Good night Irene, Good night Irene
I'll see you in my dreams.
From “Goodnight Irene”
Huddie “Lead Belly” Ledbetter …1932
As we review the damage to the East Coast in the wake of Hurricane Irene this past weekend, there are still serious problems. As of Monday, half of Connecticut was still without power, flooding was ravaging Vermont and, from the Carolinas to Maine, many people continued to grapple with downed trees and power lines, no electricity or water, flooded basements, impassable roads, and clean-up efforts that will last weeks, if not months. Some communities are drying out while others are still filling up with water. Many school systems will be starting late and, in many cases, the communities are using the schools for showering, water, or shelter. As of Wednesday morning, 54 people have lost their lives because of the storm. Transportation systems are starting to return to normal.
It is likely that the hurricane will be one of the top-ten costliest catastrophes in the nation’s history, with storm damage in the $10-12 billion range. However, the cost could have been much higher. As the storm exited the Bahamas it was a Category 3 hurricane, with a 25% chance it could develop into a Category 5 hurricane. The East Coast was lucky in that, with two landfalls, in North Carolina and New Jersey, and a pushing cold front, the storm ended up as a Category 1 and soon was downgraded to a tropical storm. As my colleague David Kotok has written, a Category 5 storm on the magnitude of the devastating Hurricane of 1938 would have caused damages well in excess of $30 billion.
As of Tuesday morning, there was no post-Hurricane Irene selling in the municipal bond market on credits that were in the path of the storm. No doubt this is also in part due to sparse attendance on Wall Street during a pre-holiday week. There is, of course, concern about the floods in Vermont and damages to towns and cities in New Jersey, Connecticut, and Rhode Island. Storms such as this point out the importance of both municipal-owned, as well as investor-owned, utilities (e.g., Connecticut Light and Power and NJ American Water Authority) providing water, sewer, and electricity. They, along with municipal transportation systems and highway and turnpike authorities, form the backbone of much of life as we know it and represent the term “essential service” that forms the core of most of the revenue bonds in which Cumberland invests for its clients.
What did Cumberland do prior to Irene making landfall? Since the potential strength and precise path of the hurricane was still not known toward the end of last week, Cumberland took an approach we have taken in the past with hurricanes approaching heavily populated areas. We looked at what seemed to be some vulnerable areas along the coast from South Carolina to Maine and selectively sold $10 million of issues. This included some general-obligation bonds, some port authorities, some airports, and some utilities. Maturities, for the most part, were unimportant. The reason for this is simple: capital preservation (because no one knew what the potential severity of the storm would be). This does NOT mean that we thought there was potential for default. The necessity of municipal plant is always borne out by severe storms such as Irene – and that is why Meredith Whitney is wrong in her prognostications. But this does not mean you cannot get periods of illiquidity in issues, as well as erosion in prices. This was demonstrated recently by Hurricane Katrina in 2005 and by Hurricane Andrew in 1992. Part of total-return bond management is sizing up events and their potential for impact – whether it is Federal Reserve actions or the behavior of tropical storms. Money raised will be redeployed into the municipal market judiciously in the next few weeks. We remain vigilant. Tropical Storm Katia in the Atlantic was upgraded to Hurricane Katia last night. More important for us is soon to be Tropical Storm Lee, forming in the Gulf of Mexico with potential tracks to the United States. Hurricane season doesn’t end until November 30th.