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Research by Shaza
Lesson: A small problem can (and will) turn into a larger one. Google created a Crisis Response page filled with images and videos to help track the spread of the spill. We started here with the rig burning off the coast:
then…
And we ended up here:
Do we not have the technological know-how? Perhaps we don’t know enough about the deep sea? In any case, $BP allowed a small problem to become something that cannot be contained. The spill has now spread to Mississippi and Alabama, and may reach Florida by the end of the week. Now, it seems like the next ‘likely’ solution is two months away. By that time, the majority of the Gulf of Mexico will be in trouble. $BP, as a result of one mistake, will blow up and it will never be the same for them, ever again. With 23,000+ claims against them already, $70 billion in market capitalization wiped out, a Federal criminal probe against them, and a host of other issues, we can safely assume that $BP already “blew up”.
How does this apply to traders? It’s about the principle of cutting losses short and quickly. I am a champion believer of this as it has kept me alive for 8 trading years. First, it is necessary to recognize that taking losses is inevitable. Sh*t happens, so you deal with it professionally. Second, it is entirely up to you to follow your rules. If you are nervous, your position may be too large. If you are quick to sell out, you may have trigger finger syndrome. If you get stopped out too often, then you are not setting your stops right. This leads to the third thing, which is trying to limit the number of times you make the same mistakes again. Since we are all human, I can’t say “don’t make the same mistake again” because it is likely that we will. The difference between a professional and an amateur is recognizing the mistake (self-realization) and taking action quickly to remedy the mistake.
Jesse Livermore said it best in Chapter 3 of “Reminiscences of a Stock Operator” by Edwin Lefevre:
“With me I must back my opinions with my money. My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat. But if I cannot advance I do not move at all. I do not mean by this that a man should not limit his losses when he is wrong. He should. But that should not breed indecision. All my life I have made mistakes, but in losing money I have gained experience and accumulated a lot of valuable don’ts. I have been flat broke several times, but my loss has never been a total loss. Otherwise, I wouldn’t be here now. I always knew I would have another chance and that I would not make the same mistake a second time. I believed in myself. A man must believe in himself and his judgment if he expects to make a living at this game.”
He also said: “A stock operator has to fight a lot of expensive enemies within himself.” Livermore understood this as a fact of human nature. Don’t be afraid to cut the loss short and quickly. If you’re wrong about it, then you can always get back in via the next entry opportunity. If you are right, then you will be breathing a sigh of relief after having purged yourself from a potentially huge awful mess.
In the end, you’ll make out just fine.
26 comments:
First!
Ooops, sorry, not on Mish's blog.... old habits die hard you know...
Just because I am British does not make me responsible for British Petroleum, but I must say how sorry I am to see this awful mess. If only we could find a way to avoid the next phase of oil exploration which will put at risk huge areas of the world.
One of my favourite commentators blew himself up over this: "Your Analyst hitting the Buy Button on BP Stock and looking for other bargains." That was on May 8th.
http://www.marketoracle.co.uk/Article19250.html
I wonder if he has now taken a loss and sold?
At some point BP will have a break-up value based on its assets (excluding its brand name). If the price of oil falls and the markets roll over we could see BP getting to a valuation which makes it tempting to a trader. But what about the morality? A tough call.
GL I addressed this yesterday. What is moral anymore? Cars that pollute, patenting a gene from a patient, Coal Fire plants, giving billions to banks? The list goes on and on. What about the morality of Walmart that pays substandard wages and imports junk we don't need from China? Many of it's employees are on food stamps and Medicaid.
BTW I don't think BP is owned by the Brits anymore, but regardless I am not blaming anyone. We needed something like this to happen to increase our awareness of what could happen. All of a sudden the "drill baby drill" people shut their mouths and Obama passed a law. The fall out at this time is unknown and I am sure other deep well rigs are in a similar predicament.
I mentioned the company Transocean (RIG) that has lost nearly 50% of its value due to it owning the oil rig.
I see them as a buying opportunity at 50.00 a share. This mess was not done intentionally, although steps were taken that may have made it worse who knows for sure? The Russians never thought about Chernobyl either and that entire area is still highly contaminated.
So once again where is morality in today's world of greed and consumption?
BTW BP made a big mistake in being self insured through one of its subsidiaries and stands to lose billions. Transocean was not.
I would stay clear of any oil/gas companies doing business in the US offshore (anywhere). The chart may look attractive, but the risk is not worth it, IMHO.
The risk there is future lawsuits, future regulatory action, and a the heavy hand of Government regulation and inspection driving their costs up.
Any company directly involved will be sued 9 ways from Sunday, and politicians in Washington may lift the liability limits etc.
