900% Increase in Oil Production, Gas Below $3, and Oil to Zero?

Crude Oil is once again making moves that could finally break out of it’s 80-120 range. Gas Prices are below 3 dollars a gallon on average in at least a dozen states.

Today's AverageChart Courtesy: Triple AAA

Crude Oil Futures are down more than 21% since July, now hovering around the 80 point mark {past performance is not necessarily indicative of futures results).

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Weekend Reads: A Roller Coaster Ride

This was quite an exciting week, where at one point the S&P erased it’s gains for the year but ended this week up finishing  up +1.68%. Will these +/-2% daily moves continue, and pick a direction? Are people keeping their positions, or reallocating? Stay Tuned.

Stock Market Commentary:

It is TOO Late to Sell and It’s NEVER Too Later to Sell…and ROBO Advisor Advice – The Market Panic of 2014. – (Howard Lindzon)

Omaha, Process, & Skin in the Game – (Meb Faber)

When To Pay Attention To The Stock Market (And When To Ignore It) – (Five Thirty Eight)

5 Thoughts on the Stock Market’s -7.5% Correction – (Attain Alternatives Blog)


Chicago and the Market Movement:

CBOE Futures Exchange sees Busiest week in History – (HedgeWeek)

Why the stock market’s scary ride is a win for Chicago exchanges – (Crains Chicago)



Cliff Asness says market volatility is a good reason to diversify – (Investments News)

Under the Hood: Wisdom Tree’s Managed Futures ETF – (Attain’s Alternatives Blog)


Crude Oil:

Countries that suffer when the oil price plummets – (The Economist)


Hedge Funds:

Preqin Quarterly Update Q3 – (Preqin)



Want to feel better about Ebola? This (massive) chart should do the trick. – (The Washington Post)


Just for Fun:

Hawk attacks drone: Video captures red-tailed hawk attacking drone – (NBC)

Photos: 50 Chicago sports teams that no longer exist – (The Chicago Tribune)

Does Chicago need express train service to O’Hare? – (Redeye)

Guy In Alaska Skips Rocks On A Frozen Lake, Has Mind Blown By ‘Coolest Sound Ever’ – (Huffington Post)

Think the Kansas City Royals Are Named for Kings? That’s a Bunch of Bull – (The Wall Street Journal)

The Playoff Implications Of Every Game For Every NFL Team – (Five Thirty Eight)

Under the Hood: Wisdom Tree’s Managed Futures ETF

You got to hand it to the marketing folks over at Wisdom Tree…. No sooner had the ink dried on Managed Futures good 3rd quarter and the Dow hit new 8 month lows this week than we started to see Wisdom Tree advertising their Managed Futures ETF ($WDTI) on CNBC. Marketing 101 = strike while the iron’s hot.

But how much “managed futures” exposure are you really getting with this product. We’ve looked under the hood of WDTI before, back when it launched in 2011, and thought it was high time to meet their managed futures marketing blitzkrieg during this stock market correction with some data and information on how well this product does what it purports to do (track managed futures).


  1. WDTI is a replication strategy

WDTI doesn’t track a managed futures index made up for actual managed futures managers providing alpha for their clients and managing real money. WDTI tracks something called the Diversified Trend Indicator (DTI), created by Victor Sperandeo, aka “Trader Vic”. The DTI tracks 24 markets (50% financials, 50% commodities) on a monthly basis and is designed to reflect rising and falling price trends in those markets. That is somewhat similar to the models used by systematic multi-market managed futures programs, but not completely similar. It is an attempt to capture the bulk of what they do at a lower price point, without the sophistication around the edges.


  1.  WDTI hasn’t replicated Managed Futures very well

So how has the WDTI done in replicating managed futures exposure… not great. Since its launch, it’s trailed the managed futures index (which we would think should be its benchmark) by 1,117 basis points (11.17%).  And what about a real program, not just the index. It’s trailed Covenant Capital’s Aggressive program, the same model used by our Trend Following Fund by 2,588 basis points (25.88%) since it was launched. And that’s after Covenant’s 2 & 20 fees. Past Performance is not necessarily indicative of future results.

