Last week as Hurricane Harvey was bearing down on Houston I talked about the calm before the storm. Over the weekend Houston weather went from calm to crazy. Which begs the question, what can investors learn from Hurricane Harvey? When disaster strikes, there is no time to prepare. As we get closer to the month of October it may be that the markets go from calm to upside down. Let me encourage you to take the time now to prepare for the good, the bad, and the unforeseen.
Following a busy week of economic news and, once again, talk of geopolitical threats, we can all look forward to the long Labor Day holiday weekend.
Thanks to Dent Research, provided here is our weekly information roundup ending the week of September 1, 2017. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
Hurricane Harvey Brings Devastation to the U.S. Gulf Coast... The slow-moving storm wreaked havoc in eastern Texasand Louisiana. The area suffered record-setting floods, with the city of Houston hardest hit.
What it means – With hundreds of thousands of people displaced and billions of dollars of destroyed property, it’s going to be a long path of rebuilding for area residents.
Expect the storm to bring short-term economic impact, mostly in energy prices, to everyone else. Several oil refineries in the area, including the country’s two largest, went offline and took about 15% of U.S. refining capacity with them. Gasoline prices should rise until the refineries get back up and running.
Worse than higher prices, many around the region are dealing with lack of supply. Tensions are rising, like in Dallas, where consumers have jockeyed for position in gas lines as many stations run dry. The holiday will make it worse with so many Americans on the road. The supply disruption could last 10 days.
I recently moved to the Houston area, so I’m experiencing the damage first-hand. I wrote more about my experience in Monday’s Economy & Markets and in today’s Triple Play Strategy update.
The U.S. Economy Added 156,000 Jobs in August... The unemployment rate ticked up to 4.4%.
What it means – If the Fed was looking for an excuse to push off raising rates anytime soon, this morning’s job report
Not only did August disappoint, but June and July’s well-received numbers saw a downward revision by a combined 41,000. Over the last three months, we averaged just 185,000 hires per month. Wages continue their meager growth, up just 0.1% over last month and 2.5% for the year.
And the Bureau of Labor Statistics’ birth/death adjustment, which attempts to measure the employment changes in businesses that they don’t survey, guessed that they added 103,000 jobs last month. Thank goodness we have the guesstimated jobs. Without those there would be no job growth at all.
U.S. Second-Quarter GDP Revised Up From 2.6% to 3.0%... This is the highest rate of real quarterly GDP growth since the first quarter of 2015.
What it means – A rise in personal consumption spending and business investment drove GDP higher in the second quarter, even as government spending fell.
Consumer outlays surged 3.3%, up from 1.9% last quarter. Durable goods popped 8.9%, with recreational goods and vehicles expanding 14%. This is a space we’ve talked about for years. Boomers love their RVs and we expect this area to keep growing.
The 6.5% slide in residential business investment was the lone negative on the business side and could be a warning sign ahead for the housing market.
Hitting the 3% mark in GDP growth is great news, but it also reminds us that sustained expansion isn’t here yet. Averaging the growth of the first two quarters of 2017 gives us an underwhelming 2.1%. A disappointing third quarter would keep us plodding along at 2%.
On the other hand, the rebuilding efforts from Harvey will require a massive amount of cash, which could buoy GDP through the end of the year. I don’t like breaking windows for growth, but there’s no denying the project will require billions of dollars and put thousands to work.
U.S. Strategic Petroleum Reserve (SPR) Releases 500,000 Barrels of Oil in the Wake of Harvey... As gasoline prices spike because of refinery closures, the U.S Department of Energy (DOE) looks to stabilize the supply chain.
What it means –The Department of Energy (DOE) will deliver the oil to the Phillips 66 refinery in Lake Charles, Louisiana, which was unaffected by the storm. While the market appears to need refined gasoline more than unrefined crude, the move suggests that Harvey has not only hurt refineries, but also crude deliveries.
We haven’t seen an emergency release from the SPR since 2012, in response to the damage caused by Hurricane Isaac. Still, the release is just 500,000 barrels out of the SPR’s 679 million barrels. This tells me the DOE doesn’t expect the disruptions to last for long.
S&P CoreLogic Case-Shiller Home Price Index Inches Higher, Rising 5.7% Year Over Year... Light inventory keeps pushing home prices higher.
What it means – If the annual gain looks familiar, that’s because the index posted the same pace last month. In fact, since the middle of 2015, the yearly change on the 20-city index rose a in strong, narrow band of 4.8% to 5.8%.
All 20 cities in the index saw prices rise for the month. The yearly tally shows the Pacific Northwest is on fire. Compared to last June, Portland home prices rose 8.2% and Seattle surged 13.4%.
Last week’s news on falling new and existing home sales show that high prices are weighing on buyers. With wages growing at roughly half the pace of home prices and bad news from Wednesday’s GDP report, it seems like just a matter of time before prices roll over.
Amazon Moves Quickly on Remaking Whole Foods... On its first day of ownership by Amazon, the grocery chain slashed prices for many items.
What it means – Amazon’s plan looks to be a full-scale integration with an effort to broaden the appeal of the brick-and- mortar stores by cutting prices on many items. The “responsibly farmed” Atlantic salmon that used to set you back $14.99 a pound now only costs $9.99. Organic Fuji apples are just $1.99 a pound, down from $3.49.
Amazon is also using the physical locations as an opportunity to stock its own products, like the Echo and Dot. Stores displayed the items in boxes beside banners under their “Farm Fresh” label, calling them the “Pick of the Season.” It’s unclear where they grew these items, but this could be the beginning of a new farm-to-table electronics retail space.
Awkward openings aside, these moves should make Whole Foods’ competitors nervous. Grocers have very slowly moved into the online space and it’s unlikely that many can compete with Amazon’s logistics power. This might be the beginning of a painful shakeout period for the industry.
Amazon also announced its loyalty plan would apply in Whole Foods stores, providing perks for Amazon Prime members.
U.S. Marijuana Industry Goes Through Growing Pains... As laws across the country continue to loosen around the drug, a production boom has crashed prices.
What it means – Pot prices have begun to settle along the traditional laws of supply and demand.
Growers, out from under the enforcement heel of the federal government, piled into the industry, and all that extra product has weighed on wholesale prices. The price of a pound of pot is down nearly 25% from two years ago, leaving retailers scrambling for a way to add a premium to their product.
Some sellers will peddle the weed with the highest THC content, while others look to fetch a premium based on different growing conditions. The stuff grown indoors, fed by fertilizers and chemicals, is very uncool. The right kind of buyer would gladly pay extra knowing that farmers grew the product under the sun and without the use of pesticides or fertilizers.
The industry is still finding its legs and, as I wrote in June’s Boom & Bust, it will continue to grow.
Next Week – On Monday, U.S. markets will close in observance of Labor Day. The rest of the week is quiet on economic
reports with factory orders, mortgage applications, and wholesale trade highlighting the remaining market days.
The proof is in the planning.
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