Can Sandy Boost GDP?

There seems to be some debate about how much Sandy will affect the economy.  Some think that it will provide a real boost to GDP; others are skeptical.  While it’s not possible to know for certain how much will be spent specifically to rebuild from Sandy, loss estimates can help us back into an estimate of how much of a boost the storm could provide to economic activity.  If you assume that the amount of money spent to repair damages is exactly equal to the amount of economic losses, then it’s pretty easy to calculate how much that would boost GDP.

Right now the estimate from insurance catastrophe modeling firm Eqecat is that Sandy caused $10-$20B worth of economic damage.  Unfortunately $20B is a small number relative to $15T in GDP–it’s only 0.13%.  Even if you assume that the spending will be double or triple the losses, the amount as a percentage of GDP is relatively small.

Hurricane Sandy Effect on GDP
Source: Arithmetic

Star Wars Franchise Total Worldwide Gross

Disney agreed to buy Lucasfilm for $4B yesterday, which is quite a sum for a company with effectively one franchise, or at least would be if that franchise wasn’t one of the most beloved movie series of all time.

Over the course of its lifetime the Star Wars movies have grossed $4.5B worldwide not adjusted for inflation.  Disney released some other numbers to help analyze the transaction:  consumer products licensing revenue for Lucasfilm is expected to be $215m in 2012, and in 2005, the last year a film was released, EBIT was $550m.  That implies about 5-8 films to make back the purchase price (depending on how much you assume they make in a non-film year).  At 1 film every 2-3 years call it a 10-15 year payback period.

Source: Box Office Mojo

NYSE Closures Due to Weather Since 1885

Today’s weather related closure of the NYSE is an extremely rare event.  In fact, in 127 years the market has only been closed for the whole day due to weather 6 times, and three of those times were on Saturdays (the exchanges were open on Saturdays up until 1952).  There has only been one time, in 1888, that weather caused a multi-day closure.  For reference, there have been roughly 30,000 trading days since 1885, which makes today a black swan of its own–a four sigma event.
Below is a list of all the times that the NYSE has ever been closed or partially closed due to weather.

A list of every day that the NYSE has ever been closed can be found here.  (a lot of history in that list).

Will Sandy Affect Economic Data?

With Sandy shutting down much of the east coast today, it’s likely that there will be some effect on economic data, but it’s tough to say how much until the storm actually hits.  Typically initial jobless claims can be one of the more sensitive indicators to week to week variance.  In 2005 Katrina caused a clear spike in the national numbers, although I don’t think anyone expects Sandy to cause anything close to the damage that Katrina did.

Jobless Claims Katrina Spike
4 Wk Moving Average

A Weekend of Abnormal Weather

While you all on the east coast will be bracing yourselves for a snow-hurricane this weekend, we in Los Angeles will be “enjoying” 90 degree weather.  It’s true that LA is often warm year round, but it’s not usually this warm.  We are in the midst of a Santa Ana wind cycle, when warm winds blow through the city spiking temperatures with a dry heat in the middle of Fall and Winter.

When I was in high school, I took an English exam on a Joan Didion essay about Santa Ana winds, which has always stuck with me for some reason.  In the piece, Didion writes that the winds make people do crazy things en-mass.

As market participants, none of us should be a stranger to watching people do crazy things en-mass.  It’s been my experience that sometimes the best explanation for crazy behavior is simply that there’s something in the air.  I’ll let Didion handle the rest:

There is something uneasy in the Los Angeles air this afternoon, some unnatural stillness, some tension. What it means is that tonight a Santa Ana will begin to blow, a hot wind from the northeast whining down through the Cajon and San Gorgonio Passes, blowing up sand storms out along Route 66, drying the hills and the nerves to flash point. For a few days now we will see smoke back in the canyons, and hear sirens in the night. I have neither heard nor read that a Santa Ana is due, but I know it, and almost everyone I have seen today knows it too. We know it because we feel it. The baby frets. The maid sulks. I rekindle a waning argument with the telephone company, then cut my losses and lie down, given over to whatever it is in the air. To live with the Santa Ana is to accept, consciously or unconsciously, a deeply mechanistic view of human behavior.

