Now Consider TQQQ

The next logical step after considering the QQQ is to look at the ProShares UltraPro QQQ (TQQQ), that is the 3X leveraged Nasdaq 100 exchange traded fund. Leveraged ETFs get bad press because they supposedly carry hidden risks for small, unsophisticated investors. Brokers charge higher margin requirements for leveraged ETFs, especially 3X ETFs ,which are advertised to deliver three times the daily return of their underlying index-3X up OR down!

Here I will compare the TQQQ to its underlying fund, the QQQ. Two caveats: leveraged funds have higher fees and leveraged funds are marketed only as short term investments, that is, the 3X returns apply only to daily moves in the underlying, not for moves longer than one day.

Do the higher fees embedded in the TQQQ erase their supposed excess returns over the plain vanilla QQQ fund? And, what ARE the long term effects of TQQQ? Yahoo data for TQQQ begins 2/11/2010. Here are the results.

The below are continuously compounded rates of return.

Annualized Returns
as of 11/29/2017
	TQQQ	QQQ
1 month	107.8%	17.9%
3 month	90.2%	-30.4%
6 month	55.9%	-10.0%
1 year	81.9%	14.0%
3 year	32.7%	8.8%
5 year	47.3%	15.4%
Since TQQQ Inception	27.3%	9.8%

* 2010 return is for the period 2/11/2010 to 12/31/2010.
* 2017 return is for the period 1/01/2017 to 11/29/2017.

Risk and Return

	TQQQ	QQQ
3 year mean	32.7%	8.8%
3 year standard deviation	28.8%	8.9%
5 year mean	47.3%	15.4%
5 year standard deviation	30.5%	9.6%

Conclusion

WOW. TQQQ returns are enormous. The 3 and 5 year returns do deliver 3 times the QQQ. The risk is enormous too-in the 28 to 30% range.  The risk adjusted returns, that is, the return delivered per unit of risk is comparable for both funds but the 5 year QQQ return per unit of risk exceeds that of the TQQQ.

The question for most in investors is risk. 9%-10% risk looks reasonable and is found in the QQQs. 29% to 30% found in the TQQQs may be too much to stomach for most investors.

Feel free to post comments.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

QQQ versus SPY

Fairness in Indexing

With all the research and talk about the superiority of indexing over active management, a major issue not yet addressed here is which index has the highest performance? Every index is just a portfolio. Indexes vary by their portfolio selection criteria. The S&P is based upon a sector neutral market capitalization criteria, size. The Nasdaq 100 although is based, in-effect, upon a technology sector specific criteria. The Nasdaq picks winners, the tech sector, which is a basic violation of modern portfolio theory (MPT).

As we approach 2017 year-end, the outperformance of the Nasdaq 100 Index over the S&P 500 just gets larger and larger. It's only fair to review the long-term performance of the Nasdaq and compare this to the S&P. The relevant symbols here are the SPDR S&P 500 ETF (SPY) and the PowerShares QQQ ETF (QQQ). Of course, there are other similar ETFs but SPY and QQQ are the largest, most active of the lot.

Results

Yahoo data for the QQQ starts on 3/10/1999 and our results begin with this date to the present (11/27/2017).

The below are all continuously compounded rates of return.

Annualized Returns
as of 11/27/2017

	SPY	QQQ
1 month	11.7%	38.6%
3 month	26.8%	243.3%
6 month	21.4%	139.6%
1 year	18.6%	79.6%
3 year	9.6%	31.0%
5 year	14.2%	28.8%
10 year	7.8%	17.2%
15 year	8.8%	15.6%
Since QQQ Inception	5.6%	9.3%

Risk and Reward

	SPY	QQQ
3 year mean	8.7%	12.3%
3 year standard deviation	5.2%	7.6%
5 year mean	14.9%	17.4%
5 year standard deviation	8.9%	8.9%
10 year mean	6.8%	10.9%
10 year standard deviation	19.4%	23.9%

Conclusion

QQQ indeed sharply outperforms the SPY even after the disasterous three year tech collapse at the inception of the fund. As for risk, the QQQ is generally higher risk, but only the most recent 3 year period has a higher risk adjusted return for the SPY.

In spite of these results, the question for investors remains: how period dependent is the QQQ outperformance?  The recovery after the 2009 recession was a good long-term test and QQQ sharply outperformed once again.

