The Volatility Genie

I was trolling Bloomberg last night and I came across the following quote:  

 

“The volatility genie is out of the bottle and it will take some time to put it back…”   

 

It doesn’t really matter who said it or what they were commenting on. I initially dismissed it as one of those clichéd comments that just takes up space and doesn’t really add anything meaningful to the discussion.   

 

I mean, “volatility genie”? Come on.   

 

But before I was able to move my search to the next article for a nugget or two of wisdom to impart to Daily Profit readers, it struck me that this “volatility genie” thing wasn’t that bad.   

 

After all, I’m at Bloomberg.com looking for some insight about how low the persistent weakness in the euro might take the currency, where the floor for oil prices might be, are there any signs of monetary tightening in China. (You know, just some light reading before I hit the sack.)   

 

This week, I’ve even devoted a couple Daily Profit issues to what needs to happen to restore some “order” to the stock market. Like “support at S&P 1,165 needs to hold…”   

 

But sometimes, there isn’t order. Sometimes the volatility genie really is out of the bottle. And from what I know of genies, you can’t just shove them back in.   

 

It is the persistent folly of human beings to try and bring order to systems that are, at their core, chaotic. And financial systems are chaotic. After all, they are made up of the various and conflicting beliefs and actions of hundreds of millions of humans, all grappling to make sense of an overwhelming amount of information.   

 

BP (NYSE:BP) crafted a huge metal bell to place over the gushing oil leak 1,500 feet below the surface of the Gulf of Mexico. It didn’t come close to working. The freezing water temperatures froze the uptake mechanism that was supposed to siphon the oil.  

 

Was it worth trying? Of course. When you’re faced with a massively chaotic and damaging event like that oil leak, you have to try anything. And eventually, a solution will be found.   

 

But that doesn’t change the fact that people will always overestimate the ability of human ingenuity to avoid or contain disaster,   

 

In 1979, Mexico’s state oil company PEMEX had a similar blow up at a well that was in just 150 feet of water. It took almost a full year to cap that well, but not before 3 million barrels of oil flowed into the Gulf of Mexico. Texas was still cleaning its beaches a year later. 

 

Nobody is even considering that it could take BP a year to cap the well that’s now spilling 5,000 barrels of oil into the sea every day. 

 

The euro is in bad shape. And everyone knows it. The farther it falls, the more destabilizing it becomes. That’s because assets denominated in euros, like bonds, that are used as collateral lose value, which means cash must be raised.   

 

Investors remember the declines of 2008 and early 2009. It’s no surprise that they are hesitant to enter the market now.   

 

At the same time, investors are well aware that there will be opportunities in this market.   

 

But no one is certain exactly when those opportunities will arise. And that’s the very definition of volatility.    

 

At some point, investors will become certain again. It is in our nature to try and impose order where there is chaos. Investors will force the genie back in the bottle. And that will make for an orderly market for a time.   

 

Now, this isn’t to say individual investors should simply walk away from the market right now. We can remain focused on buying quality stocks at attractive valuations. And a volatile market will provide more opportunities to do this than an orderly market.   

 

There’s one other thing that I know. Oil prices will be higher in the future. This, to me, is an inescapable fact. And ironically, as oil prices fall, like they are right now, it simply sets the stage for higher prices in the future.   

 

That’s because cost-conscious oil companies will delay or even shelve new exploration projects when oil prices are falling. These notoriously short-sighted companies tend to keep a closer eye on short-term profitability than they do on longer-term fundamentals.  

 

So I will be adding quality oil stocks as the price of oil weakens to the Energy World Profits portfolio. I recently added stock that’s ramping its production in North Dakota’s Bakken oil pool. 

 

This $4 company is moving from a $0.03 loss in 2009 to a $0.14 a share profit in 2010 and $0.38 a share in 2011.   

 

The stock is moving higher, despite weaker oil prices. That’s a pretty clear indication that this company will grow earnings dramatically, regardless of temporary swings in oil prices. And when oil prices do move higher, this stock will get an even bigger boost.

 

You can learn more about this $4 Bakken producer and Energy World Profits   HERE

You won’t be disappointed.