Weathering the Markets

Earlier this year, forecasters proclaimed the 2008 hurricane season would be “well above average” in terms of ferocity. While the beginning of the season has been relatively mild, multiple storm systems have begun their formation. The most recent system, Hurricane Gustav, began generating tremendous power as it approached Louisiana, inciting fear and bringing back the memories of Hurricane Katrina in 2005. Forecasters predicted Gustav would be a category five storm upon reaching land. In preparation for the storm, 96.2% of crude oil production and 82% of natural gas production in the area was shut down. Of the 32 Gulf Coast refineries, twelve completely shut down and ten reduced activity. Additionally, delivery mechanisms for finished product were also shut down. The expectation of constraints to supply caused oil and gas prices to increase before the hurricane caused any disruption. Analysis of energy prices from the 2005 hurricanes would lead one to expect increases in the prices of crude oil and gasoline after landfall as well:

However, consistent with overall unpredictability in recent months, Hurricane Gustav hit land as only a category two storm, minimizing damage to New Orleans as well as Gulf Coast production facilities. Crude oil and natural gas prices sharply declined as trading resumed after the Labor Day holiday, bucking expectations and reversing the trend caused by them. Oil dipped as low as $106 per barrel and natural gas slid to below $7.50 – the lowest levels seen in the past year and close to 100% below its July highs. Also, note that oil prices reverted to pre-hurricane levels the month after Katrina and Rita hit. Betting on oil when a hurricane is coming has proven to be a losing short term investment strategy, even when Katrina truly upset production.

2008 Political Hurricane Season

The political hurricanes that are the Democratic and Republican National Conventions have come at a time when two real hurricanes made their way to the United States. The Democratic National Convention made landfall in Denver and brought with it gusts of political wind, blowing Hillary Clinton from a fierce rival of Barrack Obama to one of his most gracious cheerleaders. Several other speakers, including Michelle Obama and Bill Clinton, reigned in the enthusiastic mood of the event which was capped by candidate Obama delivering his acceptance speech in front of more than 80,000 people that filled a recreated Athenian-American stadium.

But just as Hurricane Donkey reached its peak in Denver, focus was shifted to Dayton, OH as Tropical Storm Elephant began its formation. In Dayton, McCain selected the relatively unknown and unexpected Sarah Palin, the Governor of Alaska, as his vice presidential running mate. The secrecy of the selection catapulted the tropical storm into Hurricane Elephant which is making landfall in Minneapolis-St.Paul, MN this week.

Palin’s selection certainly carries hurricane force winds as politicos attempt to dissect what it will mean for the McCain campaign. As advantageous as some of her political qualities are – being a female, being from Alaska, being pro-oil, not having “old” Washington ties, having a working class family, having a newborn son with a disability, having another son in the military, and having a reform resume – issues from her past are quickly being unearthed which could throttle the potential power the storm showed in Dayton. So far, it has been suggested that she was a member of a “Secessionist” Alaskan Party, she directed fundraising for the indicted Alaskan senator’s 527 group, and she flipped positions on her popular “road to nowhere” comment. It remains to be seen whether these stories will negatively impact McCain’s candidacy, but one thing is for certain, the political winds are blowing hard and just like the real hurricane season, we will not see an end to them until November.

Because there is so much time and so much uncertainty, it is impossible to predict how the market will react to day-to-day news from the candidates. Similar to the energy price fluctuation caused by weather related events, THOR is keeping close tabs on the election and the policies of each candidate so we are ready to make advantageous moves based on the election of either President McCain or President Obama. However, betting on which camp will succeed at this juncture is like betting on oil before a hurricane hits land.