The news reports coming out of New Orleans and the coast of Mississippi are horrifying. We live within the cone of destruction (Pensacola), and even though we were 150-170 miles from the eye of the storm, we still had strong winds, rain, and damage. Unless I am way off base, I think Katrina will be blamed for many of the economic events that are getting ready to unfold (Pop,Prick, and Burst).
THE POP: Let's be honest. The recovery of the stock market that began after 2002 was nothing more than a rally in a Bear Market. Had it not been for the big jump in energy stocks, the rally in the stock market would have been less impressive. The news of a huge infusion of cash into the economy from insurance proceeds and Gonernment aid will have a positive psychological effect on the economy and the stock market.
Could the news of an infusion of cash be enough to rally the DJIA up to the 10,900 level by yearend ? Maybe. Yesterday, you saw some of those psychological effects as Home Depot (HD) and Lowe's (LOW) rallied. Today, both stocks are giving back their gains.
The talk that will dominate the financial channels after Katrina will be about the massive inflow capital to rebuild New Orleans and the Mississippi Gulf Coast. Its not that simple. Here are a few things to keep in mind:
1) Having lived through Hurricane Ivan, I will tell you that insurance companies will do everything in their power to pay out the least amount they can to customers , and these companies will be constantly referring to the fine print on every policy. Also keep in mind that many of the homeowners in the damaged area's do not have flood insurance because insurance company's no longer write flood policies in flood zones.
2) Governmental assistance will also be limited also. FEMA will provide grants to those with lower incomes, but rarely will they pay the entire tab. Those without insurance, or who cannot collect on their policies will have to apply for low interest loans, or make up the difference with the savings that they probably do not have.
3) Middle and higher income individuals will be eligible for grants and loans on a prorated scale. The higher the income, the less they will receive.
THE PRICK: Once the stock market and the economy begins to figure out that insurance companies and the government are not going to be entirely responsible for the central gulf coasts rebuilding, they will quickly realize that most consumers are already tapped out, or simply cannot afford to rebuild.
If there are any similarities between what happened with Hurricane Ivan in our area, (I'm sure there is)and the current situation in the Louisiana-Mississippi, many businesses and will not be able to rebuild or maintain their current loans. As was the case here in Pensacola, many will be forced to file for bankruptcy or have their property repossessed by the bank.
THE BURST: Higher food and energy prices have already been taking a big toll on the economy. Now that the already crippled refining business has taken an even larger hit, gasoline prices will soar even higher. The President and the Saudi's can flood the market with a trillion barrels of oil, and none of that extra oil will help resolve the current refining crisis. You can have all the oil in the world, but without the capacity to turn that oil into gasoline and jet fuel, no amount of crude will help.
Soaring energy costs will hurt corporate profits unless corporations pass those additional costs on to the consumer. Corporations are fast approaching a double edge sword senario.
1) Raise prices or risk lowering earnings estimates (Stock Prices Fall).
2) Raise prices, and consumers stop buying (Stock Prices Fall)
Corporate insiders already know this, and we have caught a glimpse of their thought process as they continue to sell massive amounts of their stock holdings. Consumers have already begun sewing up their pocketbooks to pay for essential living expenses(food and shelter).
Businesses will begin to layoff workers as consumers begin to cut back. The most vulnerable sectors seem to be the automotive, gaming, leisure, retail and hotel industries. The Christmas selling season could prove to be very disappointing. This further validates my call for a very difficult stock market in 2006.
In summary, a recession is undeniable.
