Adam Warner over at Daily Options Report discusses the differences between the cash VIX and futures VIX.
The best analogy is to the weather. Think of the *cash* VIX as today's weather, and the VIX futures as a contract that guesses the temperature 30 days forward from the day they expire. The same way a warm day in August will not help you call December weather, a blip up or down in the VIX will not likely impact Dec. VIX futures all that much.
Okay, so what are the cash VIX and future VIX values? If you go to the CBOE website and mouse over the VIX symbol in the upper left hand corner, you can see how cash VIX has changed throughout the day. And if you click on the VIX symbol, you will get the latest cash VIX quote (with the quote delay).
A list of futures symbols can be found at the CFE site. Simply click on the month of interest, and you will get the latest quotation.
As Adam mentions in his article, the current cash VIX is less than the futures VIXs. Thus, if the cash VIX were to pop, the futures VIX is unlikely to pop as much, because the futures VIX is already anticipating that over time the cash VIX will rise.
For those interested in learning more about the VIX, here are two articles that might be of interest:
The white paper provides more specificity on how the VIX is calculated.
Adam has repeatedly made the point that you should not look at the absolute value of the VIX, but rather look at it in context. For example, today's VIX is about 21. Is that high or low? The answer to that question depends upon how VIX has been trading recently. If you look at Yahoo!'s VIX chart, you will note that today's VIX is toward the lower end of its range for the past year. Part of the reason why it is lower is that we are in a very slow part of the year, just before Labor Day. As Adam points out, the futures VIX for September is about 23, which looks much closer to the middle of the values in previously referenced Yahoo! chart.
The point of this article was to provide additional information on the VIX. I have given you links to where you can find quotes on the cash and futures VIXs. And you can follow Adam's blog where he often discusses VIX values.
My photograph of the Mount Edith Cavell is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.
Update: 27 August 2008
Adam has another very salient post VIX Vx. VIX on this topic.
I will have more to write about the markets in a few days. Instead, this post will be about one of hobbies, photography.
I just finished reading a thoroughly enjoyable book The Moment It Clicks: Photography secrets from one of the world's top shooters (Voices That Matter)
Rather than me discussing the book at length, I will enclose two videos. Fair warning, though, the second video lasts about 70 (yes, seventy) minutes in duration. I hope you enjoy the videos.
Video 1
Video 2 – Presentation Made to Google – 70 minutes in duration
For those looking for great photography online resources, I recommend two:
Natalie Obiko Pearson wrote an excellent article IEA Sees World Oil Market Tightening for the online Wall Street Journal (subscription required).
"There is no clear sign of a recovery in crude oil [producing] capacity over the medium term," the energy watchdog said. "Despite a considerable downward revision to our global oil-demand forecast ... structural-demand growth in developing countries and ongoing supply constraints continue to paint a tight market picture."
Current oil prices are an accurate reflection of those gloomy prospects, said the IEA. "Everyone wants a simplistic explanation for high prices. The reality is that there are a multitude of interactions" taking place, some of them involving structural changes in the world economy that have been building for many years, the report said in a new chapter dedicated solely to explaining the rise in prices.
...
The IEA also weighed in on the debate over whether the flow of investment funds into the oil market have helped drive up prices. It said it recognizes that speculation can have a day-to-day impact on price moves, but believes current prices are justified by fundamentals. One reason it cited was that physical stockbuilding of oil doesn't appear to be occurring, whereas, historically, speculative bubbles have prompted hoarding of supplies in anticipation of higher prices.
I have written previously that fundamentals and not speculators are the root cause of high oil prices. Governments that want to meddle with the ability of investors and speculators to participate in the oil markets will create unintended consequences. The best course of action for governments is to ensure that trading is transparent and fair. Beyond that, governments should not meddle.
Permanently higher oil prices will have a profound impact upon the world. It will affect the political landscape. Venezuelan president Hugo Chavez, for example, will be sustained far longer than he should. And there will be economic consequences as people adapt their lifestyles to higher oil prices. The trick is to identify those companies that affected, either negatively or positively, by these changes.
