Gold Forming Classic “Frowny Face” Pattern

May 17, 2013 By Leave a Comment

Not to heap any more on the unfortunate gold bugs – their trouncing over the last few months has been rehashed in enough places (including here) that there’s not much to be gained from pointing out their woes yet again.

We just wanted to draw your attention to a chart pattern we’ve been watching as it has developed. Our charting may be a little rusty, but it appears that gold is forming the classic “frowny face” pattern:

Chart courtesy Finviz.com. Disclaimer: past performance is not necessarily indicative of future results.

Rather fitting, considering this is the face that most gold investors are probably making right now.

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Is the Yen Carry Trade Back?

May 13, 2013 By Leave a Comment

The Yen continued to plunge downward today, after last week becoming the 24th down week out of the last 32 since October of last year. That’s right – the Yen has been down three out of four weeks for more than 7 months now:

Chart courtesy Finviz.com. Disclaimer: past performance is not necessarily indicative of future results.

We’re hearing more and more about the Yen Carry Trade being back (although we have our doubts on that – with US 10-years yielding 1.92% and Japanese 10-years yielding 0.74% – there isn’t much of a carry there). Mark Dow has a nice explanation of how it works on his blog.

But what we start thinking about more than anything when hearing about the Carry Trade is the infamous Mr. John Devaney, who had to sell his 142-foot yacht named (wait for it…) “Positive Carry” during the financial crisis because of losses in his hedge fund due to the unwinding of, you guessed it – the carry trade.

The problem with the carry trade isn’t that it doesn’t work… it’s that it can be difficult to let go when the market winds take an unfavorable turn. We’d rather just short the Yen and exit the trade when the trend comes to an end. And at this point, even if the Yen reverses and heads higher now, the decline will still have been one of the best long-term trends we’ve seen in years.

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Funny Enough, We HAVE Heard of the CME…

May 9, 2013 By Leave a Comment

This week’s Economist has a rarity: an article taking a look at the CME with the tagline “the biggest financial exchange you’ve never heard of.” Well, maybe it’s because we’re in the futures business and live in Chicago – but we would venture to guess most readers of the Economist probably have heard of the CME… right?

The article itself is basically just a history lesson charting the rise of the CME. The Economist attributes its success to a virtuous cycle caused by the “network effect.” In other words, traders are attracted to the market with the most liquidity… so the exchange with the most traders gets more traders, and becomes ever more attractive to new traders.

The article also points to several cases of excellent timing, especially when it came to the shift to index and interest rate futures, as well as the CME’s success at capturing the digital trading market (and subsequently consuming its former competitors. That’s not to say the CME is unassailable. We’ve been taking note of the competition between the CME and ICE, particularly when it comes to the rift between WTI (West Texas Intermediate) and Brent Crude Oil contracts. But as it stands, the CME is becoming increasingly important to the global economy, eclipsing the NYSE in terms of market valuation. It may still trail behind the world’s stock exchange in terms of attention, but coverage like this suggests that advantage might not stand for much longer.

Oh, and while we’re at it – that sure looks like a contrarian magazine cover for the all time highs stock market for anyone who believes in magazine cover indicators.

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Risk On/Risk Off Market Snapshot: April 2013

May 8, 2013 By Leave a Comment

After 3 consecutive months of zero “risk on” or “risk off” days (per our definition), April finally added some to the tally – with 3 risk on days and 1 risk off day making for about 18% of the trading days in the risk on/risk off category. In this case, it took a horrible tragedy in Boston to cause a sufficiently large market sell-off, which then spurred 3 subsequent “risk on” days as the market erased those losses and continued to new highs.

(Disclaimer: past performance is not necessarily indicative of future results.)

(Disclaimer: past performance is not necessarily indicative of future results.)

We define risk on as an average gain of over 1% for “risk” assets; risk off is an average loss of over -1% for “risk” assets. (Click here for a more detailed breakdown.) Prior to 2008, the yearly average of risk on/risk off days stayed between 10% to 20%. So far, 2013 has gone in a very different direction, with only 4.9% of days this year qualifying as “risk on” or “risk off.”

