Thread: Market Talk

Can Disasters Be Good for Growth?
By John H. Makin
October 2005


The U.S. economy was in recession when the 9/11 terrorist attacks struck New York and Washington, D.C. Yet within a few months, despite fears of a collapse in confidence, consumption growth surged to a fourth-quarter annualized rate of nearly 5 percent, up sharply from a 1 percent rate during the third quarter. That consumption surge was enough to drag the economy out of what turned out to be a mild recession. By the first quarter of 2002, overall growth reached a booming 5 percent rate.

On August 29, 2005, Hurricane Katrina slammed into the southeastern Louisiana and Mississippi Gulf Coast causing massive property damage. The next day, the catastrophe was compounded when three levees protecting New Orleans failed, putting 80 percent of the city under water. The total direct damage to the Gulf Coast region will total well over $100 billion--probably closer to $150 billion--the largest losses from a natural disaster in U.S. history by a factor of four.

The economic damage to the region was sufficient to produce a measurable effect on the national economy. The ports in the New Orleans area, the largest in the nation, were closed for a time and will be operating at reduced capacity in coming months. The region’s oil production and refining, along with its natural gas extraction, were cut by over 90 percent. By mid-September, 56 percent of oil production and 37 percent of natural gas production were still shut down as the need to prepare for winter heating supplies grew. As a result of the refinery disruptions, gasoline prices shot up above $3 per gallon, about 43 percent above their level in June, nearly 60 percent above their year-ago levels, and 100 percent above levels two years ago. Additionally, natural gas prices rose above $11 per million BTU, more than 50 percent above July prices.

Once the immediate damage assessments in the energy sector were completed, about 5 percent of the nation’s refining capacity and 3 to 5 percent of its natural gas extraction capacity looked likely to be out of operation for several months. Since each had been operating virtually at capacity, higher prices have become necessary to ration available supplies. The ability of the ports in the New Orleans area to resume normal operations is still being determined, with the outcome critical for the flow of goods, including Midwest agricultural products moving abroad and the flow of critical imports through the Gulf Coast region into the United States.

Meanwhile, during the two weeks following the Katrina catastrophe, the stock market remained insouciant--rising by about 3 percent. Looking at storm-related disruptions, most analysts cut third-quarter growth forecasts from a 4 percent to a still-respectable 3 percent rate, but most fourth quarter forecasts were largely unaltered at about 4 percent. Most growth forecasts for 2006 rose given the expected surge in rebuilding efforts in the Gulf Coast region, which are to be buttressed by a surge in federal government aid expected to total nearly $150 billion.

While there will be an extensive rebuilding effort in the Gulf Coast region on a scale sufficient to affect national economic statistics, markets and analysts--perhaps influenced by the remarkable post-9/11 resilience of the U.S. economy--may be taking an overly sanguine view of the outlook for the coming year. The 9/11 attacks created a crisis of confidence and inflicted intensive damage in lower Manhattan and at the Pentagon. Katrina has inflicted extensive physical damage to a region that includes critical energy suppliers and port facilities.

Importance of Pre-Katrina Assumptions

The outlook for the U.S. economy during the second half of 2005 and early into 2006 has been volatile over the past several months. A spring “soft spot� was followed by a strong pickup in spending, which depleted inventories late in the second quarter. Growth forecasts for the second half of 2005 had, by late-July, been raised to nearly 5 percent.

During August, evidence began to appear that the U.S. economy was, again, losing momentum. Retail sales were weaker than expected while manufacturing slowed. One of the reasons for sharply elevated growth expectations in the second half of the year was the depletion of inventories during the second quarter that would require an acceleration in production to rebuild. However, little evidence of inventory building appeared during July and August--either in the inventory data or in the production data.

More broadly, the loss in growth momentum that appeared during August (prior to Katrina) probably reflected an underlying tension in the U.S. economy. A 1 percentage point growth drag from persistent increases in energy prices has been offset by a 1 percent growth boost from household equity extraction out of the housing sector that, in turn, helped to support consumption. As energy prices have continued to rise and activity and prices in the housing sector have weakened, the net effect has been slower growth.

