On August 29 and September 24, Hurricanes Katrina and Rita respectively, struck the Gulf Coast.   The storms destroyed lives, entire towns, busy ports, and crude oil production and refineries: well over $100 billion of destruction. Along with the hurricanes, a wave of negative consumer sentiment has also flooded America and put a pall on domestic spirit:

  • Higher interest rates
  • Fear of a housing bubble
  • Inflation pressures from higher gasoline and energy costs – expect winter heating bills to be nearly double last year’s
  • Prospects of increased taxes to fund a ballooning Federal deficit – possibly reduced tax deductions for housing costs
  • Continued war in Iraq and Afghanistan and persistent terrorism fears
  • Much publicized corporate bankruptcies

In addition, we expect additional companies to take advantage of the old bankruptcy law before it changes to more stringent guidelines on October 17, 2005.

During this consumer led recovery, much attention has been paid to every breath of Middle America, but now, that breath seems to be a pant. The media is playing a game of strategic guessing to predict the companies and sectors that will be affected positively and negatively as:

  • Consumer Confidence Index fell precipitously to a two-year low and had its largest single month drop in 15 years
  • A record 4.81 percent of credit-card accounts (up from 4.76 percent in the first quarter) had payments that were 30 days or more past due
  • Delinquent payments on personal loans, auto loans, home equity loans and lines of credit have recently increased

Economists and the media are blaming high gasoline prices for the increase in delinquencies and the Confidence decline. The displacement of over one million people in the South and overextended credit may also be a factor as well as all of the items mentioned above.

Over the coming quarters, expect the hurricanes to be a reason (excuse) for a wide variety of companies to report weak earnings. Remember, the hurricanes and the mass migrations greatly disrupted markets and logistics (warehousing and transport) for most national players and a bevy of small regional concerns.

What all of this adds up to is that the market has an inchoate sense that some catalyst will occur to shove the markets in a meaningful long-term direction. Consequently, investors seem to be at a crossroad: laying a multitude of bets and simultaneously pondering their next steps.

 

Greg P. Pellizzon
Managing Director

Michael Ashley Schulman, CFA
Director

Hollencrest Capital Management
www.hollencrest.com