6 Takeaways from the Performance of 8 Asset Classes YTD

Our takeaways:

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The Commodity Super Cycle Ain’t Over – Yet

Great long-form piece by Erik Swarts over at Market Anthropology (we borrowed the title) talking the commodity super-cycle, and how it might not be dead… We’ve talked about it being on the way to the morgue here and here.

Mr. Swarts bases his logic on multiple comparisons to different past market regimes – be it the 1930s – 1940s interest rate regime, the 1970s commodity cycle, or the 1980s stock market breakout; and gets a bit technical both with his charts and the writing:

…when we extrapolate a normalized comparative study – balanced by momentum (RSI and stochastics) signatures across the complete run of the 1971-1980 boom, we find an estimated comparative leg higher up to the early part of the next decade. Fittingly, this would roughly match the duration of the previous commodity boom that extended for ~20 years along the mirrored trough of the long-term yield cycle in the early 1930’s and 1950’s.”

CRB Commodity Super Cycle(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Market Anthropology

Now, it’s easy to gather from all of the charts and talk about rates continuing to be lower that this is all a way of saying that low rates will spur inflation and re-fuel the commodity super-cycle Jim Rogers style. But in fact this is a much more nuanced conversation than that. Mr. Swarts’ main point, from what we can gather, hinges on this one line:

“For gold to reach $700/ounce or oil $50/barrel, real yields would be pushed significantly higher.”

We have to admit that took us a second to understand, and in fact we went looking for some explanation. Why would real yields be pushed higher for Gold and Oil to go down… Doesn’t it seem higher yields = inflation = higher commodity prices??  Enter Pimco, with a great description of the link between Gold prices and real yields.

….when real yields on other assets are high, investors would likely want a bigger discount to the long-run estimated real value of [a store of value, constant long term purchasing power] asset. Conversely, when real yields are low, the opportunity cost of owning the [store of value, constant long term purchasing power] asset drops and investors would likely be willing to pay a higher price relative to the asset’s long-run estimated real value… As gold increasingly becomes a financial asset, when real yields rise, gold prices should fall if they are to maintain a given level of financial demand relative to investors’ other opportunities. Similarly, when real yields fall, we expect the price of gold to rise. “

A little technical, but the basic idea is that the more people view Gold… and its cousin Black Gold (Oil), as a long term asset which will hold its purchasing power in real terms, the more that assets nominal price will move in relation to the level of real yields. And that relationship will be an inverse one, with prices down as yields go up, and vice versa. Indeed, this is why – in part – Gold and Oil have sold off so violently over the past 12 months (especially the past month), as investors are assuming a rise in real yields.

We’re by no means Gold bugs trying to make a call on where Gold will go from here. And this analysis misses the fact that there is more to ‘commodities’ than just Gold and Oil. There’s things like Coffee, Corn, and more which aren’t really considered to hold their purchasing power (although we’re sure people would much rather have Coffee in an apocalypse than Gold); but this is definitely something to noodle over…

 

11 things you should know about the Crude Oil Drop

Christmas came a month early for those short Crude Oil over the past couple of months, specifically last week, and even more specifically – Friday.  Since July, WTI crude has dropped more than 30%, with 10% of that coming the day after Thanksgiving. And just about everyone and their mom (mom’s who have a blog about commodities?) have written something about the Crude Oil move.  Here’s 11 insights into what might make this drop more than just this week’s headline.

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10 of the Worst ETFs Money Can Buy

It’s typically a slow week in the financial world for the few days leading up to our collective feasts on Thanksgiving day, and that gives us a little down time to catch up on matters we typically don’t get to day to day, or even week to week.

One of those things is checking in on ETFs some people thought were a smart idea at the time, and now doesn’t look so good. Without Further ado, the Top 10 worst performing ETFs over the past twelve months:

ETFTicker1 Year %
VelocityShares 3x Inverse Natural Gas ETN$DGAZ-82.10%
C-Tracks Citi Volatility Index TR ETN$CVOL-80.31%
Direxion Daily Jr Gld Mnrs Bull 3X Shrs$JNUG-75.06%
Direxion Daily Jr Gld Mnrs Bear 3X Shrs$JDST-73.52%
VelocityShares Daily 2x VIX ST ETN$TVIX-73.05%
ProShares Trust Ultra VIX Short$UVXY-72.94%
Direxion Daily Semicondct Bear 3X Shares$SOXS-67.15%
Direxion Daily Russia Bull 3X Shares$RUSL-66.00%
Direxion Daily Nat Gas Rltd Bull 2X Shrs$GASL-60.71%
UltraShort DJ-UBS Natural Gas$KOLD-59.91%

