FIGURE 6.2 1992 NASDAQ Insurance IndexSource: Used with permission from Bloomberg L.P.. FIGURE 6.3 1992 Centex Source: Used with permission from Bloomberg L.P... FIGURE 6.5 1992 CrudeSou
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northward This motion brought Andrew to the central Louisiana coast on August 26 as a Category 3 hurricane Andrew then turned northeastward, eventually merging with a frontal system over the Mid-Atlantic states on August 28.
Andrew caused 26 deaths and $26.5 billion in damage Unusual for ahurricane, most of the damage was done by high winds and not floodingcaused by flash flooding or storm surge The NHC lists the four most dan-gerous elements of a hurricane in this order:
1. Flash flooding inland
sepa-First, we have all the people in the storm’s path Next, we have theinsurance companies that people have policies with that must pay out tocover the costs inflicted by the storms Let’s take a look at what happened
to the NASDAQ Insurance Index in August of 1992 This is a weighted index designed to measure the performance of all NASDAQ stocks
capitalization-in the capitalization-insurance sector In Figure 6.2, we can see the capitalization-index tanked overthe time frame that Hurricane Andrew developed and whacked Florida.The insurance industry in Florida was devastated by the incursion of $16billion in insured losses It forced the state legislature to create the FloridaHurricane Catastrophe Fund to help insurance companies in the event ofanother catastrophe and to encourage them to keep offering insurance inthe state
Home builders were not initially seen as potential beneficiaries from ahurricane, and their stock prices fell initially After October 1992, companieslike Centex (CTX, Figure 6.3) saw their stock prices rise steadily after themarket realized builders would be doing big business rebuilding in Florida.The initial reaction had been to sell shares in home builders as the marketbelieved that any homes those companies were currently building in theregion would be damaged The stock prices began to rise in late September!Three commodities had a particularly strong run associated with An-drew: oil, natural gas, and lumber Using the generic code for lumber (LB1)
on Bloomberg, we see a big spike in lumber from mid-August through earlySeptember (Figure 6.4) But you had to be quick to take profits, as the pricereversed almost as quickly
Trang 2FIGURE 6.2 1992 NASDAQ Insurance Index
Source: Used with permission from Bloomberg L.P.
FIGURE 6.3 1992 Centex
Source: Used with permission from Bloomberg L.P.
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FIGURE 6.4 1992 Lumber
Source: Used with permission from Bloomberg L.P.
Oil (CL1) experienced a similar pattern with a rally that started in gust, but faded in October (Figure 6.5)
Au-Natural gas (NG1) had a similar trading pattern (Figure 6.6) All threecommodities experienced short-term pops to the upside followed by rever-sals within two months Lumber was the only one of the three that followedthe pattern but ended the year significantly higher from August
For the major indexes, Hurricane Andrew contributed to a new low forthe Dow Jones Industrial Average (INDU INDX, Figure 6.7), a new low forthe U.S dollar index (DXY INDX, Figure 6.8), and a new low for the yield
on the U.S Treasury 10-year bond (USGG10YR INDX, Figure 6.9) As withthe commodities, the price action was temporary and later unwound.The temporary nature of the negative impact from Hurricane Andrewstems from the markets taking some time to digest a new phenomenon andwhat would be the implications for the economy afterward Initially seen as
a disaster, Andrew’s impact was subsequently viewed as a net zero impact
as the rebuilding of the areas devastated offset the devastation
HURRICANES CHARLEY AND IVAN (2004)
Since these storms hit within a month of each other, we’ll consider them intandem as their impacts can’t be separated from each other Their unusual
Trang 4FIGURE 6.5 1992 Crude
Source: Used with permission from Bloomberg L.P.
FIGURE 6.6 1992 Natural Gas
Source: Used with permission from Bloomberg L.P.
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FIGURE 6.7 1992 Dow Jones Industrial Average
Source: Used with permission from Bloomberg L.P.
FIGURE 6.8 1992 U.S Dollar Index
Source: Used with permission from Bloomberg L.P.
Trang 6FIGURE 6.9 1992 U.S 10-Year Bond Yield
Source: Used with permission from Bloomberg L.P.
behavior underscores why the serious trader must understand their naturewhen analyzing hurricanes Just like my kids, they don’t always do what isexpected or predicted This is why I list the entire description to show howeach storm follows a unique path
Let’s start with the NHC’s description and diagram of Charley Figure6.10 shows its path from Jamaica over Cuba, where it weakened tem-porarily, a familiar pattern for hurricanes as they pass over land Fromthe NHC web site (www.nhc.noaa.gov/HAW2/english/history printer.shtml#charley):
Charley then came under the influence of an unseasonably strong mid-tropospheric trough that had dropped from the east-central United States into the eastern Gulf of Mexico The hurricane turned north-northeastward and accelerated toward the southwest coast of Florida as it began to intensify rapidly By 10 A M , the maximum winds had increased to near 125 m.p.h., and three hours later had increased to 145 m.p.h.—category 4 strength Charley made land- fall with maximum winds near 150 m.p.h on the southwest coast of Florida just north of Captiva Island around 3:45 P M An hour later, Charley’s eye passed over Punta Gorda The hurricane then crossed
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FIGURE 6.10 Path of Hurricane Charley
Source: National Oceanic and Atmospheric Administration (NOAA).
