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Portfolio Managers Grapple With Katrina's Exact Impact


As the nation's money managers return from their summer respites, they're finding that Hurricane Katrina has left a host of questions marks within their portfolios.

As The Wall Street Journal reported last week, this is traditionally a time when investment professionals tweak their portfolios for the industry's final quarter, but this year they might have to rethink their strategies. Before Katrina rocked the Gulf Coast, the industry knew what might impact equities: the Federal Reserve's monetary policy, volatile energy prices and sure-footed corporate earnings. Now, however, they're trying to figure out if Katrina's impact on distribution channels might pinch corporate profits, force oil prices even higher and ultimately hamstring the stock market.

The industry's contrarians, meanwhile, are banking that rebuilding efforts in the South will boost the markets in the long run. Consumption will surely rise, as will investment in new equipment, and the Fed will likely suspend any further short-term interest hikes, they think.

"This is changing a lot of the thought patterns that I had 30 days ago," said William Dwyer, president of Baltimore-based MTB Advisors, which boasts more than $11.5 billion in assets under management. Dwyer told the Journal that after this initial jolt to the economy, Katrina's rebuilding effort could actually extend the bull market and add as much as $50 billion to the economy over the next six months.

Others aren't so sure.

"The negative consequences resulting from Katrina, whether they are economic or political, may hang around a bit longer and cut a bit deeper than is now anticipated," said Gordon Fowler, chief investment officer at Philadelphia-based Glenmede Trust. In a research note to clients, Fowler advised them to put stock buys on hold, an about-face from his recommendation last month to increase stock holdings.

For the record, the Dow Jones Industrial Average actually ended a two-week slide as cleanup efforts got under way. The Nasdaq Composite Index also posted gains and oil and gasoline futures fell on news that deliveries were picking up.

"I don't see this causing a recession," said Chris Conkey, chief investment officer at Wachovia's money manager, Evergreen Investments in Boston.

Henry Herrmann, chief executive at the Overland, Kan.-based fund complex Waddell & Reed, thinks the energy-price problem will persist. Individual stock groups might move sharply, he offered, but the broader market will make little progress.

New York-based Goldman Sachs predicted a significantly negative impact on the markets, while Bridgewater Associates in Westport, Conn., argued that it would have only a modest effect.

"While the disaster's impact on [U.S.] economic growth is likely to be limited, it could have a much larger and longer-term effect on the inflation rate," said Jim Midanek, chief investment officer of Midanek/Pak Advisors of Walnut Creek, Calif. As a result of the disaster, the Fed will probably pause on its steady rate increases, and government spending increases for beefed up disaster preparedness will enlarge an already bloated deficit. Neither of these is favorable to the inflation outlook, he added.

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