Commodity Returns First Quarter 2021

Anyone worried about missing this years rally in commodities may want to look again. Outside of energy, the returns are decidedly mixed. The Bloomberg Commodity Index ended the first quarter up 6.6% yet down 2% in March and up only 3.1% from year-end 2019.

Covid Cases and Deaths

Victory laps by a few select states and their grandstanding governors offset by the dramatic fall of other governors deserve a current look at the state of Covid by state. Data collected by FactSet on the Covid death and case totals, as of this writing (3/20/2021), are presented below. 

Cases per 100,000

Factset total number of cases per 100,000 population by state.

Higher bars are worse.

The total number of cases, per 100,000 population, range from a remarkable low of 2,026 cases in isolated Hawaii to a disastrous maximum of 13,265 cases in wide open North Dakota! The U.S. statewide average is 8,774 cases per 100,000. Oddly enough, the two states declaring victory, Florida and Texas, in red, have HIGHER per capita cases than the major targets of California and New York, in blue.  The complete list of per capita cases can be seen here. 

Truth be told, the case numbers for the four highlighted states rank near the average. Texas is ranked 27th in the country for per capita number of cases, Florida is 25th, New York 24th and California, where the Governor is facing impeachment due to Covid, is the best of the four at 22nd in the United States.

Deaths per 100,000

Factset total number of Covid deaths per 100,000 population by state.

Higher bars are worse.

The number of per capita Covid deaths by states (51, including the District of Columbia) are not so sanguine. There is a wide disparity among states ranging from a remarkable low of 32 deaths per capita in West Virginia (followed closely by Arizona, Vermont and Ohio) to a high of 271 deaths per capita in New Jersey followed by Wyoming at 254.  Of the four highlighted states California ranks with the worst at 49, behind Wyoming, at 244 deaths per capita. Florida ranks closely behind at 44th in the nation with 234 deaths per capita. Florida's Governor is campaigning on his Covid results. To fill out this story, both New York at 16th in the nation and Texas at 19th, are among the lower ranks of Covid deaths per capita.

One caveat for all these results is there are many factors other than population, such as density, social factors, economics, urbanization and more which affect Covid results. Here we see just one indicative measure.  

Conclusion

Covid is a national medical emergency (hopefully today in retreat). Despite being a medical issue, politics has distorted not just the responses of individuals to medical directives but also the public perception of state by state Covid results. New York's low death rates and Florida's high death rates make little mark in the public eye.

Disclaimer: Posts are for education only, 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 George Rahal.

YPI vs CPI, Real Price Increases vs Inflation

CPI versus YPI

T.D. Ameritrade's Ticker Tape publication posted an interesting story about "Assessing Your Personal Inflation Rate"  which discusses prices of the CPI (Consumer Price Index) versus YPI (Your Personal Inflation). The difference between the two is one's individual spending basket versus the CPI basket. Below is an imperfect yet indicative comparison of the CPI basket and my own YPI:

In our household, we spend a little less on energy, food, meds, and shelter but more on purchases and transport-we live close to stores and we have grands. All in all, we match up pretty close to the government breakdown of personal expenses. Your mileage may vary. 

CPI Up 0.4% In February 2021

Below is the reported annual price change by general category. A more detailed breakdown can be found clicking here. 

Inflation versus Real Price Change

When prices rise or fall we need to consider the source or cause of the price change. While some call every price change inflationary only a certain class of changes are due to inflation.  Inflation is a general price increase. In essence, its a rising tide that lifts all ships and reduces the buying power of a given currency, in our case, the dollar. The price rises but the price of everything else rises too

A real price increase is when a certain good or service becomes scarce and that price rises as compared to other prices. The classic examples include an ounce of gold equals the cost of a man's suit or, classically, Ricardo's "barrel of wine" buys a "bolt of cloth" and vice versa!  When buying power rises, when you need two barrels to buy the same bolt, that's a real price increase. For example, a Midwest drought may cause the price of grain to double but nearly everything else, like oil or rent, stays the same. 

Not all price changes are inflation, not all price changes are "real". Today's 4% CPI feels like inflation since all of the economy is recovering from Covid but as in everything economic, only time will tell.

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.

