Special Update #2

Dear Clients,

Let me update you on what we know, now some 48 hours after the unthinkable struck our nation on Tuesday.

The Markets

The tragedy in America sparked swift and severe selloffs in the foreign equity markets just after it happened. French stocks plunged 7.4%; Germany's DAX Index fell 8.5%; the UK's FTSE Index fell 5.7%; the Hong Kong Hang Seng Index fell 8%; and Japan's Nikkei Index fell 6% to an 18-year low. The good news is, those markets have stabilized and most closed higher today, although they are still well below where they closed on Monday. As a result, it is expected that the US equity markets will open lower to sharply lower when they open tomorrow - but that could change by Monday.

The Chairman of the SEC said late today that the stock markets will not open until Monday. The stock exchanges face many difficulties, even though, for example, the NYSE, the American SE and Nasdaq are not located at the World Trade Center (WTC). Some exchanges face the problem that their buildings are still not accessible. All face problems with phones and communications as countless phone lines were severed on Tuesday.

The Federal Reserve has worked feverishly to pump cash and liquidity into the banking system as surprising numbers of people have been pulling cash out of their accounts. The thought of needing to go to the bank and get cash, as a result of what has just happened, never occurred to me until I began to get calls from friends and clients who asked if I thought they should pull some cash. I told them no.

In addition to the Fed's actions here at home, the central banks of the world have now pumped over $120 billion of new liquidity into the system to meet cash demands and restore calm. As noted yesterday, there is little doubt that the Fed will cut interest rates further if need be, in advance of the next FOMC meeting on Oct. 2nd.

Most of the Chicago futures markets (not including stock index markets) reopened this morning. There was widespread debate yesterday about whether Treasuries would plunge due to overseas selling, as foreigners may have decided the US is no longer a safe haven, or soar in a traditional flight to safety, especially with stocks expected to open lower tomorrow or Monday. Bond futures opened on time in Chicago and traded sharply higher, especially in the early going. The Treasury markets have retreated from their earlier highs, and while still up nicely for the day, this has not be a particularly unusual day. No crisis, no chaos, and very low trading volume.

Gold, which virtually everyone would predict would have skyrocketed in such a crisis, has been all but a DUD. Spot gold managed only to jump from $272 to $282 since the tragedy unfolded on Tuesday. If that can't make gold move, I don't know what can. I would stay away. . . The US dollar has remained remarkably stable during this crisis. The gloom-and-doom crowd is, of course, now predicting a collapse in the dollar and a new bull market in gold - what else is new?

No one knows what the US stock markets will do after they open on Monday. While a lower opening is expected, no one knows what will happen beyond what should be a fairly predictable opening. As discussed below, there is no shortage of gloom-and-doomers and fear-mongers who are predicting we will see an historic market collapse. While I don't know what will happen, I would not recommend that you sell into this market. While past performance and history have not been reliable indicators for much of the last two years, the markets have historically rebounded strongly from national disasters or emergencies, ranging from Pearl Harbor, to the Cuban missile crisis, to President Kennedy's assasination, to the Gulf War, to the Oklahoma City bombing.

New Developments on the Disaster

We have learned a great deal in the last 24 hours. We know that this tragedy was the end-result of a complex, highly financed terrorist group which has had its suicide teams living and training right here in the US for well over a year. The more we find out, the more it is clear that this operation involved more than what would be possible by Osama bin Laden and his group alone. As you can read in a story I have linked to this Update, the Israelis have intelligence indicating Iraq and Saddam Hussein masterminded or at least funded this tragic strike.

We have also learned that these terrorists almost certainly targeted the White House and threatened Air Force One. It may have been the heroic passengers on the United flight that crashed in PA that saved thousands of lives in Washington.

As more and more facts surface, it is simply incredible how complex and complicated this operation was. You can read more about that in the articles linked below. It is particularly disturbing that these terrorists were able to track President Bush's movements, including while he was aboard Air Force One, and knew certain top secret code words to let the Secret Service know they knew where the the President was when they threatened Air Force One. You can read about that in the linked stories as well.

President Bush Doing Well

I have been proud of the way President Bush has handled this crisis so far. His sincerity and calm have been a welcome sight - no pandering, no waffling, no focus groups. He seems dead serious that we will hunt down these terrorist groups around the world and pound them. Let's hope and pray he keeps this resolve. Want to think about something really scary? Imagine if this happened and Gore was president!

Gloom-And-Doomers Sink to New Lows

I am absolutely DISGUSTED by some of the things I have seen coming from the gloom-and-doom crowd over the last 24 hours. They are sinking to new lows by fear-mongering in the wake of this crisis. The stories and predictions all have a similar theme: prepare for a deep recession, then a depression and the collapse of the financial and investment markets. Others are predicting a new world war.

Of course, most of these same people have something to sell you. They are using the national disaster to flame your emotions and your most negative thoughts to get you to buy something from them. Again, it's disgusting! To make it even worse, I know some of these people. I would name these people, but if you are on their mailing lists, you know who they are; if you are not on their lists, consider yourself lucky!

I, On the Other Hand, Am Optimistic

I pray that the aftermath of this disaster will change America for the better. At this moment, our leaders are all on the same page, they are working together and even most Democrats and liberals are pulling for President Bush. It won't stay that way, of course, but this could (and I emphasize could) serve to reduce partisan politics in the future. The President's approval ratings are way up, and I hope he perseveres in bringing the American people together for a common cause.

This tragedy should result in us rebuilding our military, rejuvenating our intelligence operations, greatly improving our national security and wiping out terrorist operations around the world, hopefully with the aid of our allies. This should teach us, once and for all, that we cannot share our most critical intelligence and technologies with our enemies who then pass it on to terrorist groups.

This should also cause us to seriously rethink the whole issue of political correctness. While there is no room for ethnic profiling or prejudice, we need to be more vigilant about who we allow to enter and live in our country. This brings new meaning to the phrase, "it's not a right, it's a privilege."

I cannot guarantee you that we won't dip into a recession anymore than I can assure you the stock markets will go up after the expected lower initial opening. Consumers may pull back, and if they do, we will see a recession, but it should be mild. On the other hand, consumers may remain confident and we avoid a recession.

I think President Bush would be wise to go on national TV in the next day or so and rally the country. His central theme should be that Americans be positive and keep this economy strong and growing. While President Bush is no Ronald Reagan in terms of speaking, I don't believe we must have the "Great Communicator" to rally the American people in a disaster such as this.

Wishing you the best,

Here are the links to articles mentioned above, plus some other good ones.

A view inside the bunker.

http://www.nytimes.com/2001/09/13/opinion/13SAFI.html

Israeli intelligence points to Iraq.

http://www.worldtribune.com/worldtribune/breaking_1.html

The estimated death toll is staggering...

http://www.newsmax.com/archives/articles/2001/9/12/170102.shtml

Rove: Terrorists tracked Bush's whereabouts

http://www.newsmax.com/showinsidecover.shtml?a=2001/9/13/74216

Noonan returns, and is at her best..

http://www.opinionjournal.com/columnists/pnoonan/?id=95001113

How the terrorists pulled it off. .

http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=24466

Don't sacrifice freedom . .

http://www.foxnews.com/story/0,2933,34300,00.html