Why Sandy Matters for America’s Economy

“Frankenstorm” Sandy, the hurricane that walloped millions of Americans from Maine to the Carolinas this week, was a tragedy.

The good news is that many communities were well-prepared for the storm and sustained less damage than they expected.

This is important because there’s always the next disaster — and the one after that. My state could be next — or yours.

Sandy was a HUGE storm. Ten states declared a state of emergency by Tuesday. That means it could hurt this quarter’s economic output.

Gross Domestic Product in the region between New York and Washington amounts to some $2.5 trillion. So, each day the region’s economy grinds to a halt amounts to about $10 billion in foregone output.

Economists’ and analysts’ estimates on how much the storm could cost range from $20 billion to $45 billion in losses and damages. Importantly, we should then see as much as $36 billion in recovery spending, according to other estimates.

For comparison’s sake, last year’s Hurricane Irene caused as much as $20 billion in damage. Meanwhile, Hurricane Katrina racked up a $100 billion total.

What Companies Get Hurt?

Retailers bear the brunt of any storm’s economic impact for the simple reason that shoppers stay home. Restaurants get clobbered, especially those that do big business in the affected areas. Names like Darden Restaurants (DRI), Chipotle Mexican Grill (CMG), and Panera Bread (PNRA) may all face business interruptions.

A big loser can be the global insurance industry — specifically names like ACE Ltd. (ACE), Travelers (TRV), Arch Capital Group (ACGL), Allstate (ALL) and Chubb (CB), which are included in this table showing the storm’s potential earnings-per-share impact on specific insurers and financial services companies.

The storm has the potential to cause some of the largest losses the global insurance industry has faced this year. Insured losses could total about $7 billion to $8 billion, according to estimates. But the worst of it may already be priced in by the time you read this.

What Companies Benefit?

Homeowners in a last-minute scramble for supplies can boost sales at home-supply stores including Home Depot (HD) and Lowe’s (LOW) and supermarkets like Whole Foods (WFM).

Those are some of the more-obvious plays. But you can also look for glass stores and carpet stores to clean up in the aftermath. One name that comes to mind is Mohawk Industries (MHK), which provides flooring services to business and residential customers.

Plus, plenty of infrastructure needs repair — and I covered those companies in my recent infrastructure report. State and local governments will foot the bill, with a lot of it coming in the form of federal disaster relief.

What Do These Federal Funds Pay For?

Federal disaster assistance goes beyond cots and blankets — it can include grants for temporary housing and home repairs, low-cost loans to cover uninsured property losses, and other programs to help individuals and business owners recover from the effects of the disaster.

That can be very important because America’s economic recovery is fragile. The U.S. economy grew 2% in the third quarter of 2012. That’s an increase from earlier in the year but still a weak number.

On top of that, the Federal Emergency Management Agency (FEMA) stands to lose about $878 million from its budget, including $580 million in direct disaster relief, if automatic spending cuts agreed to by Democrats and Republicans as part of a budget deal go into effect by January 2013.

So the question comes up …

Are These the Final Years for FEMA?

In Sandy’s aftermath, some of the current administration’s toughest critics, like New Jersey Gov. Chris Christie, have said the president and FEMA’s response have been “outstanding.”

But what might the next disaster look like? Well, a lot depends on the sitting president’s budget for emergency response.

If the country votes for a change in leadership, a resulting smaller federal government would mean that more functions would be handled on a state and local level. This would include emergency preparedness. In fact, in a June 2011 debate, that’s just what Romney told CNN’s John King.

King said FEMA was running out of money and asked about those who say, “The states should take on more of this role.”

“Absolutely,” Romney responded. “Every time you have an occasion to take something from the federal government and send it back to the states, that’s the right direction.”

King asked whether that includes disaster relief.

“We cannot afford to do those things without jeopardizing the future for our kids,” Romney said by way of response.

In fact, Romney’s proposed budget plan would mean at least a 34% cut to FEMA’s budget.

But can states pick that up, both from a capacity as well as a financial standpoint?

Gov. Romney has said he would provide states with block grants to cover disaster relief. But a “no strings attached” policy would mean that the money could be used for other purposes and might not be available … or even enough.

Are You Ready for What Might Be Coming Next?

I hope that you and your loved ones are safe and that you were able to stay out of “Superstorm” Sandy’s path. This disaster serves as a good reminder to do a portfolio checkup and make sure that you not only have enough money in your nest egg for emergencies, but also for the fun things for which you’ve earmarked this cash.

The stocks we talked about today could do well in Sandy’s aftermath. But we have another big event coming our way that could produce some pretty massive returns … for those who know exactly where to direct their capital.

My colleague Tony Sagami and I are ready to help you do just that.

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Yours for trading profits,

Sean