The Cringeworthy Long Only Commodities Table

Here’s our monthly look at:

1. How the numerous commodity ETFs which have sprung onto the scene the past few years are tracking a simple strategy of just buying the December futures market of that commodity, under the theory that the ETF will have to roll their positions periodically throughout the year, and in doing so take on costs the simple strategy does not have.

2. How the passive investment strategy of being long commodities (either via futures or ETFs) compare to an active strategy going both long and short commodity markets via a professional commodity trading advisor (as tracked by the BarclayHedge Ag Trader Index).

(Performance as of 7/22/2015)

Copy of Commodity ETF Over/Under Performance 2015

CommodityFuturesETFDifference
Crude Oil$CL_F
-14.16%
$USO
-19.74%
-5.58%
Brent Oil$NBZ_F
-12.01%
$BNO
-12.91%
-0.90%
Natural Gas$NG_F
-5.12%
$UNG
-5.96%
-0.84%
Cocoa$CC_F
14.75%
$NIB
12,51%
-2.24%
Coffee$KC_F
-27.48%
$JO
-31.00%
-3.53%
Corn$ZC_F
-1.81%
$CORN
-6.98%
-5.18%
Cotton$CT_F
0.19%
$BAL
4.83%
4.65%
Live Cattle$LE_F
-3.75%
$CATL
-4.06%
-0.31%
Lean Hogs$LH_F
-13.97%
$HOGS
-23.41%
-9.44%
Sugar$SB_F
-27.38%
$CANE
-23.65%
3.73%
Soybeans$ZS_F
-1.00%
$SOYB
-4.53%
-3.52%
Wheat$ZW_F
-14.68%
$WEAT
-18.73%
-4.06%
Average-8.87%-11.14%-2.27%
Average without Hogs-10.02%-8.40%-1.62%
Commodity Index $DBC-11.06%
Long/Short Ag Trader CTAs1.02%

(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

An Alternative Way to view Diversification

We’re living in a post 2008-2009 financial crisis world. Investors and advisors alike know that having your eggs all in one basket could land you in some hot water (especially if it’s the arguably broken 60/40 portfolio). The reason being, one single person or group isn’t able to call what’s going to be the “best” asset class (by performance only) in any given year.

Enter the ever so popular diversification quilt, which essentially ranks each asset class top to bottom over the past 15 years. The issue, of course, is that although they include 10 asset classes, they really don’t include alternative investments, specifically Managed Futures. The latest to release a chart like this is Business Insider.

 

As you might remember, we took the liberty of changing around the “quilts” published by Bloomberg back in September by adding Managed Futures to the mix. The second issue with the quilt table is that these “quilts” are all on the same axis level. For example, if an investment was the worst performer of the year and still up 2 or 3 percent, it would look the same as an investment that came in last at a -10% on a different year.

Which got us thinking how different would the table look if we spread out the investments so that the performance range would be visible? This is what we got.

P.S – Looking at each asset class on its own fluctuates year to year, is just one way to look at volatility. So, so we connected the dots of the largest performance range (Emerging Markets), Managed Futures, and the smallest performance range (Cash).

(Click here for a better view)

Diversification Chart Past 15 Years Logo

(Past performance is not necessarily indicative of future results)
Source:
Large Cap = S&P 500
Small Cap = Russell 2000
Intl Stocks = MSCI EAFE
Emerging Markets = MSCI Emerging Markets
REIT = FTSE NAREIT All Equity Index
HG Bond = Barclay’s U.S. Aggregate Bond Index
HY Bond =BoAML US High Yield Master II
Cash= 3 Month T Bill Rate
AA = Asset Allocation Portfolio
(15% Large Cap, 15% Intl Stocks, 10% Small Cap, 10% Emerging Markets, 10%  REIT,
40% HG Bond

2015 Halftime (Midyear) Asset Class Scoreboard

All but two of the eight asset classes we track month to month ended June in the red. Late reversals in the bonds market, and foreign currencies hurt Managed Futures, while Greece, and China hurt World Stocks and U.S. Stocks. Surprisingly, World stocks remain at the top but that might change if Greece exits the Euro, and China doesn’t recover.

