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Wall Street and the Saddam factor

News that former Iraqi President Saddam Hussein has been captured is likely to boost U.S. stocks when trading resumes early Monday, analysts say. Most strategists also expect the Dow Jones industrial average to hold above the fabled 10,000 level.
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Saddam's Hussein's capture by U.S. forces on Sunday is expected to add momentum to Wall Street's three-week winning streak by easing some concerns about security in Iraq, dampening down oil prices and allowing investors to focus more intently on the recent flow of positive economic news, Wall Street analysts said. Most strategists say the Dow Jones industrial average will easily hold above the fabled 10,000 level that it closed above for the first time in almost 19 months last week.

Before news broke early Sunday that U.S. troops had found Hussein hiding in a hole near his home town of Tikrit, most on Wall Street had expected a quiet, but positive week, with only a handful of economic data to look forward to and traders expected to stay on the sidelines of the market, anticipating the prospect of the stock market notching its first winning year since 1999.

Global markets had already reacted to the news Monday, with global stock markets posting gains and  on speculation that Saddam's capture could taper off the sabotage attacks on Iraqi oil facilities.

Tokyo's Nikkei average rose more than three percent to close at a five-week high, while European markets edged up at open, with blue chips up by 1 percent in London, 1.5 percent in Frankfurt and 1.3 percent in Paris.

The arrest of the former Iraqi dictator by U.S. troops "was definitely an unexpected Christmas present" for stock investors worldwide, said Tsuyoshi Nomaguchi, an equity strategist at the
Daiwa Securities brokerage in Tokyo.

“It could be the beginning of the end of the war,” said UBS Securities equity strategist Shoji Hirawaka.

Stock markets were nearly all higher across the Asia-Pacific region, though Hong Kong shares retreated slightly into negative territory at the close, down 0.6 percent after the Hang Seng Index briefly hit its top level of the year.

Some professional investors say Hussein’s capture could give stocks an extra lift by removing some of the anxiety in the market over the worsening security situation seen in Iraq since the former Iraqi president’s regime was toppled earlier this year.

“Concerns over the situation in Iraq have weighed on sentiment and help explain why shares haven’t rallied by as much as they could have in the face of some pretty positive economic data,” said Hilary Cook, director of investment strategy at Barclays Stockbrokers.

Cook added that U.S. and British stock markets have the most to gain from Hussein’s capture, as managing security in the region has been expensive for the occupying American and British forces.

Other analysts said Hussein’s capture could mean a drop in crude oil prices, as investors welcome the prospect of increased supplies from a key oil producer. And the U.S. dollar may ease off its lows, but the recovery is expected to be brief.

An increase in U.S. credibility in Iraq could help end terror attacks, which could help the dollar, but the Bush administration is content to see the dollar fall during an election year, as it boosts exports and reduces imports, analysts said, and the market remains concerned about a widening U.S. current account deficit, which is likely to continue to weigh on the greenback.

Analysts also said Hussein's capture, while significant, did not necessarily mean an end to attacks on U.S.-led forces in Iraq or against Western interests generally. That point was also made on Sunday by the top U.S. military official in Iraq, Lt. Gen. Ricardo Sanchez and by analysts expecting a fall in the price of oil.

“The capture of Saddam is negative for oil prices, but the market will wait to see if the attacks continue after his arrest,” said Tom James of Tokyo Mitsubishi International.

Blue chips to hold above 10,000The capture of Saddam could give the Dow Jones industrial average reason to extend a three-week advance that hoisted the index to a close above the psychologically important 10,000 mark last Thursday for the first time in almost 19 months.

Good economic news and the U.S. Federal Reserve commenting that inflation is not a problem, suggesting that it won't raise rates for some time to come, lifted the index.

While it doesn't mean much to Wall Street in scientific terms, there’s little doubt that a return to the 10,000 level for the world’s most familiar index of stocks has lifted investors’ spirits.

“Dow 10,000 is a feel-good level for the general public, but it’s also a morale boost for professional investors in the market like me,” said Scott Wren, equity strategist for brokerage firm A.G. Edwards, in a CNBC interview last Friday. “It has been 18 months or so since we last moved above 10,000, but it feels longer; it has been a long road back.”

“We can expect some choppiness, and the Dow could close below 10,000 a few times, but looking six to 10 months out the market will be well above 10,000, and I expect it to be 10 to 12 percent higher than it is today,” Wren added.

The Dow industrials are already up a hefty 38 percent from a five-year low seen on Oct. 9, 2002. And for the year the broader market, as measured by the Standard & Poor's 500-stock index, is up about 22 percent. These lofty levels have some seasoned skeptics advising caution.

The economic rebound is in full swing and corporate profits are rising, but the market might be getting ahead of itself, rising in anticipation of even better economic and profit growth than is likely to materialize in 2004 these doubters say. One such skeptic -- Barton Biggs, Morgan Stanley's global investment strategist -- told CNBC Friday the market might soon see a correction.

“I think we have the perfect economic environment -- low inflation, strong GDP growth and strong corporate profits, and we’ve had a big move in the stock market, but my sense is sentiment is very bullish again and so my gut tells me to be wary,” Biggs said.

Other cynics point to historical data. They say that when the Dow Jones industrials first passed 1,000 in 1972 experts said a key psychological barrier had been breached and stocks were set to soar. But 10 years later the index was still trading around 1,000.

Upward path unlikely to falterStill, a dearth of significant news on the economic front this week is likely to mean Wall Street’s upward trajectory will go unimpeded.

Two regional manufacturing reports -- Monday’s Empire State Manufacturing Survey and the Federal Reserve Bank of Philadelphia's manufacturing business outlook survey, due at noon on Thursday -- are expected to show continued expansion said Scott Anderson, a senior economist at Wells Fargo bank. Housing data and Tuesday’s Consumer Price Index are unlikely to hold many surprises, he added.

“It’s steady as she goes from here,” Anderson said, noting that he expects the broader market to flow upwards into the start of 2004. “We’ve been pleased with the strength of the economic numbers. That, and strength in the stock market, means we have enough ammunition to keep this economic recovery moving along nicely.”

One catalyst for the market this week could be any reports from retailers on the progress of the all-important holiday shopping season according to Kent Engelke, markets strategist at Anderson & Strudwick. Experts already think this season will be the best in four years, and as the nation’s retailers release reports on their takings over the weekend early next week it could give the stock market a boost, he said.

“Traditionally, a large portion of the holiday season’s sales happen over this weekend and next,” Engelke noted. If retail sales are positive, the market will likely rise, he said, adding that historical data show the stock market tends to do well in December.

“People are usually in good mood going into a holiday and people move markets,” Engelke said, noting that activity on Wall Street will slow significantly toward the end of this week. “A lot of people heading out of the office here later this week and they won’t be back until 2004.”