Ike, Lehman and Market Volatility

The calendar had caused me to anticipate volatility this week.

Goldman Sachs (GS - Analyst Report), Morgan Stanley (MS - Analyst Report), FedEx (FDX - Analyst Report) and Oracle (ORCL - Snapshot Report) will release quarterly results. The Fed will meet on Tuesday. (No change in rates is expected, but given the Lehman situation, there is a small possibility that a quarter-point cut could be announced.) Friday is a quadruple-witching day, meaning the simultaneous expiration of options and futures contracts.

Now, the markets will also have to contend with the aftermath of Hurricane Ike and the fallout from Lehman Brothers.

As former Houstonians, my wife and I spent a lot of time this weekend on the phone with friends and family. At this point, we have no idea what condition my wife’s parent’s house is in. (They live in Houston’s southern suburbs.)

We do know that there has been extensive wind damage. Several friends talked about trees blocking streets in their neighborhoods. The Houston Chronicle published a non-flood insured damage estimate of between $6 billion to $16 billion.

Excluded from this number is the additional damage caused by Ike as it moved through the Midwest and towards the east. (The sump pump in my Northern Illinois house has been running all weekend.) Property & casualty firms and reinsurers such as Progressive (PGR - Analyst Report) and XL Capital (XL - Analyst Report) could be under pressure this week.

In regards to energy, the initial reports suggest the refineries fared pretty well. Valero (VLO - Analyst Report) had some plants running over the weekend, BP (BP - Snapshot Report) had one powered by generators, while Exxon (XOM - Analyst Report), Marathon (MRO - Analyst Report) and ConocoPhillips (COP - Analyst Report) were trying to restore power. Ahead of the storm, 14 refineries that provide 22% of the nations refining capacity shut down, according to the Houston Chronicle.

Given widespread electricity outage throughout the metro area, refineries could have staffing issues over the next several days or weeks, however.

Negotiations over Lehman (LEH) are continuing today. Barclays (BCS - Analyst Report) appeared to be the front-runner, but has since pulled out. The Fed’s refusal to provide insurance against any losses related to Lehman’s bad assets appears to be the biggest stumbling block.

The difficult negotiations are going to put additional pressure on AIG (AIG - Snapshot Report), Merrill Lynch (MER) and Washington Mutual (WM - Analyst Report) to find additional funding, if not acquirers. (The Wall Street Journal is reporting that Merrill and Bank of America (BAC - Analyst Report) are holding merger discussions.)

Investors who paid attention to the Zacks Rank and our equity research reports, would have been cautious enough to stay away from beleaguered financial firms. Negative earnings estimate revisions have signaled ongoing problems throughout this year.

Warren Buffet is credited as saying "buy fear, sell greed". The current market environment is providing a "buy fear" environment for long-term investors. Rather than sitting on the sidelines, investors should actively research stocks.

You don’t have to buy stocks on Monday, but if you want to build wealth, you should build and maintain a watch list of stocks you would buy if the price were right.

Read the full analyst report on PGR

Read the full analyst report on XL

Read the full analyst report on VLO

Read the full analyst report on WM

Read the full analyst report on XOM

Read the full analyst report on COP

Read the full analyst report on MRO

Charles Rotblut, CFA, is the Senior Market Analyst for Zacks.com.

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