Posts Tagged ‘History rhymes’

BP an Analog for Japan?

Wednesday, March 16th, 2011

I saw the story immediately below and began thinking about BP disaster as an analog for Japan.  I know, I know–plugging a hole in the bottom of the ocean isn’t the same as stopping a nuclear problem–I mean, we know that, right?  Recalling those images, though, from the undersea cameras as they tried to snake this or that mechanism down there seemed plenty complicated–and they used concrete in that disaster, too, right–makes it sound not so far fetched.

Anyway, here’s the story.  Doesn’t it sound familiar?

So I took it a step further.  In the chart below you’ll see three panels.  In the top and bottom panels are charted BP’s stock and the S & P 500 starting 19 days before the April 20, 2010, well disaster, respectively.  The middle panel shows the Japan ETF (EWJ) from 19 days before the earthquake.  I adjusted the Y-axis on that panel, and it’s, coincidentally, not far off the scale of the BP chart.  It took the S & P 500 about 28 weeks to recoup its pre-spill levels.  From the leak to the bottom of BP stock’s decline was about ten weeks.  I didn’t try to figure out when the well had been plugged/capped because–you’ll recall–there was endless talk about endless lawsuits from the spill; I figured the bottom in the stock was a better measure.

Here are takeaways

  • This thing feels a lot like BP, with the markets trading off every single news story.
  • At times it seemed like we’d have an Old Faithful right in the Gulf, which is to say it seemed like it’d never be plugged.
  • Comparing stock prices to then, there turned out to have been a lot of great values, although BP has yet to get back to its former glory, although that seems like a stretch.
  • I’ve probably taken this to far from the very beginning, but if we take the former bullet point a bit further, we might conclude that avoiding the Japan ETF and investing, instead, in Japan recovery (think oil spill recovery) ideas, might be rewarding over time.

We never want to let time and history be the sole factors in investment decisions, but they can provide useful signposts.  Yes, the situations are absolutely different this time, but I will guarantee you that the traders have not changed a whit.  They’re still prone to swings of emotion, and that’s what makes history-doesn’t-repeat-itself-but-it-often-rhymes such a useful saw.