Assumptions about underlying U.S. growth prior to the near-term negative effects from Katrina are important. A number of analysts lowered third-quarter growth forecasts from 5 percent to about 3.5 percent after Katrina. Growth of 3.5 percent would still be slightly above the long-term trend for the U.S. economy. If, alternatively, the expectation for third-quarter growth prior to Katrina was 3.5 percent, a reduction by 1.5 percentage points from the Katrina effect, and possibly owing to some uneasiness about momentum in the third quarter, would take growth down to a more unsettling 2 percent level.

In fact, it is difficult to identify the timing of the growth impact of Katrina given uncertainties about the way in which the data is collected and reported, how the storm affects activity nationwide, and the rate at which federal government aid to the region is actually expended. Suffice it to say that, during the last four months of 2005, Katrina will have a negative impact on growth of somewhere between 1 and 2 percentage points at an annual rate. Some positive growth effects can be anticipated during the first-half of 2006 based largely on government-financed extensive rebuilding efforts in the region.

Despite the sanguine initial analysis of the near-term effects of Katrina on the economy, there is reason to be cautious. A good case can be made that the underlying growth rate during the final four months of 2005, prior to the negative Katrina impact, was about 2.5 percent. Subtracting 1 percentage point from that rate takes year-end growth down to an uncomfortable 1.5 percent rate while subtracting 2 percentage points takes it down to a near-recession level of 0.5 percent. A loss of economic momentum that resulted in a growth rate below 1 percent, especially during uncertain times, would be of serious concern to policymakers.

Why Growth May Be Lower than Expected

Three factors may contribute to a sharper slowdown in growth during the last four months of 2005 and perhaps into 2006. The first is the cumulative negative impact from a persistent increase in energy prices over the last two years. The second is the less certain, though potentially negative, impact on investment spending arising from elevated ambiguity attributable to Katrina and its aftermath. Finally, the extent of the slowdown in the housing sector will influence growth--especially consumption growth.

At about $3 per gallon, the average retail price of U.S. regular unleaded gasoline is 100 percent above its level of two years ago, about 60 percent above its level a year ago, and about 43 percent above its level in June. The price increase during August alone was 18 percent. The retail price of gasoline, not to mention the prices of heating oil and natural gas, has been rising at an erratic pace for two years. In other words, while the 18 percent increase during August (caused largely by the Katrina disruption) may be dramatic, it is only the latest in a series of persistent increases in energy prices.

The rise in energy prices through June was sufficient to impart about a negative 1 percentage point drag on U.S. growth from mid-2005 through mid-2006. The additional energy price increases since then (including the 43 percent increase in the retail price of gasoline) will impart another 1 percentage point drag on economic growth, probably beginning in the fourth quarter of 2005 and carrying through to 2006. If one sets the underlying U.S. growth rate at about 3.5 percent, which happens to be the long-run average over the past decade as well as the average growth rate during the first-half of 2005, and then subtracts 1 to 1.5 percentage points from an energy drag, 2 to 2.5 percent growth is the result.

If one also factors in a reduced boost from the housing sector of half a percentage point, it is easy to see a 2 percentage point drag on growth during the fourth quarter, resulting in a 1.5 percent growth rate. Any additional drag from Katrina, especially on disposable real income (to spend on non-energy items) could take growth perilously close to zero by the end of this year.

The second impact from the Katrina disaster may be to raise uncertainty resulting in hesitation among corporate managers regarding investment growth. The “uncertainty-hit� to investment growth from the 9/11 tragedy coupled with the fact that the economy was in recession, resulted in negative investment spending that reduced U.S. growth by 1.5 percentage points during the fourth quarter of 2001 and the first quarter of 2002. While part of that negative contribution was due to the negative cyclical impact from recession on investment spending, the unusually large investment growth drag was probably partly attributable to the uncertainty tied to the 9/11 attacks.

During the last two quarters, business fixed investment has contributed an average of about 0.8 percentage points to growth--well above the long-run average contribution since 2001 of 0.2 percentage points. If the growth contribution of business fixed investment reverts to its average over the next two quarters, the reduction in the contribution to overall growth from the first half of the year would be about half a percentage point of GDP growth. Consequently, it will be important to watch the data on investment spending and corporate confidence closely in the coming months.

