Market gains to be tested

Katrina's Wake

September 13, 2005|By Laura Smitherman | Laura Smitherman,SUN STAFF

When trading began the morning that Hurricane Katrina cut a swath across New Orleans and the Gulf Coast, the stock markets actually rose, as they did in many of the days that followed. One week later, the S&P 500 index of stocks had its best one-day rally in months.

Calm before a storm?

Or sign of blue skies to come?

The answer for investors depends on how much Katrina affects the bottom line, and concrete numbers are expected in the coming weeks, when companies traditionally massage expectations before reporting quarterly earnings next month. Already, companies such as McCormick & Co., the Maryland spice company, and Tyson Foods Inc., the world's largest meat producer, have trimmed earnings forecasts. Others like Entergy Corp., a utility for Louisiana and Mississippi, have confirmed for investors what they suspected, that the company's financial results will fall short.

Total losses from the hurricane and flooding are projected to be as much as $200 billion, making it the most expensive natural disaster in U.S. history, and economists warn the economy will reel from higher costs for energy and other goods. But investors are just beginning to understand the toll on individual companies.

Katrina may be this year's "X factor," a phrase adopted by financial analysts to describe a phenomenon in which unanticipated events send markets tumbling and companies scrambling to put the upheaval in context for investors. In 1997, it was the Asian currency crisis and the Internet bubble bursting in 2000, and the terrorist attacks of Sept. 11, 2001. Katrina would be the first such event since the meltdowns of Enron Corp. and WorldCom Inc. led to a heightened scrutiny of corporate financial reporting.

"There is the potential for a much broader impact on overall economic activity and market sentiment," Louise Purtle, an analyst at CreditSights Inc., said in a research note titled "2005's X Factor Has a Name."

Companies will be hurt in a number of ways by Katrina and its ripple effects, from property damage and loss of business in the ravaged areas to consumers nationwide cutting back because they're saddled with higher gas prices and rising manufacturing costs as commodities normally shipped through the New Orleans port have to be diverted elsewhere.

While corporate profits are expected to take a beating in the next two quarters, some economists downplay the long-term economic impact of Katrina. They point to the recovery after Sept. 11 when stock markets - which are barometers of prospects for future corporate profits - rebounded in a month. Many Wall Street prognosticators say the recovery efforts and rebuilding, as with past calamities, will end up benefiting the economy.

"In the short term, it's a punch in the stomach, and nine to 12 months later you're growing even faster," said William Dwyer, chief investment officer at MTB Investment Advisors.

Spurring the optimism is the fact that the economy is in better shape than in September 2001, when the economy was in recession and investor confidence was waning. Also, unlike other X factors, hurricanes are definable events and don't leave uncertainty hanging over the markets.

"The good news is that the shock comes at a time when corporate balance sheets are in pretty good shape," said Alan Levenson, chief economist at T. Rowe Price Group Inc. "9/11 was a direct attack on the financial sector, and people questioned the ability of the U.S. economy to function. Here, it's easier to analyze the impact, and you don't have that element of indefinable fear, of being attacked by Bernard Baumohl, director of Economic Outlook Group, said his economic forecasting firm intends to upgrade forecasts for major stock indexes in 2006. The one dark cloud that looms is the potential for a continued slowdown in consumer spending, which accounts for 70 percent of the nation's economic output.

"Now the big threat is not Katrina," Baumohl said. "The bigger threat for earnings would be a collapse in consumer spending next year."

Until then, Katrina will dominate earnings announcements. In some cases, the hurricane may be used as cover by troubled companies.

"People are going to be talking about how earnings didn't come to fruition either because of increased expenses or revenue shortfalls from lost business," Dwyer said. "I also think you're going to find some companies having difficulties who will use this as an excuse."

Several companies put out reports on Katrina's wake within days of the storm.

CBRL Group Inc., which operates the Cracker Barrel and Logan's Roadhouse restaurants, said four locations in hurricane-damaged areas will be closed for an undetermined time. The price tag for cleanup, repair and lost sales is expected to knock one to two cents from its earnings per share in the next fiscal quarter.

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