Weekly Market Commentary - Weather or Not: Be Prepared

From time to time, predicting the weather--or at least paying very close attention to how it is developing--is part of making economic and market forecasts. Hurricanes cause a temporary weakening in output and employment in those states directly affected. However, the biggest threat to economic growth from hurricanes is the nationwide surge in gasoline prices.

In general, we believe that the best offense is a good defense.

 

 

Weather or Not: Be Prepared

It is difficult to forecast the economy and markets accurately, but accurately forecasting the weather can be downright exasperating. But, from time to time, predicting the weather -- or at least paying very close attention to how it is developing -- is part of making economic and market forecasts. The effects of weather could be a major factor affecting the commodities markets and, in turn, the economy in the coming months.

Isaac is the ninth named storm of the Atlantic hurricane season this year. The National Oceanic and Atmospheric Administration latest forecast includes 17 named storms this season, including 5-8 hurricanes and 2-3 major hurricanes. Storms are being fueled by the warmer-than-normal sea surface temperatures in the Atlantic along with conducive wind patterns. The potential for severe weather activity is a risk that could result in:

  • • Lost economic output,
  • • A rise in unemployment in affected areas,
  • • Downgrades to municipal debt ratings as emergency reserve funds are depleted,
  • • Losses for insurance companies,
  • • Higher agriculture prices, and
  • • Higher energy prices.

The biggest threat to economic growth from hurricanes is the nationwide surge in gasoline prices.

With Hurricane Isaac on the way toward the key production areas of the Gulf of Mexico, energy companies have begun suspending crude and gas operations in the Gulf region, home to 23% of U.S. oil production, 7% of natural-gas output and 44% of refining capacity, according to the U.S. Energy Department. Four back-to-back hurricanes that hit the southern United States in summer 2004 resulted in a loss of 25% of Gulf of Mexico energy production. In 2005 hurricanes Katrina, Rita and Wilma devastated the Gulf Coast and shut down 24% of annual oil production during the six months that followed the storms. In addition, the source of much of the United States foreign oil, the Louisiana Offshore Oil Port, had to be closed. This drove oil prices to increase by over $10 per barrel and gasoline prices at the pump rocketed to near $5 a gallon in some areas. A repeat would be an unwelcome burden to U.S. consumers. After all, 2012 presents a much more fragile economic backdrop than in 2005 when the major hurricanes last struck.

Gasoline prices have risen nearly 10% above the year-ago level and 30% above the five-year average—but this has not yet deterred consumers. Retail sales grew at a pace of around 3-4% year-over-year in June and July 2012. However, a shock from reduced output due to hurricanes could push gasoline prices at the pump higher in the next few months relative to June and July. The burden an additional 50 cents at the pump may place on consumers could total $17 billion.

The impact that severe weather can have is evident in agriculture prices this year. The U.S. drought, excessive heat in Russia, and too much rain in Brazil have produced record prices for grains. We continue to see upside for agriculture commodities and related industry stocks. In general, we believe that the best offense is a good defense and an increasingly severe hurricane season may benefit energy commodities and stocks in the Energy Services industry.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The fast price swings in commodities and currencies will result in significant volatility in an investor's holdings.