October 10th, 2006 Price: Subscribe »

ARCHIVED COMMENTARY

How will New Orleans and the Gulf states ever clean up the mess and rebuild, especially if the hurricane season throws yet another nasty punch as has been predicted? My friend and colleague Larry Amernick thinks nothing less than an effort comparable to the New Deal is needed. He also has some timely advice for investors before the effort gets under way. Below are comments from the most recent edition of The Amernick Letter, which provides coverage of global economic trends as well as technical analysis of stocks and commodities. He writes as follows:

 

What if the United States were hit by a second storm comparable to the power of hurricane Katrina? It is not only possible, but it is probable according to U.S. meteorologists. In early August, The National Oceanic and Atmospheric Administration (NOAA) forecast an above normal hurricane season. Before Katrina hit Miami, southern Alabama, Mississippi, and Louisiana, NOAA forecast 3-5 major hurricanes and 3-5 additional “smaller” hurricanes before the end of the season in November. One can estimate that additional losses from future hurricanes this season will range from $1 billion to $5 billion in additional infrastructure damage.  Florida’s losses from Katrina are estimated to be $600 million. Stronger hurricanes would cause catastrophic damage above these estimates.

 

The U.S. government or private sector is not prepared to deal with the shocks from these natural disasters. Katrina could be just the first of a one-two punch that the nation will suffer this year. Both the government and the investment community are unprepared for the consequences of a natural disaster sequence of this nature. For almost a decade, the private sector and the middle class of the U.S. have screamed for “less government”. Now, the proponents of the “less government” philosophy are reaping what they have sown.

 

If there's a second hit, the jobless rate will climb in a geometric progression as demand for goods and services decline when additional incomes are lost. The shutdown in the Louisiana Gulf will work up the economic food chain.

 

(Click on image to enlarge)

 

The first response to the San Francisco earthquake of 1906 was also positive. Initially the market pulled back but subsequently rallied, only to plunge to new lows in 1907, as the chart above shows. A red ‘v” highlights the 1906 earthquake. Notice that the S&P 500 made a nominal new yearly high before plunging to its 1903 low. Could this market action be repeated in the current complacent environment?

 

The initial response to Hurricane Katrina was incompetent and amateurish. The storm surge that flooded New Orleans was forecast before it occurred. The Federal government should have declared a state of martial law on Sunday. Military control and command should have ordered the mass evacuation of New Orleans. The Navy should have prepared a fleet of amphibious vehicles to assist in the transport of military police in and the evacuation of stranded citizens. However, carping over a poor immediate response will not help dealing with the emergency at hand. What strategists need to deal with is the permanent movement of a large population out of the Gulf region. The population of that region is chronically poor and black. That fact cannot be swept under some politically correct rug.

 

This population will quickly be overcome with feelings of helplessness and eventually rage. It is in the entire nation’s interest to provide hope, housing, jobs, and educational opportunities for the refugees from the devastated areas. As the nation recovered from the fallout of the dot-com bubble, large segments of the population did not participate in the recovery. We must now face these social problems.

 

What can government policy makers and the private sector do together? First, the Treasury and investment-banking sector should float large amounts of recovery bonds. Congress will probably debate this issue shortly. Second, Texas is a good place to permanently settle the refugees from Katrina. The private sector, together with state and local leaders could predetermine which communities to expand.

 

These refugees need training, not re-training! In remarks before Congress, Federal Reserve Chairman Alan Greenspan argued that the U.S. is falling behind its trading partners in both literacy and math. The refugees need both courses in literacy and math. The culture of poverty must be crushed! If the private sector cannot or will not provide jobs, the Federal government, states or local governments must fill the void. Free capital advocates hate to hear this type of talk. Capital, not labor, increase wealth, but a large mass of angry and hungry people can destroy both the capital structure and its infrastructure. History is full of examples of the state not fulfilling its social contract to its citizens.

 

On August 9, 378, the Emperor Valens lost a battle at Adrianople against a confederation of Gothic tribes. Valens fled to a nearby farm and was burned to death in a tower. The Goths had rebelled against the Romans because they were starving to death from not receiving promised grain supplies. It was the beginning of the end of the Roman Empire.

 

At this moment, market capitalism is being practiced in its most extreme form in Louisiana. Looting and car-jacking is the rule, not the exception. Rescue helicopters are being fired upon and groups of angry young men with AK-47’s looted from gun shops, are roaming the area. The failure of both the private and public sectors to provide hope for these people will magnify this phenomenon. Perhaps, corporations, which sent call center business to India, might reconsider opening up shop in the Houston area.

 

Third, inexpensive and safe housing must be built for the refugees. This will be a real challenge for the Federal government, the banking industry, insurance industry, and the building industry. Many planners would opt for mass high-rise projects, but individual homes would offer an ownership option and a chance to become participants and not observers in the national economy.

