The Iran strike-effect
April 6, 2010 1:34 PM Subscribe
If there is an attack on Iran – by Israel/USA/an alliance of some kind, doesn't matter for purposes of this question – and, presumably, the price of oil rises sharply, which kinds of shares will rise with it? Oil companies? Energy supply companies? Food retailers? None of these? General and specific recommendations or thoughts welcomed. I know you are not my financial adviser.
Best answer: For the most part, US companies are prohibited from operating in Iran. So, shorting particular US stocks wouldn't necessarily work.
Which shares would rise: US and Israeli defense companies, perhaps.
I don't see why oil company shares would rise in the short term. I would suspect that they'd dive over fears that general war would break out in the Middle East as a consequence of an attack on Iran. Over the longer term, if oil supplies were interrupted, then, yes, oil company stocks would rise.
If you are interested in these things, I would start reading Stratfor and Foreign Policy.
Stratfor: http://www.stratfor.com/
Many institutional investors and hedge funds that try to make macro bets on world events have PhDs on staff trying to divine things like this in order to hedge portfolios. It's a rather interesting sub-specialty in financial risk management.
posted by dfriedman at 1:41 PM on April 6, 2010
Which shares would rise: US and Israeli defense companies, perhaps.
I don't see why oil company shares would rise in the short term. I would suspect that they'd dive over fears that general war would break out in the Middle East as a consequence of an attack on Iran. Over the longer term, if oil supplies were interrupted, then, yes, oil company stocks would rise.
If you are interested in these things, I would start reading Stratfor and Foreign Policy.
Stratfor: http://www.stratfor.com/
Many institutional investors and hedge funds that try to make macro bets on world events have PhDs on staff trying to divine things like this in order to hedge portfolios. It's a rather interesting sub-specialty in financial risk management.
posted by dfriedman at 1:41 PM on April 6, 2010
If there is an attack on Iran – by Israel/USA/an alliance of some kind, doesn't matter for purposes of this question – and, presumably, the price of oil rises sharply, which kinds of shares will rise with it?
Well, if the basic question is how to by shares of something that will mirror the price of oil, there are ETFs that invest directly in oil derivatives in an attempt to match oil prices as closely as possible. You are basically investing in a commodity at that point (like buying gold) rather than investing in an actual company, but you can buy shares of those funds just like you can with Goolge or GE.
posted by burnmp3s at 1:42 PM on April 6, 2010
Well, if the basic question is how to by shares of something that will mirror the price of oil, there are ETFs that invest directly in oil derivatives in an attempt to match oil prices as closely as possible. You are basically investing in a commodity at that point (like buying gold) rather than investing in an actual company, but you can buy shares of those funds just like you can with Goolge or GE.
posted by burnmp3s at 1:42 PM on April 6, 2010
So, shorting particular US stocks wouldn't necessarily work.
Let me amend this: Shorting US stocks under the theory that their business operations in Iran would be interrupted would not work. (I've had discussions of a similar nature with a friend, in which I made this apparently non-obvious point.)
posted by dfriedman at 1:45 PM on April 6, 2010
Let me amend this: Shorting US stocks under the theory that their business operations in Iran would be interrupted would not work. (I've had discussions of a similar nature with a friend, in which I made this apparently non-obvious point.)
posted by dfriedman at 1:45 PM on April 6, 2010
So, if you wanted to make money, you'd short some particularly vulnerable financial instruments. If you shorted some oil company, or even the S&P500 right before something like this happened, you'd make a killing. If you're wrong, you could be out (in theory... in practice there are some regulations) a colossal amount.
Alternatively you could throw your money behind defense contractors, who will see even greater profits if we retaliate and are a safe bet regardless. That won't result in a windfall though.
posted by phrontist at 1:45 PM on April 6, 2010
Alternatively you could throw your money behind defense contractors, who will see even greater profits if we retaliate and are a safe bet regardless. That won't result in a windfall though.
posted by phrontist at 1:45 PM on April 6, 2010
If you shorted some oil company, or even the S&P500 right before something like this happened, you'd make a killing.
This is true. The SEC (the American securities regulator) investigated a bunch of hedge funds which had shorted the S&P 500 in the days before 9/11. The bets were entirely coincidental--cue the conspiracy theorists--but, nonetheless, these funds made a lot of money when the markets opened significantly lower on September 17th. As I recall a lot of them donated their profits from that trade to various charities...
posted by dfriedman at 1:54 PM on April 6, 2010
This is true. The SEC (the American securities regulator) investigated a bunch of hedge funds which had shorted the S&P 500 in the days before 9/11. The bets were entirely coincidental--cue the conspiracy theorists--but, nonetheless, these funds made a lot of money when the markets opened significantly lower on September 17th. As I recall a lot of them donated their profits from that trade to various charities...
posted by dfriedman at 1:54 PM on April 6, 2010
Even though us oil companies can't do business in Iran, oil is a commodity, and other countries do have business with iran. If Iran's contribution to global oil production is interrupted, the global supply will be less than expected in the absence of a war, and the global commodity price of oil will rise.
