S&P Largest YTD Decline Since 1939

 Here's the chart for the S&P 500 stock index Jan thru April return since inception:

Source: Yahoo Finance

2022 is the third worst year on record.  Note there are 95 years in the period and in 65 or 68% of them, total year returns were higher than the Jan-Apr return. 

Considering the 10 worst Jan-Apr returns, well, 1932 was in the teeth of the depression and STILL the market recovered 50%! '39 was the dawn of WWII and again had a smart recovery. Today's 14% loss is an unknown but the historical 68% may be a good omen. '41 and '42 were when we were not sure about winning WWII. '70 was a recovery year. 2020 had a major reversal and may be the source of the extreme optimism coming into today. '73 was inflation. '60 recovered and '62 was the Kennedy steel strike. 

Historical odds are that 2022 will end up BETTER than today's levels. Below are ALL the S&P500 Jan-Apr returns in worst to best order. 

Why "cherry pick" these time periods? They are not cherry picked. This is Yahoo Finance data for the S&P 500 since inception in 1928. My spreadsheet is available upon request. See my shared items in thinkorwsim:          http://tos.mx/ICQelj3          http://tos.mx/np1uoya

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. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2022 George Rahal

How Long Will $100 Oil Last?

Crude Oil got there. Oil IS $100 a barrel plus. What does history tell us about the future? How long will plus $100 oil last?  

CL = NYMEX Nearby Crude Oil Futures closing price.

Source: barchart.com

The above is the long term chart of nearby crude oil futures which actually began trading in 1983 (not shown) yet the first time crude closed above $100 a barrel on 2/6/2008 is shown. As one can plainly see, crude has been above $100 for a very short time. Does this tell us anything about today's oil price?

Since it first touched $100, WTI Crude has had 33 runs above $100 a barrel.  Meaning, for 33 periods since 2008, crude traded above $100. The runs lasted, on average, 21 days! The shortest were 7 runs lasting a 1 day, 4 runs lasting 2 days and 5 runs lasting 3 days. The two longest runs were 194 days in 2008 and 110 days in 2013. Here is a quick summary: 

What may be missing from raw numbers are the effects of timing. Looking at WHEN crude traded may give us a clue of what to expect. The following is the list of crude oil $100 runs for "all time"/since it began trading. 

Based on trading through it, I can attest that the first time crude oil traded above $100 in 2008 was a price shock! This is the period crude traded to its all time high above $147 a barrel! This, on top of the financial crisis which, oddly enough, with the collapse of Lehman in September 2008, ENDED the oil rally. The next time we saw $100, the market took it in stride and you can see it bouncing back and forth throughout 2011.

Maybe the return of $100 in 2012 was too much and the rally lasted 81 days in 2012 and 110 days in 2013. So the market bounced back and forth again until 2014 when it finally broke. 

Break it did, beyond all expectations. Falling below $40 a barrel and staying there and more, decimating the energy sector-not to mention the Covid demand collapse to spot market NEGATIVE prices in 2020! 2020 was the bottom and all markets have been rallying ever since. 

For perspective, the 2008 price shock was short lived. The 2011 return to $100 lasted arguably, despite all the bouncing about, until 2014 or 3 years. 

So maybe today's $100 oil is not a shock. If so, if history is any guide, we can see markets bouncing for quite a while. (3 more years?) Or, today's rally, or the entire commodity rally, is predicated on the double whammy of "end of Covid" supply chain strain and war - ominous and unpredictable war. If both ARE resolved, $100 oil can quickly become another distant memory.

Why "cherry pick" these time periods? They are not cherry picked. My free barchart.com account only offered prices starting 2000, and excel formatting worked best with the 12/31 start dates. My spreadsheet is available upon request.

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. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2022 George Rahal

Is Your Gas Station Price Gouging?

Friday, 4/22/22, the nearby crude oil futures closed at $102.07 per barrel. Nearby unleaded gasoline futures closed at $3.286 per gallon.  The gas price is 3.22% of the crude oil price. 2020 thru today, the price of crude is up 70%, but the price of unleaded gas is up 89%. Is this price gouging?

CL=NYMEX June WTI Crude Oil Nearest Futures Historical Price - left axis

RB=NYMEX June RBOB Unleaded Gas Nearest Futures Historical Price -right axis

Ratio x 100 = RB/CL x 100 scaling factor - right axis

Data source: barchart.com

One answer may be found in the ratio of gasoline to oil prices. Until 2022, the ratio looked pretty steady- in the high 2s. This year, the ratio is now above 3%. There may be many reasons for the expansion of this ratio-supply chain, demand and other characteristics-but history may tell a simpler story.