As an example, consider the Yahoo! stock chart of AMR Corporation (AMR). Not a pretty chart, is it? There will be other causalities and winners as oil prices remain high.
My photograph of the Mount Edith Cavell is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.
Yesterday I provided some thoughts with regard to Saudi Oil Conference. Robert F. Worth and Jad Mouawad wrote an excellent article At Oil Conference, Saudis Offer Slight Rise in Production (free registration is required) for The New York Times. I will just offer a teaser quote and encourage you to read the article in full.
Some analysts and oil traders had expected a much larger production increase from Saudi Arabia, the world’s top oil exporter.
But King Abdullah and the British prime minister, Gordon Brown, who walked into the high-ceilinged hall together as a military band played, soon offered totally different perspectives on the problem and how to approach it.
The king spoke of the “selfish interests” of speculators as a main reason oil prices have risen 40 percent this year, urging the gathered ministers to “rule out biased rumors and to reach the real causes for the increase in price.”
But Mr. Brown squarely pointed to fundamental economics and “oil demand rising faster than supply.” The U.S. Energy secretary, Samuel W. Bodman, put it more bluntly in a meeting with reporters, saying “there is no evidence we can find that speculators are driving futures prices.”
I am firmly in the camp of not blaming the speculators and instead blaming fundamentals. The demand is outstripping supply. Until either we reduce our consumption or we find more oil, prices will continue to remain high.
For those considering investing in oil companies, you might wish to consider investing in oil futures or an ETF such as USO). Often companies will have other challenges such as increased royalty and taxes as oil prices rise. Companies will often face increased costs and have difficulty replenishing their reserves. But with futures or an ETF that mimics oil prices, you can focus solely on oil prices and not have to worry about company specific issues.
My photograph of the View From Icefields Parkway is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.
The article Oil Summit to Take on Speculators (subscription required) in today's Wall Street Journal mentions that high powered officials are looking at the role of speculators.
Officials from around the world, including U.K. Prime Minister Gordon Brown and U.S. Energy Secretary Samuel Bodman, along with the chief executives of major oil companies, will meet Sunday to discuss oil prices, investment, and the role of speculators.
"From a global perspective, we definitely think it's time that financial markets and their regulators take a tough look at how transparent is this market and what needs to be done to improve it," a contributor to the working paper said Saturday, "and if there is a need for regulation, how that regulation should tackle the issues."
Seeking diversification and a hedge against inflation, institutional investors such as pension funds and endowments have invested some of their billions into financial contracts passively following indexes composed of a basket of commodity futures.
...
Governments must help stabilize the oil market, by taking action against speculators, Saudi Arabia's deputy oil minister Prince Abdel Aziz bin Salman was reported as saying, according to remarks re-published from Asharq Al-Awsat newspaper by the state-run Kuwaiti news agency Saturday.
The reality is that speculators are not to blame. Typically, when speculators push the price of a good beyond a reasonable level, producers begin producing to capture excess profits. However, in this instance, producers are not producing. Moreover, producers are not showing their cards as to what they can or cannot produce. That is, Saudi Arabia does not allow independent assessments of its oil fields. Thus, investors and speculators can only guess.
If OPEC had the ability to open the spigots, I believe it would. It would do so to unsettle the backers and supporters of large scale mega projects, such as Alberta oil sands mega projects. If prices were to plummet dramatically for a year or two, investors would think long and hard before spending billions to develop these massive and capital intensive energy projects.
The oil summit on 22 June 2008 could prove counterproductive. After the jawboning by Saudi Arabia earlier to increase its production by a measly two hundred thousand barrels per day, and after many Asian countries have reduced their fuel subsidies, fuel prices remain stubbornly high. Should the summit produce some important pronouncements with no noticeable effects, then it will be that much more difficult to convince speculators and others that oil remains in plentiful supply and that speculators are to blame for the current mess.
Blaming speculators is easy. Fixing the root cause of high oil prices is not.
