The Fog of Katrina

The task of calculating the enormous damage from Katrina – in Human lives, in property damage, and in
economic terms – continues. As insurance claims and Federal aid flow into the
region, it is worthwhile considering a more difficult to measure effect of the
hurricane: Its ability to obscure economic and earnings data. Katrina is
looking a lot like a catchall excuse for all the shortfalls of Q3 & Q4.
Apologists have begun using the storm to avoid responsibility for every
disappointment. I anticipate economists, corporate officers, even politicians
will take full advantage of the opportunity to scapegoat the storm for their
own failures. (e.g., even spice seller McCormick blamed the storm on their

To those of us who attempt to read the entrails of the market, even more troublesome is the obscuring of the true underlying economic conditions. How the fog of Katrina impacts investor psychology and behavior has yet to be seen. Human Nature being what it is, I expect we will see an unholy litany of Candide-like
rationales – some justified, most not – for everything from consumer spending to energy costs to inflation data.

Let the excuse making begin!

Indeed, early signs of this were apparent last week in response to the University of Michigan Preliminary
Consumer Confidence data. The survey saw a 14% decrease in measured sentiment,
and a two month decline of 20%. The WSJ noted this was “the largest decline in points over a two-month period since comparable records began in 1978."

The Dismal set reacted as you would imagine, with one
even opining that “The index was likely weighed down heavily by the
emotional response to the devastating images that resulted from Hurricane

Go figure: a sentiment survey being impact by negative emotions. Is it any wonder these guys don’t have a clue?

Ultimately, investors may be getting set up for a nasty surprise. This may play out 60–90 days from now: As we’ve noted, with massive government stimulus fading prior to the disaster, growth was already decelerating, as Real Estate began to cool, and consumer spending slowed. Oil prices had nearly reached a tipping point. But now the disaster gives cover to the cheerleaders and perma-Bulls, allowing them to maintain their sunny outlook. Meanwhile economic decay gets
obscured and rationalized.

Thus, the markets can continue to grind higher over that same 2 – 3 month time period. We have no idea what finally removes the scales from investor’s eyes, but eventually, something gets revealed that cannot be papered over as Katrina’s fault. The risk to those who buy into this excuse making is that once this occurs, an unseen trapdoor may get sprung.

We would expect to adapt a much more defensive posture 60 days hence.

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What's been said:

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  1. erikpupo commented on Sep 19

    One thing I think the perma-bulls will jump on right away is the return in government stimulus by the spending of Katrina aid in the Gulf region, as promised by the president.

    The flipside of course (which cheerleaders fail to see): the stimulus is concentrated in a specific geographical area and the stimulus is highly inflationary (it focuses on raw materials and on human capital).

    Thats what make this whole debate about Katrina baffling: if the president is spending hand over fist to clean up after Katrina, and this spending is highly likely to be inflationary, why again should the Fed stop? Because they feel bad?

    I don’t get it.

  2. Andrew commented on Sep 19

    The excuses have been coming all year and the market doesn’t care, when well bulls realize that one excuse after another isn’t going to cut it.

    First we had a cold winter/late snow in the northeast. Next was the timing of easter and the 3 day weekend (something about it being early?). Summer rolls around and we are told that the slowdown is the heat and people don’t want to shop when it is hot out. New we have Katrina. What will be the next excuse?


  3. D. commented on Sep 19

    I still think the damage will come when credit spreads spring up. I can’t tell you the exact date but you know the tsunami’s coming when the biggest thing going is IO mortgages to subprime borrowers because banks can easily securitize this junk thanks to an unsatiable thirst for yield pickup.

    Who’s holding the riskiest tranches? What I want to know is who’s holding this junk: banks, lifecos, hedge funds or pensions? I’m being bombarded by CMO issues!!!

  4. decaturbob commented on Sep 19

    housing bubble, housing speculation, gold at 17yr high, $3/gal gas, 70-80% increase in natural gas for winter,
    risky mortgage instruments, inflation, poor jobs, retail sales falling off, consumer confidence drapping, huge deficits both Govt and personal…..
    I suspect that some type of turmoil will come out sometime in the near future…or I can be one of the wacked-out cheerleaders, everything is wonderfullllll

  5. Econbrowser commented on Sep 19

    Consumer confidence plunges

    Yet another key leading indicator turns gloomy. How much can the stock market and the Fed shrug off?

  6. Daniel Kwiat commented on Sep 20

    Barry, I love your blog. It’s very enjoyable to read. However, I don’t agree that stocks are grinding higher and higher. Natural resource stocks are grinding higher, and they are lifting the indices; but breadth has been relatively poor. Plenty of stocks are going nowhere; ha, only the stocks I’m most short are going up!

  7. TonytheTiger commented on Sep 24

    I believe Barry is saying stocks are grinding higher oppose to grinding lower…..generally speaking.

    Stocks can ascend on negative breadth….it happens all the time. Generally, if an index heads north and momentum is decending, then soon it will retrace. The “Big” question is WHEN!!…….

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