1 3 Total Chart

Table of Comparisons
(Disclaimer: past performance is not necessarily indicative of future results)
Data points: 1/11 – 9/14

  1. DTI underperforms Managed Futures in market crisis periods

While the ETF itself only goes back to 2007, the DTI goes back quite a bit further, allowing us to be able to see just how the indicator has done in past crisis periods. You can see it has underperformed the managed futures index in past crisis periods.

DTI vs Managed Futures Crisis Period(Disclaimer: past performance is not necessarily indicative of future results)

  1.  DTI is becoming less and less correlated with Managed Futures

Notice the interesting pattern below, where the DTI has become less and less correlated with the managed futures index over the years. Why?  Because one of them (managed futures) is the results of actual managers continuously doing research and improving their models. And one is a single indicator designed years ago.

34 month correlation(Disclaimer: past performance is not necessarily indicative of future results)

  1. 25% of the portfolio is in just 2 markets 

With 13% of the portfolio tracking Euro currency futures and 12% tracking Japanese Yen futures, a full quarter of the portfolio is in just two markets. Watch out if those two are in an extended sideways period without trends.


  1.  WDTI doesn’t go short energy…

We just don’t get this one. Why the arbitrary rule just for one sector of the portfolio. They say it is to protect against the risk of ruin, as energy markets can spike on geo political events. But at the same time they allow short trades in Natural Gas &*^%.  And have you seen the volatility in Cocoa, or Copper, or Coffee – talk about price spikes.


  1.  There are no intra-month position adjustments

We don’t quite get this one either. What if a trend starts, or ends, during the middle of a month? Guess you get in or out late. This surely cuts down on Transactional costs and keeps things simple, but we’re sure it cuts down on performance also.


  1.  WDTI is Average, by design

At the end of the day, Wisdom Tree looks to have decided to try and replicate the beta of managed futures via an imperfect proxy, the DTI. What will that look like moving forward? The “average” performance of the managed futures index? Something less? Something more?  ‘Average’ looks less and less likely as the indicator continues to diverge from the live managers doing trend following strategies, with ‘less’ possible if there are no trends in the euro and yen while a short trend in energy, and a ‘more’ scenario dependent on trends in that concentrated currency exposure and hopes of an uptrend in energy.

5 Thoughts on the Stock Market’s -7.5% Correction

  1. Why is ANYONE surprised?

This has been the most hated rally of all time, as quoted by Barry Ritholtz, The Wall Street Journal, and CNBC; with seemingly many more people doubting its ability to survive than actually participating. What’s more, this thing was getting very long in the tooth – 68 months and 197% off the March 2009 lows as The middle of September, and 17 months since the credit crisis losses were erased with a new all time high in March 2013.  Compare that with an average bull market move of 103% and 30 months off the lows, and 18% and 14 months from new highs to the eventual peak, and you can see we were due. It’s also worth noting we’re basically flat on the year after this “correction”… no gains, no losses. While hard to believe after the past few years – the stock market does have losing years. Let’s repeat that:  In distant times (like ancient 2011), there were entire 12 month periods where stocks didn’t end higher than they started a whole year ago… Quelle Horreur!

S&P Bull Run 1 (Disclaimer: Past performance is not necessarily indicative of future results)
Data of S&p 500

  1. Short Bonds if you dare…

We’ve also been due for interest rates to rise, and a lot of smart people have bet a lot of money on that happening (including one Bill Gross, whose wrongness there no doubt led to his eventual exit from Pimco). But this is the new widowmaker trade. They are carrying people out in bodybags from this one, as every head fake lower in bonds results in violent upswings.  Despite us being 6 years past the credit crisis – when everyone though rates would be going back up by now, 30 yr US Bonds have dropped from around 4% to nearly 3% this year, with bond futures prices shooting up about 7.5% in the past 20 trading sessions. There’s some programs killing it on this trade, but there’s also a lot of pain and debris left over from bonds once again moving higher (rates lower).

