A day after Hurricane Katrina savaged the Gulf Coast, investors got a better chance to assess the damage. While the worst might have been avoided, uncertainties about how long it will take to restore oil infrastructure persisted Tuesday, sending crude prices to new highs and stock prices lower.

Oil hit yet another new high of $70.90 Tuesday morning before giving back some ground on news that the Louisiana Offshore Oil Port, or LOOP, had sustained no severe damage. The LOOP is crucial in transporting crude oil to refineries.

That provided a respite for stocks, which closed well above their worst levels of the day. After losing more than 100 points, the

Dow Jones Industrial Average

finished down 50.23 points, or 0.48%, at 10,412.82. The

S&P 500

dipped 3.87 points , or 0.32%, to 1208.41. The

Nasdaq Composite

lost 7.89 points, or 0.37%, to 2129.76.

Still, crude oil for October delivery finished at $69.90, up $2.70 on the day. Unleaded gasoline futures closed up a whopping 41 cents, or 20%, to $2.47 a gallon.

Although early estimates pinning insurance claims as high as $30 billion or $40 billion were revised sharply downward, shares of insurance companies such as

Allstate

(ALL) - Get Report

and

St. Paul Travelers

(STA)

finished lower.

Stocks had rallied Monday after Katrina changed course and passed to the east of New Orleans, away from oil refineries in western Louisiana.

"But today, we're getting the light of day on the situation," says Marc Pado, market strategist with Cantor Fitzgerald. Early estimates show that it will take at least several weeks before oil processing operations can return to normal, which should keep upward pressure on crude oil and gasoline prices.

On Tuesday, investors also had to deal with a more bearish outlook on the economy as memorialized in the minutes of the

Federal Open Market Committee's

Aug. 9 meeting.

FOMC members, before unanimously voting to raise interest rates by a quarter point for the 10th time in a row in early August, voiced concerns about the impact of rising energy costs on inflation and on growth.

In spite of recent benign readings on inflation, the Fed raised slightly its expectations for core inflation given "the recent further rise in energy prices" and with revisions to previous data.

The Fed also raised its projection of economic growth for the balance of the year as data suggested "greater near-term momentum in aggregate demand." But it also trimmed its growth-rate expectations for 2006, due to higher energy prices, higher long-term interest rates, and revisions to productive capacity data.

It must have been the trimmed growth outlook that pleased the bond market Tuesday. Bond prices already were edging higher in morning trade as the surge in oil prices further threatened the economic outlook. But the benchmark 10-year Treasury bond truly rallied after the release of the FOMC minutes, to end on a gain of 17/32 in price while the yield fell to 4.10%, a level not touched since July 11.

Of course, while the minutes seemed to put more emphasis on inflation than growth concerns, there have been new developments since the early August meeting that have tipped the risk scale toward growth.

There was evidence last week that consumer confidence had dipped because of surging gasoline prices, according to the University of Michigan's preliminary survey. Tuesday's Conference Board survey contradicted this, but economists tend to rely more on the Michigan survey.

There was also

Wal-Mart

(WMT) - Get Report

, which warned two weeks ago that its customers were feeling the pinch of surging gasoline prices. Tuesday brought news that the world's largest retailer had closed 123 of its U.S. stores due to power outages after Katrina's passage.

Since then, a series of retailers have followed suit.

Most importantly, since early August, crude oil prices have continued to soar, gaining another 6%.

Now with refinery outages due to Katrina's devastation, gasoline prices soared to record highs Tuesday, reaching $2.47 per gallon.

"The Nymex trading floor price is higher than the average retail price of gasoline was just a few weeks ago," notes Jason Schenker, energy analyst and economist with Wachovia. "If prices remain at this level for even a few days, we could see the average retail price of gasoline move towards the $3.00-$3.25 per gallon range."

That's also going to keep a lid on stock prices. "People are now thinking what this will mean for the economy," says Cantor Fitzgerald's Pado. "Even if we're not as industrial as we used to be, there's still going to be a huge psychological impact on consumers."

Of course, some companies may still benefit from reconstruction efforts in the area, including heavy-equipment makers such as

Caterpillar

(CAT) - Get Report

and

Deere

(DE) - Get Report

, and storm restoration firms such

Pike Electric

(PEC)

.

Home improvement companies, such as

Home Depot

(HD) - Get Report

, also should benefit.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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