Survival Plan Monthly Recap for July 2014
“The Times They Are A Changing”
July was a good month for the Survival Plan. Total equity increased +6.5% for the month but that still left YTD equity down -8%. There seems to be a light at the end of the tunnel. The Survival Plan is a trend following program through out. It currently tracks 20 commodities and trades in three time frames. The Survival Plan has zero correlation to the S&P 500. It does not have a negative correlation. It has historically made excellent returns in a rising stock market. But, it has also shown the capacity to consistently show some of its best months when the stock market is under pressure or even when it is in a meltdown. Past results are not necessarily indicative of future performance. Where trend following programs, in general, have not been successful is a market with collapsing daily ranges, lack of volatility and low volume. This is exactly the market that we have seen since early 2009. It may be ideal for the stock market that is slowly climbing the “wall of worry”, it is decidedly not good for trend following commodity futures. Volatility, whether up or down, allows for the opportunity for meaningful trends in futures.
Market Overview in July
July felt a little different to me. I thought it acted “toppy”. True, it did make several all-time record highs in the S&P 500 but then it fizzled and really didn’t go anywhere. In fact, the last trading day of the month, it broke hard to set a new low for the July. The daily range of the stock market and many futures markets expanded throughout July. The VIX, commonly known as “the fear index”, and is a measure of market volatility, even spiked up a few times during the month off a twenty year low. True, it did take things like the shooting down of a passenger plane in the Ukraine, the rise of the dangerous militant group ISIS in Iraq and Syria, near failure of one of Portugal’s largest banks, Banco Espirito, thousands of missiles being fired between Israel and Hamas, and Argentina defaulting on the interest payments on its bonds. Surely when we look back on this in years to come this will be thought of as the “period of great complacency” The American investors have decided that our government, the Fed and the great banks have this all figured out and there is nothing to worry about. I’m not so sure, but I’ve been a trader for 46 years and I do know that “markets can act irrationally longer than your equity can last”. So if you are not taking part in this bull market in stocks or, God forbid, you are short, it’s a costly proposition! I continue to believe that staying invested in the stock market with 20% of your investment capital in Managed Futures is the prudent position.
Survival Plan in July
Let’s take a look at what made money for the Survival Plan and what lost. The AG sector has been far and away the most successful for the Plan this year. Soy Beans exited a short position picking up nearly 3%. Corn ended July with an open short position profit of over 4%. Hogs are short with profits of nearly 2%. Sugar is short with better than a 2.5% profit. And the big winner is the Cotton with an open position profit of nearly 6%. So, what’s going on and why all the short positions in world commodities? The US$ is the world reserve currency, which means that all world commodities are priced in US$. So when the Dollar rises relative to other currencies that means the cost of commodities to other countries increases, resulting in lower demand and drives the price of the commodity down. So, all other things being equal a higher US$ drives the price of world commodities down. The UD$ bottomed out July 1 and went on a tear, nearly straight up for the entire month. The Dollar is finding support from stronger than expected economic data in the US including strong durable goods orders from June. Probably, most importantly, the Fed is committed to ending QE3 by October.
Tapering of Quantitative Easing
If inflation continues to hold above 2% it seems likely the Dovish Fed Chairwomen Yellen will be forced to raise rates sooner rather than later. At the same time industrial production in the EC and Japan is lack luster at best. Further, the fear of deflation has again reared its ugly head as CPI came in at +.4% y/y in the EC, the slowest pace in almost 5 years. Speculation is that both Japan and the EC will need to undertake further stimulus measures.
Near perfect growing conditions in the US has driven the price of both corn and beans to almost 4 year lows. Ending corn stocks are projected to be at a 13 year high in the US and a 15 year high globally. While exports worldwide are very strong, one of the world’s largest importer, China halted the import of shipment on concerns that the grain carried a genetically modified trait. Beans are pretty much the same story with an enormous crop estimated to leave ending stocks in the US at an 8 year high. Ending stocks worldwide are projected to be an all-time record. A supportive factor is that demand worldwide is extremely strong.
Hog prices had screamed to an all-time high in June at $1,339 / lb as the PED virus killed more than 8mln pigs since April. But July seemed to show that the worst is definitely over and hog weights coming to slaughter are at near record level. That’s what you would expect with the cheap feed grain. Lean hogs although volatile were on the defensive throughout July.
Rain in the southern US have lowered the area effected by drought conditions in cotton growing regions. The ending stocks for cotton are projected to be at a 6 year high. Further pressuring cotton prices is very weak demand worldwide. Chinese imports were down a massive -45% y/y for January through May. July saw Cotton prices hit an almost 5 year low.
Sugar is also a story of abundant supplies and slack demand. Even though drought in Brazil, the world’s largest sugar producer, negatively impacted production, 2014/15 global ending stocks will be a surplus for the 5th straight year. Sugar prices dropped to a 6 month low in July.
The other significant loss came in the very “whippy” and volatile Coffee market. This market tends to have a series of small losses followed by large outlier profits. Past performance is not necessarily indicative of future results. We have had 3 small loses in a row--- I’m ready for the “outlier”!
The only non-agricultural sector to post significant gains for the Survival Plan during July was in energies where the Nat Gas dropped like a stone. The Plan captured a 4.5% profit.
Unfortunately, it’s more of the same old story. The governments of the developed economies of the world want to deal with their massive sovereign debt and lagging economies through manipulating very low interest rates and pressuring their currencies to keep their goods and services attractive to the world. The result is financials and currencies trading in a very narrow range month after month with a dearth of trending markets. July saw loses in Aussie Dollar of over 2% and losses in the Yen of nearly 2.5%. The bright spot was the Euro Currency which carried a winning open short position of better than 2% at month end. Mario Draghi, President of the ECB may have to actually have to institute a quantitative easing program for the Euro Zone. Signs of possible deflation seem to call for action rather than his usual methodology of just “jaw boning” the Euro currency in one direction or the other.
The US Bonds and 10-year T-Notes are trapped between conflicting data. In the US better economic data indicated the Fed may raise rates sooner rather than later. But, in the Euro a probable move towards quantitative easing pressured the 10-year German bund to a record low 1.109%. The Survival Plan lost 2% on a short Bond position.
At the end of the day “the times they may be a changing”. Make sure your portfolio is properly balanced. Normal portfolio drift has most portfolios HEAVILY correlated to the stock market. Make sure that your portfolio has significant truly non-correlated alternative investments that can add stability and the opportunity to generate alpha in a stock market crisis.
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