CAN AL QAEDA STRIKE THE U.S. AGAIN?

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
May 20, 2003

CAN AL QAEDA STRIKE THE U.S. AGAIN?

IN THIS ISSUE:

1. Stratfor Warned Of More Attacks On April 12.

2. Stratfor’s Analysis Of Al Qaeda’s New Strategy.

3. Will There Be Another Major Attack In The U.S.?

4. Market Implications & Suggestions.

Introduction

On April 16, the US Department of Homeland Security lowered the “Terror Alert” level from ORANGE (high) to YELLOW (elevated). Yet on April 12 and frequently since then, Stratfor.com has argued that the terror threat level was actually RISING. And today, Homeland Security once again elevated the Terror Alert back to ORANGE.

[For newer readers, Stratfor.com is a highly respected global intelligence firm. I subscribe to their daily “premium” service and quote them occasionally in these E-Letters. They put out some very good, insightful information.]

Stratfor’s intelligence on April 12 and since has been that al Qaeda had reconstituted itself and would very likely execute additional terrorist attacks as soon as possible, for reasons I will discuss below. In the last week, we have seen serious terrorist attacks in Saudi Arabia, Morocco, Chechnya and elsewhere, plus new suicide bombings in Israel. It is now widely believed that the attacks in Saudi Arabia and Morocco (at least) were the work of al Qaeda.

In this issue, I will share with you Stratfor’s recent and latest thinking on the terrorist threat, and al Qaeda specifically, in light of these latest attacks overseas.

Stratfor’s Warning On April 12

Just four days before the US lowered the terrorist threat from orange to yellow on April 16, Stratfor released a detailed analysis regarding al Qaeda and warned:

“The victory in Iraq has transformed the Islamic and Arab psychology. The sense of power that the Sept. 11 attacks engendered for the Arab and Islamic masses has been replaced by a sense of weakness, vulnerability and a feeling of betrayal by leaders who allowed this catastrophe to happen. There is also a sense of enormous American power. Al Qaeda is on the spot. Having set in motion the process that led to the fall of Baghdad, it is now under heavy pressure to demonstrate both that it is still operational and that it can still exact vengeance on the United States. The situation for al Qaeda requires a dramatic affirmation of its capabilities and U.S. weakness. Working from the politics -- but having no direct intelligence of al Qaeda's capabilities or intentions, and clearly aware that logic does not always determine events -- it is our view that the United States is now at the most extreme risk of being attacked by al Qaeda since Sept. 11, 2001.”

Al Qaeda’s thinking leading up to the September 11 attacks was that the US was both vulnerable to such an attack and weak. They did not believe we would respond as we did in Afghanistan and more recently Iraq. They were wrong. As pointed out above, many in the various terrorist organizations blamed al Qaeda for leading the Arab world into another military disaster in Iraq. As a result, Stratfor predicted on April 12 and continuously since then that al Qaeda would mount a serious terrorist attack soon.

Stratfor also predicted that al Qaeda would execute the most powerful strike within its capability in an effort to regain credibility in the world terrorist community. There was no doubt in Stratfor’s mind that al Qaeda would strike the US again if at all possible. Stratfor went on to say in its April 12 warning:

“For al Qaeda, this is both a challenge and an opportunity. It has been more than 18 months since the Sept. 11 attacks. Since then, al Qaeda has been involved in smaller actions, but none inside the United States. The sense is growing in the Islamic world that al Qaeda had one major operation in it, but no more. Alternatively, the argument is that U.S. intelligence has shattered al Qaeda…

Moreover, with a major crisis of confidence in Arab and Islamic leadership developing, al Qaeda has a tremendous opportunity to increase its legitimacy over that of these governments by showing that it is, in fact, capable of acting decisively even in the face of Iraq's defeat and the helplessness of Islamic officials.”

In this April 12 analysis and several that followed thereafter, it was very clear to me that Stratfor was very concerned that another major terrorist attack could occur in the US very shortly. Stratfor made it very clear that they had no evidence of such a plan. Yet they were also very confident that IF al Qaeda had the capability to hit the US again, there was no doubt they would do so. This is why I was very surprised when the US lowered the terror threat on April 16.

Attacks In Riyadh On May 12

Just a month after Stratfor’s insightful warning on April 12, terrorists struck in Saudi Arabia. It is now widely believed that the attacks were carried out by al Qaeda operatives. The synchronized attacks targeted Western housing compounds where Americans live. At least 10 Americans were killed and dozens more were wounded, along with Muslims as well.

The Americans who were targeted are employees of a US company that provides security to the Saudi royal family. It has long been a goal of Osama bin Laden and al Qaeda to destabilize the Saudi government and rid the country of all Americans.

The US says it issued multiple warnings to the Saudi government about an imminent terrorist attack(s) well before May 12. The Saudis did conduct a raid on a cell of 19 known terrorists several days prior to the May 12 attacks. The terrorists got away, but the Saudi’s reportedly confiscated a large cache of weapons and explosives, so we are told. It now appears that those arms and explosives were intended for an even greater attack on the housing compounds.

The CIA believes that several (if not most) of the terrorists who carried out the attacks are al Qaeda members, complete with names in some cases. The Wall Street Journal said on May 14:

“The suspected al Qaeda links suggest that the terror group has maintained or restored a system for planning and coordinating multiple attacks. The targets of the attacks suggest the group still wants to pursue Mr. Bin Laden’s agenda of driving Americans out of the region and shaking the Saudi government.”

This and other reports on the Saudi bombings are eerily similar to Stratfor’s warnings about al Qaeda on and since April 12!

