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Hackett Advisors in the News


How to Play Hurricane Season

Justin Rohrlich May 27, 2010 3:40 PM|

       2010 is expected to see a historic number of storms. But the prudent investor doesn’t rely solely on Mother                                   Nature.

The 2010 hurricane season begins on Tuesday, and according to reports released today, it could be one of the most active in recorded history.

“The National Weather Service put out their forecast this morning, calling for some very aggressive storms,” said Matt Rogers, a meteorologist who is the founder and president of Commodity Weather Group, located in Bethesda, Maryland.

They are predicting “an 85% chance of an above normal season” with a 70% chance of 14 to 23 “named storms” due to a unique combination of weather factors.

“14 to 23 ‘named storms’ is quite a wide band,” Rogers said in an interview with Minyanville. “We think the number will be closer to the lower end, with at least 14, which would still be about 50% more active than last year.”

“The main uncertainty in this outlook is how much above normal the season will be. Whether or not we approach the high end of the predicted ranges depends partly on whether or not La Niña develops this summer,” said Gerry Bell, lead seasonal hurricane forecaster at NOAA’s Climate Prediction Center. “At present we are in a neutral state, but conditions are becoming increasingly favorable for La Niña to develop.”

Rogers explained that, in the natural gas and oil sectors, “it used to be very bullish when you had a storm in the Gulf of Mexico.” However, “these days it’s more bearish, due to demand destruction -- power gets cut out, there are fewer people using energy. It’s the inverse from what it was in the past.”

Utilities would be affected most by an above average hurricane season, which Rogers notes is “more of a negative than a positive in terms of power prices.” He also points out that, while there can be hurricane activity in June and July, the majority of what we’ll see in the next two months will likely be hot air.

“You’ll hear a lot of hoopla starting next week, but then that quiets down until August and onward, the core of the season,” Rogers said.

If one were to play markets affected by the weather, the time to do so would be during that hoopla.

“I’m not a big fan of buying weather events,” Shawn Hackett, president of Hackett Financial Advisors, a money management firm with a focus on agricultural commodities, told Minyanville. “I try to buy fundamentally sound markets, and if weather adds an extra reason, so be it. That said, if you are going to try and play the weather, the perfect time to buy would be now -- before the market factors in what I call the weather premium. Then, you have to be nimble enough to get out on time. That’s the only way to avoid buying the rumor and selling the news.”

Hackett pointed to this past winter as an example.

“We had a legitimate freeze this winter, and saw orange juice go from $0.75 a gallon to $1.60,” he said. “Once the frost went away, OJ dropped to $1.25. If you got in too late, you wound up buying after the weather was already priced in.”

While most people tend to focus on the obvious markets when considering hurricanes -- orange juice, cotton -- Hackett has discovered an interesting opportunity that might go overlooked:

Lumber.

“It’s a real sleeper market, a potential winner you’d never really think of,” Hackett said. “If a hurricane were to hit a concentrated metro area like Miami, Ft. Lauderdale, Houston, a location with a high concentration of buildings that sustained physical damage, you could see a big spike in lumber demand.”

The fundamentals of lumber, though, are what primarily draw Hackett to the trade.

“Fundamentally, lumber is a buy. It collapsed last month -- dropped from $340 per hundredweight to $225,” he said. You always want to try and buy into a sell-off like that, and a big hurricane season would bode well for a rise in prices, though you don’t need Mother Nature to make it attractive. Getting into lumber now would be a classic contrarian play. The time to sell? Two days before a hurricane actually hits, when everyone’s screaming ‘Here it comes!’ It runs counter to what you think you ought to be doing, but that’s the way you’ve got to play it.”

Rogers agrees.

“You probably have some recent analogues with Hurricane Katrina and Rita in ’05, and Ike in ’08,” he said. “I do remember seeing some demand spikes in lumber back then.”

The lumber play won’t be limited to rebuilding efforts in the south, either.

Weather Services International Corp. expects the 2010 hurricane season to threaten the coastline from the Outer Banks to Maine, with a lot of expensive real estate in harm’s way.
A study by risk-modeling company AIR Worldwide pegged the value of residential and commercial coastal property in New York at $2.4 trillion. Connecticut, Maine, and Massachusetts are also home to coastal property with insured values exceeding 50% of total insured property values.

Robert Hartwig, president of the Insurance Information Institute, said the industry is preparing for $100 billion in insured losses “sooner rather than later.”

Weather is such an important factor in financial markets that Deutsche Bank (DB) employs staff meteorologists, as does Citigroup (C). Then, there are the more obvious companies that rely on accurate weather forecasting, such as FedEx (FDX), which has 15 in-house meteorologists, as well as BP (BP) and Transocean (RIG), which are currently embroiled in some non weather-related troubles of their own.

However, no one is right 100% of the time.

As Chris Landsea, science and operations officer at the National Hurricane Center, said at the American Meteorological Society's 29th Conference on Hurricanes and Tropical Meteorology in Tucson earlier this month, “We're doing quite a bit better job with track forecasting. Compared to Hurricane Andrew [in 1992], our errors are less than half.”

With 50% being the gold standard, it isn’t hard to see why Shawn Hackett doesn’t invest based solely on what the weatherman says.

 

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