In the future costs will be higher and projects harder and much slower to get approved. Existing projects may have to upgrade safety measures, and they will be subject to much more oversight and inspection. Insurance costs will soar, and coverage may be hard to get at any price.
Even US oil/gas companies who had nothing to do with this mess at all will be affected, and their future earnings will likely be lowered by a combination of the above effects.
So why swim against the oily tide? If you want to buy some energy sector, get away from the US (or stick to onshore producers only), or buy oil/gas ETFs etc.
Oil producers in Asia and other regions like Africa and South America will not face any of these factors, or much less of them.
Another implication is that this whole affair makes nuclear power much more attractive, and so boosts prospects in the long term for the uranium miners a little bit more. It may take a while yet, but this will become apparent to many over time.
Going Loco - I don't think he "blew up" - it's just a wrong call. Unless you expect 100% accuracy on every pick, which is of course unrealistic.
The best traders (those who don't cheat like the Squidmen - 100% profitable days is impossible without gaming the system) will get somewhere between 50% and 70% of their directional price calls correct, a few may get to 75% or even 80%.
But that means they are still wrong somewhere between 20% and 50% of the time.
And that comes back to today's post from Queen - sometimes the trade just goes wrong, and you get stopped out. Money management is more important than getting each and every call right.
So with regard to your favorite analyst there, the important question is how he does in a year or a decade with total portfolio performance, not one bad call.
Nobody's perfect.
The fallout over time will be higher gas and oil prices. Hard to see it any other way.
We will not be able to stop drilling deep water areas. Unless we decide to stop using oil all together.
Most discussion of oil focuses on it's use as energy, and they do not discuss the other uses - plastics and chemicals. Even if we stopped using oil (gasoline) for transportation fuel today (hardly possible), it is still needed for almost every sector.
Look around your house or office and think of how many things you can see there that are based on oil in one way or another, often multiple ways. Then take them out of the picture.
I don't know about you, but if I did that, I would not have much left. I'd be living in a log cabin heating with wood - and if everyone did that, the air pollution alone would be a huge problem, not to mention we would run out of firewood very quickly. And food too, as oil is the main input cost for farmers for machinery fuel and fertilizer.
There are tradeoffs to everything.
Bill Cara today on 'Index ETFs':
"Watching the market overnight in Hong Kong, I see the data services are showing that the Heng Seng index was down just -0.03%. That’s a misrepresentation. This index contains 43 stocks: one was flat and 29 of 42 were down. Only 13 were up, and only two of those were up much at all. Moreover, the 25 large cap stocks of the FXI (China 25) that trade in Hong Kong, one was flat and just 5 up versus 20 down, many significantly.
The more I trade these index-based ETF’s, the more skeptical I become about their construction and reporting.
I am quickly coming to the conclusion that we independent traders are being gamed. If the regulators are going to remain asleep at the switch, somebody needs to study this ETF marketplace."
I tend to agree with him, which is why I mostly stay clear of ETFs in general, preferring individual stocks.
The other factor he does not discuss there is that many traders with any kind of trade in a particular sector (or one thought to be opposite or inversely co-related) will hedge the trade with calls or puts on the most relevant ETF.
Then when the black swan lands, their frantic attempts to cover will cause the ETF price to spasm up or down more than the overall market. We saw this in the flash crash, and I read several pieces of analysis on it, who came to the conclusion there is a hidden risk there associated with many Index ETFs, and the risk is larger the bigger and more liquid the ETF is, because that is where more hedges are placed.
GDXJ and other small ETFs may have less of this type of risk, while major stock and broad coverage Index ETFs have much more, as well as single holding ETFs like oil or gas or other commodities where I might term this risk extreme due to the large number of hedging positions.
New law would force journalists to be licensed by the government.
http://www.shtfplan.com/headline-news/michigan-to-consider-law-requiring-licensing-of-journalists_06022010
stan - I went to the link and read the comments, they say this has almost no chance of passing. Whew!
GAW,
I agree. But I have a feeling that censorship is coming in some form.
Even More Anecdotal Benefits of Strategic Default
Here's one that will curl your hair, or straighten it if it's curly already. How to fix your personal financial issues in one easy move.
Let's all chant the MSNBC song "Nothing matters anymore! Just Buy, Buy, Buy"
Those fundamentals are totally irrelevant today, we are in the 'New Age of Extend and Pretend'. Party on Garth!
Geebus.
By that time, the majority of the Gulf of Mexico will be in trouble. $BP, as a result of one mistake, will blow up and it will never be the same for them, ever again...
Wrong. They made dozens of "mistakes" before and after the disaster.
GAW thank you for the feedback, but I don't think I will buy RIG. I don't want to board a sinking ship. It could go down quite a bit more. Hi Stan. Busy at work today can't chat until later.
