Commodity Returns- February 2021

The Bloomberg Commodity Index rose 6.4% in February 2021. Commodities have finally recovered their 2020 losses, posting small gains from year-end 2019. 

Monthly = Bloomberg Commodity Index Excess Returns (BCOM)

Cumulative = Cumulative BCOM return since start of 2020

Source: Bloomberg.com

Year-to-date, energy, up almost 20%, overwhelmed the Bloomberg Commodity Index. Industrial metals, softs and grains all were reaching for 10%. Precious metals lagged, down almost 8% year-to-date. Bitcoin, up 27%, the new "gold", is added for good measure.

Stars may be aligning for hard assets. The combination of Covid waning, more huge stimulus and ample Fed accommodation can spike demand-the punchbowl may not be leaving for quite some time. With interest rates rising the long-term commodity bear cycle may give way to signs of inflation - the definition of bullish commodity markets!

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Please follow this blog by email.

© 2021 Vista Market Research.

How to Read a Month-End Futures Statement

This post will go over the standardized month-end futures statement. This statement is generated every month-end by your commodity/futures broker.

While similar to the daily equity run (see prior post How to Read a Futures Statement), the month-end statement is different, it has no trade prices! Both the month-end and daily statements are needed to have a complete picture of one's futures account. 

The following is the actual redacted "Monthly statement" for my recently opened small account at T. D. Ameritrade. 

The statement starts with the standard header: broker name, your name, address, account number, etc. It then continues with two sections. The first, YOUR ACITVITY THIS MONTH, is a ledger of the cash debits and credits to your futures account. 

• Line 1 on 1/7/21 shows an opening trade for the purchase of one MNQH21 futures contract charging fees and  commissions totaling $2.47. NO TRADE PRICE IS SHOWN. 

The purchase and sales prices are NOT on monthly statements, they are only on your confirmations or daily statements. This can sometimes be confusing since you need BOTH the daily and monthly statements to understand the account. 

Opening trades initiate or "open" positions, either long or short. Closing trades "close" positions and create a profit or loss depending upon the opening and closing prices. Every trade is opening or closing except for when positions, as in deliverable commodities, are closed by deliveries. Longs deliver and shorts receive (i.e. buyers receive 5000 bushels of wheat or sellers deliver them).

• Line 2 is another opening trade and another fee and commission debit. 
• Line 3 shows the credit for a transfer from my TDA equity account to meet my initial margin call. 
• Lines 4 and 5 show more cash transfers from my equity to futures account.
• Line 6 on 1/13/21 shows a SWEEP or transfer OUT of my futures into my equity account. This is because my positions increased in value and created a surplus or margin excess. This broker automatically keeps futures accounts in balance with automatic sweeps. 
• Line 7 and 8 are more withdrawals from futures to equity.
• Line 9  on 1/28/21 shows a closed 'P&L', that is a profit or loss on a closed trade. Here 1 MNQH21 was closed out for a profit of $235, thus the credit. 
• Line 10 shows the fees and commissions on the 1/28 MNQ closing trade. 
• Line 11 shows the same for the closed MES position except this was a loss or debit of $422.50.
• Line 12 shows the MES fees and commissions debit.
• Line 12 shows the cash being swept out of the futures account.
• Line 13 shows an automatic transfer into my futures account. 

The second section is the summary of the account's cash activity. 

• Line 1 of this section shows my zero starting balance.
• Line 3 shows the zero ending balance (since there were no positions in the account at month end).
• The remaining lines sum up the month's P&Ls, commissions and fees. 

With any luck, my account will show gains as the year continues. 

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Please follow this blog by email.

Bond Funds vs The Stock Market

A long time friend wants to be OUT of the stock market and needs to know where to put his money now. He has two bond funds VFIDX and PAGNX and wants to know how they will move if the market declines.  Here we go: 

VFINX = Vanguard 500 Index Fund Investor Shares

VFIDX = Vanguard Intermediate-Term Investment -Grade Fund Admiral Shares

PAGNX = PIMCO GNMA and Government Securities Fund Class A Net Asset Value

Source: Yahoo Finance

How to Read a Futures Statement

In my career as a futures broker I've had many clients, sophisticated and otherwise, ask how to read their statements. This post will go over the standardized daily futures statement. NOTE: this should be read with my "How to Read a Month-End" futures statement post for a complete picture of your futures account. 

