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Stockmarket Reaction to World Trade Center/Pentagon Sep. 11 Attacks

End of Folly, Not of World

What Goes Up Must Come Down; Cashflow-driven Wall Street Shifts Funds to Bonds, Overseas Markets

PHOENIX, Sep. 26 - When the New York stockmarket reopened on Sep. 17, following the deadly Sep. 11 terrorist attack on World Trade Center and the Pentagon, the Dow dropped 7% and the airline stocks plummeted about 40%.  To some investors, it seemed as if the end of the world had come.  It did not.  The universe was unfolding as it always has been.  What goes up must come down.  The end of folly, not of the world, was merely taking place.

By the end of the week, the Dow had shed 14% of its pre-Sep. 11 value, prompting some analysts and TV networks to proclaim that the Era of Doom had arrived.  “More than $1.5 trillion of market value had been wiped out,” declared even some prominent financial news media and commentators who should have known better.

Nothing had been “wiped out,” “vaporized,” or had “vanished,” except unfortunately thousands of lives and two New York landmarks.  A cashflow-driven market, which is what we’ve been saying for years the Wall Street casino has become, simply shifted its assets away from some U.S. equities into other investment opportunities. 

Just like back in 1997-1998, the U.S. equities benefited from investors’ flight from the Asian financial crisis, now some bonds and overseas markets are benefiting from the capital fleeing America. 

As a result, the two-, 10- and 30-year U.S. Treasury securities are all up, propelled by the prospect of a prolonged war, a collapse in energy prices and the Wall Street woes.  Furthermore, professional fund managers and individual investors are putting more money into cash and European stocks, according to today’s (Sep. 26) Wall Street Journal report.

“Globally, we may see some rebalancing of investments away from U.S. assets to other regions, particularly Europe,” Adam Seitchik, chief global strategist at Deutsche Bank Asset Management in London, told the Journal.  “There has been some evidence in recent weeks of significant redemptions from U.S. equity funds by U.S. investors.”

In Europe, retail investors have also been pulling some of their money out of U.S. funds. DIT, Dresdner Bank AG's asset-management unit in Frankfurt, reported net outflows from its equity funds of about 700 million pounds, half of which was from U.S. funds, between Sept. 14 and Sept. 21.

“This was a very irregular amount of net outflow,” said Karl Hammel, an assistant director at DIT. “I think it can be compared to periods during the Gulf War.”

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And what does that say about the U.S. economy, which, we are told by major networks, is down in the dumps because of the Wall Street slump?  In a word, nothing!  The stockmarket buys and sells perceptions, not economic realities.  The Wall Street casino has long lost any direct correlation with economic performances of the companies it trades (see “The Great American Hoover,” Nov. 23, 1997,  “Wall Street Boom, Main Street Doom,” Oct. 1998, "From a Nation of Producers, to a Nation of Gamblers " - June 23, 1999,  "Small Caps Sinking First" - Aug. 2, 1998,  “Armonk's Fudge Factory” - Apr. 9, 1999, among some Annex Bulletins and other columns in which this writer warned of the folly of “bull markets”). 

Hard Hit

To be sure, there are segments of the American economy that are hard hit by the Sep. 11 terrorist attack.  Certainly the airlines are among them.  They are shedding jobs like fleas.  Delta was the latest U.S. carrier to announce a layoff of 13,000 employees on Sep. 26.  The move follows similar announcements by several other airlines and aircraft manufacturers last week.

Back on Wall Street, the United Airlines and American Airlines shares plummeted 44% and 40% respectively by the end of the first full week of trading following the Sep. 11 disaster.  But both companies had warned of looming earnings problems BEFORE the terrorist attack.  So not all of their problems can be blamed on Osama bin Laden. 

Furthermore, such high value drop percentages can be misleading.  In dollar figures, the two airlines’ (UAL and AMR) shareholders suffered paper losses last week of $739 million and $1.8 billion respectively.

Now, to put things in perspective, we picked four leading information technology (IT) services companies, and four hardware vendors, to which to compare the airlines stock price changes.  Plus, of course, the Big Blue, which epitomizes a services/hardware computer conglomerate.

During the Sep. 17-21 trading week, the Dell stockholders, for example, suffered a $15.5 billion paper loss.  That’s more than six times (!) greater than the declines in the UAL and AMR shares - combined!

