Weather forecasting gaining respect in hurricanes' wake

Oct 3, 2005 @ 12:01 am

By David Hoffman

NEW YORK - Hurricanes Katrina and Rita have spotlighted a little-known, but possibly growing, industry within financial services - meteorological consulting.

A small number of hedge funds and mutual fund companies either use a meteorological consultant or at least pay close attention to weather when making investment decisions, industry experts said.

"People have realized weather impacts their business," said Michael Schlacter, chief meteorologist for Weather 2000 Inc., a New York-based meteorological consulting firm.

It appears, however, most money managers have yet to adopt the practice - or, at least, they won't admit to it.

Mr. Schlacter said his firm has worked with a few mutual fund companies. He declined to say which companies because they have asked that their names not be disclosed, he said.

That's not surprising.

Many mutual fund companies scoff at using weather as a factor in investing.

"It doesn't fit the thesis" at Boston-based MFS Investment Management Inc., because the firm takes a long-term approach to investing, said John Reilly, a spokesman for the company.

Using the weather to help direct investments would be more useful to short-term investors, said Jason Farago, a spokesman for Lord Abbett & Co. LLC in Jersey City, N.J. Lord Abbett does not have any plans to do it, he added.

That could change.

Hurricanes Katrina and Rita have had a significant effect on quite a few companies, particularly those in the oil and gas industries, David Wyss, chief economist at Standard & Poor's in New York, said last week during a conference call.

Vulnerability abounds

Currently, 5% of refinery capacity is shut down as a result of the storms, he said. That's a lot, considering the refining business was operating at 99% capacity before the hurricanes, Mr. Wyss said.

It illustrates just how much of the economy is vulnerable to weather-related events, said Stephen Bramlett, president of Meteornomics Inc., of Kansas City, Mo. His company produces weather-focused analyses of listed public companies that are significantly dependent on the weather.

The U.S. government has estimated that up to 20% of the nation's gross domestic product is weather sensitive, Mr. Bramlett said.

Of course, commodities are particularly affected by weather, he said. It's something commodities traders have known for a long time. In fact, two-thirds of commodities traders are "shirt-tail meteorologists," Mr. Bramlett added.

But equities - specifically those of small-capitalization companies that are geographically sensitive - also are affected by weather, he said.

It's something more investment managers are coming to understand, said Joel Myers, founder and president of AccuWeather Inc., a well-known weather information and forecasting company in State College, Pa.

The business of meteorological consulting has been growing over the past seven or eight years, he said, but it really has accelerated over the past six to seven months.

Its appeal is that it allows portfolio managers to be ahead of everyone else when it comes to weather-related events that can affect their markets, said Mr. Myers, who also runs a hedge fund called Weather Prophets LLC.

For example, an investment manager could benefit from knowing just five minutes ahead of time that the National Weather Service in Silver Spring, Md., is about to reclassify a Category 3 storm into a more powerful Category 4 storm, he said. That could cause a spike in the price of natural gas futures on which the manager could capitalize, Mr. Myers said.

Tuning in

Of course, dabbling in futures is a short-term strategy in which a hedge fund manager is more likely to engage than a mutual fund manager.

But mutual fund managers will get more "tuned in" to the importance of weather forecasting, because more of the companies in which they invest are paying attention to it, Mr. Myers said.

For example, in order to mitigate losses and be more efficient, a retail organization that supplies snow shovels might try to get a handle on how much snow it can expect in a given year, he said.

The people who are managing money are going to have to "catch up" to what those companies are doing, Mr. Myers said.

Unfortunately, predicting the weather isn't a perfect science.

Weather 2000 focuses on medium- and long-range forecasts that try to determine what the weather will be like months in advance, Mr. Schlacter said. But those forecasts can't tell you if your Memorial Day barbecue will be rained out, he said.

The forecasts provide a range of information, such as how many 90-degree-plus days you can expect over the summer or how much rain you can expect in a specific month, Mr. Schlacter said. The accuracy of those forecasts, however, depends on location and season, he said.

The usefulness of such forecasts is debatable, said Meteornomics' Mr. Bramlett. Long-term forecasts are notoriously unreliable.

Investors would do better to look at past major weather events and figure out their implications for companies, Mr. Bramlett said.


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