Weighing The Week Ahead: The Market Impact From The New Iraq Conflict?

Into the economic news vacuum, summer doldrums, and sports stories, there was finally some real news – the renewed conflict in Iraq. This had all of the features that make for good financial television and web punditry – action, plenty of people with opinions and accusations, and the potential for a dark outcome.

Whether or not this is a big story, there was clearly a media drive to make it one. My guess is that it will continue to lead for the early part of the week ahead.

Prior Theme Recap
Last week I expected a focus on a rebound in volatility, with potential for an upside breakout for stocks. I suggested that we should all "be prepared." Sure enough, the quiet upside started the week, but lasted only two days. I did not guess that the House Majority leader would lose his primary race, sparking a round of instant-punditry on the future of many policies. The expanding Iraq conflict also demonstrated what can happen to markets in a low-volatility backdrop. Investment strategist John Canally, cited in Barron's opined that the shock to energy markets would have had a big effect thirty or forty years ago. It is less important for a service economy. The same article notes that many market participants confessed to watching the beautiful game during working hours. Quelle surprise!

Forecasting the theme is an exercise in planning and being prepared. Readers are invited to play along. I work on it each week because, it helps to prepare your game plan for the week ahead. It is not as easy as you might think. Feel free to suggest your own likely theme in the comments.

Naturally we would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

This Week's Theme

The market discussion will start with a recap of events in Iraq, with media sources milking the story as much as possible. By mid-week the attention will probably shift to the Fed meeting and the housing data.

I have covered the latter two topics quite thoroughly in recent weeks, so I want to take a deeper look at the Iraq issue.

Here are some interesting perspectives.

  • The breathless coverage from CNBC. I love the updates from Art Cashin, which accurately reflect what floor traders are thinking. Here is the sequence:

  • Jim Cramer, with television in both morning and evening has plenty of air time to fill. The general theme of the Cramer warnings it that everyone remembers the stock declines associated with prior Iraq conflicts.

    • On Tuesday Cramer was warning about declines while also saying that most declines since 2009 have been buying opportunities.
    • On Thursday night Cramer advocated caution, profit-taking, and sitting on cash.
    • Jim Cramer, who has a lot of air time to fill, opined on Friday morning that oil would move to $120/barrel in a straight line.
  • The 24/7 coverage from your favorite conspiracy and doomer site. If you are determined to focus on what could possibly go wrong and get some confirmation for your opinions, you know where to go! The "analysis" there makes the CNBC stories seem wildly optimistic.
  • Focus on expansion of the conflict. Whether you watch CNN or read the New York Times, The Washington Post, Politico, or The Hill (all favorite sources here) you will understand that this is not another round of major U.S. involvement. A key question is whether Sunni tribal leaders will support this particular insurgency.
  • Potential effects on energy prices – maybe $15-20 per barrel at the max. This is enough for a serious economic effect. Most of the fighting (in the North) does not currently threaten reserves or exports. (Good overall analysis at MarketWatch).
  • Many factors limit the impact on oil prices, including production slack. (Helpful story at Yahoo Finance).
  • Stocks are not likely to suffer a major decline from the Iraq crisis. The chief investment officer of the Gabelli Funds thinks that the story will be with us for some time, but expects another 7.7% upside this year for stocks.

Which of these viewpoints is correct? I track them all as part of the job, but you need not. As usual, I have some thoughts that I will share in the conclusion. First, let us do our regular update of the last week's news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week's Data

Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  2. It is better than expectations.

The Good

There was some encouraging news.

  • Short interest is higher and that usually leads to market gains. (Callie Bost at Bloomberg).
  • Job openings increased by almost 10% to 4.45 million. This was the positive aspect of the JOLTS report. (See below for the negative on quit rates).
  • Small business optimism is surging. I do not usually emphasize the NFIB results. As a small businessman and board member for two other small companies, I understand the frustration with regulation and policies that seem to stall growth. The NFIB statements express this viewpoint, and attitudes plunged with Obama's election. It is interesting to note the improvement (via the WSJ). Bespoke also has a great chart and a table of business concerns.
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