Futures vs ETFs 4 Months In

If you haven’t seen the old ‘dead cat bounce’ in Crude Oil recently, we’re looking at a 50% or so rebound from around $40 up to $60, making our “How to Play a Bounce in Oil (Hint: Not $USO)” post quite on point, both from a timing standpoint, and from the $USO pan – with December WTI now up 6.09% YTD while the $USO ETF is only up 0.74% {Disclaimer: Past performance is not necessarily indicative of future results}.  Whether this bounce keeps bouncing or not, 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 4/30/2015)

Commodity ETF Over/Under Performance 2015

CommodityFuturesETFDifference
Crude Oil$CL_F
6.09%
$USO
0.74%
-5.35%
Brent Oil$NBZ_F
6.48%
$BNO
7.05%
0.57%
Natural Gas$NG_F
-7.25%
$UNG
-8.87%
-1.62%
Cocoa$CC_F
2.07%
$NIB
1.01%
-1.05%
Coffee$KC_F
-18.73%
$JO
-22.21%
-3.48%
Corn$ZC_F
-8.93%
$CORN
-11.67%
-2.74%
Cotton$CT_F
3.45%
$BAL
11.61%
8.16%
Live Cattle$LE_F
-2.73%
$CATL
-3.04%
-0.31%
Lean Hogs$LH_F
-5.31%
$HOGS
-20.06%
-14.75%
Sugar$SB_F
-13.21%
$CANE
-12.84%
0.37%
Soybeans$ZS_F
-5.30%
$SOYB
-5.73%
-0.43%
Wheat$ZW_F
-18.29%
$WEAT
-20.30%
-2.02%
Average-7.03%-5.14%-1.89%
Average without Hogs-5.84%-5.12%-0.72%
Commodity Index $DBC-0.87%
Long/Short Ag Trader CTAs-0.02%

(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

Be Careful Predicting a Forecast

We’re only days away from April, and although it still feels a little winter-like in Chicago, planting season is upon us. Tomorrow, the USDA will release a crop report, forecasting how much Corn, Wheat, Soybeans, and so on will be planted in this fine country this time around.  And the analysts are already out with their predictions on the forecasts.  There’s a joke in there somewhere, ‘what do you call a prediction of a forecast…. wrong’. We’re not sure who these “analysts” are, but they’re predicting that the USDA will predict (you may have to read that twice) a larger planting season for one crop in particular… Soybeans.

“Analysts on average expect soybean acreage to rise 3% from last year to 85.9 million acres, while corn will fall 2% to 88.7 million acres, according to a survey by The Wall Street Journal.”

“Farmers are turning to soybeans for a few reasons: Prices have fallen less sharply than for corn, demand has been strong and producing the oilseeds costs less thanks to lower seed prices and less need for fertilizer.”

Farmers say the crop is better for business (at the moment), but there are downsides to these positions.

“But sowing more soybeans—used to make everything from animal feed to salad dressing—has its own downside. Many traders and investors are betting that further production increases will trigger steep declines in soybean futures, potentially pushing the $35 billion market to lows not seen since 2009.”

The question remains, that if more soybeans are in fact planted, could we see Soybean prices fall faster and deeper than what the markets experienced last year? Some analysts are predicting Soybeans to drop below $9 a bushel. Here’s the latest look at Soybeans by acres planted, front month contract prices, and net positions over the past 1.5 years.

Wall Street Journal Soybeans(Disclaimer: Past performance is not necessarily indicative of future results)

There’s also a little of a ‘chicken or the egg’ debate here, because what happens if the USDA does come out and forecast record breaking acres planted in Soybeans, forcing prices lower, which in turn causes farmer’s not to plant it, thereby invalidating the ‘forecast’.  Welcome to the exciting and often wrong world of predicting a forecast – we’ve touched before on how the USDA crop reports aren’t all that accurate (and here).  And in today’s age of twitter, live updates to your phone, and folks like this doing a Pro Farmer Midwest Crop Tour, the USDA has to come up with a better way to accurately report crop data.

Meanwhile, Alternatives folks (specifically those who ply their trade in such Agriculture markets) don’t care all that much if Soybeans drop to $5 a bushel. They just care that the move from $9 to $5 is consistent enough to lock in the downward trend. We’ll see what happens tomorrow.

Different Exposure, Different Price

Long Only Commodities as an asset class has been plummeting since around April last year, and the downtrend continues into 2015. The average move of commodity futures in January came out to be -5.02%, compared to ETFs -7.54%, with ETFs underperforming the futures markets they supposedly track by 2.52% {Past performance is not necessarily indicative of future results}.