Was I right that BP is no longer owned by the Brits? That is one company that I wouldn't want to work for at this moment. Worst ecodisaster of my lifetime and it ain't over yet. Hi Edgar!
I don't know how much confidence you have in Prechter, but he calls for a continual bear market from now till 2016. He says we should reach a low in June 2016. That is a long bear market. He called the high of the present rally to be between april and may of this year.
At the end of his April letter, Prechter makes an ominus statement:
" Its hard to believe that in just 11 years time we will have seen the 3 most extreme stock market tops ever. You can tell your grandkids about it"
Wow.
QB-
BP is incorporated in the UK and its primary listing is in London but its shares are owned by big investors from all over the world (and also by many individual Brits and their pension funds)
GaW -
ETFs - never could understand them; never could see the motive for creating one other than to fleece the buyers;
Uranium - just a question of timing really. Very interested in this.
Strategic Default - this is not good. I don't know how it will work out because I don't think we have ever seen this sort of mass behaviour before. Debtors not paying, and it being in the creditor's interest to pretend that nothing is wrong. Very hard to work out what will actually happen. easy to say what we think ought to happen.
stan -
licensing "journalists" (who they? Us?) Obviously a daft idea but indicative of the mindset of TPTB who are rapidly losing control of the things they are supposed to manage, but want to control everything else as well.
Prechter Great insight; rotten timing. Never buy an investment recommendation from that man.
And just to add to the air of gaiety and good humour, in dear old England we have had a mass-murderer running amok killing his neighbours and shooting himself.
It's a beautiful evening here. Blessings and peace on all of you.
Good morning all.
I think BP will be taken over by Exxon or whoever before all this ends, the price will drop to the point where even IT looks attractive.
Looks like we have a technical bounce now. THe markets are still guilty until proven innocent!
Loco, as a brand, don't you think BP would find it very hard to exist and do business with 'that' Logo flying above rigs, on petrol stations etc...?
Shaza BP is done, finished and soon to be filing BK. Exxon may pick up what's left after the meat has been torn off by the gov't the lawyers etc, but why would they want to have any association with them? Exxon is a high profile company that many environmentalists would love the chance to bring down. I am going to put up a new post soon.
“A stock operator has to fight a lot of expensive enemies within himself.”.. Jesse Livermore.
Well said by a man who ended his life with a revolver in a stock market bathroom stall.
Queen I agree.. BP is toast; the lawyers and government will consume for themselves anything of value and sell the oil rigs for what they can get for them. I'd be buying CDS's on BP if I thought anyone would actually sell me one. Not too sure about RIG; it might be worth it to take a flyer here at the bottom.
If enough people decide to "strategically default" the razor thin capital ratios of hundreds of banks will be blown sky high.. and if it's the big boys who stumble, Geithner would either face another Lehman event or another bailout. Or we could do "mark to fantasy" for other asset classes to make it all work out mathematically..
"How about if 50% or more of Florida's tourist industry is wiped out, or if beach side properties there lose another 50% or more of their value due to tar balls forcing beach closures? How about Georgia, the Carolinas, how about closing Chesapeake Bay as well as Galveston Bay? Alarmist? Maybe, then there’s no end in sight to the spill.
And that too is just the start. There’s a serious threat that the entire Mississippi watershed and river will have to be closed for -much of its- traffic. You can’t have a zillion ships a day drag oil residue all the way up to St. Louis or beyond. Oil is sort of toxic. If it would come to that, the US have a real serious problem"
http://theautomaticearth.blogspot.com/2010/05/may-31-2010-9000-days-and-dying-economy.html
You and I agree Mr K. RIG is insured and BP is self insured. Some genius executive has already lost his job over that decision. I don't see any way they can stop this leak. All they can hope is the oil runs out soon. RIG will move their platforms to other countries and had insurance. BP will take the hit.
Remember their commercials? "Beyond Petroleum" was their slogan. Beyond Belief would have been better.
QB, come on...where is Barb the banker??? We could use a laugh to finish/start the day! LOL
Mr K,
I heard an interview with Jim Sinclair he said his dad worked with Livermore. His dad was Bert Seligman and Jim took his mother's maiden name.
Sinclair said he did not kill himself due to money worries as he had been broke many times...he also said he was not completely broke but that he suffered depression his entire life, on and off...if you can get your hands on that interview it is really interesting... Sinclare's dad Seligman and his rellies were very tied in to the Rothchild family, I believe...
Anyone have any other info regarding that???
I remember where the interview was with Sinclair talking about his dad and Livermore, it was Kingworld news, a podcast!
http://www.cliffkule.com/2009/11/jim-sinclair-reknown-gold-investor.html
Jim Sinclair - renowned gold investor... discusses his father Bert Seligman & Jesse Livermore the 2 greatest traders of all time,
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