The Scariest Thing About Frankenstorm

If you've peeked at any news outlet in the past couple of days, you're probably aware of the monster storm that's expected to lumber its way up the East Coast. It's such a monster that National Oceanic and Atmospheric Administration's Jim Cisco devised the clever, seasonal, yet ominous name "Frankenstorm," given the storm's gathering collection of hybrid elements -- heavy wind and rain, high tides, and possibly even snow -- and its Halloween-week arrival.

This crazy event is basically a combination of Hurricane Sandy and a nor'easter, either of which would be a formidable and possibly highly destructive storm in its own right. According to Cisco, "We don't have many modern precedents for what the models are suggesting." Batten down the hatches, everybody.

Investors should brace themselves too. The increasing frequency of extreme weather events like this one could wreak havoc on your portfolio, and torches and pitchforks won't drive such monsters out of town.

One heck of a scary Halloween
Already, some analysts are forecasting that Frankenstorm could add up to at least $1 billion in damage on the heavily populated East Coast. That's a big deal for insurers, whose profits really rely on such destructive scenarios not hitting home too often.

It's also a big deal for utility companies, which must scramble to prepare for the storm and work overtime to keep power going as well as to restore it after outages -- which won't be an easy task for a storm forecasters say could stretch into a five-day event.

Furthermore, utilities like Pepco (NYSE: POM  ) and First Energy's (NYSE: FE  ) Jersey Central Power & Light face a huge undertaking given their handling of other storms. Jersey Central faced major scrutiny about its service after Hurricane Irene. Pepco's received the dubious honors of being named "The Most Hated Company in America" according to one survey and falling to the bottom of JD Power and Associates' analyses of customer satisfaction among East Coast utilities in 2011.

Such events aren't a great deal for retailers, either. Grocery stores, discounters, and hardware stores may get a pop in sales from the preliminary scramble to buy emergency items -- water, nonperishable food, batteries, and even big-ticket items like generators -- but then the storm itself would negatively impact sales since many shoppers would likely be holed up at home. A five-day storm, and right before Halloween? Forget it.

You get the picture of the way such events can wreak havoc on many of the cogs that make up positive economic activity.

The perfect storms
Weather can have ripple effects that negatively impact businesses, consumers, and investors. However, some are warning that climate change is causing more extreme weather events than ever before, and that it's time to step up the preparedness for that long-term view.

Ceres, an advocate for sustainability leadership, pointed out that Hurricane Sandy and the "monster storm" scenario is an example of extreme weather events that are becoming "the new normal." Frankenstorm comes about a month after Ceres launched its report "Stormy Future for U.S. Property and Casualty Insurers: The Growing Costs and Risks of Extreme Weather Events."

The report focuses on the insurance industry, which is particularly vulnerable to such a major shift like climate change, and urges the industry to engage in far broader engagement and action. In 2012 alone, more than 25,000 new record highs were set in the U.S., and over the course of the last half-century, heat waves, droughts, and floods have been increasing in intensity and frequency.

In 2011, extreme weather events racked up $32 billion in losses for U.S. property/casualty insurers. We can only guess that 2012 figures could end up daunting, given the devastating drought and monster storms like the one that's on its way to stalk the East Coast.

Fortunately, some in the industry are beginning to address the issue. Allstate (NYSE: ALL  ) has acknowledged climate change and its risks, for example. CEO Tom Wilson told investors in 2011 that severe weather-related losses beyond hurricanes and earthquakes rose fourfold over a three-year period, and that premiums priced for increased frequency of such events is a permanent change. Allstate also made the Carbon Disclosure Project's 2011 leadership index for proactively disclosing climate change information.

In its report, Ceres also pointed to the positive spirit that formed industry group ClimateWise, comprised of 38 organizations including insurers and reinsurers like Prudential (NYSE: PRU  ) , Alliance, and Aviva (NYSE: AV  ) . The ClimateWise pledge is to "lead the way in analyzing and reducing risks; support climate awareness among our customers; incorporate climate change into our investment strategies; inform and engage in public policy debate; and reduce the environmental impact of our businesses ."

Don't ignore the warnings
The insurance industry is the first to come to mind when one contemplates the economic ramifications of extreme, destructive weather, but such events can have impacts on all of the companies we invest in, in different ways.

