First as an award-winning sell-side analyst for 35 years, then as a buyside guru managing clients’ money, John E. Olson has been watching energy equities for 44 years. “I was often wrong, but never in doubt,” he jokes.

Most recently, he was managing up to $160 million for 112 high-net-worth clients as head of Houston Energy Partners, an affiliate of SMH Capital in Houston. But last December, he closed the books and returned the funds to investors. Now semi-retired, he is investing for friends and family.

His skepticism and eagle eye remain. It was Olson who famously dared to question Enron Corp.’s financial wizardry when it was a market darling a decade ago, prompting Enron to demand that Merrill Lynch & Co. fire him. Merrill complied. He has the memo framed.

He began his career at Smith Barney & Co. in New York, and from his time there, he learned a cardinal rule: Always put the client first. If you didn’t, you wouldn’t have a client. This is something that modern Wall Street has forgotten, he says.

Investor: John, put the current market turmoil in perspective for us.

Olson: It’s a good time to stop and look and listen. The markets are trading volatility, pure and simple. Both exchange-traded funds (ETFs) and high frequency “algo” traders (HFT) are everywhere. Fundamentals matter very little; and only if they can be correlated, say, like crude prices and stock prices. The IPO market is ice cold. People are scared and are leaving. Look at mutual fund trends. In the past four and a half years there have been some $425 billion of net redemptions in equity funds, but $1.25 trillion of net investing in bond funds. People are voting with their feet.

Investor: You blame the extreme volatility on what?

Olson: It’s this overwhelming impact of both HFT and ETF players who are constantly flooding the system with trading algorithms designed to arbitrage the markets, often with the goal of making 1/10 of a cent per share on huge volumes. This is gamesmanship, pure and simple.

Can you do 10,000 trades a second? I can’t, which is why we decided to exit last January. There are usually 400 to 800 algos at work in the markets, and they can run a 24-hour global trading book. HFT and ETF “rebalancing” now make up about 65% of the daily volume across all 60 trading venues, with commodities, bonds and options thrown in. They can pile in or pile out, all around the world.

Investor: Who are these guys?

Olson: They range from the major trading shops, with hundreds of computers housed in big server motels around New York City, to someone in his spare bedroom in New Jersey, with a $5-million credit line, and who ends his trading day with flat positions. You can buy algo software off the shelf. You make your1/10 of a cent per share and move 10 million shares a day, and you clear $1,000 per day. The big houses do vast multiples of this.

Investor: It’s quite a change.

Olson: When I started years ago, the commission on trading a stock was 64 cents a share. Now an institutional trade is 1 or 2 cents and the high-frequency trades cost 4/10 of a cent. Volumes have skyrocketed accordingly: from 200 million shares daily to 6 billion shares daily. With this kind of volume , velocity and volatility, there is little room for old-fashioned investing based on good management, good growth, profitability and income. What matters today is how well crude prices correlate with stock prices. The practical result is that you get markets that go way up and then way down. There is nothing on the horizon to change things, either.

Investor: You are skeptical of the shale hype.

Olson: In these markets, I’m skeptical of anything that gets hyped. I am also concerned about aggressive E&P valuations that borrow everything from the future, from supposed 3P reserves, and in some cases “4P” calculations. People act as if all of this were a fait accompli. There’s still an issue out there of whether these decline curves are hyperbolic or exponential. We don’t really know how this is going to work out.

Investor: But we hope it does.

Olson: Another problem is that the oil patch has always been optimistic. It’s in the DNA. But most managements have rarely protected their downside for their investors. There is almost no dividend support to speak of, and stock buybacks have had an unhappy history.

Indeed, the oil service industry has had a worse record here. In E&P, the cardinal rule is you can never have enough equity. But in markets like this, yield support would be excellent. While the S&P is down 7.5% this year, Oxy is down 20%, Apache is down 27%, Ultra is down 41%. This speaks volumes.

Investor: Are these great buys?

Olson: Mine is a buyside view. These stocks are very strongly correlated with crude oil prices. If you think crude is going to go back to $100, you’d want to own all of these. There are some very good values out there. Apache comes to mind immediately, because it has broken down so much.

We’ve been investing in good companies with strong dividend support. Well-run MLPs like Johnny Walker’s EV Energy Partners, Plains All American and Buckeye Partners all come to mind. In the oil service arena we like Seadrill. With a 10% yield, it provides the best value proposition for this market.

—Leslie Haines

For archives of interviews with industry legends, see OilandGasInvestor.com.