The Katrina Domino

For last week and this, the North American equity markets are all about Katrina. I suspect the bigger issue now is what impact Katrina could have on the global economy and world capital markets.

If you''ve been climbing Everest or K2 in the Himalayas last week you could be excused for not knowing that homeland America has suffered its biggest natural catastrophe in terms of lost lives and billions in wealth.

In a period of maybe eight hours, an area roughly the size of Great Britain suffered almost complete devastation. Independent analysts have forecast the indefinite loss of 500,000 jobs. When all is said and done, that figure could be low. Thousands of lives, tens of thousands of homes and at least $100 billion in wealth have been - is being - lost.

Never before in world history has a metropolitan area of 1.5 million people been wiped out in a day. That includes the greatest horror of past wars - the Atomic Bomb. In fact, the power of Katrina, and the flooding waters of the Mississippi River and Gulf of Mexico, amounted to multiple A-Bombs.

Traders have to understand the magnitude of what happened before they can begin to appreciate the implications of what''s to come. We can now refer to "After Katrina" just like "post-9/11". Our future may indeed be called the Katrina Era.

First, the U.S. economy now stands a likelihood of going into recession. S&P states that the chance of that occurrence has more than doubled to 25 pct.

Second, the U.S. government has approved the initial funding of $10.5 billion for emergency relief measures. By the time the final bill is tabulated for replacement of lost assets, and lost tax and personal income, and the negative effect on corporate profits, the smallest number you can consider is at least ten times that one.

The U.S. economy is huge, but there will be a domino effect at work that will soon cut it down in size.

Had Katrina not destroyed so many assets in the U.S. Oil and Gas industry, the final tabulation of costs would be much smaller. But, I fear that because of the resolve by Americans to prevent such an affront to their national security recurring, I suspect the world will never again see Crude Oil prices less than $35 a barrel.

The debts run up by the U.S. government to pay the damages suffered here, and the replacement infrastructure to be built, will add to pressures that previously had been pushing the USD down.

Given the loss of jobs and disposable income, and the increasing negative savings rate that started in August, the purchasing power of the American consumer will be restricted, causing concerns in other countries like Canada, China, Japan, Korea, and Taiwan.

There is a possibility that, should it occur, a sudden U.S. recession could lead to an international recession in the next few months.

But there will also be another development, which is that the U.S. Fed will stop or at least delay further increases in its bank rate. So the 3-month T-Bill yield has fallen from 3.37 pct to 3.28 pct in the past few days. The 2-year Treasury Note yield has fallen from 4.05 to 3.73, and the 10-year yield has likewise dropped from 4.17 to 4.03.

This lower interest yield and widening of the yield spread takes some pressure off the banks, for now. But, I suspect gold prices and goldminer share prices will continue to move higher, along with the major construction companies, heavy-duty equipment manufacturers, and the industrial goods finance houses.

With increasing unemployment, however, I believe that the Consumer Discretionary Spending sector will suffer widespread losses. Hard hit will be autos, travel and tourism, and media advertising.

With the millions of barrels of crude oil being released from national emergency reserves, I believe that the high prices will be capped somewhere below $70 a barrel on NYMEX, and that integrated oil company share prices will not move higher.

Should the global economy take a major hit, the Basic Material sector industries like chemicals, paper (but not forest) products, steel and base metals, are likely to suffer.

If and when interest rates start to move higher, as they must with a lower-USD-induced inflation, and rising wage-cost inflation in the non-affected regions - people have to pay for higher costs of energy, food, and property taxes, etc. - then the Tech and Financial sectors will suffer broad losses.

This is not a positive market scenario, but then Katrina did not leave a pretty picture behind. It did in fact start a series of dominos falling.

Could Katrina run the table? Well, it''s a very large economy in the U.S., which has probably a 50:50 chance of staying intact in the months ahead. We''ll have to wait for a week or two to better assess the damage.

But, for some traders, that''s not good enough odds.