Irma hits insurance stocks before landfall, averages confused

Traders appear to be hedging Friday against what could be a catastrophic, costly hit on Florida by Irma this weekend. Financials hurt, Home Depot, Lowe’s gain.

Projected Irma storm cone, mid-day Friday, September 8, 2017. (NOAA map, U.S. government, public domain)

WASHINGTON, September 8, 2017 – We’ll wrap up the week’s series of stock market reports with one that’s mostly devoted to the effects that current and incoming natural disasters are likely to have on the stock market today and next week. Given the imminent arrival of massive Hurricane Irma this weekend as well as the storm’s likely path right up the center of highly-populated Florida, this could be one for the record books.

Read also: Trading Diary: Hurricanes, politics make Friday a tough trade

We hate the way the Weather Channel and other outlets hype the usual bevy of nasty late summer and early fall hurricanes that typically invade America’s east and Gulf Coasts. They cheerlead for some new, record-breaking disaster to occur each and every hurricane season, apparently hoping to blame all the death and destruction on global warming climate change while instantly linking these catastrophes to our foolish, wasteful use of fossil fuels.

In recent years, they haven’t had many big storms to hype. But in 2017, we already have this week’s even nastier Hurricane Irma following directly behind the recently-departed Hurricane Harvey, which notoriously brought Noah’s Flood II to the Houston-Galveston area and environs.

Unfortunately, it looks like Irma is more grim reality and less hype, whether you’re inclined to blame it on global warming climate change or not. Examining photographs coming out of the already devastated islands of the Eastern Caribbean, it’s clear that the incoming hurricane is no joke.

Some of the towns and resort areas on those islands already hit no longer remotely resemble the kind of tropical paradise we’re accustomed to envision. Instead, many areas have been all-but-obliterated, and now more closely resemble the forests-turned-into-toothpicks landscape that the eruption of Mount St. Helens left behind nearly 30 years ago. Much of Florida could be next in line for some drastic remodeling.

Current projected Irma storm cone via NOAA. (Public domain)

U.S. and Florida building codes have helped strengthen both new and old coastal structures over the years. But that doesn’t mean large chunks of a now thoroughly urbanized Sunshine State can’t still take a disastrous, costly hit from the winds of Irma. Nor does it mean that massive storm surges can’t drown popular coastal resorts, particularly Miami Beach if the storm veers slightly east, or Ft. Myers and Naples if it tacks in a more westerly direction.

We know what Irma likely means for Florida residents, but what does the storm mean for America’s investors?

In simple terms, property-casualty insurers (and their shares) are likely to get as thoroughly battered on the balance sheet as are the homes and small businesses in Irma’s path. Much of the catastrophic damage in Houston was due to Harvey’s record-breaking waves of endless, wind-driven rain. Florida will get plenty of this as well, but look for the wind damage to be severe.

Any company involved in insuring property throughout the entire state of Florida is going to see reserves hit early and often, likely affecting reserves and returns severely, right off the bat. There’ll be plenty of litigation expenses, too, as companies will want (and need) to invoke “hurricane clauses” in many homeowner policies, which absolve them from much of the damage these storms cause unless the insured has added specific hurricane coverage or has purchased such coverage elsewhere.

In short, right after Harvey, another fiscal and structural mega disaster suddenly looms. Worse, there’s yet another hurricane brewing in the Gulf right now, and still another (José) following Irma like a nasty puppy dog, just a day or three behind. Right now, neither of these storms seem to be interested in hitting the U.S. mainland. But you never know.

With major insurance companies being hit in the markets today as well as lesser known re-insurance companies that back them up in case of severe disasters, many banks remain wobbly as well this week. That’s due to increasing evidence that the Fed may be cooling its ardor for that 3rd 2017 interest rate hike, as the inflation they’ve been defensing against has thus far failed to show up.

All this makes financial stocks treacherous investments right now. Given the financials’ importance in broader averages, this means they’re all doing their part to pull averages down again and again.

Another problem for the financials: The Fed may suddenly find it has no appetite for jacking up interest rates right now due to not one but two property-casualty destruction derbies that Mother Nature has dealt the U.S. in a little over a week. Cleanup and rebuilding will be costly. Thus, increasing the cost of reconstruction loans is, for now, not going to be a very popular idea, particularly among the pro-Trump voters that dominate the not-so-sunny South.

Curiously, after an initial drop, the Dow Jones Industrials, have been up much of Friday thus far, with the DJIA up 43.06 points as we approach the Friday noon hour. The S&P 500 also briefly entered the green zone earlier before backing off again, where it sits right now just below flat line.

The tech-heavy NASDAQ if worse off than the others. It’s currently down 21.92 points, roughly a third of a percent. It’s tough to say why, save, perhaps, for defensive profit-taking ahead of the storm. Another possibility: Those nasty rumors, true or not, that dog major tech stock Apple (symbol: AAPL). Allegedly, the company is experiencing supply chain problems just prior to its scheduled launch announcement next week for its new iPhone 8 line.

Restaurants, too, are getting hit Friday, perhaps because of business hits to stores directly in the line of the recent mega storms. The sudden drop in business might also be related to the end of summer break, given that summer vacationers can add plenty of green to the balance sheets of popular chains that cater to the summer holiday crowd.

There are always a few silver linings in any disaster, however. According to CNBC,

“Home improvement and materials companies surged ahead of the storm’s projected destruction in Florida. Home Depot [HD] climbed 0.7 percent and Lowe’s [LOW] added 0.5 percent, while Lumber Liquidators’ [LL] stock added another 1.1 percent to its weekly gains.”

Good luck to our many friends in Florida this weekend, and continuing best wishes and prayers for our friends in still-recovering Houston, including this writer’s indefatigable business-owner brother-in-law whose pair of first-class neighborhood saloons remain open for business.

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