Bonds versus Bonds

My earlier bond comparison "Bonds vs. The Stock Market" has led me to make a deeper look at major bond funds with varying maturities and varying credit quality ratings. Below are the results for the 10 largest bond funds in the world: 

Results first, analysis follows: 

Methodology

The method here is fairness to the small individual investor and NOT to the fund managers. Yes, there are hundreds of bond funds offered by dozens of companies but few will know these companies unless they are sold to you-a costly proposition. In the end bond funds differ only in expenses, credit quality and duration (a fancy name for time to maturity).  So I picked the TEN LARGEST funds I could find on Yahoo Finance and from searching.

All the numbers here can be found by typing the fund symbol in Yahoo finance, including daily prices since inception. If you do this, be sure to use the "Adjusted Close". This includes the interest payouts of the funds over time. 

Five of the ten are Vanguard funds. Vanguard manages over $800 Billion of the $1.2 Trillion held by the ten largest funds. PIMCO had the reputation as the largest bond fund manager in the world and today is far from it. 

Results

The ten largest bond funds had an average yield of 2.2% but with rates rising in 2021 are down 2% year-to-date (as of 3/3/2021). That is, they already lost all their income for the year plus another 2 points. Duration averages 5 years and is a measure of the gain or loss a fund is likely to have for every 1% change in interest rates (in this case 5% down in price for every 1% rise in interest rates). The average credit rating for these funds are a very good AA. 

Note, as expected, the short term funds with the shortest durations have the best year-to-date returns. PIMCO has excelled here but note the low BBB average credit quality combined with the shortest 1.9 year duration. 

Conclusion

Bond funds are NOT bonds. Bond prices fluctuate prior to their maturity and, if they don't go bankrupt, will eventually mature and return your capital regardless of interest rates. As a former bond trader I could never see the value of bond funds. 

Funds never mature. A bond fund always is buying new bonds to replace those it matures and a large portion of the bond portfolio will always be subject to interest rates.

 

For those who really want to preserve capital, the shortest term bond funds, will do best. Money market funds and CDs will do better. Bank CDs, which pay more than money markets, are usually non-negotiable, you cannot get your money early barring a penalty. Money markets have the lowest rates.

The trade offs are always the same, the safer and shorter the bond, the lower the yield. 

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.

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. 

Deo Vindice

Not since the Confederacy have we had open insurrection and today a DHS alert says this is a risk. Just how divided is the country today? 

My prior post, E Pluribus Unum, indicates 2020 Presidential election results are NOT highly divisive. That same post asked if the 50-50 split in the Senate and the 221-211 split in the House of Representatives indicate historic divisions in Congress. This post will try to answer this question by looking at historical Congressional party splits. 

Wikipedia's article on this subject, Party divisions of United States Congresses, presents historical data in length. Below is a graphic from this article showing Congressional party control since 1855 (click for expanded view):

Blue = Democrat 

Red = Republican 

Upper graph = Percent of Senate Seats 

Lower graph = Percent of House Seats

E Pluribus Unum

This post compares the general vote difference or margin (and therefore the nation's divide) of Presidential elections from 1824* to 2020. Red bars show the five elections where the winner LOST the popular vote! 

Lower bars = more division

Red=Winner loses general election

Source: CQGuide to U.S. Elections, data starts 1824 

For instance, in 2020, Biden received 4.5% more votes than Trump. In 2016, Clinton received 2.2% more votes than Trump, and she lost the electoral college! In 1844, James K. Polk beat Henry Clay by only 1.5%. 

The lower the win percentage or margin, the greater the "divide".  Of the 50 elections listed, 16 of them were "closer"  than 4.5% implying for over 60 years of the republic, the nation was MORE divided than today!

The average election margin is 9%. The biggest win (excepting earlier unopposed elections) was the 30% margin of Calvin Coolidge over John W. Davis in 1924. 

CLOSEST ELECTIONS SINCE 1824: 

ELECTION DIVIDE SINCE 1824:

PRESIDENTIAL GENERAL VOTE TALLIES SINCE 1824:

In sum, despite media claims to the contrary, the general vote tallies do not support claims of extreme divide. The parity in Congress, the 50-50 Senate and 222-211 House, a topic for another post, apparently does! If markets like divided government, the data, as is usual with markets, is decidedly mixed. 

Feel free to post comments.

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.

