Futures Trading on Tax Day

Today is tax day… and if you haven’t filled your federal and state taxes yet, do so now, or have the IRS knocking at your door. April is the time of year you’re forced to review your stock market gains and losses, compiling statements to find your cost basis and take a look at the taxes you owe. But for those of you who traded futures markets, this is one hurdle you don’t have to jump over.

Futures trading actually falls under a different part of the tax code than stock trading, with exchange traded futures and futures options trades being considered ‘Section 1256 Contracts’ come tax time. These 1256 Contracts have some distinct tax treatment, including:

Futures Tax Advantages

Unlike stocks, futures based investments are based on their marked to market value at the end of the year, so any open trade profits or losses in the account are treated as realized profits or losses as of the last day of the year. This is generally good news for investors, as futures gains or losses are treated as 60% long term capital gains and 40% short term capital gains, NO MATTER the holding period. For example, an investor who holds a futures position for just a few minutes, or hours, can book 60% of the profits on that trade as long term gains – even though the trade was anything but long term.

In addition, futures based investments do not require the accounting of individual trades. This is a godsend for any of you who have spent hours searching through old brokerage statements from 4 years prior trying to find the cost basis for a certain stock. There is also no trade by trade accounting in futures, no wash sale rules, and losses can be carried back three years on futures based investments.

Happy Tax Day everyone!

P.S. — Futures gains and losses should be reported on Form 6781 (http://www.irs.gov/pub/irs-pdf/f6781.pdf) for US citizens, which comes over onto Schedule D of Form 1040 on lines 4 and 11. Schedule D: http://www.irs.gov/pub/irs-pdf/f1040sd.pdf

Commodity ETF Breakdown

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.  C’mon futures…

Commodity ETF Over/Under Performance 2014

Commodity
Futures
ETF
Difference
Crude Oil$CL_F
2.81%
$USO
3.59%
0.78%
Brent Oil$NBZ_F
-1.34%
$BNO
-4.10%
-2.76%
Natural Gas$NG_F
6.44%
$UNG
18.02%
11.58%
Cocoa$CC_F
9.84%
$NIB
6.98%
-2.86%
Coffee$KC_F
53.78%
$JO
61.65%
7.87%
Corn$ZC_F
10.65%
$CORN
13.34%
2.70%
Cotton$CT_F
2.00%
$BAL
9.37%
7.37%
Live Cattle$LE_F
6.39%
$CATL
3.03%
-3.36%
Lean Hogs$LH_F
13.45%
$HOGS
28.07%
14.62%
Sugar$SB_F
8.79%
$CANE
12.45%
3.66%
Soybeans$ZS_F
4.58%
$SOYB
7.57%
2.99%
Wheat$ZW_F
12.09%
$WEAT
12.06%
-0.03%
Average10.79%14.34%3.55%
Commodity Index $DBC1.87%
Long/Short Ag Trader CTAs-0.90%

(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

 

 

 

YTD Asset Class Scoreboard

No matter which asset class you track on a regular basis, March was a month of little activity around the board, with none of the asset classes we track posting a return above 1% or below -1% {Past performance is not necessarily indicative of future results}. At of the end of March, Managed Futures was the only asset class in the red… which reminds us all why “Value Investing” is so hard.

Asset Class Scoreboard(Disclaimer: Past performance is not necessarily indicative of future results)

Asset Class Scorboard Chart(Disclaimer: past performance is not necessarily indicative of future results.)
Source: All ETF performance data from Morningstar.com
Sources: Managed Futures = Newedge CTA Index, Cash = 13 week T-Bill rate
Bonds = Vanguard Total Bond Market ETF (BND),
Hedge Funds= IQ Hedge Multi-Strategy Tracker ETF (QAI)
Commodities = iShares GSCI ETF (GSG); Real Estate = iShares DJ Real Estate ETF (IYR);
World Stocks = iShares MSCI ACWI ex US Index Fund ETF (ACWX);
US Stocks = SPDR S&P 500 ETF (SPY)

