A Billable Catastrophe
Research for Online Investors

by John Dalt

6/14/10

American greed and creative accounting are on full display in the gulf region.  Commercial clam fishermen have been hit hard with lost fields.  The toe bone's connected to the foot bone, with hotels and restaurants claiming lost bookings and meals served.

The foot bone's connected to the ankle bone as counties claim lost tax revenue because of lower tax receipts. The ankle bone's connected to the shin bone, the Alabama State Superintendent of Schools was on TV today, they are preparing a bill for BP claiming lost tax revenue to run the state school system, it will be a monthly bill. Let’s move to Louisiana and set up a surf shop, then claim lost business!

I talked to a friend Friday that runs a construction company in the Midwest.  One of his company’s crews hit a two inch natural gas line causing a release along a commercial street.  Area businesses were evacuated for two hours.  It took this long to safely stop the leak and make repairs.  Afterwards, safety personnel allowed the public back into the area.

One business with less than 100 employees, submitted a bill for $147,000 dollars in lost production and wages. That is one super profitable business! Sometimes a billable catastrophe can be the best stimulus you can find.

BP executives are meeting with President Obama Wednesday.  The President wants BP to put money in a special fund for the government to begin paying claims.  BP should agree to this if congress will pass a law barring individual lawsuits for economic damages resulting from the oil spill in the gulf.  This could be fashioned like the 911 Victim Compensation Fund.  Pay all claims out of this fund, and absolve BP of any additional liability.

If BP could negotiate a one time payment to the government to cover all outstanding liability concerning the gulf oil spill, their stock could quickly recover.  The cost would not be small, but would stop the bleeding.  A known cost, even a high one, is preferable to the years of litigation they face.  If they do not or cannot reach this type of settlement, the leecherous bleeding will continue until there is little left of the company.

The market is up this morning building on the rally at the end of last week.  We need to climb to 1107 on the S&P to reach the next level of resistance.  What will happen when we get there?  We don’t know, but have the problems in Greece gone away?  There have been a lot of meetings and press conferences, but the euro governments’ credit crisis is still intact.  Moody’s downgraded Greece’s debt to “junk” status this morning.

China turned in great export numbers on Friday.  Exports increased 48.5% year-over-year for May.  Treasury Secretary Tim Geithner appeared before the Senate Finance Committee.

The U.S. trade deficit widened slightly in April, and Senators want to put pressure on China to let the Renminbi yuan appreciate against the dollar.  Geithner had met with the Chinese in the spring and it was widely assumed that China would let the yuan begin to rise in mid June.  Treasury had delayed a finding that would classify China as a currency manipulator.  This finding would require the U.S. to apply trade sanctions.

According to the Financial Times, Geithner did not discourage the Senators from taking action, saying he had “‘warned the Chinese that congressional anger could result in rapid action.”  Geithner told the Finance committee that U.S. exports to China had increased 20% above pre-credit crisis levels.  This increase is much faster than U.S. exports to other markets.

Your editor absolutely agrees that China manipulates their currency, but so does every other country, including the U.S.  Hard nose trade policies do not hinge on currency valuations.  The U.S. should be careful what it wishes for.  A rising yuan may mean a falling dollar.

To the Mailbag:
Your article on the Four Legs of Building Wealth (Investor Resources) is excellent.  Thank you.  You talk about trailing stops.  In this portion of the article you strongly recommend that trailing stops not be entered on the computer.  I understand your reasoning.  However, if I do all my trading on line, then how do I enter a trailing stop without using the computer? ---subscriber M.T.

John’s Reply: Thank you for the question.  In the long term portfolio we base trailing stop decisions on the closing price.  We don't want to sell on a dip during the day, only to see the stock recover by close of market above our trailing stop.  If the stock price closes below our trailing stop we sell the stock the next day.  This can be entered in the computer as a market order if you like.  I prefer to enter a limit order at the closing price from the previous day.  If the market is up (above your limit price) you will get the higher market price.  If it is down, the order will wait for price recovery during the day and sell at our "limit price."  Unless the stock is suffering a serious sell off, it will almost always cover the price of the close on the previous day.

One other problem with entering stops in the computer is floor traders will dip stocks to take them out.  When a trailing stop is entered in your computer, the sell order is displayed on floor trader’s computers.  This is part of the game they play, dipping the price to take the rubes stock at a cheap price.  I hope this helps you.

M.T.-----Thank you for your prompt reply. You have answered my question and I now understand the strategy. I have personally been zapped by issuing trailing stops on line. I would enter a trailing stop and the stock somehow always hit my stop price and then jumped back up. Thank you for clearing this up for me and giving me the ammunition I need for future "stop" planning.

John:  Glad I could help.  I am happy to answer questions to help our subscribers understand the mechanics of trading and investing.  This helps us make our articles clear and concise.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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