America's Economic Ranking In The World

This post compares 2020 GDP, 2020 Unemployment and the 2020 Budget, of the United States (red bars), to the rest of the world. Again, we like to think we are Number One; The Economist Magazine of 16 January 2020, the source of our data, may beg to differ:

Higher bars are better.

The US 2020 GDP growth ranked 13th of 44 countries followed by The Economist. Oddly enough this was the same rank posted by the Wall St. Journal for stock market performance.  Note Egypt GDP bested Taiwan in 2020!

Lower bars are better. 

US unemployment ranked 23 out of the 43 countries posted by The Economist. Thailand, Japan and the Czech Republic had the lowest unemployment rates in the world.

Higher bars are better.

US ranked near the bottom, 37th of 39 countries for our budget deficit, roughly 15% of GDP! Only Brazil (not labeled) and South Africa did worse. Who would figure India would have such a large surplus? Or, the UK would post a balanced budget? 

Note that all countries have different economics, politics, policies and history. If nothing else, these results can temper politician claims of superiority. 

*The number of countries ranked in The Economist tables vary by category. 

Feel free to post comments.

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.

America's Stock Market Ranking In the World

This post compares the stock market performance of the United States to the rest of the world. We like to think we are Number One; the Wall Street Journal, the source of our data, may beg to differ:

Longer bars are better.

United States 2020 performance is ranked 13th of 37* stocks in the Wall Street Journal. Note that many countries above us have vastly different politics, policies and history. If nothing else, this can temper politician claims of superiority. 

*The Journal table actually includes 36 more countries with lower returns not listed here. Note that the above returns are in USD and local currency, country inflation may account for differences .

Feel free to post comments.

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.

WhatUp Bitcoin?

With commodities as dead as can be, we cannot ignore the unprecedented rise of Bitcoin. 

5/11/2015 = 1000

BTC = Bitcoin USD (BTC-USD)

GBTC = Grayscale Bitcoin Trust (BTC) (GBTC)

Source: Yahoo Finance

The chart above shows the relative performance of Bitcoin itself, BTC, up14X, as reported by CoinMarketCap.com and Yahoo; and the widely available bitcoin ETF, Grayscale Bitcoin Trust, GBTC, up 6X since the GBTC 5/11/15 inception.

With gold up only double digits, and crude oil a disappointment, GBTC is up over 30% since January 1!  Bitcoin is up more.

With BTC emerging from the lawlessness of Silk Road it has earned a role as the new gold or maybe the dotcom boom all over again. Rising and falling with uncertainty, the mainstream ETF GBTC at $44 a share, at least, may merit a place in anyone's portfolio - no blockchain required. 

Feel free to post comments.

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.

Commodity Market Lab 2020

2020 saw, on average, metals up 26%, energies down 14% and the rest a touch better, up 2%, at the end of this landmark year. 

Returns = Continuously compounded rates of return

Data Source: Barchart.com

The biggest gainer was silver, up 36%. The worst declines were soybeans, down 29%, and heating oil, down 26%! The commodity indexes did not fail to disappoint. 

12/31/2019 = 1000

SP500 = S&P 500 Stock Index 

BCOM = Bloomberg Excess Return* Commodity Index

GSCI = S&P GSCI Excess Return* Commodity Index

Data Sources: Yahoo Finance, Bloomberg.com, SPGlobal.com

While everything fell in the March COVID break, nothing fell like the energy weighted GSCI, down over 50% at the bottom. The recovery was lackluster too, with the GSCI still ending down 25% in 2020. Not even the balanced BCOM could save itself, ending down 4% in 2020. The S&P 500 outpaced them all.

Sadly, both commodity indexes are BELOW their 1990s inception levels.

This may be easily explained by technology advancing far ahead of demand. We produce too much energy, agriculture and metals, even, for prices to rise in the "long run". 

Feel free to post comments.

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.

The MOST WONDERFUL TIME OF THE YEAR to invest!

Most investors have heard of the "January effect" or "triple witching" day but there's little mention of the last day of the year, THE MOST WONDEFUL TIME OF THE YEAR to invest in the stock market! 

Next Thursday 12/31/2020 at 4 PM, funds, stocks and everything else will close on the last day of the year and a new "bogey", target or gauge for performance will be set for every investor. Money managers are laser focused on getting the highest one year, three year, five year, ten year and (for the young at heart) twenty year returns for their funds.