Does this mean investors should abandon the SPY for the QQQ? In theory, no, because the QQQ implicitly means picking winners and MPT is cautionary against that approach. In practice, the nature and ubiquity of tech may offset the negatives of stock picking, and the results are a powerful testament.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Vanguard versus Vanguard: VFIAX versus VOO

My prior post comparing Vanguard's S&P 500 fund to their ETF did not address a simple head-to-head comparison USING VANGUARD's OWN DATA. It also did not compare the VFIAX Admiral fund to the VOO which invests in the Admiral fund, or at least has the same 0.04% expense ratio.

Well here are the results:

VFIAX (NAV)
as of 9/30/2017

Returns
Quarter-end   4.48%
Year-to-date  14.20%

Average Annual Returns
1 year    18.57%
3 year    10.78%
5 year    14.18%
10 year    7.43%

Risk and volatility

Standard deviation
3 year     10.07%
5 year      9.55%
10 year   15.14%

VOO (Market Price)
as of 9/30/2017

Returns
Quarter-end   4.46%
Year-to-date  14.11%

Average Annual Returns
1 year    18.59%
3 year    10.75%
5 year    14.18%
10 year    -

Risk and volatility

Standard deviation
3 year     10.07%
5 year      9.55%
10 year   15.14%

The results are virtually the same. Which is a triumph of ETF minimal tracking error.

Investors can receive ETF benefits of custody (keeping your money at one broker, if you want-a questionable benefit at best) and market hours trading (also questionable especially with index funds) without giving up return.

Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Morningstar Falling

The recent story in the Wall Street Journal,

The Morningstar Mirage

Investors everywhere think a 5-star rating from Morningstar means a mutual fund will be a top performer—it doesn’t ,

has created a stir in the mutual fund business and in Morningstar itself which issued forceful rebuttals: 

There’s No Morningstar Mirage - We Illuminate Investing‎

The Wall Street Journal’s Statistical Fog

Setting the Record Straight on Our Fund Ratings

In addition to claim and counterclaim there have been reviews from the peanut gallery:

Morningstar Versus The Wall Street Journal: Who Won?

WSJ vs Morningstar

The upshot of all this back and forth, including the numerous studies cited in the "Who Won?" story, is that Morningstar, as expected, offers very little benefit to investors.

In my opinion, the 5-star ratings serve the interests of the fund companies that pay for them. The extensive list of categories don't really exist except to create a grouping where a fund manager can claim higher ratings.

The details of this exercise leave us with the outcome we expected: the only useful result from investment theory for individual investors is that index funds outperform. Again, our quest comes up short.

American Funds Bold Claim

I'll try to keep this post as short as possible but it seems doubtful. Earlier this year investors were regaled with ads from American Funds claiming: "A Group of Select Equity Funds Has, on Average, Consistently Beaten the Index"

Key words here are "group" and "consistently". I guess this implies that individually and for some periods they don't beat the index. After all kinds of vague charts and unspecified data, the last page of their pdf gets specific.

Seven American Funds are represented as a select group that can beat the index (VFINX).

	Symbol	Inception
Investment Company of America A	AIVSX	1/2/1934
American Mutual Fund A	AMRMX	2/21/1950
Washington Mutual Investors Fund A	AWSHX	7/31/1952
AMCAP Fund A	AMCPX	5/1/1967
The Growth Fund of America A	AGTHX	11/30/1973
Fundamental Investors A	ANCFX	8/1/1978
The New Economy Fund A	ANEFX	12/1/1983

Vanguard S&P 500 Investor Fund

VFINX

8/31/1976

Now lets acknowledge that these are great American mutual funds. The oldest fund here, the Investment Company of America goes back to 1934! Not sure what funds, if any, merged into AIVSX (or the others); but that would have a direct bearing on survivor bias and invest-ability.

I always wondered if any of the old funds have shareholder records going back to 30 years or more. I wonder what those old accounts actually look like today.

To test American's claim I took Yahoo's dataset, and compared the above funds. Caveat: I am comparing NAVs to NAVs, fees NOT included.  Is this fair? Well, both American and Vanguard have different fund classes with differing fees. American Fund A shares have some of the highest loads in the business, but then again, they are legacy funds. So to avoid the load penalty, I am using NAV for comparisons.