Weekend Reads

  • The CME Had A Glitch Yesterday And Traders Had To Yell Like In The Old Days — This Is How It Looked — (Business Insider)
  • SpongeBob SquarePants silver coins will not be stored in a pineapple under the sea — (Futures Magazine)
  • The Nasdaq Composite vs your BS Risk Tolerance — (Reformed Broker)
  • This Part of Your Brain Makes You Fall for Casino Tricks — (Pacific Standard)
  • Niederhoffer: CTAs Could Face Historic Challenges From Rising Rates — (ValueWalk)
  • A History Lesson of all the previous financial crises and how it has shaped finance today — (The Economist)
  • Savers Beware: Fees May Be Shrinking Your 401(K) — (The Associated Press)
  • Report: 44% of Twitter Accounts Have Never Sent a Tweet — (Wall Street Journal)

Just For Fun:

  • The Daily Show Takes on the NCAA — (DeadSpin)
  • In the 2020 college football season, will your favorite team still exist? — (The Washington Post)
  • The “Mad Men” chartbook: Just how different Don Draper’s world was from yours — (QZ)
  • Meet the Man Who Got Congress Its Booze During Prohibition — (National Journal)
  • Chicago Restaurant Debuts $100 Grilled Cheese Sandwich — (NBC Chicago)
  • This Is How Teens Are Asking Each Other To Prom Nowadays — (BuzzFeed)

 

Why Value Investing is so Hard (Managed Futures Style)

Recently, we came across Meb Faber’s blog post “Why Value Investing is so Hard,” and every word we read seemed to resonate a little too much for us on the Managed Futures side of things.

“ … I mean it goes against everything your behavioral instincts tell you to do.  Buying a stock at all time highs is hard to do, and one reason momentum and trend work.  Buying a value investment is hard for many reasons, a few of which I outline below with a very relevant current example, Russian stocks.”

Meb chose to focus his efforts on Value Investing –  Russian Edition, listing specific examples of why value investing is so difficult.

“1.  All of the headlines are negative.

2.  The investment has declined, usually by A LOT.

3.  All of the trailing fundamentals are really bad.

4.  People can find many reasons why “this time is different” for the value metrics not to be reflective of the current situation.

5.  There is a non-zero risk of the investment going to zero.

6.  It is not popular (or patriotic) to own the investment.

7.  Buying the investment, and it going down more,  would pose serious career risk. (or divorce risk).

8.  The banking consensus is all sell rated.

9.  Flows are out.”

Is it just us, or are these some of the same reasons investors aren’t even considering an alternative investment, Managed Futures, or something similar? Let’s go back through the list and see if the reasons match.

1. All of the headlines are negative.

If you’ve been following our blog at all, you’d know this to be true. Ever since Bloomberg opened the floodgates back in September, we couldn’t look at any financial publication without seeing some bad press about Managed Futures. See our Rebuttal.

2.  The investment has declined, usually by A LOT.

There’s no doubt Managed Futures performance has struggled the past couple of years since the 2008-2009 financial meltdown.  Volatility has been contracting ever since then, and it hasn’t found a way to uncoiling yet. Not to mention, as a whole the asset class is in a generational drawdown.

4. People can find many reasons why “this time is different” for the value metrics not to be reflective of the current situation.

Stocks are coming off their all time highs, everyone else’s 401k Stock fund allocation is well above 50%, and in the word’s of the Reformed Broker, “Everything is Awesome.” But it makes us question, “Does the market have a Phil Mickelson Mentality?

6.  It is not popular (or patriotic) to own the investment.

There’s no better way of proving this then our most recent article, “What a Hedge Fund Failure Looks Like.” Paul Tudor Jones made the decision this past month to close its Managed Futures Fund, not because performance was all that bad, but because of the game of growing assets. The Tensor Fund went from over $1 Billion ($1.5 per our numbers) down to just $120 million times over the last three years, and that is the reason the fund is closing, not anything to really do with performance, the skill of the manager, or expertise of the team. The closing of Tensor is more of a commentary on investors buying in at the top of a cycle and getting out at the bottom than anything else.

7.  Buying the investment, and it going down more,  would pose serious career risk. (or divorce risk).

Yes, buying anything with the fear of it going down further is a risk. Managed Futures is already at a generational drawdown. There’s truly nothing saying it won’t get worse before it gets better, or that it is in the process of turning around, but committing to an asset class that has struggled recently is a difficult task.

9.  Flows are out.

It all depends on how you look at AUM, but if you choose to not include Bridgewater & Winton in the discussion AUM growth has been struggling since 2009.