You could invest in OIL, an exchange-traded fund that tracks the crude oil price.
posted by Pastabagel at 2:04 PM on April 6, 2010
You could invest in OIL, an exchange-traded fund that tracks the crude oil price.
posted by Pastabagel at 2:04 PM on April 6, 2010
Sorry to piggy-back, but I'm curious about the same thing. What if you invested in oil futures? Or in some oil derivatives (gasoline, heating oil e.g.)? Wouldn't a short-term decrease in crude cause those guys to get nervous?
posted by Gilbert at 2:17 PM on April 6, 2010
posted by Gilbert at 2:17 PM on April 6, 2010
Gilbert: the original question was about stocks, not commodites or derivatives. Each of these assets would react differently. Parsing how exactly they would react is well above my pay grade. The futures and commodities markets are complex beasts...so are equities but equities have the advantage of being liquid and trading on an exchange. Not so much for commodities or futures...
posted by dfriedman at 2:22 PM on April 6, 2010
posted by dfriedman at 2:22 PM on April 6, 2010
Lots of people suggesting shorting. Is shorting really a tool that's reasonably accessible to the private investor? Hedge Fund managers can do it, but how practical is it for someone with $10,000 to invest?
Seems like people may look at alternate energy companies on the assumption that a major disruption in oil would make those more profitable. I'm not sure, but I wonder if people would rush to precious metals in a flight to safety mindset. You might look at historical performance from other periods in which the oil supply was threatened (run up to the Iraq war seems like an obvious one) to see if you spot any patterns in what went up and what went down.
posted by willnot at 2:40 PM on April 6, 2010
Seems like people may look at alternate energy companies on the assumption that a major disruption in oil would make those more profitable. I'm not sure, but I wonder if people would rush to precious metals in a flight to safety mindset. You might look at historical performance from other periods in which the oil supply was threatened (run up to the Iraq war seems like an obvious one) to see if you spot any patterns in what went up and what went down.
posted by willnot at 2:40 PM on April 6, 2010
Lots of people suggesting shorting. Is shorting really a tool that's reasonably accessible to the private investor? Hedge Fund managers can do it, but how practical is it for someone with $10,000 to invest?
Through ETFs like this it's made really easy. Otherwise, you're going to have to learn a bit more about trading and involve a more specialty broker, but I think (I'm sure Mutant or someone will be along shortly to give a more authorative answer) that's possible with fairly small amounts of money like you describe.
posted by phrontist at 2:59 PM on April 6, 2010
Through ETFs like this it's made really easy. Otherwise, you're going to have to learn a bit more about trading and involve a more specialty broker, but I think (I'm sure Mutant or someone will be along shortly to give a more authorative answer) that's possible with fairly small amounts of money like you describe.
posted by phrontist at 2:59 PM on April 6, 2010
Best answer: Lots of people suggesting shorting. Is shorting really a tool that's reasonably accessible to the private investor? Hedge Fund managers can do it, but how practical is it for someone with $10,000 to invest?
In the US, it is easy for a retail investor to set up an online trading account and short liquid stocks. (This doesn't mean it's easy to make money doing it.) If you view, say, Exxon-Mobil's stock price as a proxy for global oil prices, and you think oil prices are heading down, you could short its stock and hope to profit from that trade. (I have no opinion as to whether this is a viable trade.)
As for commodities and futures, about which some else asked, the short answer is: no, the average person can't short these. The reason is that these are customized securities negotiated between two counterparties, with no clearinghouse backing the trade (and so default risk is rather high). As a result of these instruments being custom-designed each time two parties enter into them, they require significantly more capital and market knowledge than is available to the average retail investor.
That said, it is true that there are ETFs which you can use to essentially short commodities, and, I believe, futures. But these have extra transaction costs that make then unattractive to those large investors looking to play the commodities or futures markets directly.
Hope that all makes sense.
posted by dfriedman at 3:27 PM on April 6, 2010
In the US, it is easy for a retail investor to set up an online trading account and short liquid stocks. (This doesn't mean it's easy to make money doing it.) If you view, say, Exxon-Mobil's stock price as a proxy for global oil prices, and you think oil prices are heading down, you could short its stock and hope to profit from that trade. (I have no opinion as to whether this is a viable trade.)
As for commodities and futures, about which some else asked, the short answer is: no, the average person can't short these. The reason is that these are customized securities negotiated between two counterparties, with no clearinghouse backing the trade (and so default risk is rather high). As a result of these instruments being custom-designed each time two parties enter into them, they require significantly more capital and market knowledge than is available to the average retail investor.
That said, it is true that there are ETFs which you can use to essentially short commodities, and, I believe, futures. But these have extra transaction costs that make then unattractive to those large investors looking to play the commodities or futures markets directly.
Hope that all makes sense.
posted by dfriedman at 3:27 PM on April 6, 2010
Many online brokerages will let you do shorts as well as options (puts, calls) with relatively low minimums. Of course the amount you have on deposit in reserve may dictate the amount of time you can successfully hold the short position — if the stock doesn't go down but instead goes up, they may force you to increase your reserves or liquidate your position at a loss to cover the short — but most places let you do it.
posted by Kadin2048 at 5:58 PM on April 6, 2010
posted by Kadin2048 at 5:58 PM on April 6, 2010
This thread is closed to new comments.
Analyzing option prices, we find that the large estimated average effects of war reflect the market pricing in a range of different scenarios - a 70 percent probability that it will lead to market declines of 0 to 15 percent, a 20 percent chance of 15 to 30 percent declines, and a 10 percent risk of a fall in excess of 30 percent. Across countries, the most extreme effects are on the stock markets of Turkey, Israel, and several European nations. Countries that are highly enmeshed in the world economy, or net oil importers, are most likely to experience adverse effects from war. (National Bureau of Economic Research, March 2003)
The results indicate that increases in war risk caused declines in Treasury yields and equity prices, a widening of lower-grade corporate spreads, a fall in the dollar, and a rise in oil prices. (Journal of Banking and Finance, July 2005)
posted by bunnycup at 1:38 PM on April 6, 2010 [1 favorite]