Inflation Outlook

As a negative supply shock, Hurricane Katrina both reduces near-term growth prospects and increases near-term inflation prospects. However, there is reason to be optimistic about the inflation outlook. Most important measures of U.S. inflation were falling from their peaks prior to the hurricane. While overall inflation is rising at a 3.4 percent year-over-year rate, most of the increase is due to higher energy prices, and that figure is down from a peak year-over-year rate of 3.6 percent earlier in 2005. Excluding energy, the core Consumer Price Index is rising at a 2.2 percent rate, down from a peak earlier this year of a 2.4 percent year-over-year rate. The core consumption price deflator (closely watched by the Federal Reserve) is rising at a 1.8 percent year-over-year rate, again down from its peak earlier this year of 2.3 percent. Long-term inflation expectations derived from yields on ten-year TIPS (inflation-protected treasury notes) are about 2.4 percent, below their average level over the past year.

Before Katrina, pipeline core measures of inflation were also declining. In August, year-over-year inflation as measured by the Producer Price Index was 2.4 percent, about equal to its average for the previous three months. The core inflation rate in the intermediate category for PPI had fallen to 3.2 percent year-over-year, down from 5.4 percent in May. Core crude goods inflation was actually negative during July and August, down sharply from a 9.4 percent growth rate in May.

Historically, natural disasters have produced a positive impact on inflation lasting two to three months. Given the slowing momentum in the economy, this is likely to be the case in the months following Katrina.

The Policy Environment

At the time of the terrorist attacks on New York and Washington, D.C., the federal funds rate was 3.5 percent--just as it was when Katrina hit. However, during the three months following 9/11, the Fed reduced the rate by 175 basis points to 1.75 percent.

The Fed raised the federal funds rate by 25 basis points to 3.75 percent on September 20, indicating that it saw “no persistent threat� from Katrina to the economy. Repeating the statement from previous meetings in the tightening cycle, the Fed indicated that “accommodation can (continue to) be removed at a pace that is likely to be measured.� The statement signals that the central bank intends to continue raising the fed funds rate to at least 4 percent, a level which some at the Fed consider neutral--neither stimulative nor contractionary.

The full path of the federal funds rate over the balance of the year remains to be determined, but it is probably upward, in sharp contrast to the response by the Fed to a perceived steep elevation of financial risks after the 9/11 tragedy. Needless to say, were evidence to appear that fourth-quarter growth is slowing sharply, the Fed would probably stop increasing rates, but it could well have moved the fed funds rate to 4 percent either by November 1 or December 13, before clear evidence of a sharply slowing economy emerges. The Fed’s own view is that the underlying economy is robust. That means that if the economy is actually losing momentum, the risk of overtightening by the Fed is high.

Fiscal policy at the time of the 9/11 tragedy was fortuitous. Tax cuts and transfers for lower-income taxpayers had been enacted in June and were on track to boost the government’s contribution to growth from its usual 0.5 percentage points to a full 1.5 percentage points during the fourth quarter of 2001. The government contribution to growth remained close to 0.9 percentage points, about 0.4 percentage points above average, during the first half of 2002. Now in 2005, the government contribution to growth is slightly below average at about 0.4 percentage points. Bonuses and the exercise of stock options have boosted personal income levels enough to sharply increase tax collections. As a result, estimates for the fiscal year 2005 federal deficit have gone down nearly $80 billion to about $325 billion.

Going forward, federal spending on rebuilding the Gulf Coast region will contribute an average of about 0.5 percentage points to growth, probably spread over the next five or six quarters. The federal government has already appropriated an additional $62 billion in funds for flood and hurricane aid and will probably appropriate another $80 to $90 billion in coming months. However, the timing of the growth impact depends on the actual outlay of funds, which may occur at a rate of $20 to $25 billion per quarter based upon estimates for actual spend-out rates after previous natural disasters. The current, often-repeated estimate that the government is spending $2 billion a day on Katrina relief is an exaggeration. The government has been obligating itself to additional expenditures at a rate of roughly $2 billon per day, while the actual spend-out, currently close to its highest level, is between a half a billion and one billion dollars per day.

It is also important to distinguish between the effect of fiscal stimulus that offsets substantial losses by households and businesses from the effect of fiscal stimulus in the form of increased transfers or tax cuts. The total annual spending by a low-income household that receives an extra check from the federal government (like that provided in 2001) is likely to be greater than the spending by a household receiving a check from the federal government to compensate for the loss of its home or livelihood.

