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To: Jim Willie CB who wrote (3685)	3/16/2003 11:12:54 AM
From: 4figureau	Read Replies (2) \| Respond to of 5423

Bear market needs more than peace March 17 2003 There are some structural problems that peace alone cannot cure. Investors were reminded again on the weekend that an end to the Iraq imbroglio need not signal the end of the bear market. Iraq continues to dominate global markets and the rally in Europe whereby London's FTSE 100 index gained 6.1 per cent on Thursday night and 3.3 per cent on Friday, and similar gains were enjoyed by mainland European exchanges, has to be seen in that context. It was led by traders buying shares in companies considered to have the most exposure to the Middle East. As tension has risen this year, European markets have fallen further than Wall Street has. Even after their strong rises at the end of last week, the FTSE 100 and the Dow Jones Euro Stoxx were down by 8.6 per cent and 12.9 per cent respectively in 2003, compared with losses of 5 per cent on Wall Street. This is because Europe's exposure to Iraq is compounded by the fact that the tension has been driving the US dollar down against the euro, which hurts the price competitiveness of European exports. A similar effect has been at work in the Australian sharemarket, where the $A has also rallied against the greenback, and where the ASX 200 is down by 8.45 per cent. The European market is equally hyper-sensitive to what is perceived as good news about Iraq and the sharemarket rally on Thursday and Friday was led by insurers and airlines, companies likely to benefit from either the indefinite postponement of war, or a speedy military outcome (both scenarios prompted buying during the rally). Shares in the global reinsurer, Swiss Re, rose by 18 per cent on Thursday and Friday, for example; shares in the French insurer AXA rose by 16 per cent; Air France was up 12 per cent and British Airways was up 9 per cent. The story was different in the US on Friday, however, and it is the US market which really matters. After gaining 3.6 per cent on Thursday, the Dow Jones Industrial Average rose by another 1.5 per cent in early trade. But it then gave back 100 points to close only a half a per cent higher. Bad economic data was to blame, in particular a worse than expected slump in the University of Michigan's first reading of American consumer confidence for March. The index slipped to a 6.5 year low of 75, down from 79.9, and well under the level of 78 expected. Other statistics released on Friday showed that manufacturing activity slowed in America in February, the fourth down month in the past six. Consumer confidence will bounce once the Iraq crisis passes but the hit it has already taken is materialising in lower consumption and profits. Consensus estimates of March quarter US corporate profit growth have fallen from 12 to 7.8 per cent since the beginning of the year. The consensus forecast for second quarter earnings growth has also been trimmed, from 10.9 to 7.2 per cent. But earnings growth of this size simply cannot underwrite a powerful and sustained Wall Street rally post-Iraq, something that must occur if markets in Europe and Australia are to recover. Only higher US economic growth and corporate earnings can do that. And for that to occur, the private consumers who account for two-thirds of the economy must not lose heart, as the sentiment survey released on Friday suggests they are doing. The top line of today's graphic shows the All Ordinaries Index, monthly since 1970. The two lines beneath it plot the lowest point for the All Ords in the preceding year, and the preceding five years. As you can see, it's not all that unusual for investors to give away a year's progress. But the only time the index gave up five years of growth was in 1974, when it lost almost two-thirds of its value. The five-year gap went close to closing early in 1991, when the global economy was recessed and the US was bombing Baghdad: that was also an historic turning point, the beginning of a decade-long bull market acceleration that opened an unprecedented five-year rolling valuation surplus. The gap started closing again after the collapse of the tech boom in March 2000. But it is war with Iraq that is once again raising the possibility that value destruction of the sort seen in 1974 could be repeated. smh.com.au