Weekend Reads- New Year’s Edition

We’re headed out of the work week and into the weekend, but more importantly, out of 2011 and into 2012. What better way to celebrate than by looking back over the events of the year AND gathering some excellent reading materials?

JANUARY

  • Forex Brokers Draw Scrutiny (WSJ)
  • Manager Selection: Getting it Right (Financial Advisor)
  • FBI Arrests commodities trader for threats against NFA, CFTC, FINRA,  and SEC (CNNmoney)
  • Food Inflation: Retail meat prices in December climb by most in seven years (Drover)  [gotta love a publication named ‘drover’]
FEBRUARY
  • MF Global converting to Investment Bank (Reuters)
  • Steelers win Superbowl in 52% of 2500 computer simulations (WhatIf Sports)
  • The business of running a Hedge Fund [or CTA] (FINalternatives)
  • Middle East through the Oil looking glass (Platts)

MARCH

  • Japan Quake Sets Off Market Aftershocks (Attain)
  • Funds Find Opportunity for Volatility (New York Times)
  • The Making of a Bond Debacle (Business Week)
  • Examining the Yen-Dollar Relationship (CNN)
  • 10 Ways to Win Your NCAA Bracket Pool (We Got This)

APRIL

  • Where your taxes that paid for the bailout went…  (Rolling Stone)
  • The Risk of Risk Management (ReformedBroker)Ten reasons the world economy may be going soft (Telegraph)
  • CME explains the method behind the madness in margin changes (CME)
  • Algorithms aren’t only for trading models – did they help us track down Bin Laden? (The Daily)

MAY

  • Pay attention bond traders… Predicting Unemployment number with Google Correlate (Freakonomics)
  • Copper as collateral game over in China? (FTAlphaville)
  • May commodity slaughter (Attain)
  • Goodbye Oprah (in song)  (Youtube)
JUNE
  • CTAs and hedge funds struggle in May  (HedgeWorld)
  • John Paulson loses half a billion in less than 24 hours  (ZeroHedge)
  • Is the Fed the World’s Larged Fixed Income Hedge Fund? (Ritholtz)
  • People are finally realizing that the commodity ETF market may be a little oversold (Index Universe)
  • Screencast: When commodities are financialized, managed futures win (Abnormal Returns)

JULY

  • Dumbest Moments in Debt Ceiling History (MoneyCNN)
  • Who is watching the banks? (Fiscal Times)
  • Commodity Bubble infographic (Focus)
  • Financial Beer Goggles? Who’s driving the economy? (Paul Kedrosky)

AUGUST

SEPTEMBER 

  • The debt problem nobody is talking about…   (Yahoo!)
  • Buying Tomorrow- Risk, Speculation and Seeking the Divine (Lapham’s Quarterly)
  • Spam and High-Frequency Trading (FTAlphaville)
  • Delta One Desks- How we got to UBS and the Rogue Trader (NYT)
  • Operation Twist 101 (Freakonomics)

OCTOBER

  • Volatility killed the IPO Star (Motley Fool)
  • Don’t like the ratings from the ratings agencies? Just ban them… (Reuters)
  • The Next Big Bank Bailout (Matt Taibbi)
  • Ratings Agencies show preference to those paying the most (Business Week)
  • Remember Occupy Wall Street? (Attain)

NOVEMBER

  • Best explanation you’ll find of those MF Global European Bets you’ve heard so much about (MoneyControl.com)
  • Everything you need to know about the Eurocrisis in one post (Washington Post)
  • First new poverty formula since 1964 (CSM)
  • The best Halloween play for parents…. ever. It gets good around 2:18. (Youtube)
  • How to Save the Futures Industry (Attain)

DECEMBER

  • Disagreement between investors and analysts on the value of the EU Summit (WSJ)
  • How NOT to Get a Second Date: Lessons from an Investment Manager (HuffPo)
  • 50 Economic Stats You’re Probably Not Ready to See (Zerohedge)
  • US Troops out of Iraq (AFP)
  • Ending 2011 with 11 charts about 11 year trends… (Zerohedge)
  • Biggest Bankruptcies of the Year (Forbes)

And in case you’re more of a picture person: The Most Powerful Images of 2011

That’s it for 2011, folks. Don’t worry- we’ll be back at it all next year. Until then, here’s wishing you a happy, healthy and prosperous 2012 from everyone at Attain!

