Wednesday, April 4, 2007

3 Constants In Life: Death, Taxes & A Dire Hurricane Forecast

"Save your frightened song for when there is really something wrong! Don't cry 'wolf' when there is NO wolf!" The Boy Who Cried Wolf , Aesop's Fables

In case you missed it today and I think you would have had to have had no contact with the outside world in order to, researchers once again predicted an above normal hurricane season. Excuse me while I yawn at this one. In order to fully understand the true depth of my ambivalence, one must take a walk down memory lane and look at past hurricane forecasts. I am only going to go back the last 5 seasons here just to make a point:
  • April 3, 2007: The 2007 Atlantic U.S. hurricane season will be "much more active" than average, with nine hurricanes - five of them reaching Category 3, 4 or 5 - and 17 named storms, according to a forecast Tuesday from Colorado State University researchers.The researchers lifted their forecast from early December because of the "rapid dissipation" of El NiƱo over the past few months. "Tropical and North Atlantic sea surface temperatures remain well above their long-period averages," a trend commonly associated with an active Atlantic basin hurricane season and lower-than-normal sea level pressures, wrote researchers Philip Klotzbach and William Gray. "We expect the 2007 hurricane season to be very active."
  • May 22, 2006 NOAA today announced to America and its neighbors throughout the north Atlantic region that a very active hurricane season is looming, and encouraged individuals to make preparations to better protect their lives and livelihoods. "For the 2006 north Atlantic hurricane season, NOAA is predicting 13 to 16 named storms, with eight to 10 becoming hurricanes, of which four to six could become 'major' hurricanes of Category 3 strength or higher,"
  • May 16, 2005 NOAA hurricane forecasters are predicting another above-normal hurricane season on the heels of last year's destructive and historic hurricane season. "NOAA's prediction for the 2005 Atlantic hurricane season is for 12 to15 tropical storms, with seven to nine becoming hurricanes, of which three to five could become major hurricanes,"
  • NOAA’s 2004 Atlantic hurricane season outlook indicates a 50% probability of an above-normal hurricane season, a 40% probability of a near-normal season, and a 10% chance of a below-normal season, according to a consensus of scientists at the National Oceanic and Atmospheric Administration's (NOAA) Climate Prediction Center (CPC), the Hurricane Research Division (HRD), and the National Hurricane Center (NHC). See NOAA’s definitions of above-, near-, and below-normal seasons. The outlook calls for 12-15 tropical storms, with 6-8 becoming hurricanes, and 2-4 of these becoming major hurricanes. These numbers reflect a predicted ACE index in the range of 100%-160% of the median, and indicate a likely continuation of above-normal activity that began in 1995.
  • NOAA's 2003 Atlantic hurricane season outlook indicates a 55% probability of an above-normal Atlantic hurricane season in 2003, a 35% probability of a near-normal season, and only a 10% chance of a below-normal season, according to a consensus of scientists at the National Oceanic and Atmospheric Administration's (NOAA) Climate Prediction Center (CPC), the Hurricane Research Division (HRD), and the National Hurricane Center (NHC). See NOAA’s definitions of above-, near-, and below-normal seasons. The 2003 outlook calls for 11-15 tropical storms, with 6-9 becoming hurricanes, and 2-4 becoming major hurricanes.

The real question here the talking heads on TV ought to be asking is: "when haven't they predicted an active season"? The answer? I do not know because the NOAA archives only go back to 1999 and only 2001 predicted a benign forecast of "normal to slightly above normal" hurricane activity. Every other year has featured an apocalyptic forecast. What do we as investors do then? This answer is easy, nothing. Meteorologists cannot even tell me with any significant accuracy if it is going to rain or not this weekend yet we are supposed to believe they can now predict a certain number of storms are going to form off the coast of Africa over 3,000 miles away and hit the states during the next 6 months? No way.....It is a fools bet. One also has to notice as they read the forecasts: "Why are they all basically the same?" 12-15 storms, 6-8 hurricanes, 2-4 majors. If every forecast is for the same number of storms, isn't that then, "normal"?

But, what if they are right you ask? Well, if they are, there is nothing you can do about it so getting all worked up and trying to adjust your holdings now to reflect that is a lesson in futility. If you own stock in construction related companies (OC ), (SHW ), (HD ), (LOW ), you will benefit as repairs will boost sales. If you own USO and a storm hits the gulf, the increase in oil prices will benefit you. If oil goes up, ethanol companies like ADM benefit. If you own stocks in entertainment companies, you will suffer as this discretionary income will go toward other uses.

The really ugly truth is that hurricanes, unless they are Cat. 4 or 5 and cause massive damage to a major city and port like Katrina did, are not bad for the economy and actually provide a stimulus. After the brief interruption during and immediately after the storm, the rebuilding increases economic activity. When you have a slowing housing market and laborers out of work, nothing will put them back to work faster than a CAT-3 hurricane that damages 100,000 homes. No, I am not rooting for hurricanes and no, I am not hoping to profit from them, (though the ValuePlays Portfolio will) I just need to interject a little reality here to help you wade through the barrage of inane hysteria you are being assaulted with today.

What happens in the aftermath of a hurricane? Homes and businesses are damaged and /or destroyed and cleanup and repair then begins. Immediately federal and state funds flow into the area to clean up the mess providing additional jobs and money. Then, insurance proceeds come pouring in to add even more stimulus and jobs as residents try to rebuild thousands of homes and businesses at once . Of course there are areas of suffering and that cannot be avoided, but in the aggregate, there is a significant economic stimulus to the area for years to come.

The bottom line is that it has become painfully apparent we are always going to get a forecast that is for "above normal" hurricane activity. Worrying about it or trying to adjust your portfolio for this presumed alleged event in April is a colossal waste of time.

The phrase "to cry wolf", derived from the fable, refers to the act of persistently raising the alarm about a non-existent threat, with the implication that the person who cried wolf would not be taken seriously should a real emergency take place. It can also be used to describe an alarm system that regularly goes off falsely, causing it not to be believed when a real emergency occurs.

Forecasters beware...

blogger templates | Make Money Online