This is a market that isn’t impressed with talking but will pay attention to rates and oil. So...
Tracy: Advice and Charity
09/09/2005 12:00 am EST
Kudos to Paul Tracy, who is donating 25% of the sales of his StreetAuthority Market Advisor newsletter this month to the American Red Cross. Meanwhile, in a special report, he looks at the investment implications of the disaster on some of his portfolio holdings.
"While it may seem callous to focus on the economic costs of this disaster, the hurricane will have a major impact on Wall Street, and as such, all investors need to be aware of the storm's impact on their portfolios. With this in mind, I think it's important to examine the likely consequences of this catastrophe on our model portfolios as well as the market in general. Current estimates put the total direct economic cost of the hurricane at more than $100 billion. But the final economic cost may turn out to be much higher when you consider the economic drag of higher energy prices on the US economy.
"Companies involved in the banking and insurance businesses will be affected. Although they may take a near-term hit due to loan defaults, banks and mortgage financing companies will ultimately be lending businesses and consumers the cash to rebuild their homes and establishments. Insurance companies will also see an immediate hit in the form of massive claims. However, in the long run they too are likely to benefit. Specifically, premiums on insurance policies tend to rise after major natural disasters often for months or even years. Insurance stocks tended to perform very well after Hurricane Andrew in 1992, and the same scenario is likely to unfold in the months and years following Hurricane Katrina.
"Of course, some industries will benefit immediately. It is certain that the Gulf Coast will not be in shambles forever. The region will be rebuilt and that means repairing roads, bridges, buildings, and homes. In the wake of Hurricane Andrew in 1992, companies involved in the construction and housing markets performed well. The same is likely to happen this time around. Meanwhile, topping the list of beneficiaries is energy.
"Frontline (FRO NYSE) is one of the world's leading oil tanker companies. Hurricane Katrina will affect oil tanker firms in a couple of key ways. First, the shutdown and damage to many oil producing platforms in the Gulf means that the US will likely have to import more of its oil needs until that infrastructure can be rebuilt. This will lead to greater near-term demand for tanker shipping services. Secondly, refiners will not be able to begin their normal seasonal inventory rebuild on schedule this autumn due to damage to key Gulf Oil refinery infrastructure. This means that later in the year tanker ships will be in particularly high demand to replace crude oil stocks. Tanker rates have already begun to turn higher in the wake of the storm. Higher tanker rates should lead to impressive profits for FRO.
"OMI Corp. (OMM NYSE), is also in the tanker shipping business. However, this company focuses on smaller tankers called Suezmax ships. These are typically used for shorter trips in the Atlantic Basin. OMI also owns a fleet of what's known as product tankers. These ships don't carry crude oil at all. Instead, they carry refined products like gasoline, jet fuel, and diesel. With several large refineries on the Gulf Coast shut down and unlikely to open for at least several weeks or more, the US will have to rely on imported gasoline to make up for the shortfall. That means importing more gasoline from nearby refineries in the Caribbean or more far-away facilities in Europe. OMM's product tanker fleet should benefit from increased demand for shipping these refined products.
"Magellan Midstream Partners (MMP NYSE) is a pipeline operator. The firm bears little commodity price risk, as it doesn't own the gas, oil, or refined product that moves over its pipelines. Instead, they're simply paid a certain rate by companies wishing to ship gas. As such, the pipeline business tends to offer secure, dependable cash flows. Hurricane Katrina caused major damage to some pipelines, particularly in Louisiana. However, Magellan has no assets in the immediately affected region. Its natural gas pipelines are mainly located to the west of directly affected areas, in Texas, and north into the Midwest. That said, its pipeline demand will likely remain very high for some time as companies look for alternative routes to transport their gas around the closed pipes.
"Outside of the energy area, we would also point to Iron Mountain (IRM NYSE). With more than 85% of New Orleans covered by floodwaters, you can bet a lot of important documents were lost. Law offices, banks, brokerage offices, and real estate offices, among others, likely lost any information that wasn't digitized and backed up at remote locations or stored remotely in paper form. The market leader in these storage services is IRM. The company has a network of secure warehouses around the country and accepts documents for storage at these warehouses. In addition, IRM has expanded into digital storage products in recent years. Businesses will be looking for ways to secure their documents against future natural disasters, and IRM will be right there to help them do this."
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