Pennsylvania Investment Observer

Hurricane Katrina

by Judy L. Loy

We extend our deepest sympathies to all those affected by Hurricane Katrina. The human cost is beyond comprehension.

The economic impact of Hurricane Katrina will be felt in many ways.

Initially, the major economic disruption across the country caused by Hurricane Katrina can be felt at the gas pumps. (The most inexpensive gas in our centre county area is currently holding at $3.19 a gallon.) The reason behind the increase in gas prices is that the United States' energy infrastructure is concentrated on the Gulf Coast. In fact, it accounts for over a quarter of domestic crude oil production, one-fifth of natural gas production and almost half the nation's refining capacity. The indication is that the recent spike in gas prices should be over soon because we are already restarting domestic production in the Gulf and American companies have secured additional imports. The expectation is that the Gulf will have production and refining activity back to full capacity early next year.

Ongoing, Katrina will have a larger affect than other natural disasters. One-fifth of the nation's goods exports and imports are brought through the region's seaports. Theoretically, the area may not be made as financially whole by insurers as Florida was last year because Florida has a wealthier population, which is more likely to have insurance to cover the damage. Nevertheless, the Insurance Information Institute estimates that insurance claims from Hurricane Katrina could top $25 billion.

Our gross domestic product or GDP for the year has been cut by most forecasters due to Katrina. Gas prices will most likely crimp consumer spending and travel, two major drivers of growth.

New Orleans was hit the hardest, with 80% of the city sitting under a pool of water. As I write this article, Tuesday, a major levee has been plugged and engineers are beginning to pump water out of the city. Estimates are that it will take three weeks to remove the water and another few weeks to clear debris. It could take as long as two months to get electricity back on in the city.

Rebuilding in the hardest hit regions will give power to the housing industry, and many stocks are benefiting from their expected involvement in the process. For instance, Cemex (CX) is the world's number three cement maker and is based in Mexico. It is up 6.8% Tuesday because investors expect it to benefit from rebuilding. Another stock seeing an upside is The Shaw Group (SGR). The Shaw Group, a Louisiana-based construction company, is moving higher along with other construction firms. Also benefiting from any rebuilding effort are the manufactured-home sector, including Champion Enterprises (CHB), companies that provide boat services in the Gulf, including Tidewater (TDW), offshore construction and transport sectors, including Cal-Dive (CDIS), and construction materials, including Eagle Materials (EXP). Many investors are taking short-term positions in companies that stand to see some gain from the rebuilding.

There are many things to consider when investing or forecasting the expected continuing impact of Hurricane Katrina. The only thing we know for sure is that it is a devastating event for our country and that time will only tell us the true cost of such a natural disaster.

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