Since you don't actually buy the underlying, the statement is different than your stock and bond confirmation. A futures contract is an obligation to buy or sell the commodity or other instrument at a specific time in the future. 

The following is the actual redacted "daily statement" for my new small account at T. D. Ameritrade. 

Note, this statement is commonly called a daily equity run and typically is either emailed or available for download from your futures broker. 

Lets review what's on here. Of course, your brokerage firm (technically a "futures commission merchant") name and address and phone number are on the top. This is followed by the customer name, address, date and account number. The next section shows the "CONFIRMATION" of all my trades for that day. 

• Line 1 says on 1/7/21 I bought 1 March 2021 Micro Nasdaq Index contract (symbol MNQH21, not shown) at the price of 12880. 
• Line 2 says the LTD, or last trade date for this March contract, is 3/19/2021 and the commission I paid was $2.25.  
• Line 3 shows my average price for all my positions in this contract is 12880 and the exchange fee for this trade is $0.20.
• Line 4 is the NFA (National Futures Association) fee, $0.02
• Line 5 is the total commissions and fees of $2.47.

The next section shows my "OPEN POSITIONS", or everything I own in my futures account. 

• Line 1 says I am "LONG" (I bought) the contract at 12880. The DEBIT/CREDIT shows my profit at the end of the day for this position was $96.
• Line 2 repeats the LTD and shows the closing price for the statement date was 12,928 and my profit for all my positions was $96.
• Line 3 just shows the average cost for all my positions (the one) was the same 12880.

Note that for this specific contract, MNQH21, 1 point = $2. Each separate commodity/futures contract has its own dollar multiple defined by the contract specifications. Thus, since the purchase was at 12880 and the closing price was 12928, the index rose 48 points which equaled 48 x $2 = a $96 gain.  

Of course, if the index FELL the account would LOSE $2 per point. 

The next section "MARGIN CALLS AND AGING" shows new and existing margin calls, if any. 

This day's margin call equals: 

starting cash = $0 

+ initial margin requirement $1,760 

+ commissions and fees $2.47 

- today's profit $96 

= $1,666.47

The broker then calls the customer and asks for a deposit of $1,666.47? 

No. 

In practice your broker would not execute your trade if you didn't have enough money in a cash account to cover the initial margin requirement. In fact, most brokers, like mine, will automatically withdraw from your cash account (or add any excess) to meet your futures margin requirements. Some will even have minimum starting balances of $25,000 or more.

Futures exchanges set margin requirements based on the risk they measure (an art if there ever was one) for holding the position. Today's margin for MNQH21 is $1,760. The "notional" value of the MNQ contract is 12928 x $2 = $25,856. So the margin, today, equals $1760/25836 = 6.8% of the contract value. In essence the exchange is betting the index will not fall more than 880 points in one day. In other words, less than $1800 controls $26,000 of the index. 

The press made a big ado when equity margin requirements ballooned for accounts wildly trading Gamestop. 

The last section is your daily cash statement. This is mostly self-explanatory.

• Line 7 "OPEN TRADE EQUITY" (OTE) is the total profit or loss in the account, 
• Line 8 "TOTAL EQUITY" (TE) = the sum of the ending balance + OTE
• Line 9 "ACCOUNT VALUE AT MARKET" is the same as TE for simple accounts. 
• Line 11 "MAINTENANCE MARGIN REQUIREMENT"  is the value, set by the exchange, your account can fall to without having a margin call. In most cases investors should just forget this. Just keep your account above initial margin or stop playing the game. 
• Line 12 "MARGIN DEFICIT" shows the amount of my unmet call for that day. Most brokers will automatically transfer this amount from your cash account or give you 1 or 2 days to make a transfer. If you don't meet your margin call, your broker will liquidate your account and put you on the bad girl or bad boy list. 