For nearly 20 years the ratio hovered in the 2% to 4% range. The huge 2008-09 rally in crude oil above $140 barely budged the ratio, holding stubbornly close to 3%. In the ensuing crude oil decline, the ratio also held around the 3% range. Only in the price declines of 2016 and the major collapse of 2020 did gas prices stay high with the ratio expanding to above 4% and a spectacular 5%+ (when crude oil went negative), respectively.

Historically, a 3%+ ratio persisted about 40% of all days since 2000. 

Unleaded Gas/Crude Oil Price Ratio 

Frequency Distribution Since 12/31/2000

Today's 3.22% ratio is normal. Admittedly, RB is the wholesale unleaded gas price, but, according to these numbers, your gas station is not price gouging.

Why "cherry pick" these time periods? They are not cherry picked. My free barchart.com account only offered prices starting 2000, and excel formatting worked best with the 12/31 start dates. My spreadsheet is available upon request.

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. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2022 George Rahal

  

First Quarter Wallops Markets-Oil Up 33%

While stocks wallop, commodities woke from decades of hibernation rising 25% in the first quarter of 2022. Shaken by Covid fatigue and the onset of war, oil peaked up 60% at one point, from 2021's close, to end the quarter 30% higher.

CRUDE = NYMEX May 2022 WTI Crude Oil Futures Contract

DJP = iPath Bloomberg Commodity Index Total Return(SM) ETN

GOLD = COMEX June 2022 Gold Futures Contract

SPY = SPDR S&P 500 ETF Trust

BND = Vanguard Total Bond Market Index Fund

QQQ = Invesco QQQ Trust (Nasdaq 100 ETF)

Crude oil led the commodities charge. DJP, a mix of energy, metals and agriculture, clearly shows the effects of inflation.  Gold bulls were disappointed. Stock investors posted losses for the first time in years. Bonds ticked lower on the tails of higher inflation.

Note the above, while representing indexes and asset classes, are all easily investible by small investors. They closely track their intended assets and are good representatives of market conditions.

A single quarter represents current conditions and is not a view of the current outlook. For that, we need to evaluate the medium and even long term market performance. The last three years offer a unique view of markets, including the largest declines and largest recoveries in decades-extreme markets-all compressed in the 2019 to 2022 period!

PRE AND POST COVID

To gain this perspective let's look at the pre and post covid years:

All markets posted gains for the 2019 to present period. While the Nasdaq 100 led the way, oil bested the S&P while commodities showed lesser but still respectable gains.  Stocks were relentless, even shaking off 2019's 50% decline. The oil chart is a bit deceptive as the month-end closes charted here do NOT reflect the daily nor intra-day highs and lows. The NYMEX WTI April 2020 crude oil contract touched MINUS $40.32 on 4/20/20 a day ahead of its expiration. Crude oil traded in low digits for a number of days. 

LONG TERM MARKETS

This 14 year period is defined by the BND start date in 2007, otherwise we could not make year to year comparisons.  And this period is marked by crude's all time high of $147.27 on 7/11/2008 in the August 2008 contract. So, of course, crude oil is off. 

The other major markets are about where we expect them: QQQs lead, SPY next, Gold doing ok, even BND has a return and commods are on the way to their two decades long depression. Eventually though, gold is brought down by the commodity decline. 

OUTLOOK

For one thing the world is now all shook up by not just Covid, but, war, too. 

Maybe the recovery in oil emboldened oil states to flex muscles they haven't had in years. Maybe that emboldened Putin to go to war. As we know from Afghanistan and Vietnam before it, war can last for years. So Covid will pass. We don't know when but that alone should help stocks. 

The initial inflation increase may have been Covid/supply chain related but war may keep a bid on commodity prices. Although, 20 years of Afghanistan war did NOT. 

Regardless, demographics are keeping the US economy going. Job takers are few as the Great Reitrement of the existing aging and prosperous workforce becomes a tsunami. The fast and furious recovery of stock markets in 2020 and 2021 point to strong recovery, again.