I recall being told, when I first moved to Los Angeles and was living on an isolated beach, that the Indians would throw themselves into the sea when the bad wind blew. I could see why. The Pacific turned ominously glossy during a Santa Ana period, and one woke in the night troubled not only by the peacocks screaming in the olive trees but by the eerie absence of surf. The heart was surreal. The sky had a yellow cast, the kind of light sometimes called “earthquake weather.” My only neighbor would not come out of her house for days, and there were no lights at night, and her husband roamed the place with a machete. One day he would tell me that he had heard a trespasser, the next a rattlesnake.

“On nights like that,” Raymond Chandler once wrote about the Santa Ana, “every booze party ends in a fight. Meek little wives feel the edge of the carving knife and study their husbands’ necks. Anything can happen.” That was the kind of wind it was. I did not know then that there was any basis for the effect it had on all of us, but it turns out to be another of those cases in which science bears out folk wisdom. The Santa Ana, which is named for one of the canyons it rushes through, is a foehn wind, like the foehn of Austria and Switzerland and the hamsin of Israel. There are a number of persistent malevolent winds, perhaps the best known of which are the mistral of France and the Mediterranean sirocco, but a foehn wind has distinct characteristics: it occurs on the leeward slope of a mountain range and, although the air begins as a cold mass, it is warmed as it comes down the mountain and appears finally as a hot dry wind. Whenever and wherever foehn blows, doctors hear about headaches and nausea and allergies, about “nervousness,” about “depression.” In Los Angeles some teachers do not attempt to conduct formal classes during a Santa Ana, because the children become unmanageable. In Switzerland the suicide rate goes up during the foehn, and in the courts of some Swiss cantons the wind is considered a mitigating circumstance for crime. Surgeons are said to watch the wind, because blood does not clot normally during a foehn. A few years ago an Israeli physicist discovered that not only during such winds, but for the ten or twelve hours which precede them, the air carries an unusually high ratio of positive to negative ions. No one seems to know exactly why that should be; some talk about friction and others suggest solar disturbances. In any case the positive ions are there, and what an excess of positive ions does, in the simplest terms, is make people unhappy. One cannot get much more mechanistic than that.

Asset Backed Commercial Paper Market Size

Before 2008 Asset Backed Commercial Paper (ABCP) was central to the shadow banking system.  ABCP was issued by special purpose vehicles (SPV’s), which held a pool of longer term asset backed loans.  After 2008, most of the SPV’s that issued the ABCP went into run-off mode, hence the decline of the shadow banking system.  Today, that process is surprisingly almost complete for the ABCP market.  The amount of ABCP left outstanding has fallen by $1T since 2007, about $200B per year.  At that pace, there’s about 1.5 year’s worth of ABCP supply left.

How Many Words Does it Take to Describe a Business?

After AMZN’s report last night and surprisingly positive stock reaction, I decided to turn to the annual report for some perspective.  I was stunned by how little information the company actually provides to its shareholders.
The entire description of AMZN’s business is only 1000 words–3 pages.  Amazon web services is described in one sentence: “We serve developers and enterprises of all sizes through Amazon Web Services (“AWS”), which provides access to technology infrastructure that enables virtually any type of business.”  Rackspace takes 3700 words to describe a similar business line.
For a sense of how out of the ordinary AMZN’s bare bones description is, below is a list of the number of words it takes other large tech, internet and retail companies to describe their business lines.  Most are about 4x as long.  Length does not necessarily equal strength, but does imply some extra information.
Certainly, AMZN isn’t just a company of few words either.  Where there’s legal liability involved the company is plenty verbose.  The risk factors section is 5826 words and the legal proceedings section is 3812 words.

