Volatility is a Wonderful Thing!


VIX, the ‘Fear Index’ or Volatility Index of S&P 500 options over the next 30 days published daily on the Chicago Board Options Exchange was down a little from its highs last week. Oil prices are still at multi-year lows, the DJIA rebounded Friday, October 17th moving up 263 points but is still off 5% from its September, 2014 highs.

Volatility Happens!

Actually volatility is a wonderful thing. If prices were predictable no one would make any money. Volatility is the heart beat of the market. When our pulses quicken because of events or ‘fears’ about bad stuff happening we take action to ‘hedge our bets’ or cover our behinds. Without such rational behavior every trading day would be carnage. The sum of millions of such individual decisions is called ‘market equilibrium’—the balancing of supply and demand—and the world depends upon it.

I’ve written before about the factors driving oil price volatility so I’ll spare you the sermon re-runs and go straight to the benediction:

Fear is up because the economy is weak in many places. In China they are worried about bubbles, the implications of corruption, choking air, rising costs adversely impacting exports. In the US we worry that our best days are behind us, that our government is choking us with onerous regulations, that we are getting weaker abroad and inviting trouble, and now ebola.
We need for the economy to be up to purge the evil spirits from market psychology so we can open our eyes and see opportunity as well as risk in the markets. The falling stock market offers opportunities to pick up solid stocks at bargain prices. While OPEC hates it—oil is on sale for 30% less than its recent highs and we have reason to cheer every time we fill our gas tanks.
It is election time and all our phones are ringing with negative ads and pleas for cash. Voters think the country is going in the wrong direction and we should throw all the bums out. We won’t of course but we’re making each Congress member sweat. The problem is not that we will re-elect experienced people to Congress, but that they will interpret that as a vote of confidence in their partisan behavior of scoring points rather than fixing our problems.
The great recession is finally over and the end of FED quantitative easing is un-easing. We all realize that one reason the stock market has gone way up is that interest rates have been way down for so long we hardly remember otherwise. But otherwise is likely to start happening again as the Fed quits buying and eventually raising interest rates to smooth out the rhythm of the market to something approaching ‘normal’. We need normal again with interest rates that reflect the real cost on money in the economy, as an incentive to save and to invest and begin to have normal business cycles rather than just artificial peaks and death defying valleys.

What does this have to do with energy prices?

There is good news out there lurking at us, people! Energy—-we got that! And despite the best interests of politically correct politicians, we’ve got lots of it. The US is, in fact, leading a revival of energy production. Gone is the fear of peak oil—we are not running out of oil. Gone is natural gas prices soaring into the stratosphere—natural gas is at below historic average prices and creeping back to market replacement levels. The government is threatening to regulate coal out of business in hopes we will all put solar panels on our roofs even while our home town utilities are terrified that we might given the hype in solar financing that makes even sub-prime mortgages a good investment.

Volatility is good because it is a wake-up call that things are out of balance!

There is good news lurking out there—people. Take a deep breath, turn off the robo-calls and the pre-election TV commercials and look around you. Stuff is happening and a lot of it is good news for a change.

We’ve got energy, people! The kind of energy that is creating volatility. Remember, volatility is a wonderful thing:

• Volatility caused by growing domestic oil and gas production is driving down energy prices and thus putting more money in our pockets for a change.
• Volatility caused low natural gas prices is reviving manufacturing bringing jobs home from overseas and putting more ‘made in America’ labels on things.
• Volatility caused by the end of Fed manipulation allowing a return to ‘normal’ will make it attractive to save money again, to invest money again. . .

You get the message right, falling oil prices are good news. Good news in that, in the short run, we will save money until in due time ‘normal’ kicks in and prices return to market equilibrium. Normal is probably oil prices higher than we see today but not as high as we’ve seen. Normal is when fear is balanced by a perception of opportunity. When VIX is running wild, traders are running around like their hair is on fire dumping good stocks for CYA protection. Normal is when we see those same traders buying up stocks as low priced values to be snatched up and held once again as they appreciate.

Normal is when we appreciation appreciation once again. Normal is good but first we must purge the evil spirits of market fear and government interference so markets are allowed to work the way they are supposed to work—-find market equilibrium and it will reward you with a fair price!

See the chart from the Wall Street Journal at the top of this article?  Normal is when OPEC must worry about whether you are going to buy their product from them at all when US domestic oil production offers plenty of the stuff here at home at competitive prices.

See!  I told you volatility is a wonderful thing!