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Good morning,

It is quite hard to believe the pictures we are seeing on the news channels about the state of New Orleans. When you consider what the US stands for in terms of innovation and progress it is amazing to see 20,000 people stuffed into a Super Dome without any basic facilities. It looks like one of the biggest natural catastrophes in the US for many years. Someone on a bulletin board pointed out that the San Francisco earthquake in 1906 was of similar magnitude. That lead me to do some work on the timing of “before” and “after” of this particular earthquake some 100 years ago.

The chart above will show you what I am talking about. Up until the earthquake the Dow had a phenomenal bull market into the turn of the century. It then made a secondary new high in 1901 before making a major bear-market low in 1903. The bear-market low and the timings between the high and the low are very similar to the one we saw in this century. I am not trying to use razor sharp timings here, but only to point out the similarities between the two market conditions.

From November 1903 the Dow rallied in January 1906, or about 807 days. The Dow rallied some 880 days from the bear market low to the recent high of 7th March 2005. The quake of 1906 did not materially change the direction of the market. It did sell off sharply after 2-3 weeks later, but recovered to settle into a range for the next 7 months. Once we got into 1907 the market declined 50% in a year. It was called the panic of 1907, and it had its root in a natural disaster – the earthquake 7 months earlier. While the initial destruction was not perceived to be detrimental to the market, it overlooked the damage to the rail transportation system, and it put the US economy into a slump.

Could the same thing happen again? We will of course have the usual American enthusiasm and fighting spirit, and we respect that. However, what is the damage to the oil platforms and rigs, and shipping ports? What will be the effect of oil prices above $70, if it gets above this level again? This may take 6 months to play itself out. This is of course only one side of the story. You got a major city where every single house needs to be rebuilt. The insurance claims will be huge and someone will have to pay for the party. Given that information flows so much faster today than it did 100 years ago, we may not have to wait 6 months for the effects to be felt. Keep that in mind!

Today is Labour Day in the US and there is very little going on in Europe. The Dow is still hugging an upward sloping trendline. It looks too beautiful to be of validity. I will be happy to short the Dow if the trendline breaks.

Good luck today

Tom