The Probabilities of War

Stocks rallied nicely in the first few weeks of January, right up to the moment that chemical warheads were discovered. For most investors, this was the wake-up call that war could happen, and stocks sold off 10% to 15% over the next four weeks.

We told our clients early last September, "Pragmatically speaking, given the call-up of armed forces reserves, the prepositioning of troops and materiel in neighboring countries such as Turkey, Jordan and Bahrain, and the fact that factories are on triple over-time producing the kits for 'smart bombs,' it seems that the Administration has already decided on such a war, perhaps in January-March 2003 when temperatures in the mostly desert country are bearable."

To draw conclusions of this nature, I continuously assess the likelihood of possible outcomes. I assign estimates as follows:

1% -- nearly impossible

10% -- very unlikely

25% -- unlikely

50% -- could go either way

75% -- probable

90% -- very probable

99% -- almost guaranteed

For example, to estimate the likelihood of war given current information, consider the following scenarios:

Saddam Hussein resigns and goes into exile: 1%, nearly impossible. Nothing in Hussein's 45 years in power suggests he would step down now.

Hussein is assassinated: 1%, nearly impossible. Hussein has a history of pre-emptively killing off opposition figures. Henchmen whose own survival is doubtful in the event of "regime change" surround him.

The U.S. stands down and returns troops to U.S. and Europe: 10%, very unlikely. If you put a gun to a man's head, you have to be prepared to pull the trigger. To back down now would be an astounding publicity coup for Hussein and would encourage other troublemakers.

There is a last-minute deal from Hussein to disarm: 10%, very unlikely. However, Hussein does define "victory" as his survival in power, and he just might cough up the weapons to avoid being deposed.

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David Edwards is a portfolio manager and president of Heron Capital Management, a New York management firm. Edwards was a contributor to Harry Domash's Fire Your Stock Analyst: Analyzing Stocks On Your Own available at Amazon. At the time of publication, his firm was held positions in General Electric mentioned in this column, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Edwards appreciates your feedback and invites you to send it to David Edwards.

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