We investors can batten down our proverbial hatches by noting our companies' policies on climate change, as well as encouraging disclosure from those that lack transparency about their related risks and contingency plans. Seeking out companies that seek to address and correct climate change also makes sense as potential economic impacts grow larger.

The last thing we should do is ignore the coming storms. Rises in related costs can wreak havoc on investors' portfolios.

Profiting from our increasingly global economy can be as easy as investing in your own backyard. Our free report "3 American Companies Set to Dominate the World" shows you how. Click here to get your free copy before it's gone.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


Read/Post Comments (19) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 26, 2012, at 4:38 PM, fool3090 wrote:

    Another strategy: find companies that might benefit from formidable weather. Take Compass Minerals, which (among other things) mainly sells salt for melting ice on roads and highways. It's a small cap dividend-payer, a steady-as-she-goes kind of company. A winter of big storms could result in higher than normal sales. Just a thought. I'm long on CMP on that thesis, plus the divvys. A well-run company.

  • Report this Comment On October 26, 2012, at 5:40 PM, Sotograndeman wrote:

    TMF is getting desperate for material, methinks. Sad.

  • Report this Comment On October 26, 2012, at 5:56 PM, Mega wrote:

    I think the scariest thing would be that it's headed straight for Fool HQ.

  • Report this Comment On October 26, 2012, at 6:10 PM, MNGPHR wrote:

    I used to live in MN we would always hear of a coming "snownami" and laugh about it. It seems like tv weather people overhype this stuff too much. That said I hope it does only turn into another overhyped storm.

  • Report this Comment On October 26, 2012, at 6:26 PM, AlanWest wrote:

    Both the I Ching and the Mayan calendar predict great change for the Earth and humanity in 2013. There will be increasing numbers of natural disasters affecting us this year.

    http://www.familysurvivalcenter.com/news.htm#mayan2012

    Stop chasing material goals and get your priorities straight. Set aside food and supplies to provide for your family now.

  • Report this Comment On October 26, 2012, at 6:49 PM, Mega wrote:

    MNGPHR, we're talking about hurricanes - storms with the kinetic energy of atomic bombs. Not making snow angels.

    :)

  • Report this Comment On October 27, 2012, at 11:37 AM, Beanfarmer wrote:

    The scariest part I see is the over hype by The Weather Channel. We are talking about a Cat 1 that is projected to drop to tropical storm level before land fall. It will probably imitate a strong nor'easter which New England has seen many times before. That population willbe ill prepared for a bad hurrican because of the hype lie.

  • Report this Comment On October 27, 2012, at 3:11 PM, dwatson102 wrote:

    Well finally someone is talking about the economics of climate change in terms of disaster costs.

    Now when people start talking about the predicted 30% reduction in global food supply and the resultant speculative price gouging that always results from a shortage like that maybe people will actually start to get what a big deal this is.

    We're not going to drill our way out of this one because it is consumption, not supply, which is the cause of the problem.

  • Report this Comment On October 27, 2012, at 11:47 PM, superbinvesting wrote:

    It will be interesting to see how the insurance companies try to weasel their way out of the damage claims.

    www.ingeniousinvesting.com

  • Report this Comment On October 28, 2012, at 1:57 AM, Bert31 wrote:

    Why no mention at all of Northeast Utilities and their horrible handling of the Irene and October 2011 nor'easter aftermath? One high level executive was fired. Much of the state of CT was without power for up to 10 days! They had previously "consolidated" their workforce and were able to raise rates. There was an insufficient number of workers to handle thee outages. Business Insider named them the 2nd most hated company in America recently because of this. Despite the utilities shortcomings, the comapny was able to complete its merger with NStar. Coincidentally, the agency charged with deciding on the merger is headed by a former consultant to NU who recieved over $100,000 over the past several years for services. In addition, this said regulators wife is running for Congress and has recieved campaign donations from NU. Alyce how can you not even mention NU in this article?

  • Report this Comment On October 28, 2012, at 2:31 PM, predfern wrote:

    The number and strength of hurricanes has not increased when you take into account improvements in observational practices.

    http://www.worldclimatereport.com/index.php/2012/03/16/atlan...

  • Report this Comment On October 28, 2012, at 3:41 PM, Mathman6577 wrote:

    I agree Bert. I live in Conn. NU (and the state government) did a horrible job of handling the storms. I am not sure they are that much more prepared this time around either. We'll see what happens.