 

After World War II, the government provided inexpensive loans, which built the suburbs and the prosperity of the 1950s and 1960s.

In other words, we need a “New Deal”. We do not have to repeat the mistakes of the Roosevelt Administration, which prolonged the Depression of the 1930’s. However, we do need central planning from our best academic and corporate minds to deal with this disaster creatively and constructively. Frankly, we cannot rebuild to the status quo ante. New Orleans will not be habitable until the winter. It must be rebuilt on a much smaller scale with a much more viable economy. The large economic contribution from this region is actually accomplished by a relatively small workforce.

 

As I stated earlier, the masses of poor citizens should be relocated elsewhere. The state of Louisiana will be stronger for it! In dealing with the long-term needs of the refugees, we will define what kind of nation we want to become! If we neglect their future, we will create a great rift between the rich and poor. Such an internal conflict will bring more harm than the threat of Islamic terrorism. Additionally, we must rebuild with the minimum of corruption, both governmental and private. Wage and price controls are an anathema to free market practitioners, but price gauging is also the enemy to a strong and growing economy.

 

Now, that I’ve discussed the most unsavory issues, I can discuss what areas will be most rewarding to investors. Raw materials or commodities such as lumber, steel, cotton, copper and coffee could  benefit from the disaster. Large amounts of lumber, steel and copper will be needed in the rebuilding effort. Below is the daily chart of the continuous contract for Lumber.

 

 

 

Lumber gapped up on Monday and both the fractal system and the MACD%ROC confirmed a short-term buy signal. However, the technical chart for the continuous contract for cotton is not so bullish. In the lumber chart, a bearish, descending triangle highlights the current bearish posture. Cotton would have to close above 53.80 on a weekly basis to turn this outlook around. These commodities will lead the CRB higher. Oil and natural gas are still wild cards. Persistently high oil prices will hasten an economic recession in 2006. Already, President Bush is asking the American public to drive less and consume less energy. Consumers will probably spend less and spend more time at home. Restaurants and hotels will probably feel the brunt of the impact.

 

Business travel might fall and online business activity might rise. In the hi-tech sector, the switching and routing stocks may do well in the second segment of a rebuilding effort. However, a tech slowdown should accompany the first rebuilding stage. The equity markets have not priced in an economic slowdown. The high degree of equity investor complacency combined with the multiplier effects of an economic slowdown will create choppy conditions at best for the equity markets.

 

Rates in the long-term bonds should not fall as much as rates on the 10-year note but the lows of March 2004 should be revisited.  Therefore, winners are 10-Year Notes, lumber, coffee, cotton, and copper. In equities, steel stocks, forest products, and selected truckers should outperform for the intermediate term. Ten-Year Notes should outperform should outperform the 30-Year bond. Emergency legislation will probably bring to market a huge supply of 30-year securities. Since the supply will increase, rates will have to be competitive to attract institutional buyers.

 

Below is a daily “star map” of the price of the continuous contract of the 10-Year note. The price gapped up above my 112.65 resistance point. Now, the next resistance area is 114.12. [FYI, Rick's Picks recently called for a run-up to 115^20, basis the September 10-Year T-Note.] Let’s look at a simple trading strategy for this contract. The upper window contains a complex proprietary technical indicator called the MACD%ROC.  Buy signals occur when the indicator rises above –1 and sell signals flash when the indicator falls below +1. A fractal system from Metastock confirms the signals. Currently bonds are in a confirmed uptrend and should challenge the intended first resistance area before any meaningful correction occurs.

 

 

Finally, the dollar should fall and gold should rally, due to the poor immediate response of the U.S. government to this building human tragedy. The U.S. Dollar Index should fall to 84.40 and Gold should initially rise to 453.17. A rise in bonds, commodities, and gold is an Intermarket anomaly, but that combination is the likely outcome during the current crisis.

 

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The Amernick Market Report (ISSN 1088-0194) is published over the Internet, U.S. mail, or delivered to your Email account on Wednesday. It is usually published on a weekly basis by the Amernick Publishing Company, 1234 Richmond Street El Cerrito, CA. 94530.  Charts are provided by data from Worden Bros. And Reuters. Charts are built using TC-200, Metastock, and Prime-Line software.

 

Please consider that any recommendation is not a solicitation to buy or sell securities. These are presented as the results of our research. You should look at a variety of research sources before making any investment decision. There is no guarantee that any stock will behave according to someone’s expectations.

 

For subscription, pricing, and details: please send Email to amernick@comcast.net or call  (510) 215-8015. Subscription Rates: 4 Issues (Monthly)  $24.95;  12 Issues (quarterly)     $69.00;  24 Issues (Semi-Annually) $129.00; and  48 Issues (1 Year) $249.00.

 

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A Rick’s Pick Event

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