Forget most of what you are reading about the post-Katrina
recovery. This is an unprecedented U.S. disaster that will have repercussions -
around the global economy, but most especially domestically. A major American
city has been all but wiped off the map, taking the country’s largest port with
it. To put this into context, the costs for rebuilding New Orleans after
Katrina will exceed those of rebuilding Chicago after the great fire, San
Francisco after the 1906 earthquake, and New York and D.C. after September 11th
- combined. And that’s after adjusting for inflation.

Despite what some of the more bullish pundits have been
saying, the stimulus of rebuilding New Orleans will not outweigh the
overall loss to the economy; if it did, we would level a different city each
year and rebuild it from the ground up, shiny and new. But it doesn’t, and so
we don’t.

This comes when the Consumer is running increasingly low on
dry powder. As we noted last week, the consumer is nearly – but not quite – shopped out.  Gas price spiking added some caution to their already waning sentiment.

Additionally, we note that the market’s impressive
resilience in the face of such adversity is not historically unprecedented.
When the great San Francisco earthquake hit, it took markets several weeks to
register the colossal costs and impact. So too, the market all but ignored the 1973 Arab Oil Embargo of the
U.S. For two weeks, US stock markets
actually traded sideways, before recognizing what the enormity of what the
embargo meant to the U.S.

Further, we note that Katrina has revealed the surprisingly
steep learning curve of key economic players. Alan Greenspan has learned (to
his dismay) that Jawboning is a 2 way street. He has discovered the Markets can
exert a formidable force. Having declared that the Fed must now pause on 9/20 -
and rallying in anticipation – the markets will throw a tantrum in the event
the Fed does not. How he handles this may impact how quickly the economy
recovers.

Thus, for the second time
this year, I am changing my
expectations for the market for the calendar year. Recall that previously, I was looking for a mid year peak in the markets, sliding off to finish the
year flat. What we’ve seen instead is a low set in May, followed by a sizable
rally. The endgame for this cyclical Bull now looks less and less like a blow
off top. In its stead, a more rounded top – a grinding affair, lower, slower,
and far less dramatic than previously expected – is increasingly likely, as the
the impact of Katrina makes its way into the equity markets.

This Bull is now more likely to end with a whimper, and not
with a bang.

Category: Commodities, Economy, Investing, Markets, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “Katrina Lowers Year End Expectations”

  1. the ECONOMIC aftermath of Katrina

    Barry at the Big Picture has an excellent rundown. Can you tell where I’ve been getting a lot of my commentary? I only wish CalculatedRisk wasn’t on vacation this week.

  2. pjfny says:

    I’d be interested in opinions of bernie sheaffer’s piece (free content) of why the market is so resilient despite katrina. He uses technical (expectational analysis he calls it) put/call open interest ratio analysis.

    Here is the url:

    http://www.schaefferresearch.com/commentary/bernie_observations.aspx?click=home&cat=soc&page=bernie_observations&ID=14080

    opinions?

  3. pjfny says:

    I’d be interested in opinions of bernie sheaffer’s piece (free content) of why the market is so resilient despite katrina. He uses technical (expectational analysis he calls it) put/call open interest ratio analysis.

    Here is the url:

    http://www.schaefferresearch.com/commentary/bernie_observations.aspx?click=home&cat=soc&page=bernie_observations&ID=14080

    opinions?

  4. JWC says:

    Wow, finally someone makes some sense.

    I watch CNBC (entertainment purposes only) and just shake my head. How can there be a rally in the stockmarket after a hit to our economy and country like Katrina? thank you, I think I understand a little beter. It will happen, just delayed…

    Thanks again for your great blog.

  5. Similar Thoughts on Katrina

    Barry Ritholtz wrote an article today Katrina Lowers Year End Expectations on his blog The Big Picture (one of my Favorite Websites). In his article Ritholtz emphasizes the same theme I did recently in Katrina: Good or Bad for the…

  6. SoCal Chris says:

    Regarding put/call analysis:

    Don’t you have to adjust your interpretation for the fact that many of those outstanding puts and calls are part of larger, multi-legged positions (i.e. spreads).

    Or, maybe it doesn’t matter. Another interesting trend is the consistent fall in implied volatilities for index options (i.e. VIX, VXN) over the past few years.

  7. JWC writes:

    “..How can there be a rally in the stockmarket after a hit to our economy and country like Katrina?”

    Umm, simple.

    The market isn’t here.

    It is over there.

    “There” is 6-12 months foward.

    The market looks forward — never forget that mantra!

    What the market is doing now is shaking out all the weak longs.

    If you’re still long now, you’re either extremely confident or simply trying to reap some short term gains off “Katrina plays” a la Caterpillar and Home Depot.

    (DISCLOSURE: The author has a sizable position in HD).

  8. JWC: The market’s internals and technicals have been quite healthy. This explains in part why the markets have proven so resilient lately.

    In the weeks leading up to Katrina, both the Dow and Nasdaq were making higher lows. The Nasdaq held critical support recently and bounced off of it.

    My pal Kevin (Redwood Technimentals Chief Strategist) notes, “It is hard to envision a harsh sell-off while the NYSE Composite Index is making new highs. All this recent activity suggests to us that we may be able to challenge the upper end of the range again.”

    This despite the long-term economic damage Katrina has wrought.

    How to reconcile these two apparently opposed factors? Consider them over differing timelines: There is an increasing danger of economic deterioration over the longer term (12-24 months). In the shorter term (one to three months), the markets have enough strength to power higher.

  9. Similar Thoughts on Katrina

    Barry Ritholtz wrote an article today Katrina Lowers Year End Expectations on his blog The Big Picture (one of my Favorite Websites). In his article Ritholtz emphasizes the same theme I did recently in Katrina: Good or Bad for the…

  10. Mhashe says:

    For those who posted why stocks did not break lower.

    These guys make a good case of the US markets being manipulated during times of crisis. Makes for an interesting read.

    http://www.sprott.com/pdf/pressrelease/TheVisibleHand.pdf

    BTW Barry. I like you incisive analysis. You’re among my 3 favorite analysts/traders . Others being Jim Rogers and
    Marc Faber.

  11. globetrader says:

    The whole disaster reminds me of something I read in “Reminiscenses of a Stock operator, Chapter 8 page 94″.
    Read for yourself how long it took the market 100 years ago to really grasp the consequences of the great San Francisco earthquake and to start a serious selloff, when a bull market was in force before the quake.
    Same effect seems to be in play here.