To be a successful trader, you must always think like a trader…
On September 11, 2001, I was working in midtown New York City…
When the second plane hit, our office evacuated the building. My coworkers and I filed out of the lobby onto 6th Avenue. We were huddled in the middle of the street, when we witnessed the South Tower crumbling to the ground.
I spent the rest of the day trying to reconcile what had happened. At no point did I think about the stock market implications.
A few days later I was having lunch with a friend, who was also one of my sales traders. We were sharing our experiences of the fateful day. His was much more chilling than mine because he worked in one of the towers.
When the plane hit, my friend was on the phone with a hedge fund from Connecticut. And on the call, he heard one of their traders screaming: “BUY OIL!” as the phone cut off. At the same moment, he was instructed to leave his building.
He told me in the days since, he had kept hearing those two words on repeat ring in his ears… “BUY OIL! BUY OIL! BUY OIL!”
As we sat there eating, we were shocked that someone could think about the market in the middle of an emergency. Perhaps being in Connecticut made it easier to think that way.
Yet by the end of our lunch, we both realized how cold the market could be – it is insensitive and void of emotion and compassion. Over the years I learned that the market, for the most part, efficiently and effectively puts value on the news. And eventually I realized that to be a successful trader, you must always think like a trader – how can I make money?
We’ve all heard, “For every action, there’s a reaction.” But on Wall Street, it’s more appropriate to say: “For every tragedy, there’s a trade.”
We’ve all heard, “For every action, there’s a reaction.” But on Wall Street, it’s more appropriate to say: “For every tragedy, there’s a trade.”
And there’s always something going on… from a new virus, earthquakes, bombers, tsunamis, floods, blizzards, and hurricanes.
For example, take last year… We experienced one of the costliest hurricane seasons ever in the United States. Some experts estimated $250 billion worth of damage. In August, Hurricane Harvey hit the Houston area… In September, Hurricane Irma rocked Florida… Later in the same month, Hurricane Maria devastated Puerto Rico.
During a natural disaster, traders look for three things: reduced supply situations resulting in rising prices, disruption of growth, and falling prices.
And right now, the early hurricane outlook for 2018 is being predicted at “near or above normal,” according to forecasters for the National Oceanic and Atmospheric Administration. So here’s a playbook for what traders will be looking at during this year’s hurricane season:
Insurance/Reinsurance: This is rather obvious because these companies are left with the catastrophic losses after the disaster. Last year, traders sold and got short home insurers tied to Florida when Irma strengthened into a Category 5 storm. Several stocks plunged before the storm ever hit the mainland. And the reinsurance companies, which provide insurance to insurers, also got hammered.
Oil/Gas: Major refinery shutdowns aren’t good for business. So location is everything. And between imports and exports, the United States is responsible for about 8 million barrels of refined crude a day. So any interruption to production will cause stocks to sell off. Although it should be noted, sometimes hurricane season leads to the prices being jacked up.
Hotels: This is a tossup… Hotel operators see increased demand from the public when victims of the storms are forced to evacuate. But the downside is that some of their properties are caught in the eye of the storm and are affected, causing losses to expected revenue.
Transportation: Car-rental demand and freight rates surging are two plays that traders often like to trade before a storm hits. They know customers looking for emergency resources are willing to pay up – always good for revenue. And the demand for shipping increases, allowing companies to raise rates.
Rebuild: Home-improvement stocks are always at the top of every trader’s buy list right before a disaster is about to strike. The amount of devastation and need for repairs are a direct link to stocks like Home Depot (HD) and Lowes (LOW).
Other Sectors: Traders looking for a quick pop in stocks explore companies who replace energy equipment, or other equipment replacement like communications and auto. On the downside, traders typically look at leisure and airline opportunities, telecom, and cable and industrials.
Note that these are trades – not long-term strategies. The action in these stocks lasts only for a week or two. But for the most part, natural disasters tend not to affect the overall market. Usually, these short-lived moves in stocks are exaggerated by disasters like hurricanes. And the traders who typically profit are in motion before the storms ever hit the mainland.
Turney Duff is a former trader at one of the biggest hedge funds in the world, the Galleon Group, where its founder and several Galleon employees were found guilty of insider trading. Turney rose through the ranks and then fell prey to the trappings of Wall Street: money, sex, drugs, alcohol, and power. Turney chronicles his spectacular rise and fall in his bestselling book, The Buy Side: A Wall Street Trader’s Tale of Spectacular Excess.