The IBM shareholders didn’t have much to cheer about, either.  They saw $10.4 billion of their market value disappear last week - over four times a greater amount than the drop in the two airlines’ market cap.

Sun Microsystems ($7.5 billion), Hewlett-Packard ($5.7billion), and Compaq ($4 billion) investors also lost several times more money (on paper) than did the two airline owners combined (see the above chart and Table 1).

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Yet, the U.S. Congress, at the urging of the White House, rushed a $15 billion-emergency bailout package last week for the “ailing airline industry.” 

Call it a sympathy vote.  Or charity.  Just like the aid for the families of the WTC victims.  For, Dell and other hardware vendors’ shareholders certainly lost more money.

Some IT Stocks Went Up

Meanwhile, some IT stocks went up last week.  Electronic Data Systems (EDS), for example, was up 2% on the first day of trading after the Sep. 11 attack.  It stayed up for the rest of the week, even as the Dow dropped by 14% or $1.5 trillion. 

Perot Systems was also up by 2%, while Computer Science Corp. (CSC) finished the first week of trading after Sep. 11 virtually unchanged.  Which means that all three companies were up relative to the market.

Once again, the universe was unfolding as it should.  At least according our universe.  As you’ve already seen from this writer’s Sep. 18 Annex Newsflash, e-mailed to you from Coeur d’Alene, Idaho, that’s what we expected before Monday, Sep. 17.

In a Friday (Sep. 14) interview with a reporter from New York, he wanted to know what we thought the stockmarket reaction would on Monday?  This writer replied that if logic and reason prevail, most of the high tech services shares should be UP! 

Why?  Because what happened on Sep. 11 highlighted the vulnerability of INDUSTRIAL era structures.  But it has also underlined the resilience of the INFORMATION era systems.

Well, judging by the way Wall Street traded the IT services stock last week, looks like every once in a while, logic and reason do prevail among investors and traders.  Here’s what the Dallas Morning News, for example, said about it in its Sep. 18 report:

“Those companies proved their worth in the Sept. 11 attack by keeping their computer systems running despite an interruption in phone service after the attacks, said Bob Djurdjevic, president of Annex Research in Phoenix.

"With these systems, there's no such thing as a nerve center you can hit and disable everything," he said. "The companies that provide whatever additional new support or services that are needed for those systems will benefit from this".”

There were some exceptions from that general rule, however.  As you saw, the still hardware-laden IBM was one of them.  But that’s not the only reason.  Ever since IBM sold its Federal Systems Division in 1994, the company has been virtually absent from the Pentagon market.  Which means that the Big Blue shareholders aren’t likely to benefit directly from the war that President George W. Bush has been promising the nation and the world.

Another company that’s practically invisible in the federal IT services market, dominated by the likes of EDS and CSC, is Accenture (ACN), formerly known as Andersen Consulting.  Its shares were also an exception to an otherwise robust stockmarket performance of IT services companies.  They tumbled by 16% or $1.9 billion by the end of last week.

And their slide continued this week, too.  The newly issued ACN stock is now down 19% or $2.4 billion since Sep. 10.  Accenture had a very successful IPO (Initial Public Offering) only two months ago (July 24).  The ACN shares remained quite stable after that, trading in a fairly narrow range ($14 to $16 per share).  Until the terrorists’ strike on Sep. 11 that is, which evidently shook the ACN business, too.

Some Bailed Out Early

The relatively small value of airlines compared to IT vendors’ shares suggest that most of the investors had fled these companies long before the terrorist action on Sep. 11.  But not all.  Some did it just before, according to the U.S. Treasury Secretary, Paul O’Neill. 

In a thinly veiled innuendo that among the sellers may have been the chief suspect, bin Laden, or some his associates, O’Neill said this week that a part of the government investigation involves tracing back some large sell transactions of the UAL and AMR shares that were executed immediately prior to the attack.

O’Neill warned that just like the 19 terrorists’ fake names and passports, it may take a long time to figure out the real identities of the sellers.  It’s like peeling an onion.  Sometimes it takes 10 or more layers to get to the real principal in a transaction. 

But what if someone other than bin Laden or his associates had been also selling airline shares prior to the attack?  What if someone else knew?  And if so, will we have to wait 30+ years to find out, as with Coventry WW II bombing, which Churchill covered up?

Happy bargain hunting!

Bob Djurdjevic














































Volume XVII, No. 2001-18
September 26, 2001

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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