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A new word has appeared in our vocabulary. Iraqnophobia - fear of Iraq or fear of terrorism. Let's be clear. By definition, phobias are IRRATIONAL, meaning they interfere with one's everyday life or daily routine. But what appears as IRRATIONAL to most people is very real to those suffering from the phobia. In this case it is a mass phobia, the fear of a terrorist attack involving chemicals or biological weapons. Recently the United States was placed on code 'Orange' or a state of high alert that an attack was imminent.

Of course as has happened with consistency thus far in the past, nothing happened. However, we were treated to the specter of numerous people heeding the code 'Orange' and following instructions to go out and purchase duct tape and plastic sheeting to seal their homes. The fact that it would do little to help them in the event of a real attack appears to have been lost on most people. Homeland Security issued the instructions to seal homes with duct tape and plastic sealing only later to recant the orders. Given the confusion surrounding the instructions to seal homes we are sure it only added to the anxiety (phobia?) that was felt. We are also sure that 3M (MMM-NYSE), Home Depot (HD-NYSE) and numerous others were pleased with the rush of sales.

But Iraqnophobia is biting. Consumer confidence in the US fell a shocking 15 points in February to 64 from a revised 78.8 in January. Analysts could only scramble to explain this sharp drop due to a falling stock market, blizzards, colder than expected weather resulting in sharply rising fuel prices and of course Iraqnophobia. Consumer confidence had not seen such a sharp drop since Iraq invaded Kuwait in 1991 and the Iranian hostage crisis of April 1980.

And it seems that no matter where you turn today it is Iraq 24/7. The UN Security Council is badly split threatening its long-term existence. Both Russia and France have indicated that may exercise their veto on the new US/British resolution. The US is trying to gather support from other Security Council members and has been accused of bribery and bullying in order to obtain that support. Iraq may or may not be co-operating according to whom you listen to at any given point in time. War is being threatened over missiles that exceed limits by 33 kilometers.

Turkey wants troops in Northern Iraq in order to ensure that the Iraqi Kurds do not cause problems for them and the Turkish Kurds who have rebelled in the past. Turkey first appeared to succumbed to US bribes and were going to allow troops in Turkey then their Parliament followed the 90%+ of Turks who oppose any war with Iraq and voted against it. The Iraqi opposition is upset that the US may impose military rule for up to 5 years after a successful invasion. The Kurds, who were most willing to assist the US in ousting Saddam are now upset because once again the US appears to be throwing them aside in order to curry favour with Turkey who want to put troops in Northern to prevent the Kurds And on it goes.

What all this does is it continues to cast a pall over the market that some pundits say is holding the market back. But as we have pointed out in the past that with everything possibly coming apart in global geopolitics (UN, Iraq) and the economy on shaky ground (rising price inflation, slow down in spending, falling consumer confidence, continued pressure on employment, rising budget and trade deficits, high debt levels and a slowing economy) the risk is higher for an accident that triggers an even broader stock market sell off. We have also pointed out that Iraq is merely a cover for an economy that is on shaky ground anyway irrespective of an invasion or no invasion. But the Iraq situation is certainly not helping and adds to the anxiety and therefore Iraqnophobia.

Energy and gold stocks are also feeling the uncertainty. While gold ran to $380 it has since corrected down into the $340 area. Oil prices shot to almost $40 before settling back. Natural Gas prices have been in a strong uptrend mainly because of the weather and shortages. Gold and oil stocks have not followed the upward movement in the commodity confusing many. Some believe that gold and oil stocks will fall sharply once an Iraqi invasion begins as they did in 1991 when the Gulf War started and that may be a part of the reason for the uncertainty. Call it another case of Iraqnophobia but in a different way.

But both sectors are in strong uptrends backed by strong fundamentals. With the US Dollar in full retreat both these commodities priced in US$ are major beneficiaries as are all commodities priced in US$. Rising commodity prices are a major reason we are now seeing inflationary pressures. And rising commodity prices have a negative impact on the consumer particularly the sharply rising oil and gas prices. The falling US$ is putting pressure on the already huge trade deficit. Some see the trade deficit soon hitting $600 billion per year. Couple this with the possibility of $400 billion budget deficits and the US could soon have trillion dollar deficits or 10% of the entire economy. These numbers are too huge to dismiss easily.

And gold (and other precious metals such as silver) along with oil and gas are commodities with supply problems as well. War or threat of war in the middle east coupled with no major new discoveries in over 30 years keep the pressure on oil prices irrespective of cold weather. New demands including the probable introduction of the Islamic Gold Dinar in 2004 will keep the demand pressure on gold prices. Silver has been drawing from current supplies for years and unless there is a significant increase in the price of silver coupled with no new production supply shortages for ongoing commercial use will soon be upon us.

Our charts of the TSX Gold Index and the TSX Energy Index are presented below. The energy complex is the only TSX index up on the year to any degree (healthcare is up marginally) gaining 3.6%. But the energy index has been in a strong uptrend since lows in October 2000. The gold index, while down on the year, remains in a strong uptrend also from its October 2000 lows. The irregular rise in a series of higher highs and higher lows is indicative of strength in a bull market (or climbing the wall of worry as some would term it). The energy index has also broken out of a symmetrical triangle formation over the past several months. The gold index may also be doing the same thing but a confirmed breakout will not occur until we get over 200. Meanwhile we are still susceptible to a drop to the 160 area to complete the correction and remain within the bull channel.

Canada has in no small measure been a beneficiary of the problems of Iraqnophobia. While Canada has similar problems as the US with high debt levels Canada does have both a budget and a trade surplus. Recent economic numbers, however, have indicated that we are not immune to a slowing economy south of the border as our recent GDP numbers came in at 1.6% versus an expected 2.3%. But generally our unemployment is growing more slowly and the economy has been one of the best performing of the G7.

These improvements coupled with strength in the commodity sector have been positive for the Canadian Dollar. Indeed the Canadian dollar has broken out of long term down trend line from the 1991 highs. In 2003 the Canadian dollar is already up 6%. This is a very positive development and certainly favours the Canadian stock markets versus the US markets. And the place to be is the energy and gold sectors plus as well the metals and mining sector, which while down so far this year, is also in a bull market. Overall the TSX Composite (down 42% from its highs) looks similar to the US stock markets. The TSX may also have formed a huge head and shoulders topping pattern as our chart notes. While it looks interesting the target of roughly 600 looks too improbable by even our bearish standards. Nonetheless the composite is currently meeting stiff resistance at its 40-week and 13-week moving average. Look for a move back down even if the gold and energy indices continue to do well.

Iraqnophobia may be gripping the populace. And it is not likely to end any time soon. No matter what, war appears to be imminent possibly as early as mid March but certainly no later than early April. And the commencement of war will not be the solution to Iraqnophobia that many would like it to be as it is most likely to occur following a failed UN resolution. This could be worst nightmare of Iraqnophobia and result in a sharp decline in the markets with the exception of gold and energy. As noted Canadian comedian Red Green would say "well Harold, get out the duct tape."

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