Buying Blood in the Streets: A How-To Guide

There’s no cash in the ATMs, there’s something like 5,000 prisoners roaming the streets and there’s no security.

— May Sadek, man on the street, Cairo

In my financial trading service Crisis & Opportunity, I seek maximum returns by buying stocks when fear is the highest, and selling them when the panic dissipates.

It might sound crude and insensitive to buy stocks in places where people are literally dying, but it works; and by supporting the stock market when everyone is fleeing, you are reducing the panic — which is a positive for financial stability.  

Baron Von Rothschild is credited with saying, “The time to buy is when blood is running in the streets.”

He’s been re-quoted by everyone from Mobius to Rockefeller. But through extensive research, I uncovered this bit from The New York Times circa 1931…

It has been reported during the aftermath of the Franco-Prussian War, when the French had been defeated and the mob was looting Paris, a friend of his asked, “What are you going to do to protect your interests in this dreadful hour?”

The Baron said to him, “Can you keep a secret?”

He replied, “Yes.”

The Baron said, “Well, if the truth must be told, I am protecting myself by buying real estate.”

His friend responded, “Do you mean to say you are buying real estate with the gutters of Paris running with blood and the city in the hands of a mob?”

Rothschild said, “Yes, my friend, I mean that very thing, and that is the only time, when the gutters are running with blood, that you can buy real estate at 50 cents on the dollar.”

Istanbul to Constantinople

Buying blood in the streets has become a hoary Wall Street platitude because it is extremely profitable.

The thing about revolutions is that the countries don’t disappear… Sure, governments come and go, the names and lines on maps change and are redrawn — but the people and resources remain.  

I can name a number of countries off the top of my head that had post-revolution stock market booms: South Korea, Indonesia, Malaysia, Sri Lanka, Russia, South Africa… the list goes on.

When you invest in foreign markets that are in crisis, you get a bounce-back on both the equity side and the currency side.

Here is an example: In 1998, the people of Indonesia took to the streets and threw off long-term dictator Suharto. The market crashed, and the currency went from 350 to the dollar to over 15,000 before it stopped trading altogether.

One of the Indonesian blue chips — P.T. Telecom — fell from the low $30s to $1.50.

The currency now trades at 9,047 rupiah to the dollar.  

If you put $10,000 in TLK at $1.50 and held it to the top, you would have made $366,000 on the share price — plus another 30% or so on the currency.

Dead cat bounce

Another phenomenon you should be aware of is the dead cat bounce. This is when the index or stock bounces back after a crash.

You can see this where the arrow is on the chart above (1999). 

The best way to play a dead cat is after the market puts in a higher low; but if you’re buying long term, you must have patience in your buy. 

I like to trade the dead cat short term, then buy it again after the particular market is no longer in the news. It is crucial that you buy after the higher low to ensure you aren’t catching the proverbial falling knife…

Take Greece, for example

Greece put in a dead cat in August 2010 (note the higher low in July). It then sold off and found a bottom on January 1, 2011. 

When it sells off and puts in a higher bottom — say, around 1,550 — I’m a buyer. I think we’ll see that this month.

Egyptian President Hosni Mubarak continues to sit on his throne. The fate of Egypt’s government remains up in the air.

It is unknowable if the protesters will win, or if their revolution will be subverted by the Muslim Brotherhood. What we do know is that the stock market is crashing and the currency (the Egyptian pound) is falling.

The stock market is closed today and was yesterday as well… the ports are closed and the ATMs are out of cash… the Suez Canal and the pipeline are still shipping more some 2.5 million barrels of oil a day, but that could end at any moment…

Before the stock market was closed, the Egypt Top 30 Index fell 16% during the first two days of the unrest, and the Egyptian pound reached six-year lows.

Will Egypt be open tomorrow?

The fear of a shutdown of the Suez Canal has driven up oil prices.

In London, ICE Brent crude hit $100 a barrel for the first time in two years.

In New York, the price of oil jumped over $2 a barrel after the White House expressed concerns about Egyptian unrest, although analysts don’t expect this increase to be reflected in U.S. pump prices in the near future.

It is likely the protests will continue spreading and affect other countries in the Middle East. This will push oil higher.

I’ve uncovered one company — an Egyptian oil stock — that trades in Canada and is down about 30% so far. It is likely to be cut in half again. This could be a buy as soon as this week.

There are other plays, such as the Egyptian ETF (EGPT), but it has limited upside. That said, if you time it right, you could get 30% to 50%. Wait for the higher low.

In retrospect, Rothschild should have said: “Buy the dead-cat-bounce when blood is running in the streets, sell six weeks later, and then buy the double bottom.”

But that’s not as catchy.

All the best,

Christian DeHaemer
Editor, Wealth Daily