The 20 Year Indexes chart below shows the 20 year continuously compounded gains for the major investment indexes starting at 1000 on the close  of 12/31/1999-the beginning of the new millennium. One would guess that the Russell 2000 index would be the way to go!

S&P 500 = S&P 500 Stock Index

NASDAQ = NASDAQ Composite Stock Index

RU2000 = Russell 2000 Stock Index

BCOM = Bloomberg Commodity Index 

The one year 2020 chart tells a different story.

The NASDAQ index was the top performer again this year, while everything else, except commodities, again, were all competitive. Different time periods create different winners. IMHO the S&P 500 index is the ideal long term index for nearly all investors.

The continuously compounded rolling returns show this clearly:

Source: Yahoo Finance, Bloomberg as of the close Tursday, 12/24/2020

The moral of the story is that the index you buy doesn't matter all that much as long as you buy and hold for the long term. Take your pick and, excepting the commodity index, get your decent long-term gains!

Feel free to post comments.

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.

There's a Chance

Below is the chance of gain for the S&P500 index versus the long US Treasury Bond since 1928 across holding periods.

Stock Market Insurance

The cost of 1 year stock insurance since 2005 is presented below:

SPY = S&P 500 ETF 

Put Cost as Percentage of SPY

Source: T. D. Ameritrade ThinkBack platform.

Above are the year-end closing prices of SPY and cost of the closest 1 year at-the-money put*, as a percentage of SPY, since SPY options started trading in 2005. Note that the SPY Return, our proxy for a stock market portfolio, averaged 9% with the largest drawdown of 38% in 2008. The "married put" insured portfolio, Return with Put, averaged 4% and reduced the portfolio loss by 30% in 2008. The married puts paid off in the down year. 

All told, just like real insurance, premiums (put prices) vary each year and its up to the buyer to judge their worth. In my view, option sellers are very shrewd and usually price put option insurance so its NOT worth buying.

*Two examples from the above table: 

Up year: On 12/31/2018 SPY closed at $249.92. The at-the-money put closest to covering the coming year was the 12/20/2019 250 put which closed at $18.185 or (18.105/249.92 =) 7.3%. On 12/31/2019 SPY closed at $321.86 for a return of 28.8%. The return less the cost of the put was 21.5%. Since SPY closed above the $250 strike price, the put expired worthless. 

Down year: On 12/31/2007 SPY closed at $146.21. The at-the-money put closest to covering the coming year was the 12/31/2008 $146 put which closed at $11.07 or (11.07/146.21 =) 8.0%. On 12/31/2008 SPY closed at $90.24 for a loss of -38.3%. The put stopped the loss at the $146 strike price so the net loss was only -8.1% (=11.70 cost of put +.21 difference between stock and strike = 11.91/146.21.).

Feel free to post comments.

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.

COVID Hoax Delusions

With more than 100,000 patients filling hospital beds and newly reported confirmed cases exceeding 200,000 a day-all-time records (see Wall St. Journal), the many posts implying COVID is a hoax will NOT let up.

Sadly, delusional politics is par for the course, delusional money managers are not.

GDP Revisited

Despite recent political boasting, the St. Louis Federal Reserve GDP stats provide, for some, a sobering view of economic performance under two Presidents-PRE COVID!. 

"MORE INDEX!" - Stocks versus Options

The COVID break is over! We have a full recovery plus some and NOW what do we do?. Obviously, just buy and hold MORE INDEX. Or to paraphrase: "More Cowbell!" 

In my view, once the ECONOMY recovers, which it WILL, the market will roar and maybe return to Obama level gains. (Note Obama markets doubled in the first term and rose 50% in the second also GDP growth outpaced the pre-COVID Trump era).

Given this bullish opinion, this post will compare the returns from buying the stock to the equivalent buying of TWO "at-the-money" call options. 

A valid test is time period neutral, no cherry picking. Year-to-date 2020, with an extreme decline and extreme recovery plus some, is a perfect stress test for nearly every scenario. A valid test would also use the largest most liquid tradeable index and options available, the S&P500 ETF SPYs!

In options speak, one "at the money" (atm) call option is equal to 50 shares of the underlying stock. Thus 2 atm SPY calls = 100 SPY. See a more complete discussion of options here.