Why choose these markets? Why ETFs? Why actual crude and gold futures contracts? Its all about the ease of investment for smaller investors and how well these vehicles represent the markets as a whole. Generally ETFs let small investors do what only large players could do for even less cost than large players. But commodity ETFS for oil and gold do not reflect their underlying markets very well. That's why I use the futures contracts. Today, using "Micro" contracts, even small investors can own crude oil and gold futures responsibly. 

Why "cherry pick" these time periods? They are not cherry picked. This has been such an extraordinary quarter (the Nasdaq is DOWN the most!) I could not ignore it. 2018-present is explained above as a period of extreme market moves-an ideal laboratory for analysis. As for 2007, that again was explained as the first year that the BND traded. To make these analyses valid we cannot change symbols midstream. 

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. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2022 George Rahal

$100 Crude in the Rearview Mirror

$100 WTI Crude Oil is in the rear view mirror. And we have a war. To see where we go from here, let's look at the long-term chart to see where we have been:

Source: Barchart.com

The above is today's nearby crude oil futures 20-year daily chart. It includes the current $109 peak and the 2008 $140 peak. While crude oil rallies appear relentless, note the fantastic declines from peak highs. Given this peak, and this war, our highs may not yet be in. History says there is $40 or more to go, but no one knows. 

All we can guess from this chart, and hope for, is a crushing collapse from the next peak. If and when the Ukraine War ends, we can only hope for a major break. If it ends quickly, the break may be historic. 

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. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2022 George Rahal

Staying the Course - 3X the Pain

My $92,922 investment in 3X* ETFs is down 31.091% to $64,032.

Am I disappointed? No.

If you saw my earlier post, Prep for 2022, you already know why and how I made this year-end investment. More to the point, that post laid out my potential max losses BEFORE I made the investment. 

Revisiting the post, I guess-timated** that:

my "extreme" three month loss would be -25%; 
my one year "extreme" loss would be -53%; and
my "extreme" 3 year loss would be 89%. 

Yet, I still made the investment. 

So far, after two months, with inflation and a war, my investment is very close to my 3 month measure.

The year is not over (and neither is inflation or the war) and these losses are all made with the knowledge of the long term history of a bull market (through all prior inflations and wars) and the guess that Bogle's refrain "Stay the Course" means history will repeat and these will all recover eventually.

But I am a special case. I may never sell this and my kids may inherit this account. 

*Oddly enough, the 3X ETFs, SPXL and TQQQ have nearly exactly matched their advertised returns of 3X the SPY and QQQ, respectively. 

**These are just hypothetical drawdowns. And excuse the meaningless precision. While based on actual prices, only the general estimates make sense without any false precision. 

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. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2022 George Rahal

 

March to 100

 As I write, the nearby WTI Crude Oil futures contract is up neary $3 to $93 a barrel.

This is $7 shy of $100.  

In crude's 40 year NYMEX trading history it breached $100 for only 6 years, from 2008 to 2014.

Source: Barchart.com

Strangely enough, April 2020, less than 2 years ago, at the onset of Covid, the crude futures price was negative, touching minus $40 a barrel. 

Looking at the long-term, after breaching $100 and most likely much more, the outlook for mean reverting commodities-supplier greed being what it is-is more moderate price. From one acopolypse (2008 peak oil) to another (2020 post-fossil fuels), the energy markets are refunding. The geopolitics of the oil patch is flush again and may be the host of past problems revisited. 

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. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2021 George Rahal.

Commodities Up 37% in 2021

The S&P GSCI Excess Return* commodity index rose 37% in 2021. The Bloomberg Commodity Excess Return Index rose 27%. Excess Return indices are more representative of commodity prices than the more widely distributed "Total Return" indices, which add T-Bill interest. The chart below shows performance of $1000 as of 12/31/2020. 

GSCI ER = S&P GSCI Excess Return Commodity Index Source: S&P
BCOM ER = Bloomberg Excess Return Commodity Index Source: Bloomberg

*Unlike Total Return indices, Excess Return indices have no futures collateral interest. 

Sectors

The GSCI return was bolstered by its overweighting in energy as the GSCI energy index was rose 53% in 2021. The relatively lower return of the Bloomberg index is due to its more balanced and, in my opinion, more representative weighting of energy, metals and agriculture.  While energy was the top gainer, ags had a good showing as well. Oddly enough, the so-called "pure commodities" gold and silver were DOWN in 2021. 

Is Bitcoin the new gold? Bitcoin/Crypto was up 57% to 163% depending on who is reporting.