Broadly speaking, the interruption of economic activity in the Gulf Coast region will probably reduce growth by between one-half-of-one percentage point and one percentage point over the balance of the year and that negative growth effect may just be offset by the transfer of government payments. As we move into 2006, government outlays should produce a net positive effect on the region and the national economy amounting to something on the order of half a percentage point of growth--perhaps during the first-half of 2006.

Negative Wealth Effects from Katrina

Given that Hurricane Katrina constitutes the largest natural disaster by far in U.S. history, it is worth estimating the negative wealth effects from the storm that will occur in addition to the negative impact on economic activity from storm disruptions. The tri-state region of Louisiana, Alabama, and Mississippi accounts for about 3.2 percent of national GDP. While the entire region was not directly impacted by Hurricane Katrina, economic activity and resources underlying the activity in the region were broadly affected, while homes and business facilities directly affected by the storm suffered destruction or extensive damage. Of the nation’s $12.5 trillion in GDP, 3.2 percent amounts to about $400 billion. The national wealth-to-income ratio is about four, suggesting that total wealth in the tri-state area is about $1.6 trillion. If just 15 percent of that wealth was destroyed by Hurricane Katrina, the total wealth loss amounts to about $240 billion or about 16 percent of the average annual national wealth gain over the past five years. That is a substantial sum that may negatively impact growth and spending in the Gulf Coast region for years to come. While insurance payments will cover some, perhaps a quarter of the losses (flood damage is not covered by most private insurance policies, and there are caps on lightly subscribed federal flood insurance), the net impact on national wealth is small since it represents a transfer from insurance companies to policyholders.

Looking Ahead

The full impact of Katrina on the regional and national economy, not to mention the substantial human tragedy it entails, is yet to unfold. As with any crisis, the Katrina catastrophe carries with it some opportunities to substantially improve the economic prospects for the region as well as, unfortunately, possibilities to harm the prospects for the region. The key lies with recognizing the need for substantially enhanced flood control measures in the New Orleans area.

Tragically, Hurricane Katrina revealed the inadequacy of the levee system that was designed to protect New Orleans from a category-three storm along with the serious problems tied to the atrophy of marshes at the mouth of the Mississippi River. The atrophy of the marsh wetlands has reduced the protection from storm surges tied to hurricanes in the New Orleans area. Rebuilding the levees and reversing the atrophy of the wetlands is a substantial engineering project that long has been advocated. It seems a logical candidate for public spending to repair the infrastructure of the region. The cost will probably be between $20 and $30 billion and might well be financed by the issue of hundred-year bonds by the federal government. Such bonds are in great demand, a fact that would reduce the cost of financing a public works project, which is a crucial part of any effort to restore the New Orleans region to viability.

The technology for such an undertaking has been contemplated for a long time and is readily available. Following massive floods in 1953, the Dutch rebuilt a levee system to preserve their nation from immersion under the North Sea during storms. Part of that system was a buffer-flood plain that allows levees to be intentionally breached by storms in order to reduce pressure upon them. The low-lying areas of New Orleans may be a candidate to serve as such flood plains. This would require relocating much low-income housing away from that area, but it is hard to imagine anything more irresponsible to begin with than the reconstruction of such housing directly in harm’s way.

Tragedies like the 9/11 attacks on New York and Washington, D.C., and unprecedented natural disasters on the scale of Katrina can, like all crises, present opportunities to improve growth and future prospects for the population at large. However, it is wise not to be too optimistic in the immediate aftermath of such events, especially in view of elevated recession risks and the need to proceed cautiously to rebuild critical infrastructure. Crises may include opportunities for those who react wisely, but simply assuming a positive-growth outlook and rebuilding without enhanced flood protection in the wake of a natural disaster on the scale of Hurricane Katrina would be unwise.

Info about European equities/bonds, oil futures and even windmills... lots of luck

Oct. 1 (Bloomberg) -- European stocks rose for the fourth week in five, as investors favored equities to bonds amid prospects for profit growth and signs of increasing inflation.

ASML Holding NV paced an advance by chip-related companies amid optimism about rising demand for semiconductors. Insurers including Allianz AG climbed as concern eased about damage claims from hurricanes in the U.S.

The Dow Jones Stoxx 600 Index gained 1.8 percent over the week to its highest close since April 19, 2002. All 18 of the measure's industry groups climbed. The Stoxx 50 rose 2 percent. The Euro Stoxx 50, a gauge for the 12 countries using the euro, advanced 2.9 percent, the most in almost five months.

