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August 07, 2004

Booga Booga!
by David Chapman

For the sixth time since September 2002 the USA has issued an Orange Alert, the second highest of the 5 level colour-coded terrorist alert system. Since inception in March 2002 there have only been two alerts, Yellow and Orange. The lowest two, Blue and Green, and the highest, Red have never been issued. Red alert would effectively mean martial law if executed and would only occur if an attack were under way or occurred.

Curiously to date the Orange alerts have come at interesting points in time. The first one was issued around the one year anniversary of September 11, 2001 at a time when the Enron scandals were boiling over noting possible George Bush involvement; the second in February 2003 when Colin Powell was to speak to the UN urging rapid movement against Iraq; the third in March 2003 just prior to the actual invasion of Iraq; the fourth in May 2003 just following Bush's "Mission Accomplished" and following a wave of attacks in Saudi Arabia and Morocco; the fifth in December 2004/January 2005 surrounding the outbreak of Mad Cow disease; and finally the current one just as the Democratic Convention ended and the Democrats were looking for a convention boost.

It was revealed that the information for this Orange Alert was actually primarily based on information 3 to 4 years old. That of course has raised many questions as to the basis for the alerts keeping in mind that the record of the current administration is not good when it comes to intelligence information (see invasion of Iraq based on WMD as an example). While there has been nary one terrorist attack it has managed to both increase fear and cynicism about the nature of the alerts. And it does amongst the accusations raise the throwback of "I told you so" if something actually happened. But none of that has stopped the fear mongering including at least one pundit we listened to on National TV declare that a terrorist attack will happen prior to the November 2004 election.

But certainly one can not deny the fear that this generates. As we note in our title "Booga, Booga". While specific obvious targets were cited such as the Federal Reserve, the NYSE, the IMF and World Bank in fact an attack could in theory come just about anywhere. So this results in closed roads, blocked access to buildings, car searches, holding people, and riot clad police everywhere. Security though is not cheap. And all of the cost no matter whether it is supplied by government employees (police, army) or private guards all come at a cost to the public purse either from the Federal Government or the States.

With a budget deficit already approaching a half a trillion dollars and many states remaining in constant deficit, the cost of the war in Iraq, the maintenance of US military presence in more than 130 countries and the growing cost of domestic security are becoming astronomical. All of this is taking place against the backdrop of ongoing cries to cut government but what is suffering and being cut is education, health, environment etc. while military and security grow in leaps and bounds. US global military expenditures are already almost larger than everyone else combined.

And there is a cost to the massive deficits as upwards of half of US public debt is now in the hands of foreigners primarily China and Japan. While the US Treasury Department does not see this as a problem it should be viewed with higher alarm, as effectively the US is dependent upon the largesse of other countries to finance their ongoing military adventures that are contributing to the budgetary deficits as well as the trade deficits as a result of massive imports. The question is will the foreign holders of debt continue to be "buy and hold" investors? At the rate we are going is foreigners holding even higher levels of US debt possible? What does it mean for US Foreign Policy if foreigners are providing the financing for military adventures?

And none of this takes into account the non-financial ramifications of an ongoing assault on guaranteed constitutional freedoms such as speech, assembly, association etc. The recent Democratic Convention was a case in point where the "free speech" zone was under a freeway under construction, in a pen that could only hold 1000 people with one entrance, surrounded by barbwire and riot clad police. In parts of America today even legitimate dissent can now be considered terrorism.

Why do we mention all of this and what does it mean for the financial markets? Well all of this casts a pall over the markets. And this despite the constant cry to "don't worry", "go about your business".  And the business of America is to shop. But if the local Mall might be a terrorist target why would you want to go to the Mall? The most recent retail sales numbers were much lower than expected and 2^nd quarter GDP was also lower than expected. But in keeping with the mixed nature of recent economic numbers others have been on expectations or better and consumer confidence surprisingly remains firm. That may be soon changing.

So just how has the stock market acted when Orange Alert was in effect? We took a look at it and summarize the following on the S&P 500.

The mixed record on Orange Alert to date tells us that the issuance of the alert may not be all that meaningful but it certainly cannot be ignored. The current drop in the market is due as much to the recent rise in oil prices as anything else. Oil prices have been spurred by the Yukos affair and by the ongoing attacks in Iraq. Adding fuel to the fire was the non-farm payroll numbers that came out on August 6. The sharply lower numbers coupled with the downward revisions of earlier months is a very serious slap in the face to the White House Administration and even more so to the market that has been lulled into believing the economy was improving. But it had for months been the sense that there was something wrong with the employment numbers as the overall sense was that while the numbers looked good it did not match the reality being seen and heard out on Main Street.

With a mixed record for the market on orange alerts the focus maybe should be on who benefits from an Orange Alert and heightened security. Companies that may benefit from the increased security and policing are security firms, equipment suppliers to police and firms specializing in gadgetry for security such as biometrics. Here we find that over time a number of firms have definitely benefited. Some that come to mind are Armor Holdings Inc. (AH-NYSE) up 32% YTD, DHB Industries Inc. (DHB-NYSE) up 112% YTD, Mine Safety Appliances (MSA-NYSE) up 38% YTD, Lakeland Industries Inc. (LAKE-NASDAQ) up 15% YTD and Taser International (TASR-NASDAQ) down 2.3% YTD although at one point it was up 332% so it is extremely volatile and now has problems because of the deaths of a number of people after being subdued by a Taser baton.