The promising news for Managed Futures managers is they have a history of performing better in the second half of the year {Disclaimer: Past performance is not necessarily indicative of future results}.

(Performance as of 6/30/15)

Asset Class Scoreboard July 2015

Asset Class Scoreboard Chart July 2015

(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 (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)

Infographic: 7 Traditional vs 7 Alternative Assets in 5 Bear Markets

We tried our hardest to find an easy to read article (or graph) of the major asset classes and how they performed over the various crisis periods in the last 20 or so something, and couldn’t… so we decided to do it ourselves.

Enter the infographic, which we’ve tiptoed into before with Han Solothe Nasdaq, and Risk On/Risk Off Roller Coaster. However, all of those look a little silly next to this infographic looking at 14 different asset classes performing during 5 different crisis periods over the past 20 years, thanks to our newly found graphic designer, which came as part of our merger with RCM.

P.S. — If you like this infographic and want more from us, sign up for our weekly (sometimes bi-weekly) blog digest emails.

(Click on the image to enlarge) 
Infographic_Investments-in-Crisis_Full-Image_5


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Rain Makes Grains (Die?)

Forget what’s happing halfway around the world in Greece, we’ve got a storm brewing here in the heartland of America, in the grain markets. One quick look at the Finviz quote table, and we can see grains are as a green as the commodities they represent.

Grains Table(Disclaimer: Past performance is not necessarily indicative of future results)
Table Courtesy: FINVIZ

The major grains are up anywhere between +2% to a little under 5%. For those living in the Midwest this might not be a shocker, as June was one of the wettest months on record if not the wettest, putting a damper on our summer celebrations so far.  And putting a damper on ideal growing conditions, where you need just the right amount of rain. To greatly oversimplify things: too little rain, and the Corn dies of thirst. Too much, the Corn drowns.

Which brings us to the current ‘too much rain’ environment, where the only things more colorful then the table above are the maps of May precipitation versus the average – with a big swath of the country in the green to dark green color representing 100% to 500% more precipitation than normal.

Perception Percent AverageChart Courtesy: NOAA

For a slightly different look, here’s each state ranked individually on the dry to wet scale (which for some reason goes up to 121?), meaning this is the wettest May on record for Texas, Oklahoma, and Colorado.

Rain RankingsChart Courtesy: NOAA

While the NOAA hasn’t released June numbers yet;  the Illinois State Climatologist says June has been the wettest in the state’s history.

Illinois Rain RecordChart Courtesy: Chicago Tribune 

If you like to hear it from the words of the people who spent time in the fields, Rosetta Capital’s Jim Green spent a great deal of time on I-80, traveling through the heartland of the U.S., and experienced some not so great crop conditions.

“I saw so much drowned out beans, windblown corn and major roads closed due to flooding in the largest corn county in the US of A! The water damage is more prevalent than not. That tells me we will have a tough time reaching USDA estimates on planted acres and projected yields. A warning has been issued that things are far from perfect and the funds are short.”

It seems Mr. Green isn’t the only one noticing these conditions, with the grain complex up sharply since the middle of June, and many markets going Limit Up today, leading the CME to extend daily limit moves for the commonly traded grains.

 

This time last year, Ag traders were looking at riding the grain market trend down, down, down, with systematic traders joining in once the trend was established. And now it looks like the tables will be turned – with discretionary traders looking at crop conditions and the recent up move as proof prices have some upside, while systematic traders are likely getting stopped out of short trades as markets like Corn break above their 50, 100, and 200 day moving average in the past 6 trading days (June 23th), setting things up for potential long trades if their models confirm the rally as an up trend.

Corn Markets moving average(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Barchart

Of course, there’s those out there who get worried about rain causing gains, because of the old trader saying:  “Rain Makes Grain”, with the thinking going – rain can be bad for supply, but more often than not it’s a good thing, meaning more supply thanks to the rain, not less… which would make this a head fake higher. Only time will tell.

For more information on how these ag mangers trade these markets, check out our whitepaper, “Ag Traders.