There were two articles in the Wall Street Journal this past weekend that caught my attention. First was A Hostage to Fame: After Six Years of Captivity in Colombia, Ingrid Betancourt Is a Global Celebrity -- and Too Valuable for Rebels to Release (subscription required), a front page article concerning Ingrid Betancourt who is a courageous and strong woman being held captive by communist Revolutionary Armed Forces of Colombia, or the FARC. I have written about Ingrid before here and here.
Ms. Betancourt, a minor presidential candidate when she was abducted in 2002, is one of about 700 hostages held by the FARC, Latin America's oldest and largest insurgency. The FARC, estimated to number about 9,000 fighters, funds itself largely through drug trafficking and kidnapping. All but about 40 of its hostages are held for ransom. The rest include Ms. Betancourt, three U.S. defense contractors abducted in 2001, and Colombian policemen, soldiers and politicians whom the rebels consider prizes of war to be deployed to strategic advantage.
Ms. Betancourt, who holds dual Colombian and French citizenship, has become the face of Colombia's captives and their heart-breaking suffering. In Europe, she is a cause célèbre, so famous that she is simply known as "Ingrid." Her portrait hangs on the facade of the Paris city hall and in Milan's main piazza. France stages marches to demand her release, and Italy holds midnight vigils. Across the world, more than 1,000 cities and towns have declared her an honorary citizen.
But in becoming so famous, the 46-year-old Ms. Betancourt has also become more valuable to the FARC, which has suffered a string of major setbacks in the past few months. Only days after he complained about Ms. Betancourt in the email, Mr. Reyes, the rebels' second-in-command, was killed in an airstrike by the Colombian military on his camp in neighboring Ecuador. Weeks later, the group lost its legendary leader Manuel Marulanda, who apparently died of a heart attack.
The article goes on to discuss Venezuela's president Hugo Chavez's possible role in assisting FARC to destabilize Colombia.
The second article Venezuela's Chávez Urges End to Colombia Insurgency: In Sharp Reversal, Guerrillas Are Asked To Release Hostages (subscription required) shows Chavez changing course.
In a surprising turnaround, Venezuelan President Hugo Chávez urged Colombian guerrillas to free hundreds of hostages, put down their weapons and end their almost 50-year campaign to overthrow Colombia's government and install a communist regime.
Speaking on his weekly television program, Mr. Chávez, who has been a public ally of the 9,000-strong Revolutionary Armed Forces of Colombia, or FARC, said the group's efforts to overthrow Colombia's democratically elected government were unjustified. "The guerrilla war is history," Mr. Chávez said.
The president has been lobbying friendly governments to grant de facto democratic diplomatic recognition to the FARC. "At this moment in Latin America, an armed guerrilla movement is out of place."
I am always drawn to people of principle who struggle against seemingly insurmountable challenges. And thus, I admire Ingrid and hope that she and her fellow captives are released soon. She has suffered far too much.
With regard to Hugo Chavez, while I appreciate any effort to help free the FARC hostages, I have strong concerns about his role in assisting FARC and helping to destabilize the region. Unfortunately, the high price of oil is helping to stabilize his regime and allow him to continue to wreak havoc. That is truly unfortunate.
I have long held a strong interest in South America and am drawn to people with strong principles and convictions. Thus, Ingrid Betancourt's story has captured my interest and attention.
My photograph of the downtown Calgary is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.
Last Sunday, EnCana Corporation (ECA) decided to split into two parts, with one part focused on natural gas and the other part on oil sands. While most financial journalists and analysts thought highly of EnCana's move, I think differently.
Those who believe EnCana's move was a smart decision point to increased focus and investors' ability to pick and choose which asset group they want in their portfolio. And, of course, many point to the two smaller sized companies being more attractive as take-over targets. My arguments for opposing EnCana's decision are almost the same. The natural gas and oil sands provided diversification. For example, if natural gas continues to be a weak commodity for several years, then investors in EnCana can enjoy the strong oil sands performance. Of course, some would argue that investors who want diversification could still buy stock from each company and thereby enjoy the diversified benefits. I am not sure, however, that having stock in each separate company provides the same benefit of having just one company.