``European shares this week were driven by investors looking for alternatives,'' said Rene Clerix, who oversees $2.6 billion as head of European equities at Dexia Asset Management in Brussels. ``We don't want to be in bonds when there are signs of potential inflation.''

European two-year government bonds had their biggest weekly slide in more than a year. A report yesterday showed the fastest pace of consumer-price inflation since May 2004 in the nations using the euro, reinforcing expectations that the European Central Bank may raise interest rates in the coming year.

Inflation erodes the value of a bond's fixed payments.

``Bond markets are quite expensive'' given the outlook for higher interest rates, said Artino Janssen, head of asset allocation at Rotterdam-based Robeco Group NV, who helps manage $133 billion in assets. ``European shares are very attractive.''

Seventeen of the 18 national benchmarks in Western Europe increased this week. Germany's DAX climbed 3.3 percent. The U.K.'s FTSE 100 Index added 1.2 percent, and France's CAC 40 Index rose 2.7 percent. Only Copenhagen's KFX Index fell, dropping 0.2 percent over the week.

Technology Gains

ASML Holding NV, Europe's largest semiconductor-equipment maker, gained 2.7 percent to 13.66 euros. Infineon Technologies AG, Europe's largest chipmaker, rose 5.7 percent to 8.18 euros. STMicroelectronics NV, the region's No. 2 semiconductor maker, advanced 4.5 percent to 14.31 euros.

South Korea's Samsung Electronics Co., the world's No. 2 chipmaker, said Sept. 29 it will spend $33 billion in the next seven years on plants to meet rising demand for semiconductors that power devices such as Apple Computer Inc. iPods.

Micron Technology Inc., the largest U.S. maker of computer memory chips, on Sept. 29 reported an unexpected profit as the company sold more flash memory and products for digital cameras.

``In general, good news for the chipmakers means good news for the technology sector,'' said Mikael Kadri, who manages a technology fund at Carnegie Asset Management in Stockholm. Carnegie manages $1.8 billion.

The Stoxx 600's group of technology companies climbed 3.9 percent on the week, the most of any industry group.

Hurricane Rita

Allianz, Europe's largest insurer, gained 7.3 percent to 112.24 euros in Frankfurt. Aegon NV, the second-biggest Dutch insurer, rose 7.8 percent for the week.

The Congressional Budget Office in the U.S. said Sept. 29 that the economic impact of Hurricane Katrina will be more ``modest'' than previously estimated, even with the additional effects of Hurricane Rita.

``Overall, the environment is better for insurers,'' said Koen Dierckx, who manages about 500 million euros ($602 million) at KBC Bank NV in Brussels. ``Rita definitely played a role, as it was not as severe as people feared.''

The Stoxx 600's group of insurance shares, which slid 1.7 percent last week, climbed 3.6 percent this week, the third- biggest advance among industry sub-indexes.

BASF, Raiffeisen

Chemical companies including BASF AG and Bayer AG, which use oil-derived raw materials, rose amid speculation that crude oil prices may decline.

Twenty of 54 analysts and strategists surveyed by Bloomberg News, or 37 percent, said oil will fall next week, as record energy prices caused by Hurricanes Katrina and Rita lead consumers to reduce fuel purchases. Nineteen, or 35 percent, said prices would rise and 15 forecast little change.

BASF, the world's largest chemical maker, added 5.8 percent to 62.5 euros. Bayer, Germany's second-largest chemical company, rose 4.3 percent to 30.49 euros.

Raiffeisen International Bank Holding AG, a Vienna-based specialty lender in Eastern Europe, posted five straight gains and surged 13 percent over the week to 55.55 euros, the second most in the Stoxx 600.

UBS AG, Europe's biggest bank, on Sept. 28 rated Raiffeisen ``buy'' in new coverage, and forecast a share price of 65 euros, citing its ``strong hand in high-growth, less-developed markets.'' Croatia this week hired Raiffeisen to manage the sale of INA Industrija Nafte DD, the country's oil monopoly.

Vestas, H&M, Compass

Vestas Wind Systems A/S, the world's largest windmill maker, rose 13 percent to 150 kroner in Denmark, the steepest climb in the Stoxx 600. Fidelity Investments, the world's largest mutual fund company, on Sept. 28 said some of its funds raised their combined holding in Vestas to 5.19 percent.