And these are the results:

VAMI RETURNS

VAMI Table:

AWSHX   $20,806.88

AGTHX   $22,019.03

ANCFX   $21,394.35

AIVSX    $14,844.63

AMRMX  $13,950.99

AMCPX   $12,828.53

ANEFX   $13,841.07

VFINX   $22,008.00

Only three funds, AWSHX, AGHX and ANCFX compare favorably to VFINX over the long term.  For shorter periods, nearly ALL the listed American Funds do well.

ROLLING RETURNS

Q32017
	VFINX	AWSHX	AGTHX	ANCFX	AIVSX	AMRMX	AMCPX	ANEFX
YTD	13.21%	12.14%	16.54%	14.56%	12.02%	11.34%	14.10%	24.17%
1-Year	16.93%	17.63%	18.11%	18.48%	15.05%	14.41%	15.83%	23.33%
3-Year	10.13%	9.39%	10.94%	10.88%	8.87%	9.09%	9.06%	10.79%
5-Year	13.15%	12.71%	14.10%	13.61%	12.89%	11.81%	13.64%	14.80%
7-Year	13.28%	12.85%	13.10%	12.76%	12.10%	11.71%	13.18%	13.50%
10-Year	7.06%	6.62%	7.09%	7.01%	6.35%	6.84%	7.70%	7.92%
15-Year	9.45%	9.06%	10.27%	10.67%	8.98%	8.97%	9.67%	11.43%
20-Year	6.67%	7.30%	9.05%	8.22%	7.42%	7.35%	8.46%	8.11%
30-Year	8.97%	8.95%	9.06%	9.23%	8.09%	7.80%	7.49%	7.81%

The above are 8 rolling period returns for VFINX and the 7 American Funds in this test. American Funds beat VFINX in 33 of the 63 periods shown.  American Funds beat the index 52% of the time.  Three funds, AGTHX, ANCFX and ANEFX beat 89% of the time periods tested.

CALENDAR YEAR RETURNS

My data spans 31 complete calendar years, 1986 to 2016, and 3Q2017 year-to-date. American Funds overall beat VFINX 40% of the calendar years.  The individual fund beats vary from a spectacular 53% for ANCFX to 44%-34% for the others.

RISK REWARD

3, 5 and 10 year standard deviations of annualized returns have the following results:

3-Year Standard Deviation: 2 of 7 American Funds beat VFINX
5-Year Standard Deviation: 1 of 7 American Fund beats VFINX
10-Year Standard Deviation: 3 of 7 American Funds beat VFINX

CONCLUSION

American Funds NAV generally, over shorter time frames, meet and one beats the returns of VFINX with slightly higher risk. American Funds bold claim is fair.

Disclaimer: This blog is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

VTSAX v VFIAX

Here we go again, this time comparing two Vanguard index mutual funds, the Admiral Class Total Stock Market Fund, VTSAX versus Vanguard's Admiral Class S&P 500 Index Fund, VFIAX.

If you ever studied finance in B-school, or anywhere for that matter, portfolio theory was all about stocks versus bonds versus cash. Well, before the Vanguard Total Stock Market Investor Fund was created on 4/27/1992, nobody could ever buy the entire stock market asset class. Since then, you can. Same with bonds and you always had cash.

Both funds come in Admiral and Investor Class shares as well as institutional classes, as do other Vanguard index funds. We are going to compare the Admiral classes this time. But, fyi, key differences are: Admiral shares have a later inception date of 11/13/2000, a $10,000 minimum investment and 0.04% expense ratio versus much earlier inception dates, $3,000 minimum and 0.15% expense ratio for Investor shares.

Since they are both Vanguard funds we can get the numbers directly from Vanguard. Here they are:

Annualized Returns (reported by Vanguard as of 9/30/2017)

                             VTSAX       VFIAX
Quarter-end             4.54%         4.48%
Year-to-date           13.95%       14.20%
1-Year                    18.63%       18.57%
3-Year                    10.69%       10.78%
5-Year                    14.18%       14.18%
10-Year                    7.69%         7.43%
Since Inception        6.41%         5.81%

Dividend Yield         1.84%         1.93%

3-Year Std. Dev.     10.32%       10.13%
Sharpe Ratio               .84              .90

Top 10 Stocks are the same for both funds.
Total # Stocks          3607             512
Top 10 Stocks*          17%           20.5%
AUM**                   $174.5B     $212.6B

I computed the correlation of daily returns since inception to be an indistinguishable 99.6%.