    Also note that NU has been pretty much a crony of the state government for many years and has been allowed to keep raising rates while at the same time providing bad customer service.

    I wouldn't invest in them for either reason.

  • Report this Comment On October 28, 2012, at 8:04 PM, goldozone wrote:

    I'm holding tight to CBIS Cannabis Science, PCFG Pacific Gold, AUMY Auric Mining, EGI Entree Gold, AONE A123 Systems < Energy, Gold and Mining plays.

  • Report this Comment On October 29, 2012, at 3:49 PM, Darwood11 wrote:

    Berkshire Hathaway derives a substantial part of its income from insurance. Yet, BRK-A and BRK-B are considered good stocks to purchase,and there are articles frequently at the Fool supporting that position.

    My point in this is to separate "short term" investing from "long term,"

    In the near term, weather and politics will have an impact on specific stocks. Long term? Events far beyond the control of our politicians will decide the outcome. Back in 1965, when Medicare was passed, it was pretty much below the political radar, and described as a "small government program which would have little or no impact on the economy," Quite to the contrary, it and it's sister program "Medicaid" has created a sink hole for total government spending. These programs have fueled the boom in health care and related insurance stocks.

    Looking at age demographics, this was not a surprise. What was unknowable was the degree to which the government would contribute to the bottom line of health care stocks.

    I face a simple decision as an investor. Will I become a "short term" investor and ultimately a day trader, or will I retain my course as a long term investor.

    Storms, politicians and even wars and global contagion are ultimately a short term phenomenon.

  • Report this Comment On October 30, 2012, at 12:51 PM, ETFsRule wrote:

    People forget that Frankenstein was just a doctor; the monster that he created was the real menace.

    That's why I think the moniker "Frankenstein's Mon-Storm" is more appropriate for this hurricane.

  • Report this Comment On October 31, 2012, at 12:08 AM, goalie37 wrote:

    I'm hoping you and your coworkers at the Fool are all safe and well.

  • Report this Comment On October 31, 2012, at 3:35 PM, TMFLomax wrote:

    Thanks for all the thoughts everyone. Also, sorry some utility stocks simply weren't on my radar ahead of this storm; that's why it's great to have readers be able to add to the discussion!

    ETFsRule, you're absolutely right about that technicality. ;)

    As far as I know, everyone at Fool HQ is doing just fine, and here in DC it appears we really dodged a bullet in terms of not getting the worst of the storm. I know a lot of us down here are thinking about everybody affected in New York and New Jersey though. A very serious and mind-boggling situation up there.

    Best,

    Alyce

  • Report this Comment On November 02, 2012, at 11:38 AM, 48ozhalfgallons wrote:

    In 1626, the Canarsee sold manhattan to the Dutch for $24 worth of beads. Apparently their ancestors had witnessed the ravages of a coastal hurricane. The local natives were never so presumptuous as to build "permanent" structures on the coast line.

    Climate change...... Hmmmm I always become suspect of credibility when one writes about climate change. The climate is always changing. At its slowest pace, crust tectonics will change climate. Changes in solar energy output and volcanic activity cause faster changes. To believe that man can control any meaningful change in climate kindles images of Atlas or a turtle holding up the planet.

  • Report this Comment On February 20, 2013, at 6:18 PM, BillFromNY wrote:

    We just can't keep warning people enough about how the people on the planet will suffer if something is not done about man-made climate change.

    Look what happened when we did not heed the warning of Alvin Toffler in his 1970 bestseller Future Shock. Well, in that case actually nothing that he predicted happened, as the population managed to react very well to drastic, technology-driven change.

    But don't forget Ravi Batra's bestseller The Great Depression of 1990, in which he predicted that our economy was "moving toward the greatest worldwide depression in history, in which millions of people will suffer catastrophic financial reversals...." To begin in 1990 and continue through at least 1996.

    Well actually it turned out that there was not too much to that one either. But our biggest blunder was and is not paying sufficient heed to Stanford professor Paul Ehrlich and the deadly warning of his bestseller The Population Bomb. In this 1968 book he predicted that by the 1990s war, pestilence, and famine would cause 500 million deaths, and the polar ice caps would melt and raise ocean levels by twenty feet. Let's hope that it is not too late to head off THAT disaster.

    The whole world loves a good doomsday prediction. As for me, the only threat that really frightens me is nuclear proliferation.

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