Post-Katrina Odyssey

09/09/2005 12:00 am EST

Focus:

Dennis Slothower

Chairman and CIO, Alpine Capital Management

"I can’t help but feel as if we are all like Ulysses in the Odyssey, trying to navigate through treacherous waters," notes Dennis Slothower. "But we are a resilient people and we will bounce back from this disaster."  Here, he argues for caution in an uncertain environment.

"We are just now starting to get some idea of what our economy might face in the next month or two from the Katrina disaster. I can’t stress enough the importance of risk management for your portfolios. It should be your top priority right now. You should count on the economy suffering sharply as a result of this hurricane. As news of the damage and recovery is released over the next month or two, investors will come to realize the gravity of this event.

"There are more than a million displaced people. Hurricane Katrina may cost 500,000 Americans their jobs in the month of September, which would be the biggest decline in payrolls in more than 30 years. The bill for economic losses is going to crush real economic growth in the next quarter and it is entirely likely the stock market will discount accordingly as it comprehends the impact. Overall, risk is exceptionally high, in my opinion. My advice is to play your hand very conservatively during this period of uncertainty it will take time to sort out the damage, impact, and market reaction over the next few weeks.

"This direct attack by Mother Nature on the Gulf States is creating a real sense of foreboding about the economy and the risk of a recession developing. I know we are all hoping for the best. But the real truth will not be known for weeks. After Hurricane Ivan hit this region in 2004, oil prices climbed 20%, and if this is repeated we will be looking at $85 a barrel. Higher gas prices are certain to fuel concerns that consumers will cut back on other spending. Since consumer spending accounts for most of the US economy, any serious retreat could trigger a recession. Nearly all the recessions of the past four decades came after spikes in oil prices.

"At this time I want to be long on those sectors that are particularly strong right now and short on what I see as deteriorating sectors. On the negative side airlines, hotels, and casinos could take the biggest economic hits from Hurricane Katrina. You might want to consider shorting casino operator Harrah’s Entertainment (HET NYSE), which is likely to lose money as a result of their exposure in this area. Also, Hilton Hotels (HLT NYSE) is looking weak as people cut back on traveling.

"Obviously, certain companies are going to be hurt by this while others will benefit from the repairs that will follow. BJ Services (BJS NYSE) and McDermott International (MDR NYSE) are two energy services companies that will get a lot of the work to repair the damage to oil platforms. Houston-based Offshore Logistics (OLG NYSE), the helicopter transport company serving the oil and gas industry, is likely to get a lot of work. One company that looks like a good speculation is Global Industries (GLBL NASDAQ), which is a leading offshore construction company in Louisiana likely to benefit from this hurricane. Global offers a comprehensive range of marine construction and support services in the Gulf of Mexico and selected offshore petroleum centers around the world."

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