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Wheat Tour 2013

May 7, 2013 By Leave a Comment

No, it’s not the most boring concert event of the summer – this year the CME decided to do some live-tweeting of the Kansas City Board of Trade wheat tour and posted pictures and analysis along the way.

It always amazes us to see this side of grain trading in action. Despite all of the technological advances we’ve made, we still have people driving around, looking at dirt and estimating crop yields. Doesn’t it seem like we should have microchips on the seedlings giving real time data by now? Or at least drones scanning the fields and producing automatic reports… Maybe that will be Google’s next project – Google Grains.

Perhaps this is why USDA reports are sometimes so bad at estimating what’s going on out in the fields. Crop report days are notorious for frequently sending grains limit up or limit down due to big revisions in their earlier estimates, and it’s one of the factors that allows grain traders to post huge returns and/or losses in very short periods. Inaccurate estimates plus the role of unpredictable Mother Nature can lead to some huge price swings.

And perhaps this is why there’s still room for former farmers to get into the CTA business and start managing hundreds of millions of dollars. More so than any other market, the need for the “old school” expertise in grains helps explain why 100 PhDs in a room might not be able to figure out the direction of crop prices any better than the guy with pig $#!* on his boots.

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Asset Class Standings After New Stock Highs

May 6, 2013 By Leave a Comment

With the S&P 500 breaking 1,600 for the first time ever last week and finally getting above those pesky 2007 highs, we decided to look at just how well everything else has done in comparison since all was well before the financial collapse, and see if any other asset classes are back above their 2007 (nominal) highs. You can see the S&P (price only) middling along there about the exact same as Real Estate, just pushing back above the 1000 line.

Disclaimer: past performance is not necessarily indicative of future results.
Managed Futures = Newedge CTA Index, Bonds = Vanguard Total Bond Market ETF (BND)
Hedge Funds = DJCS Core Hedge Fund Index Commodities = iShares GSCI ETF (GSG)
Real Estate = iShares DJ Real Estate ETF (IYR) World Stocks = MCSI World Index (ex USA)
US Stocks = S&P 500

The big winner since the last time stocks were at these levels: you guessed it, BONDS. You know, the bonds that people say are getting bubbly. Hedge Funds and Managed Futures also look quite good in relation to stocks since 2007, although they’ve had their problems underperforming stocks in the past few years. Now, some are pointing out that the S&P is still down significantly in inflation-adjusted terms  from the 2000 high (much less the 2007 high), but when comparing all the asset classes to each other – the real vs nominal game doesn’t apply. We would simply shift all the curves lower to adjust for inflation, and the S&P would still be middle of the pack.

It’s also quite a thing to take a step back and remember that huge spike in commodity prices,  and the fact that they peaked much later than stocks did.  We’ll see what happens over the next six years, but in the meantime – this is a good reminder that it is a marathon, not a sprint. And the fastest one around the track this past year or two or three may still be lagging others in the overall race.

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Asset Class Scoreboard: April 2013

May 3, 2013 By Leave a Comment

The numbers for April were good for managed futures… and for every other asset class we track that isn’t named “Commodities.” It was nice to see our favorite asset class post a fifth consecutive month of gains per the Newedge CTA Index – despite February nearly breaking that streak. But even bigger gains in stocks and real estate left managed futures in the middle of the pack. (Disclaimer: past performance is not necessarily indicative of future results.

Almost as impressive as the gains for real estate and stocks was the nosedive taken by the commodity index. It plunged from up 0.34% YTD in March down to -4.57% in April. That downturn contributed to some of the gains in managed futures, thanks to managers’ short positions in the falling commodity markets. Is it time for asset allocators to start rethinking long-only commodity exposure?

Disclaimer: past performance is not necessarily indicative of future results.
Managed Futures = Newedge CTA Index, Cash = 13 week T-Bill rate,
Bonds = Vanguard Total Bond Market ETF (BND), Hedge Funds = DJCS Core Hedge Fund Index
Commodities = iShares GSCI ETF (GSG), Real Estate = iShares DJ Real Estate ETF (IYR)
World Stocks = MCSI World Index (ex USA), US Stocks = S&P 500

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