Ok, so whats the difference between these two funds?

-Not much, with little that matters to investors.
-VTSAX includes the small stocks not in the S&P 500.
-Small stocks are more volatile than large stocks.
-Small stocks have lower dividends than large stocks.
-Small stocks have sometimes higher returns than large stocks.
-All three effects account for the slight differences in fund performance.
-The Total Stock Market Index is arguably more academically correct in that portfolio theory likes to own the whole market and not pick winners and losers.

* Top 10 Stocks as percentage of AUM
**AUM = Assets Under Management

Disclaimer: This blog is not investment advice, is for information purposes only, may be subject to change without notice, and while prepared with care, may be subject to omissions and errors.

VFINX Data Test: Yahoo vs Vanguard

Before going any further with index to fund comparisons, we must know just how good IS Yahoo historical price data?

Lets set the scene:

-The idea is to compare historical VFINX data from Yahoo and Vanguard.
-Return calculations must include effects of distributions (dividends, capital gains) and stock splits.
-Yahoo provides Net Asset Value (NAV) closing prices, dividend data and "adjusted closing" prices, adjusted by split and dividend multipliers. Thank you Yahoo. Without these we could not do valid return calculations.
-Vanguard does NOT provide adjusted closing prices for their mutual funds. Vanguard also only provides ten years of distribution data, not a complete set.
-We are left with closes as the only "raw" head-to-head price comparison of Vanguard and Yahoo.
-Yahoo provides dividends for its entire dataset but Vanguard provides only 10 years of dividends.

Taking the price and dividend download of VFINX from Vanguard and matching it against the Yahoo download, we have the following results for the "closing price" series:

Date of downloads: 10/1/2017
Yahoo database start date: 1/2/1980
Vanguard database start date: 8/31/1976

Number of days in Vanguard data: 10,366
Number of days in Yahoo data: 9,525

Number of date errors: 3
Number of Yahoo price errors: 124 out of 9,525 prices (121 excluding missing dates).

Vanguard database dividends reported: 40
Yahoo database dividends reported: 154
Number of reported date errors: 0
Number of reported dividend errors: 0

Here are ALL the errors found in Yahoo's VFINX closing price data.

Due to rounding, most of these are not even errors!

CONCLUSION:  YAHOO DATA IS RELIABLE!


Notes:
-While the VFINX inception date is 8/31/1976, Yahoo only provides data since 1/2/1980.
-Yahoo data is missing for 10/30,2012, 10/29/2012 and 1/2/2007.
-I did not check Vanguard dates, which appear to be complete.
-Vanguard's website only shows dividends for ten years total. This download has a start date of 12/21/07.
-Yahoo data includes all dividends since 1/2/1980.
-Prices were rounded to two decimal places.

Even after this conclusion we have one more step to go: using the available Vanguard dividend data, compare Yahoo's adjusted close to Vanguard's "adjusted" close (called "reinvest price" by Vanguard) For all available dividend dates posted by Vanguard, Yahoo is the same!

Vanguard fun facts: Vanguard has the following S&P 500 Index Fund classes:

Class, Symbol, Inception date, Expense Ratio, Minimum Investment, Assets Under Management

Investor, VFINX, 8/31/1976, 0.14%, $3000, $27.3 Billion
Admiral, VFIAX, 11/13/2000, 0.04%, $10,000, $212.6 Billion
Institutional, VINIX, 7/7/1997, 0.035%, $5 Million, $134.2 Billion
Institutional Plus, VIIIX, 7/7/1997, 0.02%, $100.0 Million, $93.2 Billion
Institutional Select, VFFSX, 6/24/2016, 0.01%, $5.0 Billion, $29.6 Billion
ETF, VOO, 9/7/2010, 0.04%, 1 share, $71.8 Billion

As expenses differ, each class will have its own price series.

Disclaimer: This blog is not investment advice, is for information purposes only, may be subject to change without notice, and while prepared with care, may be subject to omissions and errors.

ACSI v SPY

This post will compare ACSI to SPY. It's interesting because ACSI has an entirely different methodology using customer satisfaction as a basis for investment. This is a new fund. Yahoo's data begins 11/7/2016.

Here's the chart and return data for the comparison.

ACSI v SPY

As anyone can see, ACSI holds up very well to SPY. Of course, this is a very limited dataset and few conclusions can be drawn from it.