Suppose, for example, that natural gas prices were fall substantially, both in absolute and relative terms, for several years. EnCana's natural gas might be forced to batten down the hatches while it rides out the storm. If the company remained whole, then the company might be better positioned to use its financial resources from the oil sands to purchase inexpensive natural gas assets.
While I agree that because EnCana's two separate pieces are now better (and easier) takeover targets, that is a bad thing. We Canadians have already lost too many of our resource company to foreigners. Although a strong supporter of free trade, I would like to have at least some our world class natural resource companies remain Canadian. My preference would be for EnCana to be an opportunistic acquirer rather than an aquiree.
In fact, if we look at recent history, we see larger oil and gas companies trying to get bigger, not smaller. ExxonMobil Corporation (XOM), ConocoPhillips Company (COP), and BP p.l.c.'s (BP) takeover of Amoco are all recent examples of giant energy companies having become even larger.
All that said, if we look at how EnCana performed relative to Canadian Natural Resources Limited (CNQ) or Suncor Energy Inc. (SU), we see that there is almost no difference. Last week, they all performed strongly and closed within a few percent of each other. That hardly seems like a ringing endorsement of EnCana's latest strategic maneuver.
I am long stock of EnCana, Suncor, and ExxonMobil.
My photograph of the Bow River Falls is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.
With the recent strength of the American dollar, I am ambivalent toward commodities in the short term. Longer term, I remain a steadfast bull. If you look at the Bloomberg Commodities Chart, you note that commodities recovered nicely after their dip and have dipped slightly again. If, as everyone believes, the U.S. dollar continues to rally, then commodities will suffer. In my view, however, the important signpost is what happens as we enter the second half of the year. Is the worst truly behind us, or does the worst remain ahead of us?
My own view is that we have yet to experience the worst. If I am correct, we should see further strength in commodities, particularly precious metals as well as oil and gas.
The severity of this recession is difficult to anticipate. On one hand, the jobs numbers do not look too bad yet. On the other hand, economic weakness persists because of all the headwinds of high energy prices, falling house prices, tight credit markets, and increased uncertainty. So we just need to let events unfold and react accordingly.
Given my ambivalence toward commodities, have I lightened up on oil stocks? I probably should but have not yet. While oil prices are coming off their recent highs, I remain bullish on oil and remain unconvinced that oil will fall much further. With regard to gold and silver, I am keeping my gold and silver related stocks. In short, I am in a holding pattern.
My photograph of the Bow River with the Rocky Mountains in the background is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.
Adam Warner over at Daily Options Report discusses how volatility collapses after earnings reports and how that affects options pricing. That is, you might have purchased puts expecting a drop in a stock price. You were correct in that the stock price did fall; however, you lost on your puts because the volatility collapsed. It usually just takes one or two experiences to learn this painful, but powerful lesson.
Knowing that volatility collapses after an earnings release, you can use that information to determine how much the stock is expected to move. You know the prior volatility before the earnings run up. You know the current volatility. In his article Serious Yahoo, Adam walks you through how to estimate an earnings move in the stock price.
If you use options at all, you need to understand how earnings announcements affect volatility.
My photograph of the Banff with Cascade Mountain in the background is hosted at Flickr. This picture was taken at the end of Banff Avenue near the Administration Building. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.
In my last post Still Believe In The Commodities Bull Markets, I discussed Barron's article Commodities: Who's Behind the Boom? (subscription required), where Gene Epstein provided a compelling argument that the commodities bubble is about to burst. I further wrote that I am a commodities bull and referenced Jim Rogers. As luck would have it, Lawrence C. Strauss wrote a feature article in this week's Barron's Light-Years Ahead of the Crowd: Interview With James B. Rogers, Private Investor (subscription required).
Below is an excerpt from the article where Jim Rogers comments on the recent Barron's commodities article.
Our colleague Gene Epstein argued in a recent Barron's cover story that there is a huge speculative element pushing up commodities prices.