Index and sector returns are shown below.

Long Term Commodity Index

While 2021 finally broke the 10 year commodity bear market, the larger picture has a way to go. Below is the chart for our referenced Bloomberg Commodity Excess Return Index since inception in 1991. Priced at 100.0000 on the 1/2/1991 inception date and closing 12/31/2021 at 99.1694, the totality of the now thirty year record is questionable at best. 

Note the more widely published "Total Returns" are higher than the excess returns, they include T-Bill interest on top of commodity returns. I also consider the Bloomberg to be a far better representation of the commodity market because of its more balanced weightings. Both indexes, though, suffer from too frequent rolling of futures components. 

Outlook

While commodities have had a good year in 2021, the long-term picture shows only a small uptick. There may be room for a more substantial recovery in the year to come. 

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. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2021 George Rahal.

Prep for 2022-Indexes vs 3X Indexes - Investment Magic!

According to the latest (Sep 2021) SPIVA Index Scorecard 70% of all active managers could not beat the S&P500 Index. Other studies show that managers who DO outperform have "below random" returns in the following three years. To nail the point, of the "Top 250 Mutual Funds" listed in this weekend's (12/24/2021) Wall Street Journal, only 7 beat the Vanguard Admiral S&P 500 mutual fund. 8 (other index) funds matched it.  This is obviously NOT a representative sampling but it was good enough for the Wall St. Journal. 

So we get it, the original Malkiel and Bogle (buy the earliest editions you can find) were right all along (as if the success of Vanguard hasn't proved it for a generation!) buy and hold the index fund. It's a heck of a good portfolio!

Index ETF or 3X ETF?

Anticipating a buy on the year-end close this Friday December 31st and hold for all of 2022, this post compares, mainly, the risks, of holding the major index ETFs versus their 3X ETFs. 

Why ETFs? Well, while they are closed in the after-hours, unlike the index futures, they cannot trade outside normal market hours. After LONG history we have to agree that the lack of trading ability is a GOOD thing, an EDGE, for any investor.

Futures also have expirations and, perhaps, rolls which ETFs do not have. You CAN buy and hold an ETF for years with NO taxable event until you sell. Futures mark to market every year.  

What about your thirst for leverage? You can buy ETFs on margin or you can buy 3X ETFs outright with no margin costs - how they do that is magic.

Using Yahoo's full year daily historical data for the SPY and QQQ outright ETFs and the SPXL and TQQQ 3X ETFs since inception (note the TQQQ did not trade until and could not be compared until 2010), we get the following results:

SPY = SPDR S&P 500 ETF Trust (SPY)

QQQ = Invesco QQQ Trust (QQQ) 

SPXL = Direxion Daily S&P500 Bull 3X Shares (SPXL) 

TQQQ =ProShares UltraPro QQQ (TQQQ) 

Drawdown = (Yearly low/yearly high) -1

Return = (Ending price - starting price) / starting price

Start date = Last trading day each prior year.

End date = Last trading day of each year.

2021=Year-to-date as of the close on 12/23/2021

Source: Yahoo Finance

The SPY average return 2011 - 2021 was a remarkable 17%!  Although, SPY's worst drawdown within any given year was Covid's 2020 -41% decline. The 3X SPY, SPYXL average return was 48%, HIGHER than 3 times the SPY. Oddly enough, the worst SPXL drawdown was -73%, significantly better than 3 times -41% or -123% from a multiple position in the SPY. As far as SPY goes, the 3X ETF is signifcantly BETTER!

For the QQQ, the TQQQ average drawdown of -20% is WORSE the QQQ's -26% forget about the multiple. The average returns, though, were as expected.  Given the above results, with an eye to the 2020 worst declines, there appears to be NO advantage to owning the outright ETFs. 3X ETFs do the same or better on paper.

What about the mechanics of my hypothetical $100,000 investment on the 12/31/2021 close?

Investing

The following compares characteristics of buying the above One X and 3X ETFs:

See the magic. How does buying 3X and arguably NINE TIMES the return COST LESS and RISK LESS than buying the 3X on margin*? Note also, somehow buying 3X ETFs increases your exposure with no debt and no chance of margin calls. Finally, note that the exposures are NOT exact. The $47,000 invested in 100 SPY at 10% earns $4700. The $13,967 at 30% earns "roughly" the same. 