If anyone wants the excel spreadsheet, just ask.

Disclaimer: This blog is not investment advice, is for information purposes only, may be subject to change without notice, and while prepared with care, may be subject to omissions and errors.

The Benchmarks-VFINX SPY VOO

For this post I will look at the history of the VFINX, SPY and compare them both to the Vanguard S&P 500 ETF-symbol VOO.

Comparing VFINX and SPY is a good starting point. We need to see if both benchmarks, which measure the same thing, ARE the same. VFINX and VOO is a valid comp because the VOO is the ETF version of the VFINX. The ETF is just another wrapper for the same content. Investors need to know if wrappers matter.

There ARE other index mutual funds and index ETFs  (such as IVV) but they all started much later than the VFINX and SPY and I am not sure the comps of these others will be useful to investors. Since these all measure the same thing, we can expect them to be the same. Below are the history and and data for the VFINX, SPY and VOO.

Full History

Chart 1. Full History

Table 1. Full History

There ARE differences. For some reason, when compared head to head for full years only, the mutual fund has a higher average annual return and lower standard deviation of annual returns than either ETF. Most interesting may be the VOO data which shows a significantly lower return than its mutual fund cousin.

Does the ETF reduce return when compared to the same thing in a mutual fund? Maybe Vanguard has an answer.  The risk reward chart shows VFINX, the top left data point, outperforming with higher return and lower risk than either the SPY, middle point, and VOO, the far left point.

Chart 2. Risk Reward

Despite the return difference, the correlations are very high, as expected.

Table 2. Correlation

VFINX versus SPY

This is head to head vami chart starting with the start date for SPY, 1/29/1993 = 1000.


Chart 3. VFINX versus SPY

Table 3. VFINX versus SPY

When I first looked at this, I thought there was an error starting with the 3/9/2009 recession low. Here are the peak to trough to current date returns.

Table 4. Peak to Recession Trough to Present

VFINX mutual fund sharply outperformed SPY for these critical periods. I still don't get it, but I cannot find an error.

VFINX versus VOO

Here may be the most remarkable test. VFINX and VOO are the same fund except one is a mutual fund and the other is an ETF as noted before. This is a vami chart showing the difference.

Chart 4. VFINX to VOO

As noted before, either mutual funds outperform ETFs or there is a problem I am missing. I'll ask Vanguard about this. Note: mutual funds are marked to NAV every close while ETFs are freely traded with arbitrage enforcement.

The excel spreadsheet for this post is available to anyone. Just ask.

Disclaimer: This blog is not investment advice, is for information purposes only, may be subject to change without notice, and while prepared with care, may be subject to omissions and errors.

Indexing Genie is Out of the Bottle - The Road to Serfdom

In August of 2016, the brokerage firm Sanford C. Bernstein & Co., LLC. wrote what may be the only serious criticism of passive index investing that I have ever seen.

(https://www.bloomberg.com/news/articles/2016-08-23/bernstein-passive-investing-is-worse-for-society-than-marxism).

The gist of this article is that despite the utter and total complete investment success of indexing as an investment strategy (almost 1/3rd of all aum when compared to every other strategy) indexing is a threat to capitalism. That is, passive investing "impedes the efficient allocation of capital". The article further states that "the social function of active management ... is to direct capital to its most productive end, facilitating sustainable job creation and a rise in the aggregate standard of living". 

Hurrah! The indexing genie is out of the bottle: indexing or passive investing is a SYSTEMIC RISK!

The most basic systemic risk in finance is anything that is not sensitive to price.  A well functioning capitalist system creates buyers when prices are too low and creates sellers when prices are too high. Unfortunately, passive indexers, like myself, do not have market incentives to buy or sell. We just buy and hold.

So, what's wrong with that? Lots is wrong with that. Passive investing is divorced from price signals. Passive investing is actually a parasite on the back of the remaining active investors. Without active investing, there would be no price signals and no markets. 

As long as the great majority of investors are active, passive works. Passive assets under management, aum, is currently estimated to be just under 30% of all aum. If this number were to grow much beyond 50% there will be fewer and fewer investors left to tame the markets and passive investors will be on a new uncharted road. 

Disclaimer: This blog is not investment advice, is for information purposes only, may be subject to change without notice, and while prepared with care, may be subject to omissions and errors.

