Monday, June 14, 2010

The Daily Note - A Short Story

As daytraders we continually seek to find a good short when it is to our advantage. After all, our goal is to capitalize on the disfavor, however temporary, of a stock.  The most likely disfavor scenario is when a stock has been over extended or over bought and owners are ready to take profits. It, being the case it is a good time to sell short and buy back when there is again some interest in the possible profitability of gain or rise in the price.

However, there are numerous other scenarios that can work well also shorting a stock. These are usually dependent on news.  Top of this list is earnings; when a company misses the awaited earning outlook or actual profit that was the consensus among the analysts and traders alike. Traders and investors tend to punish the company by selling  shares when such announcement is made.

Another is when an awaited news story disappoints, such as announcement of a new product that does not meet expectation, disappoints its public or when a new product is not approved by the "gods" that be in control. This latter usually applies to new drug approvals or tests that meet not meet the expected result.

Then, there is the natural diminishing of industry or a company due to lack of further possible growth, dying interest in the product or failure due to a myriad of reasons, provided the government does not step in with a bailout. I imagine the buggy industry suffered a lot during the growth of the horseless carriage, for example.  

The last scenario is when disaster strikes and a company is adversely effected by the fallout.  Such was the case with the airlines and travel industries after 9/11  and more recently the coal mine explosion at MEE and the one in the news now BP and the oil platform explosion resulting in probably the biggest oil leak and perhaps the worst disaster to effect the Gulf.

I think all short positions, taking advantage of a scenario is fair game, except for the last. I really do not see the point of  making a bad situation worse. Especially when the evidence is already there that the companies will lose as a result of the disaster. Keeping in mind that companies are living and breathing entities teaming with people who depend on doing the work for a living, investors who with good cause invested in the company, and of course the company itself that most likely did not get up one morning and decided to create a disaster just for the effect.

Sure, there are mistakes and omissions and even criminal negligence that needs to be investigated all in their turn; not during the disaster but afterward. It does no good  for the people affected if we continually bash, short and drive down a company already suffering.  Often times the judgments doled out our unwarranted and not only do  the ones responsible suffer, but also the employees like in the case of Arthur Andersen that drove the company into bankruptcy after years and years of good reputation.

Mass of opinion is not always right and in fact it's often wrong yet  no one in the media or the masses is accountable after the damage is done. Therefore I do not see any joy in receiving the reward out of disaster and if  you consider that  the funds in the case of BP will be needed to help those that truly suffered perhaps it would be better to make sure that BP will be able to pay.  Am I naive? Maybe, but I doubt if I am alone. Perhaps a way to look at it is if I put forth the challenge that all those who profited from the BP disaster, by shorting the company,  donate the funds to those who are suffering the effect.

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JT said...

Interesting standpoint on BP shorting, i hadnt heard of anyone taking a profit->donate view. Do you know of any other blogs /newsletters that focus solely short side profits?

Anni_V said...

Hi JT, thanks for the comment. No, I don't know of blogs that do. I don't focus on shorts alone either, but felt something needed on the positive side for all the tweets hammering $BP.