Norwegian wind-power production will increase by 18 times by 2020 as almost half of all new electricity will come from wind turbines, the newspaper Aftenposten said on Sept. 29. Separately, Australia's Babcock & Brown Wind Partners, which owns wind farms in Europe and has links to Vestas, said it would have an initial public offering to generate funds for expansion.

Hennes & Mauritz AB, Europe's biggest clothing retailer, gained 2.6 percent to 276.5 Swedish kronor. The company said third- quarter earnings jumped 36 percent, more than analysts had estimated, as it offered fewer discounts and benefited from cheaper garment prices in China.

Compass Group Plc, the world's largest caterer, fell 9.1 percent to 206.25 pence in London, the second-biggest slide in the Stoxx 600. On Sept. 28, Mike Bailey quit as chief executive officer and the company said annual profit will be below analysts' estimates.

HMV Group Plc, the U.K. operator of HMV music stores and Waterstone's bookshops, fell 12 percent to 206.25 pence, the steepest drop in the Stoxx 600, on concern a five-month slide in British sales may extend into the Christmas period. The company said Sept. 28 that sales at stores open at least a year fell 4.4 percent in the 21 weeks through Sept. 24.

The I fund had a good September run, foreign speculators may be getting ready to take some profits for a few weeks - wouldn't hurt to step back a bit if you are a trader - long termers just ride through it and accumulate - IMHO.

The dollar didn't get any sustained direction from U.S. economic data Friday that showed weaker-than-expected U.S. income and spending for August, an uptick in a key inflation measure, better than-expected Chicago-region manufacturing and a drop in September consumer sentiment. Overnight, the dollar had traded higher versus the euro, on continued optimism over prospects for higher U.S. interest rates following hawkish comments Thursday from Federal Reserve Bankof Philadelphia President Anthony Santomero.

But buyers stepped in again each time the euro pushed below $1.2000, rejecting a key technical level that has become an increasingly stubborn barrier this week. Some investors suggest that the repeated failure to push the euro below $1.20 is a sign that the dollar rally of recent weeks might have run its course. Others say traders are merely condsolidating their dollar holdings ahead of the next advance for the U.S. currency.

Overnight, the yen got an early boost after data showing Japanese industrial production rose in August, while the jobless rate fell slightly. But things turned around when the dollar failed to stick below 113 yen level.

From the Bloomberg article and recent trends I've decided to reduce my F Fund allocation to a small amount: 6%.

The G Fund I've upped to 14%.

I've been reading some of the stuff the talking heads have been putting out and it is so negative its enough to make a contrarian tingle with glee. October should be a good month if the so called negative vibes persist.

Since the mid 1940's, the market has been very strong the 1st week of October during the 1st year of the presidential cycle. It appears the seasonal bias is trumping the technical indicators.

Also, the spread between the yield on the 10-year Treasury note and the yield on the two-year note is roughly 15 basis points. During the past two decades, that has been a signal that chances were quite good that high-quality stocks would outperform lower-quality ones on a six month and 12 month time horizon. Lower quality stocks generally have outperformed higher quality ones so far this year. S fund versus C fund. That's odd, based on the historical pattern, particularly at a time when overall earnings growth is slowing. Moreover, lower-quality stocks have a hefty valuation premium vs higher-quality ones.

Birchtree wrote:

The I fund had a good September run, foreign speculators may be getting ready to take some profits for a few weeks - wouldn't hurt to step back a bit if you are a trader - long termers just ride through it and accumulate - IMHO.

if the repos were not above 20billion/day avg. i would be in complete agreement Dennis......http://www.omo.co.nz/Plots-TIO.htm

I fund should continue to run like a 67 fiat spider....

3Q Wrap up for the S&P: Who won? Who lost?
Stocks posted solid gains but rising energy prices made the third quarter tough. What's next?
October 1, 2005: 7:01 AM EDT
By Alexandra Twin, CNN/Money staff writer



NEW YORK (CNN/Money) - The stock market chalked up solid gains for the third quarter but rising energy prices made it a rocky ride.

The rest of the year may not be much easier.

For the quarter, the Nasdaq jumped 4.6 percent, the S&P 500 gained 3.2 percent and the Dow industrials climbed nearly 2.9 percent.

That's a bit better than average. Yet, most of those gains came in July and late September, with the rest of the quarter plagued by murky sentiment and volatile trading.