Long-only Commodity ETFs v. Futures – 2011 Final Score

The year has drawn to a close, and while the powers that be are still hard at work tallying up the 2011 results for various asset classes, the year has already issued its verdict on commodity investment options. We’ve posted throughout the year on the underperformance of long-only commodity ETFs- especially when you have the opportunity to invest in futures instead and see better results. Futures trading is complicated, presents a risk of loss, and isn’t for everyone- especially since past market performance doesn’t necessarily indicate future results- but given the numbers, we’re left scratching our heads. We’ve yet to receive a good answer to the question: why invest in an ETF when you can just roll December contracts annually?

Read ’em and weep…

Feeder Cattle (+20%) and 30 Year Bonds (+18%) top 2011 commodities performers

Everyone’s talking about Milk as 2011’s top performing commodity, but we’re more interested in markets that managed futures professionals actually trade, like Bonds, Crude Oil, Natural Gas, and Cotton. Per our favorite quote site, Finviz.com, we find the following 2011 stats for commodity markets. [Please note – finviz does some weird things around contract rolls, which can make their percentage gains over longer periods different than what would be found using a continuous contract or the cash/spot market, nonetheless, we feel it is representative of each market’s 2011 movements].

The highlights:

  • 40% (16 of 40) of markets up for the year (compared to 85% in 2010)
  • 57% of markets down for the year (compared to 15% in 2010)
  • 3 markets down more than -30% (Cocoa, Cotton, Natural Gas)
  • 12 markets down more than -15%
  • Only 3 markets up more than 15% (Heating Oil, 30 Year Bonds, Feeder Cattle), compared to 4 markets with gains over 75% in 2010
  • 3 markets within 3% of their 2011 highs (US Dollar, 30 Year Bonds, 10 Year Notes, Feeder Cattle)
  • 2 markets withing 3% of their 2011 lows (Natural Gas, Platinum)
  • Cotton, after posting the second highest gains in the field last year, fell to the bottom of the heap with losses of -36%.

What will 2012 bring?  That is the million dollar question, to be sure. Will this finally be the year Natural Gas breaks out of its slump? Will Cotton and Cocoa bounce back? Can US Bonds continue to put in positive years?  Will Gold break its multi-year win streak ?

Luckily, managed futures investors don’t need to know the answers to those questions before hand in order to have a successful 2012. The managers don’t even need to know the answers, they just need to be able to identify and capture any such moves when they happen (no small task).

Putting Numbers to the (Smiley) Faces

We always enjoy when Barry Ritholtz, one of our favorite market/economy bloggers, puts out his collection of market sentiment charts, as he did last week. Our favorite is the simplistic one below with the cute faces.

We actually put numbers to this chart in a newsletter a while back, showing how getting in at the highs and out at the lows (those points of emotional distinction) might look like if the model were applied to a trading system. The trick was defining what euphoria and despondency looked like in terms of performance numbers, and we came up with a simple way of defining what each of the emotional stages represented in terms of actual numbers by assigning each stage a corresponding new multi month high or low reading. For example, Euphoria is represented by a new 21 month high, hope by a new 3 month high, and so on.

Barry’s posting of these charts again got us thinking as to how the stock market performs, on average, on the market emotions cycle. Mainly, we wanted to see if the Euphoria stage actually is the point of maximum financial risk, and conversely whether the Despondency stage really is the point of maximum financial opportunity. We found that to generally be the case, with Euphoria (as represented by a new 21month high in the S&P 500) followed by below average returns over the following 12 months, and Despondency (as represented by a new 21 month low in the S&P 500) followed by above average (well above average) returns over the following 12 months.

Anyway, some food for thought, and support that it is never a good thing to be getting in at the highs and out at the lows.

For those of you who like tabular format better:

The 5 Questions Every Investor Needs to Answer

With 2011 coming to a close and 2012 just around the corner, it’s only natural to start contemplating your New Year’s resolutions. While the traditional resolutions that come to mind are often personal (better fitness, less stress and more philanthropy are some of the most common if you ask the government), we urge you not to neglect financial contemplation as you outline your goals for the dawning year.