My next post, Part 2, will show how to read the slightly different "month-end" futures statement. 

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Please follow this blog by email.

Stocks versus Options versus Futures

Investors need to know the most efficient use of capital. This post compares the three roads to a long-term position in the S&P 500 stock index: ETFs (essentially a stock), options and futures. The same position-three ways to get there-which one is best? 

SPY = S&P 500 ETF and represents the S&P Micro March 2021 futures contract.

ATM Call = SPY 12/31/2020 321 Call

Source: Yahoo.com, TDA Thinkorswim, Black Scholes Option Model

This post compares the return of the S&P 500 ETF, symbol SPY, and 1 year S&P futures contract, which mirror the index, to the one year at-the-money (ATM) SPY call option. 

SPY is the "go to" analytic test as the most liquid investible index ETF (exchange traded fund). ATM calls are the most liquid, best priced, options. Year 2020 is an ideal test year for extreme market conditions.

The SPY and futures contract are buy and hold positions subject to margin calls. The option is not subject to margin calls. Returns are calculated on the initial margin, the maximum and average margin for the calendar year 2020.

The justification for purchase of each instrument can be stated as follows:

• SPY - you cannot buy an index but you CAN buy an ETF! The easiest way to buy the S&P 500 index is to buy SPY. SPY trades and is margined as a stock but trades identically to the actual index. The drawback is the $32,186 cost for 100 shares. Most brokers would only require 33% margin or so and that is why initial cost is $10K+.
• SPY 12/31/2020 321 ATM Call - The SPY closed 2019 at 321.86, the 321 strike price was that day's ATM call. The ATM is the most liquid, best-priced option. The leverage or low $2,180 cost to control 100 shares of SPY is cited as the primary justification for buying options.
• Micro S&P500 March 2021 ESH21 Futures Contract - The Micro futures contract is a vehicle for smaller investors. The higher leverage, minimal $1,003 initial futures margin requirement is cited as a justification for purchasing futures. 

Results

While notional values may differ, 2020 returns on initial cash favor futures. The low return on total cash was a result of the deep decline of index prices/bear market in March. The quick rise of indexes/bull market would have returned the additional cash when indexes recovered from their decline. Option returns split a difference between futures returns. Both dwarfed the returns of holding the ETF. This result, as all results, is just one historical data point and may not be indicative of future results.

General Conclusions

• In a bull market, futures would dwarf the returns of stocks and options. 
• In an unchanged market, the stock and futures would end unchanged and the options would expire worthless, a total loss. 
• In a bear market, the stock may do best while futures would incur margin calls and the options would expire worthless, again, for a total loss. 

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Please follow this blog by email.

Commodity Returns - January 2021

The Bloomberg Commodity Index rose 2.6% in January 2021. A decent start for the new year. Only three of the 16 major commodity futures markets shown here were down at month-end.

E Pluribus Unum II - Elections and Markets

This post will compare the winner's margin of victory in U.S. Presidential elections since 1824* (Winners Margin) to the return of the Dow Jones Industrial Average** (DJIA) for the winner's term, i.e. the next four years. The goal is to see if there is any correlation between the "division" in the nation's electorate and the subsequent stock market return. 

Source: 

List of Presidential Elections by Popular Vote Margins

Dow Jones Industrial Average, Annual Development

*Presidential election popular vote data starts with 1824.

**The DJIA was not created until 1896. Research showing implied data is used for this illustration. 

Red indicates winner lost the general election.

Results:

• A .23 correlation coefficient indicates a positive yet small correlation between winner's margin and subsequent four year stock market performance. 
• The ten highly divided elections (winner's margin under 2%) had mixed high and low stock performance. 
• Four of the five elections where winners LOST the general election had negative subsequent returns. 
• The major exception is 2016 and the +50% four year gain.

Conclusion:

Despite all the potential data problems and the use of equity returns as proxy for economic prosperity, the Republic appears to do better when Presidential elections are won by larger margins. Unity may beget value.