Financial Review

One-Two Punch

….Irma targets Florida. Senate passes emergency aid package. Natural disasters ripple through the economy. ECB to wind down QE. Amazon plans HQ2. Equifax hacked.

Financial Review by Sinclair Noe for 09-07-2017

 

DOW – 22 = 21,784
SPX – 0.44 = 2465
NAS + 4 = 6397
RUT – 3 = 1398
10 Y – .05 = 2.06%
OIL – .07 = 49.09
GOLD + 15.10 = 1349.60

Hurricane Irma has been ripping up the Caribbean. With Category 5 winds of around 175 mph, the storm lashed several small islands in the northeast Caribbean, including Barbuda, St. Martin and the British Virgin Islands, tearing down trees, flattening homes and causing widespread damage.

The eye of the hurricane did not directly hit Puerto Rico, passing north early this morning, but doing serious damage and knocking out power for about two-thirds of the island. Because of budget problems, the power may be out for months in some areas. Trump approved emergency declarations for Florida, Puerto Rico and the U.S. Virgin Islands, mobilizing federal disaster relief efforts. Irma’s eye was forecast to pass over the Turks and Caicos Islands, a British territory, and the Bahamas before moving towards Cuba’s keys. One of the big concerns, in addition to the wind, is a storm surge that could be 20 feet high. The exact path is uncertain but Miami is a likely target. There is a massive evacuation effort underway in Florida. Irma will likely hit Florida as a very powerful Category 4 storm on Sunday morning, marking the first time the mainland has been hit by two Category 4 hurricanes in the same season – and this is back-to-back with Harvey. And something else – Hurricane Jose is gaining strength out in the Atlantic, while Hurricane Katia has formed over the southwest Gulf of Mexico.

The Senate today overwhelmingly backed a $15.3 billion aid package for victims of Harvey, nearly doubling Trump’s emergency request.  The Senate added a temporary extension of the federal flood insurance program, which otherwise would have expired at the end of the month. The 80-17 vote sends the massive package to the House for a Friday vote. The must-do legislation would provide money to government agencies through Dec. 8, eliminating the threat of a government shutdown when the new fiscal year starts next month. The aid money comes as Harvey recovery efforts are draining federal disaster aid coffers. This is just a down payment. Texas Gov. Greg Abbott estimated that Texas will ultimately need between $150 billion and $180 billion in federal aid to rebuild in the aftermath of Hurricane Harvey. We don’t yet know the costs of Hurricane Irma.

Harvey is likely to cost the insurance industry as much as $10 billion-$15 billion. European reinsurers like Swiss Re and Munich Re have the most exposure to Harvey-hit areas. One bit of good news for insurers: the firms are sitting on enough excess capital that the hurricane impact is likely to dent their earnings, not their balance sheets, even if the price tag hits $20 billion. Insurers also rely on catastrophe bonds  which are essentially securities designed to protect insurers from payouts for natural disasters by passing on the risk to investors. The catastrophe bond market was largely spared from Hurricane Harvey. That’s because most of the policies backing the bonds aren’t tied to flooding. Hurricane Irma won’t be so forgiving. Barclays estimates Irma will inflict as much as $130 billion on insurers in a worst-case scenario.

A California geophysicist says the sheer weight of the torrential rains brought by Harvey has caused Houston to sink by 2 centimeters. Chris Milliner, a postdoctoral fellow at NASA’s Jet Propulsion Laboratory at the California Institute of Technology, says water weighs about a ton per cubic meter and the flooding was so widespread that it “flexed Earth’s crust.”

The Energy Information Administration said weekly crude stocks increased 4.6 million barrels last week, topping analysts’ forecast for a 4.0-million-barrel build. The impact of Hurricane Harvey is clearly visible in the report. The data scrambles the recent trend of declining crude inventories and further rises are likely in the weeks ahead. As refineries try to ramp back up production the big drop in refinery utilization “almost assures” crude stockpiles will continue to rise in coming weeks.

Make no mistake, natural disasters have a huge impact on financial markets. We know the oil and petrochemical industry was slammed in the Houston area, and cruise lines (which use Miami as a hub) are disrupted. Even if you aren’t planning a cruise, Irma will likely affect your grocery bill. Florida is the biggest producer of oranges in the country, but it’s also a key producer of tomatoes, grapefruits, watermelons and sugar cane; broccoli, potatoes, beans—and even timber—are also produced in the state. Cotton markets are also nervous because Harvey did an as yet uncalculated amount of damage in Texas, which is the country’s top grower of cotton. And if Irma affects Georgia, the country’s number three producer of cotton, the U.S. cotton industry will be dealt a serious blow.