"I'd characterize third-quarter stock performance as disappointing and event-driven, although it was understandable why the market reaction was what it was," said William Hummer, principal at money manager Wayne Hummer, Inc.

Hummer was referring the surge in oil prices in August and September, the pair of rate hikes we got from the Federal Reserve and the one-two punch of hurricanes Katrina and Rita.

Granted, even without all of this, the period wasn't expected to be particularly positive for stocks. September is usually the worst month for the three major averages, according to the Stock Trader's Almanac, and August and October aren't much better.

But this year was a little different. Stocks were more upbeat than usual in the often upbeat month of July, then sputtered for the rest of the quarter. Strip that out and you'd have a much more negative picture.

Stocks jumped that month as investors breathed a sigh of relief that second-quarter earnings were stronger than initial expectations. Hopes that the Fed might pause in its interest-rate hiking campaign and a certain "head in the sand" take on rising oil prices helped.

Yet the optimism faded come August, with worries beginning to surface about the economy heating up too fast. Then Katrina and Rita hit, and that added to the uncertainty, said Subodh Kumar, chief U.S. investment strategist at CIBC World Markets.

"The overriding issue in the market is still the reality of higher energy prices and interest rates," Kumar added. "It looks like these things are holding the market back, even though earnings are good and the economy, both here and globally, seems OK."

The twin worries will keep the market nervous "until they are addressed," he added.
Double, double, oil and trouble

One result of surging oil prices: energy stocks were again the strongest sector in the S&P 500, just as they were in the first two quarters and in 2004. (For a look at the top sectors in the quarter, see the chart).

Whether that will continue is a matter of some debate on Wall Street.

"I think energy stocks will flatten or worse," said Hummer. "I'm not looking at the sector to tank, but I don't think it will hold the same appeal for money managers as it has in the previous three quarters."

Energy prices were already significantly higher before Katrina and Rita, and the storms mean oil prices will stay high, said Ben Halliburton, chief investment officer and founder of Tradition Capital Management. But the underlying stocks are approaching fair value after having run up for nearly two years, he said.

Even so, he thinks oil exploration and production stocks may still be worth a look. Some of the stocks are trading as if oil is $50 a barrel whereas "oil is at $65 right now," said Halliburton. "So even if oil prices were to fall back, that sub-sector would still be undervalued."

Oil and gas exploration and production stocks jumped nearly 30 percent in the quarter and are up 71 percent year-to-date.

Elsewhere coal stocks led the industry, jumping about 46 percent in the quarter, and are up 87 percent year-to-date. Oil and gas refiners and marketers held the second spot, with gains of 44 percent and 94 percent, respectively.

Clothing retailers and department stores, home furnishing firms and thrifts and mortgage companies were among the worst performers. (For a look at S&P 500 winners and losers, see the chart.)
Crystal ball gazing

Regardless of whether the stocks pull back, oil prices look to remain high, which will keep pressure on the broader market as investors worry about the impact of high energy costs on the economy -- and earnings.

"Consumers are going to be in for an ugly winter, heating their homes and fueling their cars," Halliburton said "As a result, consumer spending in other areas is going to change."

Non-essentials will feel the impact, with recreation and consumer electronics stocks likely to slump, said Michael Swanson, senior economist at Wells Fargo.

"If you have to reapportion money on energy, you're not going to take it out of money you spend on food, medicine or clothing," Swanson said. "The staples aren't effected, but the discretionary items are, and you're likely to see that reflected in the stock market."

Stocks that could do well in the quarter include those affected by the reconstruction of the Gulf Coast, said CIBC's Kumar.

Financials, which have had a tough time amid rising rates, could see a bit of a recovery in the fourth, Kumar added. Additionally, he said that people are underestimating select companies in info tech.

Health care, excluding the big drugmakers, are likely to benefit as investors look for defensive stocks, some analysts said.

As for the broader market, it may not suffer that much overall though trading could be volatile, Swanson said, noting pressure from oil and interest rates could spur sector rotation or some modest moves out of the market, rather than wholesale selling.

"The question is, if you have money to invest, do you want to put it into the bond market, which has inflation issues, or keep it in stocks," Swanson said. "Stocks will probably continue to hold up in the quarter because other asset classes are less attractive."

Additionally, November and December are traditionally up months for the stock market, with strong inflows into mutual funds, holiday retail sales, and other stimulative factors in play.

