WASHINGTON, Feb. 13 (UPI) -- Investors, like politicians, occasionally find it necessary to adjust or even completely reverse their course. Politicians hate doing this and strive at all costs to avoid it, since projecting an image of clarity and infallibility is vital to their stature. Investors should not flip-flop lightly, but cannot afford to be as stubborn.
For investors, the next elections isn't four years away, but tomorrow at 9:30 a.m. If a market has turned, and if you don't adjust, you lose money every day.
Recently, a number of international money managers decided it was time to flip their position on South Korea, and flop from long to neutral, or even, in the case of the Democratic Century Fund, from long to short. Those investors are likely to make money.
In its domestic economic policy, as UPI's Martin Hutchinson has noted, South Korea's president-elect, Roh Moo-hyun, has moved from a campaign emphasis on growth to a transition emphasis on taxes, transfer payments, and redistribution. This has been a mild drag on South Korean stock prices.
In the meantime, however, something more fundamental has arisen: the knowledge that one of the world's most risk-friendly dictators, North Korea's Kim Jong-Il, now owns 2-3 nuclear warheads. He apparently is building 8-9 more over the next half year or so.
Since this story began unfolding decisively in December, Korean stock prices have declined more than 20 percent. This is a period during which other Asian markets -- Japan, China, Singapore, Thailand, Taiwan, the Philippines -- have been generally flat, down up to 5 percent and in some cases positive.
Like the U.S. market and many others, South Korea is now a war-and-peace market. And, unlike the others, Korea's crisis is probably not nearing its end, but just beginning.
In the short run, it is difficult to envision how the U.S. wins this game. The North Koreans believe the U.S. is not going to physically halt or retard their effort to construct 8-9 new nuclear warheads over the coming 6-9 months. The North Koreans are right.
The United States has little or no economic stick. We've already cut off all but purely humanitarian aid. China, the one country with a large aid budget for North Korea, has no inclination to pressure the country. Despite their reassurances to U.S. diplomats, Chinese rulers realize the crisis actually benefits them, particularly as China's new leadership strives to conduct modest democratic experiments at home balanced by a hawkish policy towards Hong Kong, Taiwan, and the United States.
On the carrot side, America can, of course, offer expanded aid and trade, and encourage its allies in the region to offer more as well. They will offer more. South Korea has just opened up a corridor across the de-militarized zone, sent envoys to the North, and done Kim's bidding by encouraging the United States to engage in direct talks with him. Kim Jong-Il rebuffed the envoys, has thanked South Korea for the friendly attitude... and is moving ahead with his nuclear program.
To Kim, this process only italicizes his suspicion that he is playing a winning hand. If 2-3 nuclear warheads, as he has now, and the prospect of 8-9 or more in the near future, is enough to elicit such concessions, why give them up? There remains, of course, the military stick: The possibility of an actual or threatened U.S. strike on North Korea's nuclear facilities and existing warheads.
This is certainly a possibility for Kim to consider, especially in light of unfolding events in the Middle East. In a few weeks, if all goes well, the United States will decisively demonstrate its ability to deal with rogue dictators building weapons of mass destruction, namely in Iraq. Bush will not only enjoy a boost to his practical credibility to deliver on threats, but a surge in his moral standing, as invading troops from the United States, Britain, and more than a dozen other nations discover mass graves, weapons stockpiles, and torture cells.
Despite and in fact because of that surge, however, international concern over a Bush-led U.S. imperium will not decline, but rise. Europeans and Asians will fear all the more that America is itching to make Korea "the next Iraq." U.N. resolutions on Korea will, like those on Iraq in the early 1990s, include no real threat of force, and may, indeed, contain explicit warnings against "unilateral action."
"Where does it end?," Germany, China, and Russia will demand. "What about Iran? How many pre-emptive attacks does America require to feel secure?" Politicians don't like to be wrong, and tend to redouble their bets.
There will be, unlike in Iraq, no inspections charade -- no futile search to prove Kim Jong-Il is lying. Kim Jong-Il isn't lying (now). He's told the world quite openly and brazenly, in so many words, that he means to "defend his country" by maintaining and expanding a nuclear deterrent. Your move, America.
April, May, June, July ..... North Korea's arsenal, married to long-range missiles that could strike all of Asia and even part of the United States, will be under construction.
The U.S. choice will be either 1. to keep playing Kim's game, or 2. to launch a strike against North Korea's assets, amidst a chorus of international attacks. Although three warheads aren't a lot, they will be very difficult to spot amidst the dozens of decoy bunkers and hidden underground bases Kim is reportedly throwing up. It is very likely that anything less than a simultaneous U.S. strike on two or three dozen targets might miss a nuclear warhead or two. Then what?
Hence, North Korea will keep pushing. Kim will build his arsenal between now and Thanksgiving, and see how much leverage it buys him. There is, to be sure, a chance that at some point, he will agree to some amount of money for some level of restriction or even reversal of his program. He may, on the other hand, find that he rather likes being able to threaten to blow up Tokyo, Seoul, or Los Angeles at the push of a button, with all the special treatment it brings from the U.S. and the world.
Either way, it is not going to be a fast or easy negotiation. In the meantime, investing in equities in South Korea, his nearest target, is not likely to be profitable over the coming 6-9 months.
Market technicians would say there is long term support for the Korean index, now trading at around 580, at 550, and again at 500. We plan to take profits as the Korean index hits each of those levels, and still maintain some shorts at 500 against the possibility it makes a run even lower. In the meantime, there is a good chance of a trading profit of 5-15 percent, on the short side. (Individual investors can take a small short position, for example, on the relatively liquid Morgan Stanley Korean Index shares, symbol "EWY" on the New York exchange.)
How can "the bottom line" advise readers to short Korea today when three months ago we told them to buy? The best response to this type of question comes from a politician, former New York Mayor Ed Koch, who on one day denounced subway gunman Bernard Goetz as a vigilante, and then, two days later -- following a New York Post poll showing Goetz was wildly popular -- praised him.
Asked why he flip-flopped, Koch, a politician, answered with the heart of an investor: "I was wrong."
(Gregory Fossedal is chief investment officer of the Democratic Century Fund, managed by the Emerging Markets Group. His firm may hold some of the securities mentioned his articles. Individual investors should contact their own professional advisor before making any decisions to buy or sell these or any related securities.)