 

The aftermath of hurricanes, or any natural disaster are difficult to predict. The after-effects ripple out through the economy in a variety of ways. One sector that should benefit from the destruction of Hurricane Harvey – automakers. The storm flooded 1 million vehicles and the rush is on in states near and far to acquire and ship new ones into the city. While Harvey dragged on auto sales in August, the stocks of carmakers have rallied on expectations that post-storm replacement demand could boost deliveries this fall and into early 2018.

 

Comcast shares dropped about 6% today. Comcast expects to lose up to 150,000 video subscribers in the third quarter due to competition and the impact of recent hurricanes.

Walt Disney’s chief executive, Bob Iger, said the company’s earnings per share for the current fiscal year ending Oct. 1 will be roughly in line with a year ago, when it earned $5.72 per share. Analysts had been expecting the company to earn $5.88 this year. Disney shares were down about 5%.

The European Central Bank wrapped up its policy meeting today, reaffirming its ultra-easy stance. The bank kept its growth and inflation outlooks unchanged. Then ECB head Mario Draghi announced the central bank was looking at how to wind down its 60 billion-euro-a-month buying program. No timeline yet. The Euro surged. European stocks saw their day’s gains halved. The Euro Index is already up about 9% since the start of the year. Against the dollar, the euro has surged to as high as $1.20 in recent days from $1.03 in early January – about a 15% gain.

 

The productivity of American firms and workers rose somewhat faster in the second quarter than originally estimated, though the long-term trend remained weak. The government said productivity increased at a 1.5% annual pace in the spring, up from an initial 0.9% estimate. Productivity rises when workers supply more goods and services in the same amount of time. The upward revision stemmed entirely from workers producing more goods and services. Output was revised up to show a 4% increase instead of 3.4%.

 

 

Amazon is headquartered in Seattle, where it is a major employer, on course to have 10 million square feet of office space, more than 15 percent of the city’s inventory. Now, the company is looking to build a second headquarter to rival the Seattle headquarters, at a cost of over $5 billion over the next 15 years. Amazon’s Seattle office houses over 40,000, and many of the jobs for Amazon’s second home will be new hires. Look for municipalities to promise the sky and the stars to lure Amazon. It does not look like Phoenix would make the short list of sites for HQ2.

Late yesterday, Facebook said it had found evidence that fake accounts “likely operated out of Russia” purchased thousands of ads during the US presidential election designed to amplify divisive political messages. The announcement represents a sharp turnaround from the company’s previous remarks on its role in the spread of fake news during the election. Facebook said the ads were part of elaborate “information operations” in which “organized actors,” including governments, used social media to deceive the public and distort political sentiment. Facebook conducted an examination of ads purchased over the past two years in response to mounting concern over “Russian interference in the electoral process” and Facebook’s role in spreading misinformation leading up to the election. The company discovered roughly $100,000 in ad buys between June 2015 and May 2017 “associated with roughly 3,000 ads” and connected to nearly 500 affiliated fake accounts. The “vast majority” of ads related to the fake Russian accounts didn’t target a political candidate and instead focused on “amplifying divisive social and political messages across the ideological spectrum.” So, internet advertising really does work.

Equifax, which supplies credit information and other information services, said a cybersecurity incident could have potentially affected 143 million consumers in the US. Equifax said it discovered the breach on July 29. Leaked data includes names, birth dates, social security numbers, addresses and potentially drivers licenses. 209,000 U.S. credit card numbers were also obtained, in addition to “certain dispute documents with personal identifying information for approximately 182,000 U.S. consumers.” Equifax said it is now alerting customers whose information was included in the breach via mail, and is working with state and federal authorities.

Britain’s most iconoclastic sports car brand is finally caving to peer pressure. Jaguar Land Rover announced today that starting in 2020, all of its new vehicles will have a fully electric or hybrid option. In July, Volvo committed to electrifying all of its car by 2019; in August, Aston Martin said it will go completely hybrid by 2025. Promptly following JLR’s announcement today, BMW promised to create 12 all-electric and 13 hybrid models by 2025. Volkswagen has announced plans to launch 30 all electric models by 2025. So, the race to electric cars is definitely on, and American carmakers are in the back of the pack.

 

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