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Market Commentary

Good Night Irene: Bullets Dodged
August 28, 2011, David Kotok, Chairman and Chief Investment Officer

Bullets dodged this week: earthquake, Bernanke, Irene.  What a week. 

We are always grateful when severe natural events result in minimal casualties.  Amen.  

One cannot control property damage or business interruption.   We’ve seen and had both. 

Cumberland is intact.  There are some household wet basements in the north and temporary power outages (mine is back on).  Thankfully, all parties are safe.  The redundancy between the Sarasota office and the Vineland office meant uninterrupted business activity.  Our IT system worked flawlessly as did the contingency planning.  Hat tip to Cumberland’s Terri Pantalione and Sam Santiago.  The tornado that passed near the New Jersey office was fortunately above ground level.

Irene hit a cold front and weakened.  Whew!  It maintained the storm track that could have been a disastrous rival to the 1938 experience.  That one was a killer.  Paul Walsh, of the Weather Channel and a personal friend, and I emailed frequently during the run-up to the weekend.  We estimated that 1938-level storm damage, in present-day dollars, would approach $33 billion.  Irene will cost several billion and was, and is, very disruptive.  However, it is not a 1938-type experience.  

Larry Kudlow asked for our economic assessment when we did an interview on his weekly radio show Saturday morning.  Larry noted how this storm was tracking over the geography of about one-tenth of the nation’s GDP output and how it affected so many millions of people.   Witness 3 million folks without electric power this Sunday.

Larry’s question was in economic terms and not in terms of personal loss of life or property, but he and I were both quick to bemoan and regret personal tragedy.  It is always better not to have it. 

Let’s get back to the question in economic terms.  We are now upping our estimate of fourth-quarter GDP in the US economy.  Billions will be spent on rebuilding and recovery.  That will put some people back to work, at least temporarily.  We speculate that Washington may set aside the usual destructive and divisive partisan political wrangling and act in the interest of the nation.  That means there will be a flow of federal financial assistance to the disaster areas.  We also suspect there will be a rapid response rather than Katrina-type delays.  FEMA lives under a microscope these days.

We expect GDP growth in Q4 to exceed 2% and maybe approach 2.5% to 3%.  This will be accomplished with low inflation and very low interest rates.  The earthquake-hurricane rebuilding will pile on the recovery of the manufacturing sector.  The Japan earthquake may have taken as much as a half point out of GDP in Q2 and Q3.  The rebound from that tsunami natural disaster will also occur in Q4.  Japanese supply-chain interruption was worldwide and impacted the US.  We believe that Q4 economic measures will become a positive surprise to the gloom and doom purveyors who are forecasting a severe recession by yearend.

Coming out this week are commentaries by Bob Eisenbeis on the debt/deficit issues, by Bill Witherell on Germany, by John Mousseau on the hurricane defense we applied to managed Muni accounts, and by me on another obscure stock market indicator that is bullish.  Check www.cumber.com list serve for details.  

We are off for a Labor Day weekend where a few of us will reconvene at Leen’s Lodge for some quiet talk, casual fishing, and glorious post-hurricane Maine early foliage and delightful weather.  Amen, again. 

Come join us. 

David Kotok, Chairman and Chief Investment Officer
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