And yes, your risk of loss IS great, SPXL and TQQQ drewdown -73% and -59%, respectively, but you paid cash and can carry the position through the decline with NO margin calls. Loading up on 300 shares each of the SPXL and TQQQ will guarantee a wild ride with only your original $100K at risk.

*At my broker, 3X ETFs are virtually not marginable, so you HAVE to pay cash.  An unnamed risk here, the TRUE  unmentioned risk, is what if the 3X ETFs default? Or get delisted? This happened to select volatility and commodity instruments but none with the history/pedigree of SPXL and TQQQ.  Also, I had to revise this post because my drawdown numbers were slightly off and they are now corrected. :-)

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. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2021 George Rahal.

They're BAAACK!

 Annuity hucksters are back with more style and less substance than ever.

Under the rubric of "Defined Outcome" you get anything but. Correction: some of your losses ARE defined by the huge unecessary fees you pay to put on such a ridiculous strategy. 

Index-linked annuity advertisements creep up like weeds whenever the stock market falls.

I believe these ads mislead and are harmful to your wealth. The above is a rough picture of the investment portion of a one year index-linked annuity contract. These expensive and opaque insurance contracts generally offer, for a 1 year or other term, a certain amount of "buffer" or "shield" from market declines along with a capped share of the gain if the market rises.

This "insurance" strategy can easily be created with exchange traded index options with total transparency, total liquidity, at extremely low cost with NO withdrawal fees and a far smaller cash deposit than any insurance purchase. 

The SPY, S&P 500 ETF, chart above shows the profits and loss from a "split strike with short put" options strategy.  It's something like the "split strike" strategy touted by Bernie Madoff but without the upside.  Whether Madoff is a tip off or not, this is the terrible strategy:

As of last night's (12/22/21) closing prices, with SPY at 470, (1000 shares = $470,000),
Buy 10 SPY 12/16/2022 (1-year) 470 (at-the-money) Puts for roughly $39.20 or $39,200
Sell 10 SPY 12/16/2022 (1-year) 420 (10% out-of-the-money) Puts for $23.875 or $23,875
Sell 10 SPY 12/16/2022 (1-year) 520 (10% in-the-money) Puts for $65.155 or $65,155

These trades combined will CREDIT your options account with +$49,830.
Total commissions at my broker for these trades are $20.85. 

The initial margin required for the 10 lot position according to my broker today is $116,510.

This is fully covered by your 1000 share long position which is the "reason" you are putting this hedging strategy on in the first place. 

With options you have full transparency with market prices available anytime the market is open.

You have total control! You can get out ANYTIME for the same $20.85 commissions.

There are NO withdrawal fees, no waiting periods, no hassle at all to get in or get out!

This $49+K credit is the "protection" against the loss of your real portfolio, which in this example, is the $470,000 invested in the SPY.  This example is slightly more than 10% but you can change your credit by adjusting the strike prices of your options.

Why is this strategy so bad? Look at the chart: your losses can be UNLIMITED and your gains are capped, the exact opposite what any investor wants. If you really do want protection, forget selling puts and just buy the at-the-money put. The "married put" is a pricey insurance policy that costs 11% of your portfolio and gives you total protection from the downside with 100% upside (except for the insurance premium) if the SPY rises.

The chart above is so bad that option traders don't even sell this strategy. You would be hard pressed to find the above options payoff chart online.  Its so bad that only annuity salesmen would sell it.

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.

11 Trading Days Left in 2021

As the year turns, its time to prepare for the last trading day of 2021 and especially the 2021 year end close at 4PM* Friday December 31st!  Let's look at how my hypothetical Model Account in 2021 went:

This was obviously a lucky year.... or was it? Let's look the same trade in the extreme year of 2020.

Not such a good year. The $100K model account lost ALL its value, and then some, in the Covid March break and had to post maintenance margin (totalling $40+K, not shown). The true believer though ended up with a net double ($100K gain) at year-end.

What about a more "normal" year, like 2019?

In the first half, the model account was up $50K, stayed unch until November, and then rose another $50K, posting a $100K gain for the year. 

So WHAT IS? this model account that has SO much risk yet apparently so many gains. Its simply a small variation on the long stock index buy and hold-but with the leverage of futures. Short answer: just look at the S&P and Nasdaq charts!

