Busch: Gustav Spreads Fear as it Gathers Steam

Thursday, 28 Aug 2008 | 11:54 AM ET

After experiencing strong political winds from Denver all week, the markets are now firmly focused on the “other” wind that forming in the Gulf of Mexico. Hurricane Gustav is spreading fear from New Orleans to Wall Street as it gathers steam. The latest models have it trekking into the oil and gas producing regions of the US gulf coast. From Texas to Mississippi, this area has 25% of US oil production and 15% of US natural gas production flow through it. Oil, natural gas, home heating oil are just some of the commodities already getting wind struck from just the possibility of the storm’s approach.

Hurricanes have had an enormous impact on the financial markets from lumber to insurance providers to oil producers. What’s disturbing is the increasing strength and frequency of these storms. More than 30%of the worst hurricanes of the last 106 years have occurred in just the last 6 years. If we use the last 20 years, the total goes up to 40%. This is why some researchers believe that global warming is a contributing factor to the number and frequency of these storms. This angst is fueled by the storm period of 2004 and 2005 which produced six hurricanes Category 3 or higher.

From a damage perspective, the top 6 out of 7 costliest mainland US hurricanes occurred in the last 3 hurricane seasons. Their estimated damage: a whopping $151 billion with Katrina contributing over half the dollar total in 2005. This was just the damage inflicted on buildings and infrastructure. It doesn’t take into account the damage inflicted on investor’s portfolios. The irony is that we know when these storms generally occur: the season is from June 1st to November 30th. What we don’t know is where they will hit even after it makes landfall. Hurricane Katrina made its first landfall in Florida before moving on to Louisiana. Hurricane Fay made landfall four times in Florida. Amazingly, investors can prepare and take advantage of hurricanes.

Let’s look at 2004. Hurricanes Charley and Ivan hit within a month of each other and should be considered in tandem as their impacts can’t be separated from each other. Charley came up through Cuba which is about where Hurricane Gustav is trekking now. It then turned north and devastated the western coast of Florida. Hurricane Ivan went over Cuba and then headed through the Gulf Shores area. So while Charley impacted tourism in Florida, Ivan impacted energy production and distribution in the Gulf.

Over the time frames of the storms forming and hitting, crude oil rallied 10%, the US dollar index sank from 82 to 78, and natural gas soared almost 50%. Much of this reaction had to do with the surprise of the size of the storms and the short time frame in between when Charley and Ivan hit. However, the construction sector was also impacted. The Bloomberg US Homebuilders Index is a cap-weighted index of the leading home builders in the United States. Prior to the storms, this index was at the lows for the year in late 2004. It started a rally in August and took off with the landfall of Charley. It continued to rally strongly into Ivan. And then it backed off to pre-Charley levels.

Hey, that’s a thought: a hurricane could actually be a good thing for the US construction sector! Wow, in dark times we need a hurricane to help? Friday on the Closing Bell , I’ll be taking a look at what happened with Katrina and Rita in a segment called Man vs Market. Tune in for further ideas on how to prepare and invest when a hurricane hits.



Andrew Busch

Andrew B. Buschhere