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Facing a Market Transformed by Terror

Tuesday's awful events will have an enormous impact when trading resumes.
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Financial journalists often use terms such as crash and carnage and panic to describe market developments. Tuesday's terrorist attacks demonstrate in the harshest manner just how frivolous such usage is.

In fact, it all seems trivial now -- covering the tech stock debacle, the debates about the course of the bear market, about when the bottom might arrive. As painful as it's been for many investors, even the trillions in lost wealth pales in comparison to the ongoing human tragedy. If there is any good that can come out the horrible events, it's that the terrorist attacks have reminded all of us what is really important. We are praying for the victims, their families, and for the strength of those working to aid them.

But, macabre as it seems, we have an obligation to report the news, including the outlook for the economy and financial markets going forward. While it's a distant second to the tragic loss of human life, the economic impact is expected to be tremendous; this morning, Moody's Investors Service estimated the direct damages from the attack could be $10 billion to $15 billion.

There are concerns the terrorist attacks will exact billions more via the impact on consumer confidence and market psychology, which already were tenuous.

"It feels trivial but I know there are people shaking in their boots" worried over what happens when trading resumes, Harry Schiller of said in an interview Tuesday afternoon. "I suspect the longer they keep this thing closed, the tougher this will be."

At this point, there was no indication about when trading will resume. In a

statement yesterday

Securities & Exchange Commission

Chairman Harvey Pitt said "trading will resume as soon as it is practicable to do so."

In an interview on CBS today, Pitt said he is hoping trading resumes tomorrow, which seems almost impossible, given the state of Lower Manhattan, and still unanswerable questions about how brokerage firms with operations in and around the World Trade Center will deal with the reopening of trading. Then there's the emotional state of market participants: Yesterday and early today, most could think only of lost friends and colleagues, and shock over the horrific events.

Like many observers, Schiller believes "they're going to hammer this thing" when trading resumes. But he also believes the tragic events could trigger the capitulation session many have long said is necessary to end the bear market.

"It's a gruesome twist of fate, but I think this is the event that people have been looking for to spark that washout that should

prove to be the bottom," he said. "The worst thing a person can do is sell anything into that."

Paul Rabbitt of in Hermosa Beach, Calif., expressed similar sentiment in an email to clients last night.

Rabbitt predicted major averages would open down 7% to 15% when trading resumes, but also expressed hope that "bear markets often reverse after climactic events." Although direct comparisons are impossible, markets quickly recovered after recent tragic events such as the assassination of President John F. Kennedy in 1963, the beginning of the Gulf War in 1990 and the first World Trade Center bombing in 1993, he noted.

"There is no rational reason for investors to sell off corporate America based on a noneconomic event such as a terrorist bombing,

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and selling during unstable times is never a good idea," Rabbitt continued.

Certainly there is hope Wall Street can follow the example of European bourses when trading resumes here. After tumbling yesterday, major markets in London, Germany and Paris were in recovery mode this morning. (Asian markets were down sharply today in their initial reaction to the gruesome events.)

Of course, because almost everyone is expecting major U.S. averages to sustain steep losses when trading resumes, there's a chance the opposite occurs. But that, of course, is an optimistic outlook, which Schiller and (to a lesser extent) Rabbitt have been espousing of late.

Conversely, John Mesrobian, analyst at Constantinople Advisors in Williamsburg, Va., has been extraordinarily bearish and said Tuesday's events did nothing to alter that view.

A falling dollar and careening stocks "is something we said would occur but not under these circumstances," he said in an interview Tuesday. We believed "there had to be an event to exaggerate the move, but no one would think of this. I hate to be ghoulish, but I think people getting out

of stocks and the dollar is going to feed on itself. I don't think it's going to be the usual capitulation stage. This has more ramifications."

Yesterday, Mesrobian said the dollar's fall and gold's rise had particularly negative implications because many derivatives market participants pair long positions in the dollar with short positions in gold. "When this market opens up, unless something goes on with the dollar, we'll see U.S. assets being sold off."

As with European bourses, gold and the dollar were reversing Tuesday's trends in overseas trading today. Of late, the dollar was unchanged vs. the euro and up slightly vs. the yen. Gold was recently trading around $280 an ounce in London after approaching $290 yesterday.

The dollar and European markets likely were aided today by an infusion of liquidity by central banks in Europe and Japan, which totaled $80 billion,


reported. There are rising expectations the

European Central Bank

will ease when its policy making board meets tomorrow, perhaps initiating a coordinated easing by world central banks.

The Federal Reserve issued a

statement yesterday assuring that the discount window, the vehicle by which commercial banks borrow from the Fed, is "open and operating" and "available to meet liquidity needs." Additional Fed action, including an intermeeting rate cut, is possible.

Still, the uber-bearish Mesrobian believes Tuesday's events will eventually contribute to ongoing market weakness.

"The markets were already headed south and the dollar as well," he wrote in an email Tuesday evening. "We believe what has happened

Tuesday was very terrible and we feel this event will be long lasting, not short term."

If there's anything everyone can agree upon, it's that the impact of Tuesday's events will be long lasting.