ES and NQ Buy and Hold

This is a hypothetical futures account, funded with a hypothetical $100K, that hypothetically buys, on the last day of the year, at the close, one "red" March S&P 500 E-mini futures and one "red" March Nasdaq 100 E-mini futures contract. The initial margin requirement for this position is today roughly $40,000. You post $100K, so you have $60,000 margin excess ($60K losses before you get a margin call).

As I write, noonish December 16th, 2021 the "red" March 2023 S&P 500 E-Mini, symbol ESH23, is offerred at 4740.00 and the "red" March 2023 Nasdaq 100 E-Mini, symbol NQH23, is estimated at 16,000. Both contracts should have firm offers by the December 31st last trading day of the year. 

At current pricing, ESH23 has a notional value of (4740 x $50=) $237,000. And the NQH23 is at (16,000 x $20)=$320,000. Being long at these prices would give ($237,000+$320,000)=$557,000 of index exposure (read risk) in your futures account. 

My broker's current initial margin requirement for the S&P E-Mini is about $16,000 and the Nasdaq E-Mini is $24,000. Thus the total margin requirement for this hypothetical account is roughly $40,000. The $100K deposit would leave an excess of $60,000 in the account.

Outlook

2022 appears to be a pivotal year with the first signs of inflation, the hyper politics of the mid-term elections and the twists and turns of the Covid pandemic. But we have HAD many pivotal years, especially in the Covid infected 2020. So 2022, despite all the hemming and hawing, may just be another year in the market. 

Happy Christmas, Happy 2022 and Happy Trading!

*"Red" means, in commodity talk, the next year's month not the upcoming month. Thus, today's "red" March means March of 2023, not the upcoming 2022. The March 2023 contract is nearest contract to trade during the entire year 2022. There are many details involved in the reasoning behind this kind of trading account. For more complete information showing markets and returns feel free to download my spreadsheet here. Note also, these are hypothetical accounts only.  

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. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2021 George Rahal.

Commodities Dinged but Still UP 20% YTD in November

Just as inflation panic began to spread, commodity prices solidly fell -7% in November while holding strong +20% gains year-to-date.

GSCI=S&P GSCI Commodity Excess Return Index

BCOM=Bloomberg Excess Return Commodity Index

The declines were widespread as the following table of the BCOM components shows:

The biggest gainers were energy. Note precious metals and a few agriculturals are down on the year. Note also crudes gave up substantial gains in November.

*Excess Return indexes are futures price returns without the interest on futures collateral included in Total Return indices,

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. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2021 George Rahal.

The 10 - 20 Strategy

I had a unique commodity futures client who had a system for trading that would buy only 10 year lows or even 20 year lows.  He no longer trades commodities. The thought was that 10 year lows were LOW. 

Aside from the obvious scarcity of 10 year lows (it was definately a long-term generational strategy) we have to consider the mechanics of this trade. Starting, for convenience, in 1991, the inception date of the Bloomberg Commodity Index, commods have had roughly 5 long-term bull runs. In the same period there were maybe four bear runs. Here's the long-term chart:

BBG CI=Bloomberg Commodity Excess Return Index since 1/2/1991 inception. 

If nothing else,  for the 30 year history of the index, there are very few chances to buy at 10 year lows. The 10 year low is not available to a buyer until 2015. And then, it was a loser until 2020! Likewise, selling 10 year highs, with one major exception (2008), have been losing trades. Today's market is at the lower end of the today's 10 year range.

The 20 year range offers even fewer opportunity, which may be expected from an index with a 30 year lifetime. Until 2020 there was maybe one opportunity to buy a 20 year low. 

BBG CI=Bloomberg Commodity Excess Return Index since 1/2/1991 inception. 

The Bloomberg Energy Index shows much the same.

Energy=Bloomberg Energy Excess Return Index since 1/2/1991 inception.

There are limited opportunities to sell the 10 year high, and many, since 2009, chances to buy the 10 year lows-albiet unprofitable.  

The ag markets appear more balanced, with very limited sell opportunities. Except for recent Covid trade history, 10 year buys were limited too.

Agriculture=Bloomberg Agriculture Excess Return Index since 1/2/1991 inception.

Precious Metals, despite the more rounded charts, have actually even fewer trading opportunities at 10 year extremes.

Agriculture=Bloomberg Agriculture Excess Return Index since 1/2/1991 inception.

The 10-20 year trade is a bust. It may be an occasional wealth builder but the entries and exits are so few and far between, they are hardly worth waiting for. In hindsight, Covid has presented a rare opportunity indeed. 