But where is the oil coming from that's going to drive down prices and keep them down? We are going to have corrections, as was the case in 2001 after 9/11. Is there speculation in commodities? Of course. Whenever you have a bull market, it draws money. If the fundamentals are right, investors make money and they want to make more. But people were buying commodities for 20 years in the 1980s and 1990s and nothing happened, because the fundamentals weren't right yet. Now that the fundamentals are right, more money is going into commodities. It will end in a bubble and hysteria. But in 2018, or whenever this bubble finally starts to peak, if I'm lucky you will call me up and I'll say it's time to sell commodities.
So you expect commodities prices to keep running up.
Absolutely. Look, if somebody discovers a gigantic oil field in Chicago or Berlin, then we will maybe have to start reassessing. But remember that all the great oil fields are in decline, including those in Alaska, Mexico and the North Sea. And I'm not just talking about oil. You can't go into your garage, snap your fingers and bring a new zinc mine to market. It takes on average 10 years to bring on any new mine.
Again, as mentioned in my prior post, if you look at the graphs of the commodities indexes on Bloomberg's website, you will note that, while commodities have become more volatile recently, they are still up on the year. In fact, the various indexes have essentially recovered from their prior swoon two weeks ago. Oil prices remain near record highs at about $110 per barrel. Not so very long ago, we wondered when oil would break the one hundred dollar barrier. Now the question is, will oil hit $120 per barrel this summer? Natural gas remains strong, along with agricultural products. You may wish to view my prior article, referenced near the top of this article, for links to gold and silver charts.
Last Friday certainly was an interesting day with the earnings release of GE). I bought some GE near the bottom as a trade. While I think GE is an outstanding company, I am uncertain as to how deep and now long this recession will be. Initially, I did not expect this much damage. While I was aware of the housing bubble, I did not anticipate this much fallout. And according to some, we might be early in the game.
That said, I am not sure how much further down we could go. Are we vulnerable to a much further drop? While I hope not, I am far from certain. Reality is, like most investors, I am waiting and watching events unfold. As the earnings season progresses, we should gain more clarity. However, the companies themselves might not be well positioned to offer much insight, because they too are waiting and watching. Does the housing problem continue to spiral downward and spread throughout more of the economy, or do we begin to stabilize?
I have not made many trades recently. For the most part, I am content to watch my positions. I remain biased to commodities, with particular emphasis on oil, gold, and silver. Outside of commodities, I continue to have a well diversified portfolio, including some stocks that are being hit. We will just wait and see how events unfold.
My photograph of the Rocky Mountains Seen From Calgary is hosted at Flickr. This picture was taken from the western edge of Calgary looking west. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.
In this weekend's Barron's magazine article Commodities: Who's Behind the Boom? (subscription required), Gene Epstein provides a compelling argument that the commodities bubble is, indeed, a bubble and that it is about to burst. And the price action in today's markets certainly seems to support that thesis. All that said, I disagree.
Jim Rogers in his book Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market
If you look at the graphs of the commodities indexes on Bloomberg's website, you will note that, while commodities have become more volatile recently, they are still up on the year. Oil prices remain near record highs, natural gas is strong, along with agricultural products. If you visit Kitco's five year gold chart or Kitco's five year silver chart, you will again note that prices are still up substantially compared to recent history.
In the Barron's article, we are told that it is speculation that is driving commodities far beyond reasonable valuations. My response is that, if prices are so far beyond reasonable valuations, then why are the physical producers not taking advantage of this situation by dramatically increasing their production? The answer is, of course, because they cannot do so. They simply do not have the ability to find more readily available cheap oil. Finding gold and silver are similarly difficult. Natural gas is somewhat different because a lot of previously stranded natural gas is being converted to liquid natural gas (LNG) and imported to the U.S. I do not follow farm products, so I am more cautious about my comments. From my weak knowledge of the ethanol boondoggle, some artificial forces that are creating a distortion. The point is, many commodities remain in short supply and difficult to produce more quickly.
Until I see the commodity suppliers threaten and have the ability to carry out their threat of substantially more production, then I will remain steadfast in my outlook. At present, I do not significant additional sources of production coming on stream. Does that mean that prices can grow to the sky? The answer is clearly no. Prices are constrained by customers' ability to pay. While some argue that the U.S. recession is now removing the customers' ability to pay, I am in the camp that says world growth is still growing and thus commodities are still in demand.