First Post

Saw my friend Phil Bok's new ACSI fund on LinkedIn. Phil's a very smart guy and I like his fund, but I had to test it and that led to this blog where I will test any fund against indexing.

Criteria I will use on every test are as follows:

1-Easy free public data only.
Too many studies use proprietary, modified data that everyone can't check.  If your study uses these, no go for me.  Fund issuer data and Yahoo data is freely available as of this writing. If you claim that Yahoo's data is bad, well, you know, we all want to see the plan. My answer is that I sometimes test for that and Yahoo data is generally very good. Finally, why Yahoo? Because if Yahoo doesn't list it, is it really widely available for the average investor? Show me a more popular and free data source and I'll use it.

2-Continuously compounded daily returns only.
I like easy arithmetic. I compute the daily return = ln(b/a), where a = Yahoo's "adjusted close" on day 1 and b = the "adjusted close" on day 2. Adjusted close is its own issue and my tests for that are pretty good too.

3-Volatility = the excel population standard deviation function-STDEV.P
Simple and as good as any other measure and does not buy in to the fiction that term rearrangements add information.

4-Correlation = the excel correlation function.
Correlation is important because we don't want to buy the same returns in a different wrapper.

5-Select maximum, calendar year and rolling time periods, only.
Tricky one. Every possible time period will have a different result. A perfect track record would beat in every possible time period-impossible!  So how do you pick a fair time period? You don't pick; you use the same periods for each test and look for consistency.

6-Use VFINX or SPY as the index.
You can buy these; you cannot buy the S&P500 Index.

VOO is a great choice too but is 17 years too late. VFINX is the mother of all indexes but it's a mutual fund not an ETF and ETFs are where it's at in today's markets. So, if you have a mutual fund, VFINX will be the index. If you have an ETF, SPY is the bogey.

That's it. If you have a public track record on Yahoo or somewhere that can beat it, send me the symbol. Maybe there's a million out there that nobody knows about.

Disclaimer: This blog is not investment advice, is for information purposes only, may be subject to change without notice, and while prepared with care, may be subject to omissions and errors.

VistaCTA MarketView Archive 2016

Commodity Market Updates for 2016

MarketView December 2016 - First Solid Gain in 5 Years

MarketView November 2016 - Volatile Commodities End Mixed

MarketView October 2016 - Commodities On Hold Before Election

MarketView September 2016 - Energy, Agriculture & Metals Higher

MarketView August 2016 - Commodities Turn Lower

MarketView July 2016 - Oil Drops A Mixed Basket

MarketView June 2016 - Brexit Drives Gold Higher

MarketView May 2016 - Commodities Mixed Metals Dive

MarketView April 2016 - Commodity Rally Takes Hold

MarketView March 2016 - Commodities Rally

MarketView February 2016 - Metals Rally Edge Commodities Higher

MarketView January 2016 - Energies Weigh On Commodities

Back After 3 Years

I'm back and will occasionally be posting after three years absence.  

To start, lets see how things are going since my last post.  Here are the 15 established, liquid, fair and well-formed commodity futures contracts that compose the investable VistaCTA commodity basket:

The weakest performer, no surprise, is WTI Crude Oil, down 87%.  The strongest performer, big surprise, is frozen concentrated orange juice. OJ is up, yes, but on very bad news of major Florida crop destruction due to disease.  The average commodity is down 24% for the period.  The indexes are a little worse.

Here is the chart for the VistaCTA basket (VBX), the Bloomberg UBS Commodity Index (BCOM) and the S&P GSCI Commodity Index (GSCI) (all excess return indexes) for the same period:

Terminal values and total losses for VBX, BCOM and GSCI are $707 -35%, $641 -44% and $434 -84%, respectively. These have been dark years for commodity indexes. Let’s check out the why and wherefors next time. 

VistaCTA Archive for 2015

MarketView December 2015 - Commodities Down Double Digits 3 Years in a Row

MarketView November 2015 - Another Bad Month Sends Legacies Down 20% YTD

MarketView October 2015 - Month of Failed Rallies

MarketView September 2015 - Mixed Markets Post Loss

MarketView August 2015 - Small Loss Masks Deep Volatility

MarketView July 2015 - All Sectors Down

MarketView June 2015 - USDA Reports Counter Commodity Bears

Time to Really Do Contango Homework

There are recently a boatload of misleading, misinformed and inaccurate (repetitive, I know) posts by unnamed others about doing one's "contango homework", about looking at the shape of the futures curve to somehow make some conclusion about the prospective gains or losses to investors in said "contango" or "backwardated" commodities.