"Earnings growth for the S&P 500 continues to be robust, and could endup beating north of 10 percent for the year," Tradition Capital's Halliburton said, adding he thinks those will support stocks even if short-term rates keep rising.

"Looking into the fourth quarter, the market could move up a little from here," he added. Top of page



Find this article at:
http://money.cnn.com/2005/09/30/markets/3Qwrapup/index.htm

Iran says to hold back oil sales if sent to U.N.
By Yara Bayoumy
DUBAI (Reuters) - Iran, the world's fourth biggest oil producer, may hold back on oil sales if its nuclear programme is referred to the U.N. Security Council, President Mahmoud Ahmadinejad said in an interview published on Saturday.
Iran has failed to convince the United States and the European Union its nuclear programme is peaceful, prompting the U.N. nuclear watchdog to recommend Tehran be reported to the Security Council for possible sanctions.







Iran may respond by holding back on oil sales if its nuclear programme is referred to the United Nations Security Council, Iranian President Mahmoud Ahmadinejad said in an interview published on Saturday. Ahmadinejad attends a ceremony for the start of the new university year in Tehran September 27, 2005. (REUTERS/Raheb Homavandi)Diplomats expect a referral is likely in November.
"If Iran's case is sent to the Security Council, we will respond by many ways, for example by holding back on oil sales," Ahmadinejad told the United Arab Emirates' English-language daily, the Khaleej Times.
He did not specify what he meant. Oil accounts for about 80 percent of Iran's export earnings.
"We have been extremely cooperative, we have had more than 1,200 man days of inspections, monitoring cameras are everywhere in our facilities," the president added.
Analysts had predicted Iran could use its abundant oil resources as leverage against countries seeking to send it to the Security Council.
OPEC heavyweight Iran pumps around 4 million barrels per day.
It sees politics and its hydrocarbon resources as intimately linked. Nationalist leader Mohammad Mossadegh, who was ousted in a CIA-backed coup in 1953 after nationalising the British-run oilfields, is an enduring symbol of national pride.
Ahmadinejad's remarks are the latest in a series of warnings Iran has made against sending its case to New York.
On Thursday, it reiterated it would resume uranium enrichment and stop allowing U.N. snap inspections of its atomic facilities if it was referred.
Iran has restarted nuclear fuel related work but has so far stopped short of actually producing enriched uranium in underground facilities near the central town of Natanz.
Washington says this enriched uranium will be used in warheads but Tehran insists it is only needed for power stations.
Tehran has already threatened to use trade ties to punish countries that voted to report it to the Security Council, possibly endangering major deals with India and Japan.
The 35-nation governing board of the International Atomic Energy Agency (IAEA) meets next month to discuss Iran.
"So I urge the U.N. not to bend to U.S. pressure," Ahmadinejad said.
"We understand and we know that their (the Western powers') intentions are bad. All of our activities have been transparent to the IAEA and we've announced many times that because of our religious and cultural views (we) are against the creation and use of nuclear weapons."


http://tinyurl.com/9gkcl

here comes ole flat top......oil may end up being the straw with these guys.

Indian Government at a loss what to do

- Iran scraps Gas deal with India after India votes against Iran
Kiran Chaube
Sep. 29, 2005



http://goldismoney.info/forums/showthread.php?t=24405




India thought Iran will not retaliate. It voted against Iran in IAEA resolution to allow referral to UN Security Council. Iran has retaliated. It cancelled all gas sale to India.

Iran has scrapped a natural gas export deal with India after New Delhi voted in favor of a UN atomic agency resolution putting Tehran on notice over its nuclear program, a newspaper reported on Wednesday.

Under a deal signed in June, India planned to import 5 million tons of liquefied natural gas annually for 25 years with deliveries from Iran starting in 2009.

Iran's decision to cancel the deal was conveyed to India's permanent representative at the International Atomic Energy Agency by Iran's ambassador in Vienna, Austria.

It followed India's decision to join the US, Britain, France, Germany and other nations in backing a resolution calling on the agency to consider reporting Iran to the UN Security Council for not complying with the nuclear non-proliferation treaty.

Birchtree wrote:

The I fund had a good September run, foreign speculators may be getting ready to take some profits for a few weeks - wouldn't hurt to step back a bit if you are a trader - long termers just ride through it and accumulate - IMHO.

Good call, Birchtree.