Understanding the ‘fear index’
.floatimg-left-hort { float:left; } .floatimg-left-caption-hort { float:left; margin-bottom:10px; width:300px; margin-right:10px; clear:left;} .floatimg-left-vert { float:left; margin-top:10px; margin-right:15px; width:200px;} .floatimg-left-caption-vert { float:left; margin-right:10px; margin-bottom:10px; font-size: 12px; width:200px;} .floatimg-right-hort { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 300px;} .floatimg-right-caption-hort { float:left; margin-right:10px; margin-bottom:10px; width: 300px; font-size: 12px; } .floatimg-right-vert { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px;} .floatimg-right-caption-vert { float:left; margin-right:10px; margin-bottom:10px; width: 200px; font-size: 12px; } .floatimgright-sidebar { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px; border-top-style: double; border-top-color: black; border-bottom-style: double; border-bottom-color: black;} .floatimgright-sidebar p { line-height: 115%; text-indent: 10px; } .floatimgright-sidebar h4 { font-variant:small-caps; } .pullquote { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 150px; background: url(http://www.dmbusinessdaily.com/DAILY/editorial/extras/closequote.gif) no-repeat bottom right !important ; line-height: 150%; font-size: 125%; border-top: 1px solid; border-bottom: 1px solid;} .floatvidleft { float:left; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} .floatvidright { float:right; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} Dear Mr. Berko:
Could you please explain the VIX to me, what its relationship is to LIBOR (whatever that is), how it is calculated and if it’s a valid index? I just became acquainted with this listening to the radio but never see it in the financial section of a newspaper. Also, how do I get rid of all the silly legal and accounting reports I get from the public companies I own? I own quite a few different stocks and bonds, and I’m outraged by all the unnecessary mailings sent to me by the companies I own, 95 percent of which is mumbo-jumbo that I don’t understand.
E.P., Lady Lake, Fla.
Dear E.P.:
The relationship between VIX and LIBOR is not unlike the relationship between time and bacteria. You must be listening to too much satellite radio advertising. VIX is an acronym for Volatility Index, which is a contrarian sentiment indicator that helps determine if there is too much optimism or fear in the market. High values imply pessimism, and low values imply optimism.
Now, I can’t explain the complicated math involved, which is above my pay grade, but suffice it to say the VIX is a weighted blend of prices for a range of options on the Standard & Poor’s 500 index and is often referred to as the “fear index.”
Simply put, when investors believe that there is significant upside volatility, they are not willing to sell call options unless they receive a substantial premium. So the resulting collective increases in the upside call option prices raise the VIX, just as the collective increases in the downside put option premiums occur when investors are fearful of a significant downside move. This gives the investor an upside measurement as well as a downside measurement.
Today, the VIX stands at about 26, which indicates a volatile market. Three weeks ago, the VIX was 18. But if the VIX falls to 10-12 or rises above 25, I suggest that it’s time for the market to make a dramatic move. This index trades on the Chicago Board Options Exchange, and you can get an instant reading on the VIX with the ticker symbol VIX.
LIBOR is an acronym for the London Interbank Offered Rate, which is a worldwide-accepted benchmark for short-term interest rates and is published daily in most financial publications. The one-year rate recently stood at 1.02 percent. LIBOR is quoted in one-, three-, six- and 12-month rates. Twenty years ago, the one-month LIBOR was 8.375 percent (it was as high as 9.375 percent in late 1989) and it recently stood at 0.34.
Yes, it’s darned annoying when your mailbox gets stuffed with all of those printed pages of corporate mumbo-jumbo. The computer age hasn’t made us a paperless society, rather the opposite – we’re killing more trees than ever. But it’s impossible to stop all those noxious reports from spoiling your tranquility. The Securities and Exchange Commission, after consulting the American Bar Association and the printing industry, decided that this corporate detritus importantly benefits shareholders. Less than 2 percent of recipients understand legal and accounting trash, so I share your outrage.
Can you believe that it costs a company with 20,000 shareholders about $240,000 per year just to print and send a plain-vanilla annual and quarterly report, and additional mailings may cost another $60,000? Assuming 15,000 public companies (plus mutual funds, exchange-traded funds, closed-end funds, various preferred stocks, corporate bonds, etc.), the minimum yearly costs are $30 billion of waste.
Consider putting a “return to sender” sticker on those things, because there’s no way to stop the onslaught.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, Fla. 33775 or e-mail him at mjberko@yahoo.com. © 2010 Creators.Com
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