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).

(Data as of January 30th, 2015)

Commodity ETF Over/Under Performance 2015

CommodityFuturesETFDifference
Crude Oil$CL_F
-4.47%
$USO
-12.48%
-8.00%
Brent Oil$NBZ_F
-6.45%
$BNO
-10.57%
-4.12%
Natural Gas$NG_F
-6.63%
$UNG
-7.45%
-0.82%
Cocoa$CC_F
-6.02%
$NIB
-8.45%
-2.43%
Coffee$KC_F
-2.13%
$JO
-3.21%
-0.80%
Corn$ZC_F
-4.85%
$CORN
-6.27%
-1.42%
Cotton$CT_F
-2.53%
$BAL
-1.99%
0.54%
Live Cattle$LE_F
-4.20%
$CATL
-8.08%
-3.88%
Lean Hogs$LH_F
-4.21%
$HOGS
-13.59%
-9.39%
Sugar$SB_F
0.83%
$CANE
1.77%
0.94%
Soybeans$ZS_F
-5.96%
$SOYB
-6.17%
-0.21%
Wheat$ZW_F
-13.41%
$WEAT
-14.02%
-0.62%
Average-5.02%-7.54%-2.52%
Commodity Index $DBC-5.69%
Long/Short Ag Trader CTAs0.61%

(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

Alternative Links: “We Basically Controlled the Oil World”

Crude Oil:

“We basically controlled the oil world,” said  Al Kaplan, former president of Phibro’s energy unit. Mr Kaplan. “It was quite amazing. We had very good people. There was no price dissemination, so we used to tell people what the price was.”

Rise and Fall of a Commodities Powerhouse – (FT)

3 reasons for oil’s crazy bounce – (MarketWatch)

7 Technical Indicators to tell when the Crude Sell Off is Done – (Attain Alternatives Blog)

Managed Futures:

[Read more…]

Futures Market Winners/Losers of 2014 – The Last Five Years Edition

This year was anything but boring in the futures markets. There were plenty of major moves in multiple markets, and it seems just about every market not at 5 year highs (stocks, the US Dollar, and cattle) was at 5 year lows (Crude, Copper, Yen).  That’s in stark contrast to the past few years, where there’s been more markets up than down.  But it was two black liquids stealing the headlines – with Coffee leading the way on the upside, and Crude Oil the big loser on the downside. All those who had the Long Coffee/Short Oil trade on, take a bow – that’s a winner! (What could we call that – the Texas Latte, the Beans over Barrel spread?)

[Please note – Finviz does some weird things around contract rolls, which can make their percentage gains over longer periods different than what would be found using a continuous contract or the cash/spot market, nonetheless, we feel it is representative of each market’s 2013 movements]:

2014 YTD Futures(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Finviz

  • It was a mostly down year, with 63% of markets down; compared with 51% up in ‘13, 80% up in ‘12, and 85% up in 2010
  • While it seemed more volatile this year, just 15 markets finished up or down more than 15% (compared with 16 last year).
  • Having said that – VIX futures finished about 20% higher than where they started the year, despite stocks at all time highs (curious)
  • US Stocks & US Bonds turned in near identical performances in 2014, both up around 12%. Not every day you see that.
  • Commodity markets were routed. Crude made the headlines, but Cotton, Soybeans, Rice, Oats, Platinum, Sugar and more were all down double digits.
  • Gold, for all the headlines, was basically unchanged
  • Currencies were in play, for the first time in what seems like forever, with the USD making a very sneaky move up to multi year highs; the Japanese Yen and Canadian Dollar hitting 5 year lows, and the Euro, Aussie, and Swiss testing multi-year lows.
  • The headliner Coffee was up impressively, but despite being up around 50%, it’s still about 50% below its 2011 highs (needs to rise 100% or so to get there)
  • Many markets are at 5 year lows, including:  energy futures (Crude, Heating, Gasoline), many metals (Silver, Platinum, & Copper), currencies (Jap Yen and Canadian Dollar), and a few random like Cotton,
  • Wheat & Corn – Despite being some of the most volatile futures markets, you wouldn’t know it by this chart, down only (-1.9% and 4.7%) this year

So what will 2015 bring? A big rebound in Oil prices (a rise back to $80/barrel would be a gain of about 60%)? The much expected sell off in US treasuries? A commodity rebound in metals, softs, and grains? None of the above?

Luckily, professional managers don’t need to know the answers in order to have a successful 2015. They just need to be able to identify and capture any such moves when they happen (no small task, to be sure; as we’ve seen in recent years….but more than a few will be up to the task).

Happy New Year!