Replies (1) \| Respond to of 120405

some thoughts about the mkts and the economy going forward, short and long term...just one person's opinion: Liquidity: if I have the number right the fed did two repos last week for a total of $120B. For any number of reasons it is going to be extremely important for the fed to keep injecting liquidity into the mkts for some time to come. As part of this process I would not be surprised to see the fed cut 1/2 pt at least Monday...probably during mkt hours. Further cuts may be necessary. Now, depending on how long this war lasts and what the overall requirements may be in terms of drawing down American treasure to fund multiple known and unknown needs (part of this will depend on how much of the cost burden our allies will bear) don't be surprised to see a pivot point down the road a piece where inflation becomes a concern again and rates turn up. As an aside I believe the Treasury may begin to issue 'war bonds' of some type to partially fund the war. Costs: the initial $40B was passed at lightning speed by a unified Congress…remember Daschle...'no air, no light between us' on this endeavor. The final amount needed to rebuild the financial district is still being evaluated but the resulting needs for IT replacement (i have heard $8-$9B for IT), construction material and labor of all kinds will be monumental. Construction firms are going to have to rebuild the equivalent of 13-15 Empire State Buildings just to replace the office space. Ramifications here should be self evident. The wording of an accompanying resolution gave the president all the room he needs to act in response to this attack (he has it anyway...throw out the War Powers Act) and we have the initial draw on the Reserves of 50,000. That number may go up in time but what will rise rapidly are the overall costs in all respects. The $40B is probably a drop in the bucket. Depending on who you wish to read or believe the Air Force alone is so critically short of spare parts that some wings would have difficulty staying 'hot' for even a modest amount of time. It is also well agreed that the military as a whole is underpaid, underfunded, ill supplied and tactically out of date in some areas. This was the case BEFORE the day the world changed on Tuesday. Just bringing all of the various branches of the armed forces up to PAR will cost an enormous amount. Outfitting it properly for the missions to come and replenishing material as it is used could cost hundreds of billions. Finally, their will be additional large sums needed for our various intelligence agencies...the blame game can wait for a bit. What will be required for the FBI, CIA, NSA and acronyms we don't even know about to both bring them up to speed and bring these services the tools needed for both transparent and black operations to come will again be a substantial sum. One plus is that one critical requirement that is in generous supply is high morale and a kick-ass attitude. The direct and indirect implications of these costs depend in part on how the war is waged, what kind of assistance we receive from other countries and how long it will take before the president can declare victory. What is obvious is that while certain sectors of the economy will be hit hard (air carriers, hotels, travel agents (there are more out there then you realize), insurers and re-insurers etc...other sectors and niches in the economy will benefit. These could include the obvious...defense contractors and suppliers, R&D in all areas of defense against any and all modes of potential terrorist attacks as well as R&D in new, proactive technology and implements of offense, security in all aspects, communication modes that can substitute for a business flight etc...as well as goods and services that may not make the headlines but could be in direct demand in the short and long term such as ...IT replacement and build up for for redundancy and security, car rental companies, staffing companies serving specific needs etc… Employment: Continental already cut 12,000 jobs two days ago. The travel industry including all the airlines will keep letting people go at least for a while. However, again depending on the requirements in toto of the military in all its aspects , the requirements to rebuild part of the Pentagon and NYC, the requirements at the local level to beef up and secure the resulting amount of money spent on same will result in hiring…maybe lots of hiring in certain sectors. In time it could be better than a wash and come out as a plus. Economic costs: how many people either went to a mall or shop the last few days or bought a car or other big ticket item? Answer is very few. NYC alone will be a hit to GDP. So will the slowdown over the short term caused this event as it threads its way thru so many facets of our economy. BUT…there is also going to be over the long term an unknown amount of money injected into the system by companies in the sectors above and the Gov’t in relation to the military and intelligence needs as described. Again, over the near term, this may come out better than a wash and over the long term might turn out to be a significant plus for the GDP. If you listened to the president this aft (Sunday) you might again get an idea of how long this war may have to go on. Short-term-the open tomorrow morn: at the open it's possible the Transportation Average may take a huge hit, thus dragging down the Dow over and above general pressure. Unless Congress passes the already proposed $2.5B bailout for the airlines (it was defeated in the house yesterday on 1st vote) this could be a continuing problem. There will be a significant flight to quality (short term bills and bonds) and perhaps some foreign selling. There is also some anxiety that the insurers may have to liquidate some of their long bond positions to start addressing the huge claims coming out of this attack. There will be less panic selling than if the mkts opened last week. There is also email flying around urging Americans to take a stake in their country rather than selling their positions. Some short houses insist they will not short tomorrow and many brokers and houses insist they will be buying. Corporations have already announced significant buy backs (Cisco $3B for example). The SEC has lifted the rule preventing companies from buying their own stock except on a down tick. There may be an initial downdraft but I think the chances are good for the mkts to balance out over the first part of the week and settle down a bit by the end of the week. However, given that there will be unknown news events occurring daily…some military in nature….expect significant volatility. Long term: We will finally bottom this week and the amount of money that will probably be injected into this economy from various sources described above over both the short and especially the long term is bullish.