To be fair, after the way the markets have behaved  this year, the thought of delving into your investment portfolio may be cringe-inducing, but, as they say, “No pain, no gain.” It’s years like this that really picking apart your portfolio is crucial. Take a look at your investment portfolio, its performance, its balance, and what you’re hoping to accomplish with it over the next year. Unsure of where to start in this fiscal self-examination? Here are a few questions to kick things off:

1. What is my Investment Window?  How much time have I given a certain program (investment strategy) – how much more time am I willing to give it? Too often investors jump on a hot program, and then jump off of it at the first sign of trouble. We wrote earlier this year about how this disconnect between expected and realized performance results in a vicious “in at the top/out at the bottom” cycle that can deliver swift losses to the foolhardy investor.  For managed futures in particular, we advise a minimum investment period of 2-3 years if you’re going to have proper context for program performance evaluation. Using this as a filter- how is your portfolio doing?

2. How diversified am I?  Is my portfolio filled with all option sellers? All day trading systems? All trend followers? If you’re an Attain client, you’ve probably been warned away from such imbalances, but these questions are important as you recalibrate for the new year. We just broke down 2011 managed futures performance by strategy type last week, and viewing your portfolio through the lens of those strategies  can help you make informed decisions about how balanced your strategy exposure may be within your portfolio, which may help hedge against a year where one particular strategy struggles. For instance, many investors had way too much trend following exposure back in 2004/2005 – and then ditched it all and loaded up into option selling programs in 2006/2007 just as volatility spiked in 2008, then flopped back into trend followers in 2009 just as they struggled and option sellers shined. These investors would have been better served to have had equal exposure between the two strategy types the whole time.

3. What Markets am I exposed to? Which do I want to be exposed to?  Do I have exposure to Crude Oil, Wheat, etc.? Do I want exposure to those markets? What markets is my exposure in? Am I overexposed in any one sector? These are all great questions to ask of yourself, and the answers very well may surprise you, as investors are usually much more exposed to stock indices than they think. After a year that has been as risk on/risk off as 2011, it may seem silly to even worry about which markets you’re in; they were all swinging on every headline out of Europe, anyway, right? Even though this may be the case, there’s much more to analyzing market exposure. What kind of liquidity do these markets have? How volatile were the moves made there? Which markets ended up yielding the most profits for you, and- most importantly- why? Were you missing out on more favorable trading conditions in other markets, and, if so, were the movements in that market a product of new developments or fluke-ish events? Understanding these answers may help you better understand the risk within your portfolio, and give you insight as far as how it could be better managed.

4. What are my Stop Trade Levels?  Drawdowns can and will happen in the future. Do you have a plan, written down, on what you will do when the drawdown hits for one the components in your portfolio? It is important to set a stop trade level for each of the programs in your portfolio, so you don’t make emotional decisions during a stressful drawdown. The problem is that, while we may understand when sitting at equity highs that drawdowns are a part of investing in managed futures, and often (though not always) come up in a cyclical manner, once that drawdown actually hits, we have a bad habit of morphing from a rational investor into a panicked, frenzied mess.  It is much better to make decisions regarding your stop trade levels today, with a clear head, on what you will do when a certain program gets to a certain level than dissolve into pieces alongside your account statements in the heat of the moment.

5. What does my overall portfolio look like? Your managed futures portfolio likely doesn’t exist in a vacuum, and it pays to make sure it can play well with others in your portfolio. If you’ve allocated a large chunk of your risk capital to a long-only commodity fund, like GLD, you may not want to be allocating to a program that may increase your long exposure during critical times. For most investors, your main concern will be making sure you’re not overexposing yourself to stock market performance, which may mean avoiding option sellers that will suffer when stocks sell off and volatility spikes. The bigger picture question may have to do with your overall asset class allocation. We’ve written in the past about the updated “Efficient Frontier”- arguing that balancing your portfolio between stocks, bonds and managed futures with a 40%-20%-40% split, respectively. Does your portfolio fit within these parameters? Could it benefit from a shift?

As we said, these questions are only a start, and should not be considered exhaustive as you sit down to analyze the current state of your investments. But that’s the nice thing about asking questions- they often lead to even more questions. The end goal of asking these questions should be the development of your New Year’s Financial Resolutions for your portfolio- what comes next? What programs are on my shopping list? How do I measure my success- especially as it pertains to process?

More questions than answers? Maybe… but when it comes to investing, we think you should ask as many questions as possible; an informed investor is often the more successful one.