central Florida, passing near Kissimmee and Orlando Charley was still of hurricane intensity around midnight when its center cleared the northeast coast of Florida near Daytona Beach After moving into the Atlantic, Charley came ashore again near Cape Romain, South Carolina, near midday on the 14th as a category 1 hurricane The center then moved just offshore before making a final landfall at North Myrtle Beach Charley soon weakened to a tropical storm over south- eastern North Carolina and became extratropical on the 15th as it moved back over water near Virginia Beach.
This was a compact storm by most standards, as the maximum windsand storm surge extended only seven miles from the eye However, the windscrushed two cities, Punta Gorda and Port Charlotte Hurricane Charley
Trang 8produced 16 tornadoes from Florida to North Carolina to Virginia Charleyalso produced 15 deaths and $15 billion in damages.
Now, let’s turn to Hurricane Ivan As you’ll see, this storm quickly lowed on the heels of Charley, representing the worst-case scenario for aseries of storms This pattern would be followed in 2005 with a similar timeframe and devastating results To use a clich ´e, it’s literally a one-two punch.From the National Hurricane Center (NHC) (www.nhc.noaa.gov/HAW2/english/history printer.shtml#ivan):
fol-Hurricane Ivan began developing only 16 days after Charley left the United States Its path was similar in the Caribbean By the 5th, Ivan had become a hurricane about 1,150 miles east of the southern Windward Islands Eighteen hours later Ivan became the southern- most storm to reach major hurricane status, at 10.2EN Ivan was a category 3 hurricane when the center passed about 7 miles south of Grenada, a path that took the northern eyewall of Ivan directly over the island In the Caribbean, Ivan became a category 5 hurricane, with winds of 160 m.p.h., on the 9th when it was south of the Do- minican Republic, and on two occasions the minimum pressure fell
to 910 mb The center of Ivan passed within about 20 miles of maica on the 11th and a similar distance from Grand Cayman on the 12th, with Grand Cayman likely experiencing sustained winds
Ja-of category 4 strength Ivan then turned to the northwest and passed through the Yucatan channel on the 14th, bringing hurricane condi- tions to extreme western Cuba Ivan moved across the east-central Gulf of Mexico, making landfall as a major hurricane with sustained winds of near 120 m.p.h on the 16th just west of Gulf Shores, Al- abama.
Ivan weakened as it moved inland, producing over 100 tornadoes and heavy rains across much of the southeastern United States, be- fore merging with a frontal system over the Delmarva Peninsula on the 18th While this would normally be the end of the story, the ex- tratropical remnant low of Ivan split off from the frontal system and drifted southward in the western Atlantic for several days, crossed southern Florida, and reentered the Gulf of Mexico on the 21st The low reacquired tropical characteristics, becoming a tropical storm for the second time on the 22nd in the central Gulf Ivan weakened be- fore it made its final landfall in southwestern Louisiana as a tropical depression on the 24th.
So not only was Hurricane Ivan a category 5 storm, but it was so nastythat landfall couldn’t kill it It reformed and looped back down the East-ern Seaboard to finally end up in Louisiana Nature can do some pretty
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FIGURE 6.11 Dow Jones Industrial Average
Source: Used with permission from Bloomberg L.P.
weird things, and this is a perfect example of how limited science can be inpredicting what can happen with weather
Like Charley, Ivan generated damage estimated to be near $14.2 billion.However, it was far more deadly, as the death toll in the United States,Grenada, Jamaica, Dominican Republic, Venezuela, Cayman Islands, To-bago, and Barbados reached 92 NOAA said that the storm surge completelyoverwashed the island of Grand Cayman, where an estimated 95 percent ofthe buildings were damaged or destroyed That’s one nasty storm
For the financial markets, let’s look at the big indexes first Try to keep
in mind that we were in the home stretch for the 2004 presidential electionduring these storms Also unusual was that Hurricanes Charley and Ivanhappened just one month apart Therefore, Ivan shortened recoil in themarkets from Charley and extended the direction Charley hit on a weekend
so there was some concern heading into Friday about the storm The Dowput in its lows for the month on Friday, August 13 (Figure 6.11) It then ralliedfor about a month before Ivan hit Then it gave back all of that ground andput in new lows for the year
The U.S Treasury 10-year note’s yield was declining prior to Charleyand had a big drop just before the storm hit (Figure 6.12) The yield droppedfrom 4.40 percent in the beginning of August to a low of 4.00 percent after
Trang 10FIGURE 6.12 U.S Treasury 10-Year Note Yield
Source: Used with permission from Bloomberg L.P.