So, ok, let's do the homework.  Below are the results of 33 years rolling positions in the VistaCTA commodity basket of 15 major commodities (crude, heat, natgas, rbob/gasoline; corn, wheat, beans; gold, silver, copper; coffee, sugar, cocoa; cotton and frozen concentrated orange juice).  These are the highly select well-formed futures contracts included in the VistaCTA basket.  The results of rolling these contracts since 1980 are shown below.

Per the VistaCTA rules, the basket is rolled once per year, held for a year, sold and replaced with a new basket.  The sell and replacement is the "roll".  Note rolling does not create a return event, only the liquidation (vb sell) of the existing basket versus the original basis (vb buy) creates return.  The vb's shown are each year's new basis.

yr          vb                 cb       %cb     r

1980 613,794.44 contango 5% -26%

1981 497,085.43 contango 9% -16%

1982 431,779.92 contango 3% 6%

1983 459,955.46 contango 0% -11%

1984 424,249.76 contango 4% -11%

1985 375,251.52 backwardation -1% -10%

1986 348,666.38 contango 3% 2%

1987 367,878.51 contango 3% -2%

1988 349,500.62 backwardation -3% 0%

1989 345,122.92 backwardation -1% 19%

1990 395,668.58 backwardation -4% -14%

1991 343,179.91 contango 1% -8%

1992 321,498.46 contango 2% 0%

1993 336,825.07 contango 4% 16%

1994 406,335.85 contango 4% -7%

1995 368,142.81 backwardation -3% 4%

1996 365,516.05 backwardation -4% 6%

1997 375,650.90 backwardation -3% -15%

1998 338,576.80 contango 6% -4%

1999 325,407.08 backwardation 0% 14%

2000 369,313.10 backwardation -1% -22%

2001 307,072.03 contango 7% 17%

2002 348,316.05 backwardation -3% 11%

2003 376,951.43 backwardation -2% 31%

2004 476,701.93 backwardation -4% 41%

2005 608,361.51 backwardation -10% 10%

2006 715,832.95 contango 7% 14%

2007 805,308.50 backwardation -1% 8%

2008 911,174.50 contango 5% -14%

2009 815,403.10 contango 5% 16%

2010 957,105.35 contango 1% 11%

2011 1,065,868.55 contango 0% 8%

2012 1,130,263.50 backwardation -2% -11%

correl correl (0.20)

yr = roll year

vb = VistaCTA basket value when purchased on the roll date.

cb = contango (%cb>0) or backwardated roll (%cb<0)

%cb = % contango or -%cb for backwardation = (vb new)/(vb old) -1

r = subsequent rate of return of the basket after the roll = (vb sell)/(vb buy) -1

Clearly, there is no relationship between contango/backwardation and futures returns.  How sad that billions apparently are committed to a false concept, a relationship that does not exist.  A recent academic paper demonstrates that "roll yield" doesn't even exist, it is an error in the construction and calculation of legacy commodity indices.  

By the Light of the Silvery Moon

I may be the first to proclaim the current turnaround of commodities but... August's sector action brings up a question.

While the VistaCTA commodity basket is up 4.12% month to date (as of Friday's 8/16/2013 close) this is NOT a broad based rally.  Energy, which was July's top performer, is up only 1.34%, grains are unchanged and agriculture, on average, is up 1.92%.  The gains are concentrated in metals which are up 9.77% in August.  And silver, the weaker sister, dominates, up 18.79%.  Silver, per trader lore, is the fickle metal and wanes and waxes with the moon and is usually NOT the marker for a long-term broad based commodity rally.

Coffee Flash Boom Crash Crash

Thursday and Friday were banner days for ICE (formerly CSC) coffee futures contracts.  Weeks of price action were compressed in minutes.  Here's the background.

CHART COURTESY OF BARCHART.COM

September Coffee has been in a slow downtrend from $1.60 per pound to $1.20 per pound all year long with two short lived boosts: $1.55 to $1.65 in January and $1.35 to $1.50 in May.  Since mid-June, coffee has been trading around $1.18 to $1.25.  The chart shows a blip on Thursday July 18th to $1.34 followed by Friday's close at $1.2270 per pound.