The point is, we see that managed futures is “that” value investment right now. However, that doesn’t mean things are going to stay the same. In fact, that’s the whole point of value investments, and the point Meb is trying to make. You know that it’s not going to stay this way forever, so why ignore it?

Are You Being a Phil Mickelson?

In preparation of The Masters, we were reading up on the superstar and three-time green jacket owner, Phil Mickelson. So what did he have to say the night before the Super Bowl of golf begins? Mickelson revealed  he was going to compete with 2 less clubs than everyone else, because he just doesn’t need them… Yahoo Sports explains.

“It’s a bizarre quirk that after remodeling, renovation and some lengthening, Mickelson says that he needs just 12 clubs to win the Masters. He says he never – literally never – has to make a long chip (low 100 yards) to the green. For Mickelson, that shot requires either a sand wedge or a gap wedge.

“I don’t ever need them,” he said. “… The past six or seven years I’ve played this tournament, I have not had a shot between 90 and 130 yards. So think about that. I have not ever had a shot between 90 and 130 yards, so I have a 40-yard gap in there. I don’t ever need [those two clubs].”

Phil Mickelson

Which brings us to the question of the post, “Are You Being a Phil Mickelson?” What do we mean by that? We’re talking about a general opinion of investors tending to overweight what is performing well, versus maintaining a long term investment horizon. Phil Mickelson knows Augusta National through and through, and thinks he doesn’t need clubs for the long chip (100 yards). We can’t help but think the long chipping clubs are the “Alternative Investment Clubs” of financial world, as they haven’t been up to par performance wise (pun intended) {past performance is not necessarily indicative of future results}.

But here’s where things get interesting…  later in the article, Mickelson admits he wants to use 16 clubs (not 12 or even the 14 allowed) on some courses, as he knows that in reality, those clubs are essential to getting through some courses. Is anyone else thinking what we’re thinking? He’s telling us he’s playing without 2 clubs because the long chip shot isn’t needed for Augusta, (because it’s not needed now) even though as a whole, those clubs are needed in order to be a successful golfer.

That doesn’t sound familiar does it? Would Phil make the same choice of clubs if the PGA tour required all players to have the same set of clubs the entire year?

Performance of 40 Futures Markets after Q1

Commodities continue to grab headlines this year, as stocks have took a tumble in April, forcing many to question whether 2014 is the year of “Commodity Sex Appeal?” We’re a little bit past the first quarter of the year, and there’s reason to believe in the appeal by the amount of green shimmering below.

Futures Market Performance(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Finviz.com

Here’s some of our thoughts:

  • 31 out of 40 Futures markets are positive thus far this year. That’s an impressive 75 percent, compared to a 50/50 split from all of last year.
  • Softs & Ag markets are by in far outperforming other markets, holding the top 11 positions, while last year’s high performers, futures stock indices are in the red, or close to it.
  • The so called “Dr. Copper” which many believe to be a predictor of turning points in economics, is the only metal down on the year.
  • Not that it’s a shock by now, but Coffee remains to hold an unbelievable up trend, now standing at 78% YTD. Here’s Coffee by the numbers.
  • The nasty hog virus sweeping the nation is causing a lack of supply, having a rippling effect on the Lean Hogs market.
  • Natural Gas has all but erased its multiple instances of volatility explosion, while the Crude Oil Market is getting boring.
  • As the situation in Ukraine continues, the Corn and Wheat markets could be impacted.

What’s in store for the rest of the year? Are Coffee and Lean Hogs done with their uptrend? Will the Ag Markets be one of the top performers list for the full year? Are stocks going through a “correction” phase, or is the bull cycle over?

From a managed futures perspective, CTAs don’t care about the headlines, the hype; they don’t even care if Commodities themselves are up or down. All they care about is a consistent prolonged trend in either direction. Although we will say the nice thing about up trends is there is no cap on how high they can go (in theory). In comparison short trades have a natural floor (cost of production) and can never go below zero.

From a more broad perspective, after last weeks fall in stocks, we can only guess that there were more than a couple investors searching “Alternate Investment Opportunities.” So is it time to Google Alternative Investments, or is this just a blip before the stock market run continues? For those of you who think stocks will have another repeat year, ignore the last part. For those of you who might consider protecting your portfolio, do your due diligence about what alternative investments are out there, and what their return drivers are before taking your next step.