  1. Managed Futures have been waiting for this…

September was great for managed futures, and we’ve been cheering stocks to zero so far in October, because this type of environment is what managed futures lives for. It’s been a quiet few years of waiting for a volatility expansion like this for managed futures strategies, most of which essentially bet on outlier moves like this one happening, not just in stocks, but in bonds and currencies, and the rest. The ability to be able to go long and short – combined with the ability to be in markets like bonds, wheat, and even stock indices – means these types of moves can be captured. Now, there are likely to be whipsaws and the potential for lower volatility ahead… just like the stock market, volatility can’t keep rising day after day; but every manager we talk to is very excited about this new market environment.

  1. This is why you diversify

If this type of market move scares you – remember this is why you diversify; even when that strategy has been getting it’s ass kicked the last 5 years. Those who are diverisified and missed out getting the full return delivered by stocks the past few years realized that diversification isn’t in place for what is going on today, but for what may come tomorrow (tomorrow is here). They realized that the choice to diversify can mean accepting smaller positive returns today in return for smaller negative returns tomorrow.  At the end of the day – this isn’t just about the final return – it is about the journey as well. It’s about avoiding the swamps… as the Abraham Lincoln quote in the movie Lincoln illustrates:

“A compass, I learnt when I was surveying, it’ll… it’ll point you True North from where you’re standing, but it’s got no advice about the swamps and dessert and chasm that you’ll encounter along the way. If in pursuit of your destination, you plunge ahead, heedless of obstacles, and achieve nothing more than to sink in a swamp… What’s the use of knowing True North?”

Just owning stocks and hoping the market goes up indefinitely is akin to just plowing straight ahead with your Compass pointing North. We’ve landed in stock market swamp… You going to go through it, or diversify your way around it?

  1. This is proving time for Liquid Alts

There’s been a huge influx of mutual funds offering hedge fund like strategies such as long/short equity and market neutral, as well as managed futures mutual funds and ETFs that have come to market since 2008. This is the first real proving ground for those products, and the volatility and stock market losses should really start to separate the proverbial wheat from the chaff. It will be quite interesting to see who delivered on their glossy brochure promises and who didn’t when the dust settles.





Alternative Links: The Cycle of Intrigue

“Axel Merk, president and chief investment officer of Merk Investments, says if you want alternatives to have an impact on a portfolio, you should hold 20%, and that now is the time to rebalance portfolios to hedge against volatility and rate hikes.”

Video – How do you build alternatives into an ETF portfolio? – (Investment News)

The Answer is there is not an ETF that brings true alternative exposure – (Attain Capital)

Morningstar partners with ProShares to manage an alternative ETF – (Investments News)

Alternatives: A key piece of the investment puzzle – (Investment News)

Goldman Sachs strategists say investors hold too much stocks and bonds and need to jack up alternatives allocations – (Investment News)


CTAs extend positive performance run into September, says Newedge – (Hedgeweek)


Michael Covel’s Trend Following Radio interviews Roland Austrup of IMFC – (Michael Covel)


Volatility Strikes Back, Overused as a risk measure, Volatility seeks a new home in investors’ long term portfolio – (Morningstar)

NASDAQ: The Good, The Bad, and The Ugly

(click here for a larger view)
Nasdaq Infograph_6

Commodities Volatility in One Table

Here’s our monthly look at the various commodity ETFs and how they track a simple strategy of buying December futures and rolling them annually. Plus, a comparison to Ag Traders and an overall commodity index.

Some Notes:

  1. The BarclayHedge Ag Traders CTA Index is killing it {past performance is not necessarily indicative of future results}. Many ag programs have a combination of long meats and short grain exposure. Both have been good trends thus far in 2014. (See Trade commodities instead of “invest” in  them?)
  2. Grains continue their massive down trend.
  3. 75% of the commodities in this table are experiencing double digit moves on the year.

(Performance as of 9/30/14)

Commodity ETF Over/Under Performance 2014

Crude Oil$CL_F
Brent Oil$NBZ_F
Natural Gas$NG_F
Live Cattle$LE_F
Lean Hogs$LH_F
Commodity Index $DBC-9.47%
Long/Short Ag Trader CTAs17.64%

(Disclaimer: past performance is not necessarily indicative of future results).
(Disclaimer: Sugar uses the October contract, Soybeans the November contract.)
Long/Short Ag Trader CTA = Barclayhedge Ag Traders Index