While these firms (and others) have done exceptionally well in the era of heightened security watching their sales grow immensely and their stock price soar there is one company above all others that has benefited not so much from the heightened homeland security but overall because of the war on terror and the invasion of Iraq. That company is Halliburton Co. (HAL-NYSE). This is the company that was headed during the 1990's by now Vice President Dick Cheney.

VP Cheney has been one of the prime architects behind the invasion of Iraq even before September 11, 2001. VP Cheney has repeatedly defended the invasion of Iraq and the reasons for the invasion of WMD and al Qaeda connections even as they have been proven to be false. VP Cheney has defended the torture of prisoners at Abu Ghraib, that the treatment of prisoners under the Geneva Convention was no longer applicable, and that prisoners at Guantanamo Bay even if they were put on trial, which they haven't yet nor have they been charged, but if some day they were on trial and found innocent they still may not be released.

We point this out because of the stamp of Halliburton is all through the oil regions of Central Asia and the Middle East during the 1990's. But Halliburton is now under criminal investigation for activities during the Cheney years of bribery charges and misappropriation of funds. Reports have surfaced largely in international news sources of "misuse of corporate funds", "corruption of foreign agents" and Cheney's "alleged complicity in the abuse of corporate assets" (Sydney Morning Herald, London Times and Le Figaro). Halliburton is also under investigation by the SEC for similar activities.

Cheney has been under investigation in Congress as well for his deferred compensation packages, unexercised stock options and continuing financing from Halliburton. Halliburton has been awarded more then $2 billion in contracts in Iraq including one worth $1.2 billion on a non-competitive basis. The continuing financial interests and options may be in defiance of federal ethics laws. There have also been findings that Halliburton inflated fuel prices and phantom shipments that have bilked the US Taxpayer for millions. Halliburton has also been heavily behind the hiring of private security firms to provide armed security in Iraq. This is also charged to the US Taxpayer at a far higher cost then regular army.

Despite all the largesse directed at Halliburton the stock remains well off its highs seen in 1997. As well throughout 2004 Halliburton has been caught in a drifting trading range as the allegations against the company mount. We suspect that like the broader market Halliburton is about to fall sharply. Halliburton appears to be forming a symmetrical triangle and appears to have penetrated the lower end on the close Friday August 6. Despite that we remain above the 40-week MA so major support lies just below. The real danger will get underway if that level breaks from the probable topping pattern.

For several months now the market has been in a major drift. This drift is similar to what was seen through the summer of 2000 and again in late 2001 and the early part of 2002 following the rally that followed the 9/11 attacks. Investors should take heed because what followed was effectively a long hard crash. And now not only do investors have to deal with a far less than robust economy that never was, sharply rising oil prices that are clearly negative for the economy, an over indebted consumer, increased insurgency and revolts in Iraq, threats against Iran, ongoing destruction in Gaza but as well Orange Alerts and the real threat of a terrorist attack going into the November elections. Booga, Booga.

DavidChapman.com
Technical Scoop

Charts and technical commentary by:
David Chapman of Union Securities Ltd.,
69 Yonge Street, Suite 600,
Toronto, Ontario, M5E 1K3
(416) 604-0533
(416) 604-0557 (fax)
1-888-298-7405 (toll free)

David Chapman is a director of Bullion Management Services the manager of the Millennium BullionFund www.bmsinc.ca

Note: The opinions, estimates and projections stated are those of David Chapman as of the date hereof and are subject to change without notice. David Chapman, as a registered representative of Union Securities Ltd. makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete.

The information in this report is drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does Union Securities Ltd. assume any responsibility or liability. Estimates and projections contained herein are Union's own or obtained from our consultants. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any securities and is intended for distribution only in those jurisdictions where Union Securities Ltd. is registered as an advisor or a dealer in securities. This research material is approved by Union Securities (International) Ltd. which is authorized and regulated by the Financial Services Authority for the conduct of investment business in the U.K. The investments or investment services, which are the subject of this research material are not available for private customers as defined by the Financial Services Authority. Union Securities Ltd. is a controlling shareholder of Union Securities (International) Ltd. and the latter acts as an introducing broker to the former. This report is not intended for, nor should it be distributed to, any persons residing in the USA. The inventories of Union Securities Ltd., Union Securities (International) Ltd. their affiliated companies and the holdings of their respective directors and officers and companies with which they are associated have, or may have, a position or holding in, or may affect transactions in the investments concerned, or related investments. Union Securities Ltd. is a member of the Canadian Investment Protection Fund and the Investment Dealers Association of Canada. Union Securities (International) Ltd. is authorized and regulated by the Financial Services Authority of the U.K.

Copyright © 2002-2008 David Chapman

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