The closing price of SPY on the last day of 2019 was $321.86. The "full year", atm call on that date was the 18 December 2020 expiration, $322 strike, call option. The comparison of buying 100 SPY versus buying 2 SPY atm calls is shown below:

Quotes Source: Thinkorwim Thinkback

The options cost roughly $4,000, a fraction of  the more than $30,000 needed to control 100 shares of SPY.  Likewise the return on investment is huge for the options, while the dollar gains are roughly the same. 

A small caveat is that while you must pay for the options up front in full; the stock position may require one half to a third of total cost depending upon your broker's margin requirements. Thus the return on investment, ROI, would be much larger for the stock position but still far below that of the options. 

A large caveat is that options expire, stocks don't! If the stock is not up enough, you will lose ALL or some of your atm option investment. When your time runs out, your option expires. You stock doesn't expire. 

A final caveat, this is just one data point, just one year. While the method is valid, there is no guarantee that any given year will produce the same results. Consider 2017 for a counter example. 

In conclusion, options may be one of the best ways to capture stock market gains in rising markets.

Feel free to post comments.

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.

The COVID Market Break is Over!

Last week, Monday November 16, 2020 at 29950.44 , without fanfare, the Dow Jones Industrial Average fully recovered from the COVID stock market low on 3/23/2020 at 18591.03.

The Dow took 238 days to recover and was the last major stock index to return to its pre pandemic high. Here are the numbers:

These are remarkable numbers. As shown in my 3/12/2020 post in the middle of the COVID market break, Time To Recovery, the historical average for all bear markets since 1900 is 5.6 YEARS peak to peak!  

The difference may be clear: pandemics are limited events. With vaccines on the way, the markets anticipate a full recovery from COVID. With all four major indexes fully recovered, at some point we will start a new cycle, a new break and a new time to recover. 

Sadly, as perhaps indicated by the modest year-to-date returns, the real economy for most people IS NOT RECOVERED. 10 MM unemployed, GDP a fraction of its former self and ever rising income equality may only prove that stock markets are just one measure, a limited measure, of the national welfare.  

Feel free to post comments.

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.

Full Recovery?

Wednesday's 6/3/2020 $236.69 NASDAQ100 QQQ adjusted closing price marks a FULL RECOVERY from the $168.94 multi-year low of March 16th and exceeding the prior all-time high of $236.48 on February 19th!

QQQ = Invesco QQQ Trust

SPY = SPDR S&P 500 ETF Trust

IWM = iShares Russell 2000 ETF

Source data: Yahoo Finance adjusted closing prices

It took 105 days for the Nasdaq to recover its all time high. Note the S&P 500 ETF SPY is hot on the heels of QQQs recovery. The Russell 2000 represented by the IWM ETF still has a way to go.

Based on yesterday's closes here is where the major indexes and commodities I follow stand:

DJP = iPath Bloomberg Commodity Index ETN

GCZ20 = December 2020 Gold Futures Contract

CLZ20 = December 2020 Crude Oil Futures Contract

HGZ20 = December 2020 High Grade Copper Futures Contract

Commodity Source data: barchart.com, DJP source date: Yahoo Finance

Note the QQQs are UP 11% year-to-date! The SPY is -2% ytd and -7% from its all time high! Crude Oil is the major laggard, still down about 40% for the year and from its all time high. Copper is well off its high but only -11% year-to-date.  Gold has been the star performer for 2020 but in the last few days has been eclipsed by the QQQ.

Outlook

All these numbers are backward looking but then again, history is all we have and all we have to go on. The long term effects of pandemic and social unrest have yet to be felt. But, so far, this market break is well within historic limits. Note also there may be a major disconnect between the economy and the stock market. I feel confident, with time, one will catch with the other.

Note, right or wrong I use exchange traded index funds to represent the actual indexes/asset classes. We cannot buy indexes but we can buy the etfs. Also, the major broad based etfs very closely match their underlying indexes. Of course, there is no assurance this will continue in the future. This year has been an excellent stress test and, in my opinion, the etfs have passed with flying colors!

As for commodities, the DJP decently represents the pre-eminent Bloomberg Commodity Index and, in my opinion, the December futures are the best possible representative for long term commodity prices. 

Feel free to post comments.

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.

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