Correllated markets

[J_V]

Let's say there is a nuclear meltdown in Churnobyl, industries and companies across the world are effected in obvious ways. It seems reasonable to me that the market would react quickly enough to stay more or less efficient in this regard.

But a disaster like this would also effect some equities is some less than obvious ways, and it seems that it would be free money if you prepared for this.

My question are these free money plays really available and if not, how does the market react in time to stay somewhat efficient.

I can't think of a good example but I think you get my drift.

[Noodles.]

Short power companies and then blow up their industries?

[Tupacia]

1.Unforeseen crises are usually when the market is least efficient, not most efficient. Usually, markets overreact to crises on a long-term timeframe.

2. There are of course opportunities in these situations, but you have to act quickly. For instance, I know of a hedge fund that made a killing investing in glass manufacturers after the disastrous earthquakes in India a few years ago.

[calmasahinducow]

Don't know if you read Liar's Poker but Chernobyl comes up in there. The day of the accident, Michael Lewis's mentor tells him to buy potatoes because the crop in Europe has been ruined and people there are going to need something to eat. So yes, disasters affect prices of various things in ways that are less than obvious.

[DcifrThs]

[ QUOTE ]
Let's say there is a nuclear meltdown in Churnobyl, industries and companies across the world are effected in obvious ways. It seems reasonable to me that the market would react quickly enough to stay more or less efficient in this regard.

But a disaster like this would also effect some equities is some less than obvious ways, and it seems that it would be free money if you prepared for this.

My question are these free money plays really available and if not, how does the market react in time to stay somewhat efficient.

I can't think of a good example but I think you get my drift.

[/ QUOTE ]

good question justin,

ideally, thinking about events that could move risky assets would occur on a daily basis as part of the portfolio management process so your mind would become accustomed to thinking like the Liar's poker example given above.

markets are not efficient enough to make short term profits from disasters (or mini bumps or whatever) impossible. for instance, in february the 9% fall in shainghai wasn't felt immediately in other global equity markets...there was a short time lag before they fell around 4-5% globally.

while working at my old job, we had recently been talking about global market correlations in class. we also had the ability to make bets on all sorts of securities where the firm tookt he other side of all trades (so we could trade in fractions of a contract).

me and a group from the analytics team went short equities and long bonds briefly after hearing the news of the 9% drop in the CSI300. we made a tidy profit in 2 days and then covered and went back to marginally long equities and short bonds.

this is just a small example of how being on top of yoru thought processes allows one to capitalize on quick changes in sentiment/market action in even extremely liquid markets.

so i think the answer to your question is 2 fold:

1) global markets are correlated in a few ways. a) business cycles are more tightly tied together at the present than they have been; b) financial markets are much more global now so reverberations are felt more broadly, and thus c) risk is spread wide, yet felt just as wide.

2) thinking about your positions and what would cause each one to move and always reading/being on the lookout for anything new is the best way to take advantage of those dislocations.

hope that makes sense,
Barron

[ifckladyluck]

buy potatoes.