Spreading the Risk by Michael Santoli
- Highlighted companies: Lockheed Martin Corp. (LMT), General Dynamics Corp. (GD), Boeing Co. (BA)
- Summary: Barron's takes an in-depth look at how the U.S. financial landscape has changed since 9/11. Highlighted changes: 1) Wall Street lost its focus: Of 25,000 workers displaced and relocated outside Manhattan, only 8,000 returned. The remainder are now working out of New Jersey, Westchester County, and Connecticut. 2) Post 9/11 investor risk-aversion has lead to increased hedging and algorithmic trading. For example, credit-default swaps, which lay-off risk of issuer-default, barely existed in 2000; their value now stands at $17 trillion. 3) Short interest, representing hedges or bearish bets, has doubled from 5 to 10 billion shares. 4) Defense and security stocks have become more popular and more valuable. Examples: Lockheed Martin Corp. (LMT), General Dynamics Corp. (GD), Boeing Co. (BA) have all nearly doubled since 2001, while the S&P 500 only gained 25%. 5) Commodities were propelled into the limelight: Gold is up 166%, and oil is up 189%. 6) U.S. investors seeking non-domestic diversification has increased, almost doubling. 7) The housing bubble: Pre 9/11 Greenspan was about to stop cutting interest rates; post 9/11 the Fed flooded the markets with liquidity and slashed lending rates to 1%. The public, burned by stocks, gained new appreciation for their homes. All this lead to a housing bull-market. 8) Online trading is down 36%. 9) Low P/E rations (15 vs. 17.5) and low bond yields (or high bond prices) further reflect investors' distaste for risk.
- Quick comment: The article has an excellent set of charts that visually illustrates some of the lasting post 9/11 changes. In Sept. 2002, Congress published "The Economic Effects of 9/11: A Retrospective Assessment." (.pdf) See also "Economic Costs to the United States Stemming From the 9/11 Attacks". Some of the themes are echoed in today's article, such as investor risk-aversion and increased defense spending, while other scenarios seemed to have played-out quite differently, such as a decrease (not an increase) in risk-premium and a shift toward, not away-from globalization. Five years later, it makes for an interesting economic study to contrast forecast, perception and reality of the effects of the devastating attacks.