Monday, August 28, 2017

National Disaster and a New Calculus in Domestic Politics

Monday, August 28, 2017 – The lazy Dog Days of Summer have been anything but for investors. Stock indexes were on the road to recovery early last week possibly from the celestial effects of the Solar Eclipse that captivated the nation’s attention. The market then sold off on concerns of the departure of key White House staff but nevertheless ended the week on a slightly higher level. US Benchmarks ended up with the S&P 500 closing at +.72% for the week to 2,443.05 and the Russell 2000 rising 1.45% to 1,377.45. The tech heavy Nasdaq Composite rose in line with the S&P 500 by a +.79% to 6,265.64. Investors continue to bet on Tax Reform this Fall and continued deregulation by Presidential directives.

Sunday night it became apparent that the flooding from the Hurricane Harvey that hit Southeast Texas over the weekend was “unprecedented and all impacts are unknown and beyond anything experienced” according to the US National Weather Service. Consequently, potential loss of life, dislocations of people, property and infrastructure damage will likely be significant as those from Katrina and Sandy. The direct and collateral damage of Harvey will not be known until later this week. Financial Markets will reflect the consequences of the damage particularly around the Houston Metropolitan Area and coastal gas refineries.

While September was already looking to be an exciting month to watch cable news with political haggling over raising the deficit ceiling and threats of government shutdowns – which have proven to be short-lived trading opportunities, this time is likely to be different thanks to Harvey.

Why? First, the reserves of the national flood insurance fund are likely to prove inadequate to cover claims. This will open the debate of increasing deficit spending to bail out the fund. This is likely to fan the debate of climate change and whether taxpayers should bear the bill of rebuilding residences and businesses along the coastal areas. Also, expect damage to crops and refineries all of which will take the form of higher soft commodity and gas prices – as early as Monday morning. So look for the inflation rate to increase, but not for long hopeful reasons like wage inflation. The scale necessary to rebuild the region is likely to make the Fed think twice about rising interest rates due to the short term regional slowdown in economic activity resulting from the damages due to Harvey.

A search of “politics of natural disasters” brings up a considerable number of studies both in the US and internationally of how unforeseen disasters have a way of affecting politics, in particular, having negative consequences for those in office. We need to look no further than the effect of Katrina on the Bush Administration although Trump appears to be trying to get ahead of the situation.

The need to authorize spending for a big infrastructure projects should become inevitable as there will be plenty of “shovel ready projects.” Discussion about tax cuts was on the September agenda but could get pushed back in wake of the need to immediately address rebuilding concerns. Ready your popcorn and favorite beverage and tune into your favorite cable news channel to see how this unfolds.

We continue to favor the Reflation trade on the expectations of tax cuts and big infrastructure spending. If anything, the damage from Harvey will eventually accelerate this trajectory if reason prevails in Washington. The continued decline of the USD from its highs since December could give investors with foreign ETFs a double reward, rising equity prices and an FX kicker as well.

Our ETFG Quant Score list based upon Friday’s closing data does not yet reflect the effects of Harvey, so we suggest checking the daily movers list as the week progresses for new ratings. We favor infrastructure plays, energy and foreign markets.

Looking at our Weekly % Movers list, we see IEQ and HAP as energy/commodity plays moving up in ratings as well as a good selection of foreign ETFs such as BRAQ, EUFN, EWT, and QEMM.   Looking at our Select List, for Energy ERGF, EMLP, CRAK, MLPA, PXI are attractive in ratings in their respective sector. Others we think are likely to benefit are XTN, INDF in the Transportation Sector, MATF and JHMA in Materials, INDF in Industrials and FTRJ, FTAG, NFRA and TOLR in Natural Resources.

We suggest looking over the Quant Movers % Daily when big events occur that affect financial markets to zero in on attractive plays and sudden changes in our ratings outlook.

Thank you for reading ETF Global Perspectives.

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