(Disclaimer: Past performance is not necessarily indicative of future results)
Table Courtesy: ETF.com

Our Notes:

  1. We’re not surprised to see 3 of the Top 10 worst performing etfs be “tracking” Natural Gas, and again – both a bull fund and inverse fund both among the worst performers (it is truly magical their ability to pull that off). Those ETFs seem to not perform well under…let me see here, ok, under most circumstances.
  2. Gold Miners still suck. (See Here Here and here.) And now they join the dubious distinction club as being one of the plays where you lose no matter whether you thought Gold Miner’s were going up or going down. This one’s even more egregious than the Nat Gas, as they are bull and bear on the same index – yet both down more than -70% in past year.
  3. The Good old VIX. Betting on Volatility is a tricky, tricky game. Betting short on the VIX over the past 5 years probably seemed like a good bet, right up until October when the VIX spiked without notice, and all the sudden you lost half of the investment.

So how did you fare? Hopefully not as bad as some of these… Have an ETF that surprised you? Let us know.

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.

 

 

 

 

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

CommodityFuturesETFDifference
Crude Oil$CL_F
-2.64%
$USO
-2.52%
0.12%
Brent Oil$NBZ_F
-10.35%
$BNO
-13.76%
-3.41%
Natural Gas$NG_F
-2.83%
$UNG
6.86%
9.69%
Cocoa$CC_F
21.68%
$NIB
21.93%
0.25%
Coffee$KC_F
60.99%
$JO
69.31%
8.32%
Corn$ZC_F
-28.80%
$CORN
-25.51%
3.29%
Cotton$CT_F
-21.75%
$BAL
-23.12%
-1.37%
Live Cattle$LE_F
24.01%
$CATL
18.86%
-5.15%
Lean Hogs$LH_F
18.90%
$HOGS
10.96%
-7.94%
Sugar$SB_F
-9.21%
$CANE
-6.94%
2.27%
Soybeans$ZS_F
-19.54%
$SOYB
-16.25%
3.29%
Wheat$ZW_F
-25.43%
$WEAT
-25.97%
-0.53%
Average0.42%1.15%0.74%
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

Stocks… We Hope they Go to Zero!

One of the best things about being in an investment which can do well when markets are down is the fun you can have at cocktail parties, in the locker room at the golf club, and dinner with friends. A -334 point down day in the Dow and around -5% move off of all time highs starts to  bring out the shrugs and exasperated expressions, as those well to do’s around you murmur their version of the timeless classic:

“Tough day in the markets today, huh?”

And here’s where it gets fun… because our go-to response is usually:

“Sure was tough… we hope they go to zero.”

For those from the world of traditional investing, or better yet – those who’ve only been around the last five years – this can be a bit unsettling and cuts a lot of conversations short.

“Go to zero? What?”

While we don’t actually want market to go all the way to zero (we still want a functioning society and all of that), we welcome with open arms the volatility that would accompany some fear and panicked selling. Because, you see, we’re mostly in the business of volatility. Or to be more precise – the business of profiting off of volatility expansions from periods of consolidation and dampened volatility.

As we have laid out before, managed futures tends to do well during market crisis periods because of their ability to go short global markets. In 2008, managed futures programs found themselves short nearly every type of market not considered a safe haven, be it stock indices, energies, foreign currencies, metals, grains, or softs. Fast forward to the past few weeks, and we’ve seen several managed futures programs start to initiate such short positions in markets like US and non-US stock indices, energies, foreign currencies, grains, and metals.

Quite simply, we’re cheering the markets to zero because the lower they go in this move down, the better for our clients in their long volatility investments. Of course, past performance is not necessarily indicative of future results and there are clients and programs and positions which may lose money in an extended move lower.  But generally speaking, such down trends work to the benefit of the managed futures space in our experience.

So for now we’ll be cheering… “Go to Zero!”

Russelll To Zero(Disclaimer: Past performance is not necessarily indicative of future results)
Chart via Finviz.com