Want a Weather Forecast? Ask Wall Street
Talk About High Pressure: If Wall Street Meteorologists Don't Get Their Forecasts Right, Their Banks Can Lose Big
By ALICE GOMSTYN, RICH BLAKE and DALIA FAHMY
Feb. 8, 2010
Want the most accurate weather forecast money can buy? You might want to make friends with someone like Corey Lefkof.
Lefkof is a meteorologist, but you won't find the 41-year-old answering phones at the National Weather Service or flashing a toothy grin as the weatherman on your local TV news.
Lefkof runs with a different crowd, the sort that risks millions of dollars on the kinds of predictions Lefkof makes every day.
He works for a bank.
"It's a much more stressful environment than anything I've ever been involved with," he said, "but it's also taught me a lot about risk-reward management."
Lefkof is a Houston-based meteorologist at Deutsche Bank's commodity trading business. By 6 a.m. most mornings, Lefkof has reviewed the latest overnight weather models, drawing from reports by private forecasting companies, the U.S. government and his employer's own satellite subscription service.
He estimates that about a dozen or so of his fellow meteorologists do the same work at other big banks -- JPMorgan Chase is currently advertising on Internet job boards for a "supporting meteorologist" to assist its chief meteorologist -- while others work at hedge funds.
Still other financial firms and funds rely on private weather consulting services, and some have tried both: Goldman Sachs and Barclay's Capital both hired their own meteorologists before turning to outside providers, industry sources say.
Exactly why is Wall Street so obsessed with weather?
Lefkof and others will tell you that weather predictions aren't just useful for planning your vacation or your choice of jacket -- they drive the global economy. Under the radar as they may be, Wall Street's weather men are as crucial as any analysts because of the sheer size of the money being wielded -- in the trillions, by some estimates -- in weather-linked investments, especially commodities.
Why commodities? Because things like crop yields and energy demand can depend heavily on the weather. Think of the recent cold snap that gave orange growers anxiety in Florida, the floods that soaked Iowa corn fields in 2008 or the record low temperatures driving up heating bills in Maine last month.
"If we know it's going to be cold in large demand centers of the Northeast, Midatlantic, Ohio Valley, Midwest," Lefkof explained, "a lot of our investors might speculate and buy natural gas futures."
Hot and Cold Bets
Commodities aren't the only way to make weather plays. In 1999, the Chicago Mercantile Exchange established weather products -- investing instruments based entirely on weather predictions, including temperature, hurricanes, snowfall and frost.
Such instruments, often known as weather derivatives, are about more than just making a bet on the rise or fall of the mercury. Businesses ranging from utilities to snow mobile manufacturers can use weather investments to hedge against climate conditions that they know could cost them money, said Felix Carabello, director of Alternative Investment Products at the CME.
"Before these products were available," he said, "the only thing you could do is hope for the best."
Insiders say that when it comes to long-range weather predictions, watching the weather markets may be better than any Farmer's Almanac.
"The weather market, to a large extent, called the cold winter we've been having," said Nick Ernst, the director of weather markets at the brokerage firm Evolution Markets Inc.
The recession has hurt investment in weather markets much as it's hurt everything else. Trading in weather financial products has dropped by $30 billion since 2006, according to the Weather Risk Management Association.
But industry experts expect the markets to rebound as more companies realize the benefits of using weather investments to manage their risks.
Influence From Enron?
Wall Street's demand for weather-related expertise has grown steadily over the last 10 years, said Matt Rogers, the founder and president of Commodity Weather Group, which offers weather consulting services to several Wall Street firms.
"It's gone from being a luxury to being a requirement," Rogers said.
Rogers believes that Enron, the energy trading firm whose spectacular implosion rocked Wall Street less than a decade ago, helped to introduce the financial sector to meteorology. Enron had a dozen meteorologists on staff, he said.
Former Enron energy trader John Arnold went on to found the hedge fund Centaurus Energy, the $5 billion fund that includes its own staff meteorologist, according to published reports.
Six-Figure Salaries for Wall Street Weathermen
The growing demand from financial firms has helped boost metereologists' career choices.
"When I went to school in the early 1990s, I had never heard of this," he said of financial weather consulting. "But that has changed."
Mark Wysocki, the state climatologist for New York and a faculty member at Cornell University's Department of Earth and Atmospheric Sciences, said that the university developed a business minor for its meteorology program some five years ago to accommodate the growing number of students headed into the private sector, including utility companies, insurance companies, consulting firms and, most recently, banks.
Wysocki and Rogers said that Wall Street meteorologists can earn six-figure salaries, more than they can expect to make working in government jobs or even as TV weathermen.
"Officially, the best way to make a living as a meteorologist is in a top TV market, such as New York, Chicago or L.A.," Rogers said. "Otherwise, it's very hard to make money in television."
Lefkof wouldn't talk about compensation. But he did talk about the thrills of his job, like getting a call right when almost everyone else got it wrong.
Take last week, for example.
Earlier U.S. forecasts had called for the winter to turn mild at the start of February. Lefkof disagreed.
"I'm sticking out my neck out there, saying, 'No this pattern's going to change to colder around the turn of the month," he said. "I was recognizing a pattern even though the models were not directly showing that."
Going against the grain made for a very stressful week for Lefkof -- not that he's not used to it.
"I guess you develop a tough skin and you just get a tolerance build up for stress," he said.
Tough skin or not, Lefkof needed the cold to come before he could feel better. Fortunately for him, it did.
"When I came in on Monday, all the forecasts were colder and natural gas was up 30 cents," he said. "All the stress was gone for me.
"That was a very good day."