Alternative Links: Forever Stamps Are a Commodity

“You can see why managed futures grew in popularity following the crisis. This particular index outperformed stocks by more than 50% in 2008 and beat a 60/40 portfolio by roughly 40%. Predictably, managed futures mutual funds exploded in AUM from around $200 million in 2007 to almost $2.5 billion by the end of 2009 as investors chased past performance.”

The Importance of Intellectual Honesty in the Markets – (A Wealth of Common Sense)

Alternative Investments By the Numbers: Top 5 2015 YTD Takeaways – (All About Alpha)

Headline Havoc – (361 Capital)

Curse of the Macro Tourist – (Barry Ritholtz)

Large CTAs take spoils of performance revival – (CTA Intelligence)

Forever Stamps:

 “The prison or ward economy runs much like a commodities market: Money in a commissary account can’t be traded, but goods sold at the commissary can be. And since the amounts in circulation are tightly regulated, their value can far surpass their price in dollars. Store men — prison or psych businessmen who have amassed a fortune of stamps — often mail stamps to loved ones outside effectively converting their fortune into cash, reducing the number of stamps in play and thereby inflating the value of individual stamps.”

Forever Stamps as Underground Currency, from Bo Keely – (Daily Speculations)

The Euro:

Euro

This Chart Tells You Why It’s So Hard to Bet Against the Euro – (Bloomberg)

Treasuries:

Hedge Funds Load Up on Dollars to Treasuries in Search of Yield – (Bloomberg)

Is Managed Futures Secret Weapon Coming Back? – (Attain Alternatives Blog)

Gold:

Hedge Funds Are Holding First-Ever Gold Net-Short Position – (Bloomberg)

Gold is doomed – (Washington Post)

The Life of a Gold Bug – (Attain Alternatives Blog)

Commodities:

Global Growth Worries Pummel Commodities – (Wall Street Journal)

Have They Convinced You That Commodities Are Dead Yet? – (Attain Alternatives Blog)

Armajaro Said to Shut Commodity Hedge Fund After Assets Shrunk – (Bloomberg)

These 10 States Will Be Hurting the Most After the Commodities Meltdown – (Bloomberg)

Commodities Hurt the Most

Emerging Managers:

7 Messages Family Offices Give Emerging Managers – (All About Alpha)

Industry News:

Catalyst Funds To Acquire Auctos Capital Management, Convert Managed Futures Fund – (FIN Alternatives)

 

Have They Convinced You Commodities Are Dead Yet?

If you had a dollar for every article about how horrible commodities have been performing, well.. you’d be rich (or have about as much as if you had shorted said commodity markets).   The past few weeks have seen Gold drop below 2010 prices, WTI Crude drop back below $50, and Sugar hit fresh 4 year lows.  The result? The long only commodity indices taking it on the proverbial chin…

Here are just a couple headlines and charts associated with the articles:

Are We Nearing Peak Commodity Hatred?

Pragmatic Capitalism Commodities Chart(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Pragmatic Capitalism

Commodities: The Great Bear Market

Economist Commodities(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: The Economist 

Global Growth Worries Pummel Commodities

WSJ Commodities Charts(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Wall Street Journal 

There are 100s of Commodities Out There:

With headlines like these, you would never know that Canola Oil is at all time highs, Cocoa is at four year highs, or that Natural Gas has barely been moving this year while Crude Oil has been rocking and rolling.  Turns out, there’s 100s of different commodity futures markets out there – and more than 30 liquid ones beyond just Gold and Crude Oil.  All of these commodities are broken down into five main sectors:  Energy, Metals, Grains, Softs, and Livestock., which is about the order in which people think about commodities.  We all know Oil is a commodity, and Gold is sort of the commodity poster child, even though it acts a bit more like a currency at times.  But you’re deep in the weeds when you start to think of Cocoa or Cattle as commodities.

Commodity Index WeightsChart Courtesy: Barchart

The people who created product around commodities are no dummies, structuring commodity indices around such popularity (at times based on actual metrics like percent of global production value), with a heavy slant towards energy and metals, with the Coffees and Cattles of the world essentially being left behind. The chart above is a little old, from a 2010 BarChart article, but the point remains – there’s more than one way to track “Commodities” via an index. Here’s how the various indices have performed over the past 60 months, highlighting just how different these indices move.

Commodity Index ETF Bear Market
(Disclaimer: Past performance is not necessarily indicative of future results)

It’s not Whether it’s going Up or Down, it’s by How Much

Which brings us back to our little slice of the world in Alternative Investments.  You can read how Commodities aren’t all that Alternative in a recession in our ‘Truth & Lies in Alternative Investments’ whitepaper, and the charts above showing the big impact of energy in most commodity indices drives that point. If the S&P 500 has a large portion of companies in energy sector, and energy is a large portion of the commodity indices – does it follow that a large portion of the S&P is tied to commodities?  Food for thought.

Thing is – while economists and shipping companies may care how much of a country’s GDP is energy versus Cotton farming; giving value to a value weighted commodity index  is something alternative investment managers don’t really care about.

They just want a commodity market – any commodity market – to be moving more than average. We can all grasp how the stock market is more than just the Dow Jones Industrial Average. There are outliers to the upside like Netflix and Apple, outliers to the downside, and everything in between, forming an average; and creating room for ‘stock pickers’ to be able to pick the winners and pan the losers to add value.  Professional Alternative Investment managers working in the commodity space take a similar approach, albeit highly systematic and risk controlled as compared to the stigma of a “stock picker.” The commodity pros aren’t just investing in Commodities going up or down – they are looking for the outliers inside of the commodity complex. They are looking for the Netflix of commodities, or Enron on the downside.

So don’t cry for those in commodity futures when the Wall Street Journal waxes on about the big bear market in commodities. We may be crying if it is a slow crawl downwards interspersed with lots of fits and starts, or cheering it down if it’s a significant move in one direction over a few weeks to months.

For an in-depth understanding of how a long/short commodity strategy works, click here.

For a performance comparison of the Commodity Index ETFS vs. managers actively trading the ups and downs of the commodity market, click here.

The Life of a Gold Bug

It’s our hope to provide you with some laughs now and then. Our latest effort is publishing weekly cartoons of the “watercooler talk” in the alternatives space. This week’s cartoon is titled, “The Life of a Gold Bug.”

Let us know what you think!

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

(Click Here for a closer look)
Goldtimer_comic

 

Weekend Reads: A Crammed Market

Gold:

Gold vs. Interest Rates – (Reformed Broker)

The Life of a Gold Bug – (Attain Alternatives Blog)

Morgan Stanley: Gold Could Plunge to $800, and It’s Not Because of China’s Reserves – (Bloomberg)

Finance Related:

An honest Update on the Trend Following Landscape – (Red Rock Capital)

Infographic: Squeezing New ETFs Into a Crammed Market – (Ignites)

Nikkei buying Financial Times from Pearson for $1.3 billion – (Market Watch)

U.S. Corn, Soybeans Slide on Demand Worries – (Wall Street Journal)

Google’s Co-Founders Each Just Made $4 Billion In One Day – (Bloomberg)

CFTC plans more scrutiny over algorithmic trading – (CFTC)

U.S. SEC launches civil probe into FIFA bribery case – (Reuters)

World’s largest hedge fund Bridgewater has turned bearish on China – (Market Watch)

KIWI’S FALL FROM GRACE – (Short Side of the Long)

Just for Fun:

Blackhawks Corn Maze – (Illinois State)

5 Things to Know About Monsanto and Syngenta – (Wall Street Journal)

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