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Wall Street weighsIraq outcomes

As tensions between Iraq and the United States rise, Wall Street strategists are weighing the possible outcomes of a U.S.-led war in the region and its impact on the stock market. — By Roland Jones
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As tensions between Iraq and the United States rise, Wall Street strategists are weighing the possible outcomes of a U.S.-led war in the region and its impact on the stock market.

Earlier this month, the Bush Administration condemned Iraq’s arms declaration as incomplete and therefore a “material breach” of a United Nations Security Council resolution adopted in November, an offense that could trigger a war between the two countries.

Iraq has insisted it has nothing to hide. Even so, the United States continues to build up its forces in the Gulf region. A briefing by U.N. arms inspectors to the Security Council, expected on Jan. 27, is widely seen as the next key date that could prompt a US-led war against Iraq.

Meanwhile, the war worries have pressured stocks recently as the traditional year-end “Santa Claus rally” failed to materialize.

A conflict, if it takes place, will likely happen in 2003, reckons A.C. Moore, investment strategist at Dunvegan Associates. If the conflict is not a long-drawn-out issue, it could mean a 15 percent rise on the benchmark Standard & Poor’s 500 stock index, the broadest gauge of the health of the stock market.

“A successful resolution to the Iraqi situation will bring thoughts of economic resurgence,” said Moore. “We need some meaningful step that shows the world is a more peaceful place,” he added, noting that a successful campaign would have clear benefits for oil prices, given the proximity of Iraq to important oil producing regions of the Middle East. Lower oil prices will help the U.S. economy and stock market.

Robert Barbera, chief economist at ITG/Hoenig, agrees, noting that there is a strong possibility for regime change in Iraq without military intervention.

“Saddam Hussein is a bully, and bullies are cowardly at heart” Barbera said in a CNBC interview. “As the vice tightens, why wouldn’t he decide to leave? Maybe we’ll get regime change without military altercation. I think the market would receive that very positively and I think it’s good for a 20 percent rise on the Dow,” he added.

Donald Straszheim, president of Straszheim Global Advisors, believes that it’s no accident that the United States has decided to deal with terrorism first and with Saddam Hussein and Iraq second.

The eventual outcome of the Bush adminstration’s plan will be a widening of support for the U.S. cause, he said, and just as geopolitical concerns were a problem for the market in 2002, in the coming 12-18 months they are likely to become a “big plus.”

“I see more and more countries coming to the conclusion that they might soon become the target of terrorism, and as more terror attacks take place they will side with the United States and its war against terrorism,” Straszheim argued. The outcome for the U.S. stock market will be a diminishing fear of terror on the part of investors, he said.

“Just as the fear brought about by corporate governance issue last year dissipated — it was over by Thanksgiving — I also think the market’s reaction to another terror attack will not be as severe as it was post-Sept. 11,” said Straszheim.

Rather then a downward spiral in stock prices, Straszheim predicts an upward curve “driven by forces on the side of order, growth and freedom.” The drag on the financial markets now looks more like a lift, he added.

“Investors should be moving aggressively towards equities and away from fixed income,” he said