Dollar Correlation with Romney Since Debates

Over the last few years, the dollar has had a strong negative correlation to equity and commodity prices.  When the dollar has weakened, equity prices have generally risen and when the dollar has strengthened equity prices have usually fallen.

For most of that period, risk on/risk off mentality plus a nice dose of QE 1,2 and 3 have been the major forces affecting the dollar.  In recent weeks there has been another factor at play though which has been interesting to watch.  Ever since Romney’s strong performance at the first presidential debate, the market has started to price in the possibility that he could actually win.  This would have big implications for the Federal Reserve, QE and the dollar, because most expect Romney to push for an end to QE.  As such, the dollar has started to trade with some correlation to the Romney intrade contract.  In the last few weeks, when Romney’s odds of winning increase, the dollar (measured by DXY) increases as well.

Importantly, most people seem to think that a Romney presidency would be a positive for equity markets; however, a Romney presidency would likely mean a stronger dollar, which could mean lower equity prices if the correlation holds.

What Did Warren Buffett Want to Buy?

And now for some pure speculation…

This morning on CNBC, Warren Buffett said that he almost bought two different companies for $20B this year and may be looking at a 3rd company that could be purchased for $6B.  Below are some possible names that he might have been alluding to based on a few Buffett-based assumptions 1) He wouldn’t pay more than a 30% premium to current price (Burlington Northern and Lubrizol were each purchased at ~30% premiums) 2) He likes companies with long operating histories and better operating metrics than peers 3) That are in industries that he understands well (close to companies that he already owns).

Possible $20B Acquisition Targets

Archer Daniels Midland (ADM: ~$18B):  In my mind this is the most likely candidate for a Buffett acquisition of this size.  He’s actually said in the past that ADM is the type of company that he likes to invest in.  It’s a Midwest company and Buffett knows agriculture well.  He frequently talks about owning farmland and in fact does own a farm that his son Howard runs.  Howard Buffett also happens to have been on ADM’s board from 1992-1995.  Buffett is the ultimate collector and ADM is possibly a trophy that he has long coveted.

Kellogg (K: ~$18.5B), Heinz (HNZ: ~$18B), or Hershey (HSY: ~$16B): I lump these three together because all are in relatively similar businesses with similar price tags.  Buffett knows packaged consumer goods businesses well as already owns/has owned P&G, Kraft, Coca-Cola, See’s.  All three possible targets have good timeless brands and we know he has a sweet tooth.

Sherwin-Williams (SHW: $15B):  Buffett knows the housing and chemicals spaces.  He owns a lot of housing and construction related businesses already, so SHW would fit into the portfolio.  It has had a huge run recently, but a Buffett bid whisper might actually help to explain that.  He had been silently buying IBM for months before anyone knew.

McGraw Hill (MHP: $15B):  This might be more of a long shot because he already does have a large stake in Moody’s, but McGraw Hill is a crossroads of a two types of businesses that he likes: financial services and publishing.

Possible $6B Acquisition Targets

H&R Block (HRB: $4.7B):  Could it be?  Buffett has owned the company in the past but liquidated his stake in 2007.  Buffett did say that he already knew the company in question, but he knows most companies at this point.  The problem is that HRB has turned into a dysfunctional company with a messy legacy sub prime exposure and is getting beaten badly by INTU.  My guess is that if this is the company he was referencing, he’ll realize he doesn’t want to take on the risk once he looks at the financials.

Gannett (GCI: $4B): He has always loved publishing and media businesses even if they are somewhat old world.  Arguably, USA today is one of four national newspaper brands besides the New York Times, the Wall Street Journal and the Washington Post (which he of course owns already).  There are also about 100 local newspapers owned by Gannett which is a business that Buffett also feels is more protected from new media.

International Flavors and Fragrances (IFF: $5B):  A bit of a dark horse perhaps, but it has been in business in since 1833–a specialty chemicals company in an oligopolistic market that creates and licenses scents and flavors for consumer products.  A really nice niche business that might be buy-able for $6B.