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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Option Trading is For (Thanksgiving) Turkeys

It’s that time of year. The Christkindlmarket is open on the Daley Plaza, there’s ice skating in Millennium Park, and we’re preparing ourselves for the savoring smells and tastes of Thanksgiving dinner, where no platter of food is more important than that of the turkey. The relative that might disagree is your vegetarian cousin (Tofu turkey for you), and the guy who makes the ultimate sacrifice in the name of giving thanks…. the turkey.

Don’t feel too sorry for the turkey though… it had a great life, and died at the peak of its existence (being fed everyday), but the only issue is it had no idea, the “turkey surprise,” was coming. If fact, there’s a lovely chart of the turkey life, courtesy of Nassim Taleb’s wonderful book The Black Swan. Taleb’s depicts “the good life” of a turkey, including round the clock care, all the food it can muster, developing a life of self-satisfaction, just so us humans can prepare the unfortunate creature for the not so pleasant surprise ending.

The Turkey Surprise

 

Now we’re not trying to lend advice on your eating habits, but can’t help but use this example in the investment realm. While it seems impossible to imagine this chart could be a stock market index tomorrow, next week, or next month – this chart is to remind those caught in stock market dream that anything could happen, at any moment, without notice; especially those selling volatility for a living.

Which brings us back to Mr. Turkey. The turkey sees 1000 days of small gains followed by one day of large losses, and we can’t help but think of that as a lot like the performance profile of option sellers. The reason is option sellers are technically short volatility programs which on the whole make a living by risking a large amount to make a small amount. There’s an old saying about option sellers ‘picking up pennies in front of a freight train’. They can get away with this (in theory), because they have a large winning percentage where the large losses are very rare.

But no matter the math and no matter how good your option selling manager is, or has been to date, there is no denying that they have a greater than zero chance of a large negative surprise akin to the turkey’s 1001st day at some point in the future.  Indeed, just this year (last month to be exact), a spike in volatility in October sent some option sellers to the dinner table, as they didn’t see the turkey’s day of demise coming.

Now, professional option selling managers design their programs not to lose everything on a single day like the turkey; but they are betting against the occurrence of such a day, being set up to realize frequent but small gains in exchange for the risk of infrequent but very large losses (making them perhaps a distant cousin to the turkey).

In the meantime, Happy Thanksgiving to you and yours from the Attain team!

Asset Class Scoreboard (where’d that stock loss go?)

The month’s Asset Class Scoreboard numbers is a perfect example of just how much noise is out there in the markets. If you were glued to your twitter feed in October, you may have been freaking out about the -5% drop, but someone who checks in monthly doesn’t even see it… October finished just fine for them after a somewhat rare stock market bounce.

And then there’s managed futures, which somehow amidst all the ‘trend following is dead’ commentary and articles about Paul Tudor Jones losing money – posted its third consecutive month of gains, and 6th out of the past 7 months, to find itself sitting in third place on our YTD scoreboard.  Of course, this is an index, not all managed futures programs are up. But just the same, it sure is nice to be around the upper tier for a while after spending most of the past few years towards the bottom.

PS – take a look at the buy and hold commodities trade, down double digits on the year as Crude Oil joined the commodity sell off in October, to join grains and metals which had done so in the month’s prior.

Table of Asset Class ScoreboardChart Asset Class Scoreboard(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)

Pursuing Portfolio Perfection

It’s 5 years into the one of the biggest stock market bull runs of all time, and all looks fine for the aging bull even after this brief downturn in October.  For many, this has been a great run and they’ve been doing quite well during it. For many others, it’s been rather annoying, as their “smart” choice of diversification has under performed recently.

But here’s the deal – it’s not about beating the S&P 500. You’re on the quest to find a portfolio that best matches your needs before retirement. For some, that’s so far in the future, you’re not worrying about volatility. For some, it’s within reach, and you want to protect what you have before something bad happens. For some, you’re looking for something in between the two. So what’s your “Perfect Portfolio?” It’s not an easy question to answer, and many pros have tried (check out Meb Faber’s impressive list of asset allocation strategies and stats here). The basic portfolios to consider in our mind are the following:

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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

150 Asset Class Returns in One Chart

We love these new looking charts that keep popping up (the latest was over here on Ritholtz) showing how the different asset classes go from the top to the bottom, to the middle, and so forth depending on the year… implying if not outright saying that it’s a fool’s game to try to pick which one will be best… just diversify into them all.. (which is what the AA gray box represents)

But we have two issues with these charts.

  1. They don’t include managed futures…. An easy fix.
  2. They do a good job of showing how the different assets can be the best or worst performer in different periods – but they don’t really give a good view of how good or bad they were in those periods.

For us, a more telling graphic would show each ‘block’ in a ranking above and below the ‘zero line’ (in dark red), so you could more easily see when certain asset classes lose money in a year. In addition, comparing the volatility of a few different assets would be nice, showing how far they move year to year…

Here’s our amended graphic… with a Managed Futures & Emerging Market line included to show its consistency of performance over the past 15 years. What else does this chart tell you?

(Click here to enlarge)

Asset Class Compare 15 YearsData Courtesy: Novel Investor
Disclaimer

Asset Class IndexManaged Futures = Newedge CTA Index

Invest like a Billionaire?

When someone first starts investing, there is the sort of high that comes with it; a high that convinces you that you just might be the next Warren Buffet. Sure. You watched a couple investing tips videos on Youtube, and you think you found some ETFs (with extremely low or no fees) that no one else knows about.

The thing is, that feeling never really goes away. The overly active investors are confident that with a little hard work they too will eventually become Warren Buffet. We all know the likelihood of that, so instead the people at Direxion decided to take that idea and turn it into an ETF. What are we talking about? The newly launched ETF Direxion iBillionaire (IBLN). Now you can feel like you’re trading with the greats, without actually doing it. Here is the description:

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