  Date    Open    High     Low    Last  Chge  ----52 Week----
07/19/13   12790   13025   12175   12270  -485
07/18/13   12750   13400   12665   12755   -40  -------High----
07/17/13   12545   12920   12530   12795  +200  07/23/12  19700
07/16/13   12340   12675   12320   12595  +270  --------Low----
07/15/13   11930   12410   11860   12325  +385  06/20/13  11710

DATA COURTESY OF BARCHART.COM

The dailys do not show how fast and fleeting the trade was on those days. To get a clearer idea of the extent of Thursday's "flash boom crash" and Friday's crash we need to look at the intra-day charts:

ALL CHARTS COURTESY OF BARCHART.COM

Oddly enough while the above Barcharts do not show it, $1.34 did print and it was fleeting. The boom started with the decisive trade above $1.30 at 7:21 AM (US Central Time) and then the $1.34 touch at 7:27 AM.  Only limit orders need apply and not the $1.34 limit!  The first crash was the 400 point move to $1.27 at 12:10 PM and the final crash was the second 400 point decline to the $1.2275 per pound level near Friday's 1:00 PM close.

The dollar value of the 37,500 pound coffee futures contract at Friday's closing price of $1.2275 per pound was $46,031.25.  The exchange minimum margin for coffee as of Friday was (and still is) $2,750 per contract or 6% of the contract value.  A 7 cent move in coffee (the daily range on Thursday and Friday) equals $2,625 or roughly one's entire margin requirement.  Woe to the speculator trading coffee on exchange minimum margins.

Is the Commodity Turnaround Coming?

The monthly value of the VistaCTA basket of 15 commodity futures contracts since 2009 is shown below:

The gaps in the graph represent the annual roll of the current-month basket to the back-month basket, as defined in the VistaCTA rules.  Note the basket rolled higher in 2010, nearly flat in 2011 and slightly lower in 2012.  Some would call 2010 and 2011 "contango" type rolls and 2012 a "backwardation" type roll.  Note also that subsequent price action appears to have nothing to do with the type of roll.

From a start of under $900,000, the value topped out above $1.3MM and now is valued near $960,000. The July 2013 bounce may be sign of better days to come!

Sixth Worst Day Since 2009

Commodities fell 3.9% yesterday.  Lead by precious metals, then everything else; here's what happened to the 15 commodities in the VistaCTA basket:

silver	-0.087
gold	-0.066
coffee	-0.049
rbob	-0.038
crude	-0.037
sugar	-0.035
heat	-0.032
cocoa	-0.027
copper	-0.026
soybeans	-0.02
corn	-0.018
oj	-0.014
natgas	-0.014
wheat	-0.01

This was the sixth worst day of the 1044 trading days since Vista started 5/1/09.

	top 10 down days			top 10 up days
9/22/2011	(0.0535)		6/29/2012	0.0443
5/5/2011	(0.0517)		7/30/2009	0.0330
9/23/2011	(0.0516)		9/27/2011	0.0300
12/14/2011	(0.0412)		9/30/2009	0.0297
4/15/2013	(0.0411)		10/27/2011	0.0283
6/20/2013	(0.0398)		11/16/2009	0.0281
3/15/2011	(0.0374)		8/3/2009	0.0279
11/12/2010	(0.0365)		1/3/2012	0.0276
5/11/2011	(0.0351)		6/1/2009	0.0266
8/4/2011	(0.0316)		7/3/2012	0.0264

Here is the scatterplot of all the daily returns since 4-09. Note all returns are continously compounded.

As you can see, fall 2011 had the worst declines with the Q3 swoon.  The biggest up day was last summers grain drought.  The two recent low points were the first gold break of 4/15 and yesterday's gold break.

All in all, though, the VistaCTA basket has held very well through this period since inception.

Still 40% up!

There may be two major points of view regarding the current market break:
-One says we are in a continuing secular commodity price decline, i.e. more declines and more volatility are on the way.
-A second view is that, no, this is a man-made, or more accurately, a Fed made crisis that can easily be fixed by man, or, the Fed.   Thus, the better bet is to use breaks to build positions.

The relatively benign response of most commodities to the precious metal decline (for example, energy is still up on the month and ags are down 2%, or so)-the benign commodity response- may be an excellent setup for better returns to come. Statistically, rare events are rare and more normal times prevail.

The tiny red bar (do you see it?) shows yesterdays move.  It's pretty rare.