The latest bombings in Morocco last Friday, and others, are also being investigated for al Qaeda involvement, either directly or indirectly. Stratfor had this to say on May 17:

“Given that the Moroccan attacks come on the heels of attacks in Chechnya, Riyadh and Karachi, we may be seeing a pattern emerge. Stratfor has argued that al Qaeda has entered a critical period, during which it must demonstrate that it remains viable and effective. Since the attacks on New York and Washington, the United States has taken the initiative, destroying two regimes and entrenching itself militarily in the Middle East. The United States and its allies have broken up al Qaeda networks, arrested their sympathizers and seized their funds. Al Qaeda's response has been so minimal as to suggest the organization is no longer functional.

While each of the attacks could be explained as isolated and driven by local issues, the steady stream of attacks -- all at least peripherally related to al Qaeda's war with the United States and its allies -- suggests a coordinated program of attacks is under way, likely coordinated by al Qaeda.”

Is Al Qaeda Incapable Of Striking The US?

Several questions arise. Were these latest attacks al Qaeda’s best shot? Will there be more? Does this mean al Qaeda is not capable of striking the US? As noted above, it appears that the terrorists intended a much larger attack in Riyadh, but because of the Saudi raid on their hideout days before, the attacks were more limited than planned. Yet even if they had those weapons, the attack would have been nothing on the order of 911.

Stratfor believes that while al Qaeda has reconstituted, it is still relatively weak at the upper and mid levels. As a result Stratfor believes the terrorist strategy has changed:

“If indeed the Moroccan and other attacks turn out to be the work of al Qaeda or its sympathizers, we can see a new strategy emerging. In Chechnya, Riyadh, Karachi and now Morocco, they are hitting soft targets of opportunity. They are selecting targets of least resistance like gas stations and restaurants, poorly defended civilian residential compounds and countries on the periphery of security efforts. Additionally, they are not targeting exclusively U.S. or, in the case of Chechnya, Russian citizens; they are hitting any Westerner, and appear unconcerned about collateral damage among the local Muslim population.

However, their strategy change may not be voluntary… They simply may lack the resources and infrastructure to carry out major attacks, and are instead doing the best they can with what they have. They are relying on small plots with relatively simple planning and logistical requirements, well within the means of autonomous local cells.

All this suggests that al Qaeda has still not regenerated at the top level. Commanders may have issued orders to cells they believe are still intact to do the best they can -- substituting lots of small attacks for one or more big dramatic attack. If they are taking this approach, they are burning a lot of resources. They are using up their remaining operational cells in hopes of making up in tempo what they lack in magnitude.

This means we can expect a handful of additional attacks of similar magnitude. Given the distribution of al Qaeda resources and the new focus on soft targets, we would expect at least one attack in Southeast Asia, and possibly others in Europe or Latin America. There could easily be additional attacks in the Middle East and South Asia. But this campaign will quickly burn out. Al Qaeda is not husbanding its resources, it is using them up in hopes of appearing bigger and more effective than it remains.

Al Qaeda must get its point across before it runs out of useful cells, since at the end of this campaign, the network will still have its core apparatus to rebuild and will have to replace its operative cells as well.

Incidentally, as this campaign proceeds, there likely will be a lot of communications between the core and peripheral [terrorist] groups. Warnings before the Saudi and Moroccan attacks suggest that the United States is receiving some intelligence, close to real time, though not yet sufficiently detailed to prevent the attacks. The Casablanca attack came a day after U.S. warnings that an al Qaeda attack might be imminent, possibly in Africa. And U.S. officials called for security to be beefed up at a specific site in Riyadh just prior to the coordinated attacks on May 13. With each communications intercept and with the evidence and survivors left behind in the attacks, now is a prime opportunity for U.S. and allied intelligence services to nab some senior al Qaeda leaders.”

Will There Be Another major Attack In The US?

If Stratfor’s analysis is correct, one might assume that the risk of another major terrorist attack in the US is fairly low at this point. And that might be correct. Maybe that’s why Homeland Security lowered the threat level on May 16. Maybe they believed that any further attacks would continue to be in foreign countries where security is lacking.

Yet today, as I am writing this, Homeland Security has once again raised the Terror Alert level back to ORANGE (high). Our security agencies are now warning that there may be more terrorist attacks on US targets overseas in the next few days. The FBI announced today that they are also concerned about another terrorist attack(s) in the US. We cannot let our guard down.

Even if this latest elevation in the threat level passes and there are no attacks in the US, we should remember the old proverb that says, “Revenge is a dish best served cold.” About five years elapsed between the first WTC bombing and the 1998 attacks in Tanzania and Kenya, and then another three years between those attacks and 911. We should never assume al Qaeda and other terrorists are no longer a threat just because it has been a while since their last attack.

The good news is that it appears al Qaeda has been seriously weakened as a result of our successes in the War On Terror. Hopefully, Stratfor is correct and several senior al Qaeda members will be captured or killed in the next few weeks.

Market Implications

While we cannot rule out another major terrorist attack in the US, I think it is fair to say that we are safer today than we were on 911. If Stratfor is correct that al Qaeda is in a slow burnout, we may see a continued rise in consumer confidence in the US. If so, this will lead to a stronger economy and perhaps a continued slow rise in the stock markets.

The Bank Credit Analyst had the following to say in their daily report on Monday: “The U.S. economy is recovering, and the monetary and financial market backdrop are becoming even more supportive.” I agree.

As for the stock markets, specifically, my guess is that we are in a big trading range between 7500 on the downside and 10500 on the upside in the Dow, which could be with us for quite some time. This argues for a market timing strategy.

If the economy does indeed continue to recover, that means interest rates will begin to trend higher at some point. That will be bad news for most bondholders, especially those in Treasury bonds. That is why I continue to recommend Capital Management Group for a portion of your bond portfolio.

Wishing you a safe and happy Memorial Day weekend,

Gary D. Halbert

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