Ivan hit The U.S Dollar Index exhibited a similar trading pattern, as it wassinking when Charley hit, rebounded partially, then sank again after Ivanhit (Figure 6.13) Unlike the Dow and the 10-year Treasury note, the buckkept going south the rest of the year The broader point to see here is thatthe macro trends that were in place prior to the storms were given a steroidboost by the damage, but about a month afterward their negative impactdiminished for equities and bonds
Next up, commodities Here’s where things get a little strange First,lumber didn’t have the rally that we would normally assume would happenduring a rebuilding in the wake of two nasty storms like Charley and Ivan.When Charley hit, lumber rallied as we would expect (Figure 6.14) However,
as Ivan was forming and hitting, lumber collapsed This could have beencaused by the U.S Federal Reserve moving away from the 1 percent federalfunds rate and raising interest rates (Figure 6.15), which would hurt housingand builders
The energy side saw the biggest and most sustained moves Oil ralliedgoing into the beginning of August and backed off after Charley made land-fall Then it started a step climb from when Ivan hit that lasted almost twomonths (Figure 6.16) This was occurring as Nigerian rebels were hitting oilplatforms and the Organization of Petroleum Exporting Countries (OPEC)
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FIGURE 6.13 U.S Dollar Index
Source: Used with permission from Bloomberg L.P.
FIGURE 6.14 Lumber
Source: Used with permission from Bloomberg L.P.
Trang 12FIGURE 6.15 Federal Funds Target Rate
Source: Used with permission from Bloomberg L.P.
FIGURE 6.16 Crude Oil
Source: Used with permission from Bloomberg L.P.
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FIGURE 6.17 Natural Gas
Source: Used with permission from Bloomberg L.P.
was saying that it was essentially powerless to stop the rise in the price ofcrude Oil subsequently backed off and finished the year at the levels fromthe beginning of the storms Natural gas was just insane Take a look at itsprice pattern in Figure 6.17 It fell from the time Charley hit until the timethat Ivan hit Then it went crazy and had rallied almost 100 percent by theend of October It then collapsed back to the gap that was created when itexploded to the upside To sum up, the storms created the environment forvolatility to increase and for the energy commodities to rally as the paths
of the storms took them through the Gulf where oil and natural gas areproduced
Last, let’s take a look at more industry-specific indexes and how theyreacted to the storms The Bloomberg U.S Homebuilders Index (BUSHBLD)
is a capitalization-weighted index of the leading home builders in the UnitedStates Looking at Figure 6.18, you can see this index was near the lows ofthe year in late July It started a rally in August and took off with the landfall
of Charley It continued to rally strongly into Ivan Then it backed away
to pre-Charley levels This is somewhat consistent with trading patterns inother indexes and commodities Then it exploded to the upside and finished
2004 at the highest levels of the year as low interest rates and destructionfrom the hurricanes dramatically increased demand
Trang 14FIGURE 6.18 Bloomberg U.S Homebuilders Index
Source: Used with permission from Bloomberg L.P.
Next up, the oil service sector Why this group? When hurricanes runthrough the Gulf of Mexico, they force oil companies to shut down plat-forms and stop producing oil and gas This can cause the prices of thosecommodities to rise and therefore cause the prices of the companies gettingthe oil/gas further out to sea to rise as well The Philadelphia Oil ServiceSector Index (OSX) is a price-weighted index composed of 15 companiesthat provide oil drilling and production services, oil field equipment, supportservices, and geophysical/reservoir services Figure 6.19 shows that, unlikehome builders, the OSX was selling off into Hurricane Charley Once Charleymade landfall, this index began a rally that was extended by Hurricane Ivan
It finished the year on the highest levels of the year
Last, let’s take a look at how the insurance sector did by using ourNASDAQ Insurance Index (CINS, Figure 6.20) along with graphs for AllstateCorporation (ALL, Figure 6.21), Safeco Corporation (SAF, Figure 6.22), andSwiss Reinsurance (RUKN, Figure 6.23) Figures 6.20 through 6.23 showthat between August and October, they all either declined or went sideways.Safeco and Allstate were hit the worst in October as they dropped to theirlowest levels in several months However, all recovered significantly andended the year on highs (except for Swiss Re) The movement underscoresthe short-term nature of the impact from hurricanes, as the effect appears
to last on average around two to three months