When Others are Greedy I am Fearful; When Others are Fearful I am Greedy: That is a quote from Warren Buffet. Mr. Buffet has recently been in the news as a result of placing billions of dollars in Goldman Sachs and General Electric. He obviously saw great opportunity there. Wouldn't it be nice if there were a quantitative measure of the amount of greed and fear in the marketplace? According to market technicians, there is. I looked for a reference to what I am about to tell you but have been unable to find one; however, I have a strong memory of attending a seminar where this was discussed. The quote I remember is that "the VIX is never wrong." What is the VIX? It's a measure of market volatility published daily by the Chicago Board of Options Exchange (CBOE). This is said to be directly proportional to the amount of fear in the marketplace. According to the speaker at the seminar I attended, when the market is dominated by very high levels of fear, a turnaround will occur within six months. The next question is what constitutes a high level of fear? Most technicians believe the VIX is only highly predictive at levels of 40 and above. The current level is 45. According to this we should be racing to put money in the market. I don't know about you but I'm not racing to do anything.
What Does History Tell Us? I attended the seminar I'm telling you about somewhere around 2003 and have watched the VIX ever since. During that five year period, the VIX has often been around 10 and has never been above 40 until now. Since I still don't trust the validity of some here say info I got from a seminar, I decided to do a quick scan of VIX values from now until they began to be published in 1990. To my disappointment, I found only three periods when values were above 40. The first occurred in August of 1998 when the value was 43. At that time the S&P 500 was 1027. Six months later the VIX was 27 and the S&P was up 20.5% at 1238. The next occurrence was in September 2001 when the value was 42 and the S&P was 1085. Six months later, the VIX was 17 and the S&P was up 5.8% at 1148. The last occurrence before now was in Sept of 2002 when the value was 40 and the S&P was 845. Six months later the VIX had dropped to 31 and the S&P was up 5.9% at 895. If we feel comfortable depending on three data points, we can say that the theory holds. Let's see what happens in another 6 months. I must say that I am more optimistic at this point than I was a month ago; however, I wouldn't recommend that anyone make an investment decision on such a small sampling of data. I also don't recommend ignoring the VIX. One more factor to take into consideration when planning your investments can't hurt.
Gasoline Prices Below $3.40. Right down the street there is a service station offering gasoline at $3.31 per gallon. This is good news and bad news. With oil prices at $150 a barrel, the motivation to bring on additional energy sources was extremely high. At $94 a barrel it is less exciting. Although there are a number of patriotic reasons to conserve the energy we have and search for more, I'm afraid these will always take a back seat to economic incentives. As an example, I recently saw an article about conversion of cars to natural gas at the University of Denver. This allows them to run their vehicles at the equivalent of $2.25 per gallon, a savings of approximately $1.25 a gallon. This has to be a bargain right? I'm not so sure. The cost of modifying each vehicle was $12,000. Do the math. If a vehicle gets 14 miles per gallon and drives 15,000 miles per year, it uses 1,071 gallons per year. At a savings of $1.25 a gallon, it saves 1,339 a year. This means you break even at the end of 9 years. How long do we expect these vehicles to last? At 15,000 miles per year, the accumulated mileage after 9 years would be 135,000. While this is not an outlandish figure, I think most would agree that at 135,000 miles the vehicle is pretty well spent. The bottom line is that I wouldn't invest my money with zero return on investment over a 9 year period. Why would DU do this? Because they got a grant of $180,000 from a non-profit organization. Nice for DU but I don't think we can depend on non-profit organizations to solve our energy problem.
Still Here. I am finally catching up on my backlog of problems. Still, I doubt I will leave before late October. I always want to hear from old friends and clients.
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