- The Washington Times - Tuesday, December 24, 2002

Stock market investors aren't likely to receive their customary Christmas rally this year because of what Wall Street calls "geopolitical risks."
Stocks this month got off to a promising start after posting hefty gains in October and November. But lingering worries about war with Iraq, combined with new fears about the economic consequences of a Venezuelan oil-worker strike zapped hopes for a year-end rally like the ones often seen in the 1990s stock market boom.
Just yesterday, escalating tensions in Venezuela sent crude-oil prices to a two-year high in New York, weighing on the market for a third week since the strike began, severely disrupting oil shipments to the United States on Dec. 6. The Dow Jones Industrial Average ended down 18 points, at 8,493.
"The stock market encountered rough sledding this past week, challenged by the disruption of Venezuela's oil production and increasing anxiety about a military attack in Iraq," said Lynn Reaser, chief economist at Banc of America Capital Management.
Spooked by oil prices soaring as high as $31.75 a barrel and gasoline prices mounting by the day, investors dived into safe-haven investments, such as gold, which is at a six-year high, she noted.
"With the fog so thick before Christmas Eve, investors were reluctant to make bets," she said. All the major indexes have stalled or declined since the strike began and the Bush administration started signaling that a war with Iraq is likely as early as next month.
"Do not expect to see the glow of a Santa Claus rally," Ms. Reaser said, referring to a strong year-end rally that has eluded the market in recent years. "Too much geopolitical risk persists."
The market's concerns about oil are real because the daily loss of production in Venezuela, one of the United States' top two oil suppliers, already exceeds the production of Iraq, said John Lichtblau, analyst with Petroleum Industry Research Foundation Inc.
The loss is compounded by "strategic considerations," he said, because Venezuela was one of the countries that increased its supplies to help the United States weather high oil prices during the 1991 war with Iraq.
"This time the world is approaching a potentially imminent war with Iraq with the possibility that substantial Venezuelan supplies could still be off the market," he said.
Venezuela's 1.4 billion barrels of daily oil exports to the United States far exceeds Iraq's 500 million barrels of daily exports, and Venezuelan oil feeds two critical refineries in the Caribbean that provide a large share of the gasoline used by U.S. motorists.
In addition, Venezuelan supplies can be delivered in days, while oil from the Middle East, where Saudi Arabia and other Arab countries have promised to provide the United States with backup oil in case of war, takes more than a month to arrive.
The Venezuelan experience this month is a "strong reminder that energy-supply risk encompasses far more than worries about the Persian Gulf," Mr. Lichtblau said.
The Venezuelan turmoil hit the markets just as events developing over the U.N. weapons inspections in Iraq suggested that war with Iraq is a near certainty, said David Wyss, chief economist with Standard & Poor's Corp.
Because high oil prices act as a tax on U.S. consumers and businesses, cutting economic growth, the supply threats overshadowed some recent positive economic news showing that the United States is in a slow but steady economic recovery, he said.
Yesterday, the Commerce Department reported that consumer spending rose 0.5 percent in November, posting a second month of surprisingly healthy gains. The University of Michigan also reported that consumer confidence ticked up for a second month in a row.
Economists say the reports show that American consumers, despite the threat of war and a scarcity of jobs, show no sign of letting down an economy that has been running almost exclusively on consumer-spending power in the past year.
"War fears are neutralizing not only the effects on the market of a modestly strengthening economy, but also the favorable seasonal influences that stocks typically experience around this time," Standard & Poor's said in a note to clients that stated that the market will remain treacherous until the geopolitical risks are resolved.
Stock analysts note that the jump in oil and gold prices, combined with a recent slump in the dollar attributed to the likelihood of war with Iraq, are negative signals for stock buyers, causing many big portfolio managers to stay out of stocks.
Ralph Acompora, technical analyst with Prudential Securities, said he, nevertheless, is hopeful that those recent ominous signals will turn out to be just "noise" and that the market will continue its rally from the five-year lows established Oct. 9.

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