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August 30, 2005

A bit overwhelmed, Tues., August 30, 2005, 10:53 AM

I feel a bit overwhelmed today as I receive increasing number of comments and direct mail related to this blog. Clearly there is interest in what I am doing " or at least trying to do " on a daily basis. So bear with me if I can't return mail, etc.

Already I find no time to return to the top nav bar sections for my Quarterly Update. That should have been done a month ago. Also, I started a Focus of the Week concept that basically remains a concept because my head is being pulled in too many directions.

I am trying to get closer to having the Market Rhythms Report rolled out, which takes time and focus.

And, I'm doing something in terms of building a portfolio/trades in ETFs and HOLDRS that will become part of the top nav section of this website because I know how many of you are not the least interested in taking risks in individual stocks. The active traders have a high profile, but most traders are part of the silent and conservative majority. So, I will get that project done too.

The events of recent days in the market have also been overwhelming " mostly I think because of the timing of Katrina, arriving at a point where equity markets were starting to turn bearish. After all, this market cycle has been a relatively long one; reaching a bottom in 4Q02, and starting a new bull phase at the end of 2Q03.

There is a phenomenon in equity markets connected to major hurricanes that I referred to in the past few days. Typically, there is a drop in share prices of between one and two pct in the days immediately prior to a hurricane coming onshore the U.S. Then in the days and weeks following, there is a comeback of between two and five pct in share prices.

The reason for the comeback is the fact that insurance funds and Fed/State/Local disaster emergency funds are deposited into local banks, which increases the loan capacity of those banks. Then the money is lent out for reconstruction projects, much of which is wealth creating, which in turn enhances share prices.

Call it the Home Depot Effect if you wish. But, it is a reality.

Before it hit, Katrina was presumed to make a direct hit on the City of New Orleans, rather than being a partial hit with much less wind and water damage. Still, the enormity of the actual losses from Florida to now the Gulf States and soon to be right up the Mississippi River and Ohio River systems, particularly in flood damage, is likely to become the greatest storm-related loss in the history of North America.

Therefore, the new funds that will now go into the economy will possibly be $50 billion or more " much larger than some of the estimates I read about at this point. That ought to give a significant bump to broad equities " enough say for the Dow 30 to rise from 10,400 to 10,900 " on it's own (i.e., attributable directly to the storm).

But here is my dilemma: the economy had been very weak, and this storm might put it into recession. If Wal-Mart has something like 130 stores and a couple major distribution centers closed, then what about other retailers. If a very significant part of the U.S. energy industry has been shut down for weeks or months, what are the prospects for energy prices, and the effect that will have on consumers, and producers.

What could happen here " it usually does " is for management of thousands of corporations to put the blame on Katrina for all their problems. Banks will increase loan loss reserves (lowering profits); manufacturers will write off more slow-moving inventory (lowering profits); retailers will permanently close marginal stores (lowering profits, and increasing the unemployment); meetings and convention travel plans will be deferred (lowering profits for the whole travel and hospitality industry); and on and on. I have seen it before.

So, get ready to read the Blame it on Katrina" story in next quarter's corporate results and guidance.

Therefore, I have to say that I may be wrong this time, with Katrina itself stopping the usual equity market comeback following a hurricane. It could be that never before have we seen so much structural damage to the economy that an extra $50 billion or whatever will have a minimal effect.

Kind of like some of those sandbags along Bourbon Street and along Canal Street in the Big Hurt.

The Dow 30 is off about -75 points as I write. I'm starting to get the picture that others are seeing what I see.

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btw, I was hit by a Comment SPAM Attack 45 times last night from a couple of poker-related sources. I see the same perp has returned in the past 30 minutes with another 20 computer-generated spams. None of this garbage gets through to you, but it takes a couple of minutes to delete from my system, which reduces my available time.

Posted by Posted by Bill Cara on August 30, 2005 10:54:14 AM | Category: Cara Today in the Market

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