September 12, 2013 Update

DJIA:15,327 S&P 500:1,689 NASDAQ:3,725 Gold:$1,342 Oil:$108.60 EURO:$1.33 YEN:99.39

Betting on Catastrophe

I always assumed that betting on the weather was only in the nature of kindergardeners, the universe, and meteorologists, but apparently even seasoned investors are placing bets on mother nature’s mood swings. Hurricane Sandy left her deadly foot print in every east cost town she passed, leaving a trail of devastation for investors to follow. The more populated an area, the more needs people have after catastrophe. So, naturally, it took New York City months to fully recover after Hurricane Sandy, since half of the city lost power and the other half was stranded as the subway system closed down. In particular, the Metropolitan Transportation Authority nearly drowned. Train stations were flooded, tracks needed repair, and tunnels had to be cleaned out. In total, the MTA suffered $4.8B in damages. Although the MTA has millions of riders a day and operates in Connecticut, New Jersey, and New York, the company is continually strapped for cash. The unexpected storm nearly put the company’s financials underwater and, as result, insurance companies no longer are willing to provide coverage. Being an MTA employee is a relatively dangerous job with significant responsibility that needs proper compensation. Keeping up with the unionized demands of 50,000 employees and the pensions of over 20,000 retirees is a like enduring a 12-month typhoon for the MTA. New York City’s subway operator needed help, and unlike the government and insurance companies, investors have the capital and are willing to take on the risk. The MTA has constructed a $200mm coverage plan that will help guard the city again another weather related tail risk event. The “catastrophe bonds” have allowed the MTA to pay less than the cost of usual property coverage by buying protection from MetroCat Re Ltd. (a Bermuda-based insurer). The bonds yield 4.5% above the three month Treasury bills and have a three year maturity. Bond holders would loose their investment if a storm exceeds certain threshold levels that Sandy breached. S&P has rated the unprecedented bonds BB-. Similar to other financial instruments, I am sure the forecasts were made using mathematical models based on historical data. But as the earth endures the most significant climate change that has happened in centuries, how safe are these bets that another super storm won’t happen? Like in the markets, weather conditions are constantly changing. Sandy was the financial crisis of New York City’s environment. These days, weather seems to be as volatile as the market itself. Who is to say another crisis won’t happen within the next three years? It seems to me that betting on the weather is another example of investors’ desperate search for yield in this foggy environment.

Domestic News

• Market Update Futures are trading up, but only slightly, ahead of job data.
• The US Labor Department will release weekly jobless claims at 8:30am, which are expected to edge up to 330,000 for the first week of September vs. 323,000. 

International Updates

Asia

• Market Update Markets were mostly up expect Tokyo, which fell from a stronger Yen. 
• Australian unemployment hit a four-year high of 5.8% in August vs. July’s 5.7%. This is the highest level since 2009 while the participation rate of 65% is the lowest level is more than six years!

Europe

• Market Update Markets traded lower as the benchmark index fell from nearly a five-year high as a result of weak industrial data. 
• Industrial production in the Eurozone fell unexpectedly in July -1.5% on month from +0.6% in June, and missed the forecast of +0.1%, and falling -2.1% YoY.

Corporate

• Hilton Worldwide is filling for an IPO, which is currently owned by Blackstone Group (BX). The company reported total revenues of $9.4B, and an operating income of $1.3B for FY13.