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. Send request to gdrahal@gmail.com to follow this blog and for additional information. 

© 2021 George Rahal.

Commodities YTD Up 30%-50%

 While the major commodity indexes are YTD up 30%-50%,

the sector returns reveal more about this year's price behavior. 

The steady march of oil prices from extraordinary lows plus covid scarcity has underpinned the 180% rise in energy. Remember, roughly one year ago the crude oil price was BELOW ZERO! The 20% rise in agriculture markets is actually reflective of the "almost-post" Covid demand shock. Gold has been flat to down, to spite the inflation hedge talkers.  And bitcoin, for good measure, is giving us the price and value of vapor - right in line with today's GOP politics. 

As the economy normalizes, as fewer hold out against vaccinations, as rationality returns to American political discourse, markets WILL moderate. Or not. It's a bet on future conditions, especially the future of rationality, science and democracy. 

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. Send request to gdrahal@gmail.com to follow this blog and for additional information. 

© 2021 George Rahal.

Selling Option Premium

Had an interesting conversation with an old classmate who, in his apparent retirement, has taken a liking to selling options. I love TD Ameritrade and admire TDA's educational work-far better than almost ALL investment research online. BUT, we have to be honest here, option income a siren song.

If option writing was such a good strategy, option income funds would be such good funds*. Well, what do you think? First, lets try and find any option income fund (they were popular in the 1980s and not so much, today). 

Eaton Vance**, a venerable old-money fund manager, runs a handful of option writing funds. Let's look at them over the long-term:

SPY = SPDR S&P 500 ETF Trust (SPY)

ETV = Eaton Vance Tax-Managed Buy-Write Opportunities Fund (ETV)

ETB = Eaton Vance Tax-Managed Buy-Write Income Fund (ETB)

ETW = Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund (ETW)

EXD = Eaton Vance Tax-Advantaged Bond and Option Strategies Fund (EXD)

Source: Yahoo Finance

With the S&P up 500%, the option funds, up 300-400% all lag, 

Almost sixteen years seems like a good period to review the option writing strategy. Was this cherry-picked? Well, it so happens that 4/27/2005 was the first Yahoo price date for the earliest fund, the flagship ETB fund. The others started trading after that date. This is a misleading yet truthful picture of these funds. Of course, the SPY has been trading long before that date and is used, as always, for the comparison benchmark.

Let's look at a true comparison, using the first date in common for all five funds. 6/25/2010 is the first date in Yahoo for the youngest EXD blended tax advantaged bond and option fund:

The roughly ten-year period didn't change much. The S&P still beat option funds by 150% or more. So, did we cherry-pick again? Here's the five year period:

The S&P still beats by roughly 100%. Let's look at the 2020-Present time period. Here, the results narrow.

With EXD up 33% and SPY up 44%. the lead narrows to less than 10 points. Finally, lets look at what these funds did for us lately-the year-to-date 12/31/2020 to 10/15/2021 numbers:

NOW you can accuse me of cherry-picking! The SPY is smack dab in the middle of the Eaton Vance option fund returns! Ranging from 26% to 15%, the EV funds comp well with the SPY 20% ytd gain. 

As one can see, you have to work hard to get option writing to beat the S&P.

*The idea here being that if the smartest, richest traders in the world, public fund managers, can't do it. Nobody can!  The reason why so many fund manager's do worse than internet chatroom traders is because fund manager results are audited!

**While it may seem so, I am NOT picking on Eaton Vance. Option income is a tough strategy, especially, in bull markets. You keep giving up gains for pittance. Also, EV is one of the oldest managers out there with old money clients who primarily want to keep their money. These are wonderful gains, where many other managers have given up on option income funds. 

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. Send request to gdrahal@gmail.com to follow this blog and for additional information. 

© 2021 George Rahal.

Covid Deaths and Cases Per 100,000 Population

As Covid new reported cases fall, it may be time to review the totality of the pandemic. Below are the "rankings" of per capita Covid cases and Covid deaths by state as of 10/13/2021. Read and weep:

Of the four most populous states, red Texas and Florida cases are significantly worse than blue California and New York.

Source: Johns Hopkins University

In per capita deaths, New York ranks lower (46th at 287 per 100K) than Florida (41st at 267) and Texas (32nd at 235) and California's surprising high ranking (16th at 178).

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. Contact gdrahal@outlook.com for additional information.. 
© 2021 George Rahal.