In summary, while I acknowledge that the commodities markets are volatile, I continue to believe that the bull markets in commodities will continue. And while the U.S. recession might temporarily damp the price of commodities, I expect that external demand to be a moderating force. The demand for commodities continues to grow and the ability to produce more commodities cheaply is not keeping pace with the increased demand.
My photograph of the Bow River in Banff National Park is hosted at Flickr. This picture was taken from bridge on Banff Avenue looking west. If you click on the picture, you will be taken to my Flickr account where you can see other similar pictures.
Before I begin my book review, you should know that I have a strong positive bias toward smart money managers that rely on fundamentals to formulate their investment theses. I enjoy reading the intellectual rigor of Doug Kass, general partner of Seabreeze Partners Management, Inc. and commentator for The Edge Column on RealMoney Silver (subscription required—part of TheStreet.com family), Jim Rogers (see his The Millennium Adventure website), and Bill Fleckenstein. While these managers will not always voice the same opinions, I know that when I read their opinions, they have been well thought out. Having stated my bias, I will now move on to the book review.
I heartily and enthusiastically recommend Bill Fleckenstein's book Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve
Some might be inclined to believe that it is always easy to find fault in hindsight when everything is laid bare. However, as Bill and others demonstrated by their articles throughout the period, astute observers could and did recognize the problems in real time.
Once again Greenspan was able to rationalize the maniacal behavior that took place daily. Productivity explained it all. Companies felt good, analysts felt good—all was well because productivity was powering a new era. His predecessor at the Fed, Paul Volker, the man who had successfully broken the back of inflation in the early 1980s, didn't quite see it that way. He had too much respect for his former office and was too much of a gentleman to be direct, yet on May 14, 1979, he made the following point in a commencement address to the American University, School of Public Affairs/Kogod School of Business:
"The fate of the world economy is now totally dependent on the growth of the U.S. economy, which is dependent on the stock market, whose growth is dependent on about 50 stocks, half of which have never reported any earnings."
Obviously the prior quote relates back to the dot com era. Just after the dot com era passed, Bill Fleckenstein and others chronicled in real time the problems with the housing market, all of which leads us to today. The housing and mortgage situation is dire with the final outcome yet to be determined.
Throughout both periods, Greenspan's overwhelming belief in technological and productivity gains led him astray. He often confused cause and effect. It was not the technological and productivity gains in the technology as well as housing and mortgages industries that led to super rich valuations. Rather, it was the low cost of money that encouraged averaged citizens to reach beyond their means, both intellectually and financially, that created the super rich valuations. Because of a proliferation of media sources, both cable networks and internet sites, citizens became overly confident of their abilities to judge the worthiness of securities. With everyone else enjoying the party and no one even threatening to remove the punch bowl, people were enjoying themselves then and were content to worry about the hangover tomorrow.
During Greenspan's tenure, the creative destruction component of capitalism was routinely suppressed. The main consequence of this suppression was a loss of fear. Thus, the normal risk reduction response to periodic financial pain never occurred, as Greenspan wouldn't even allow small crises to run their course. Instead, as people lost respect for the idea that they might lose money, risk taking continually escalated until the situation reached a point where it is now: the United States, individually and collectively, is swimming in an ocean of debt that has been rapidly ratcheting higher. At the same time, the country is experiencing a declining real estate market that supports much of that debt, a sinking economy that has been dependent on an unsustainable real estate bubble, and a weak currency. Plus, there are over $500 trillion worth of derivatives that Warren Buffett has described as
"financial instruments of mass destruction." You couldn't have created a more precarious environment if had tried.
Many people today are having to contend with their financial hangover. Tomorrow has finally arrived. Bill Fleckenstein's book provides an excellent chronicle of the events that led to our current difficulties. We are perhaps right in the midst of the housing troubles. After reading Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve, you will have a better appreciation as to why and how we got here.
