This week, we’re tackling a fear on the forefront of every investor’s mind: What happens if a war with Iran breaks out?
We’re also serving up a fresh reminder of why we shouldn’t let fear keep us out of the markets.
The Best Hedge Against Skyrocketing Oil Prices[ad#Google Adsense 336×280-IA]We’re all hoping diplomacy and increased sanctions keep Iran in check.
That didn’t exactly work out in Iraq, though, now did it?
So with tensions escalating lately, it’s natural to worry about what another conflict would mean to global financial markets.
I’ll take a wild guess. It would be crippling. At least in the short term.
But we aren’t defenseless. As Barclay’s Sreekala Kochugovindan reveals, the VIX Index tracked Brent crude prices very closely during the Gulf War. Take a look:
It’s reasonable to assume that the same correlation would hold if a conflict broke out in Iran. So buying long-term options on the iPath S&P 500 VIX Short-Term Futures ETF (NYSE: VXX) could prove to be a solid hedging strategy.
Please note. This is about being prepared – a la the Boy Scouts – and not profiting from disaster. So spare me any hate mail about trying to make money off a war with Iran. That’s not what I’m suggesting.
Not a Simple Supply and Demand Equation
The big threat about a war with Iran is that it could prompt the country to shut down the Strait of Hormuz. It’s a strategic chokepoint since about 20% of the world’s oil passes through the narrow waterway.
Cut off supplies, and prices will surely rise, right? Well maybe not as fast as we fear.
Turns out, we’re sitting on above-average stockpiles of crude. In fact, the current level of 345.7 million barrels is one of highest inventory levels in 25 years.
My point? The market’s already prepared for a temporary shutdown in supply. If one materializes, oil prices might not be jolted as much as we expect.
Happy Birthday! (Or Not)[Yesterday] the current bull market turned three. That’s reason to celebrate for some investors. Not so much for others.
Investors that followed Baron Rothschild’s admonition to “buy when there’s blood in the streets,” or Warren Buffett’s advice to “be greedy when others are fearful,” are almost whole again.
But investors that let fear keep them out of the stock market are, well, not even close to whole again. They’re probably nursing some regret, too. Just another wild guess.
Let this be a reminder: The stock market’s much like the lottery. You need to be in it to win it. No matter how scared you get.
So if you’re thinking of sitting on the sidelines until the Iranian crisis subsides, think again!
Ahead of the tape,
— Louis Basenese[ad#jack p.s.]
Source: Wall Street Daily