Checking Out ARKK

Some smart people recommend a fairly recent and interesting actively managed ETF, ARK Innovation ETF.

Source: Yahoo Finance adjusted close for symbols ARKK, SPY and QQQ.

ARKK began trading in October 2014 and has a currently reported $1.6B in assets. ARK's investment objective is to actively invest in what they call "disruptive innovation". Check out this link to see how the fund describes itself. We will check out the fund performance to see how symbol ARKK stands against tradeable index ETFs, SPY and QQQ!

To start, the chart above looks pretty good but something happened in 2017 thru mid-2018. Let's look at the annual and rolling returns as of today's 5/29/2019 close:

Prior to 2017 and after 2018, ARKK looks like a decent actively managed ETF.  The spectacular gains occurred in the 2017-2018 period. Whether these gains can be replicated in future years is the question. Recent volatility is hurting ARKK much more than even the Nasdaq (as represented in the QQQs). The following table highlights this risk.

All of the above are based on continuously compounded rates of return. 

Unlike Mueller, this blog does make judgement calls and the call on ARKK is its an excellent high-risk performer (3 or 4 times the risk of the SPY and Qs). While slow out of the gate, it made spectacular gains mid-stride, with recent performance in line with the benchmarks.

I think its a great choice for high-risk non-index active investors. An index it is not.

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 Tariff Tantrim

As I write this post, the temperature of tariff threats rise (as well as other threats) and the Dow Jones Industrial Average falls! The Dow is having another Tariff Tantrum!

Source: Yahoo Finance, yahoo.com.

The Dow as of approximately 3 PM this afternoon is down 378 points or 1.72% at 25398, nearly 500 points below last Friday's near 25900 close. Likewise, broader indexes are all down in lockstep: The S&P 500 down 1.7%, NASDAQ down 2.05%, the Russell 2000 down 2.28% and the Bloomberg Commodity Index is off a mere 1.25%!

Despite the strum and drang of today's headlines, this again may be ANOTHER chance to BUY THE DIP! The year-to-date performance, in my view, paints a much prettier picture.

S&P500 = S&P 500 Stock Index

DJIA=Dow Jones Industrial Average

NASDQ=NASDAQ Composite Index

RU2000=Russell 2000 Index

BCOM=Bloomberg Commodity Index

Source: Yahoo Finance historical "adjusted close".

Even with this most recent down move, about -5% month-to-date, indexes are still up +8% to +13% for the year.  The exception being the commodity index which is only +1.5% up on the year. 

It's still too early, if ever, to give up on the market!

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 Time Machine

As stated many times before here and everywhere, commodity prices are low. Some are near their all-time lows as recorded by the major commodity indexes. Below are key Bloomberg Commodity Sub-Indexes since their 1991 inception.

Source: Bloomberg.com.

Energy and Agriculture are both at their all-time lows! Commodities are trading BELOW their 1991 levels!

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.

Commodities and Tariffs

Commodities and tariffs don't mix. Actually prosperity and tariffs don't mix. These lessons have been known since the time of Adam Smith and Ricardo and they were relearned at enormous pain and suffering through two world wars and the Great Depression.  That they have to be relearned again TODAY is just one sign of how far we have fallen.

Commodity prices have been depressed. At first due to advances in technology and resulting supply surplus and today due to the threats and now reality of punishing tariffs.

2019 has seen continuing declines in agricultural markets:

BCOM = Bloomberg Commodity Excess Return Index; AG, Energy and Pr. Metals = respective Bloomberg sub-indexes.
The above are continuously compounded rates of return.

Source: Bloomberg.com downloaded 5/11/2019.

Who is going to stand up to this? Who is going to stand for the 75 years of peace and prosperity of the "Pax Americana" post-war markets, borders and world trade? One party cannot do it. Both parties, all of America, must together restore values that brought peace and prosperity to the nation and the world.

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.

Day 838

May 8th is day 838 since Trump's inauguration on January 20, 2017. There have been a number of tweets and news stories about a new Gallup poll showing Trump for the first time with a higher approval rating than Obama at the same time in his term.

Polling is an inexact science just as markets are an inexact science but I always like to see how the stock market averages fared when I read stories like this. Let's fully understand that one person IS NEVER responsible for market and economic performance.  So here goes, in my view, an objective comparison of two very different periods in recent history:

Market Data Source: Yahoo Finance Historical Adjusted Closes.

GDP Source:  https://apps.bea.gov/iTable/iTable.cfm?ReqID=19&step=4&isuri=1&1921=flatfiles

Unemployment Source: https://data.bls.gov/pdq/SurveyOutputServlet

All downloaded 5/9/2019.

First observation is these 16-month returns for the stock indexes are all fantastic. How fantastic for each period is obvious.

One COULD say we are not fair to Trump because the markets have been breaking the last few days, well even using the all time highs, 26828.93 for the Dow and 2945.83 for the S&P, Trump gains stand roughly the same at 30% and 26%, respectively.

Most recent quarterly GDP improved 7 points under Obama. Trump had much higher GDP. The unemployment rate got worse 16 months into Obama's term and is near record lows for Trump.

This post, like Mueller, will not make a verdict on any President. Either way we have to acknowledge that markets and economics are not dependent upon one person.

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.

Option Write Strategies versus the S&P 500

A tweet today https://twitter.com/SeekingAlpha/status/1125749396069466112 posted some big "risk-adjusted" numbers for the CBOE CallWrite (BMX) and PutWrite (PUT) Indices versus the S&P 500. I think this tweet is misleading.

First of all, the concept of risk adjusted returns in my opinion does not really work for the great majority of investors. Only very few professional investors, if any, get paid on risk-adjusted returns. Risk-adjusted returns DO make underperforming investments look better!

Back to option writing. Let's compare the returns of call and put option writing to the S&P. Note that investors cannot own the BMX and PUT indexes. You CAN buy ETFs that track these indexes. Two "major" ETFs that do this are the Invesco S&P 500 BuyWrite ETF (symbol PBP) and the WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW). In fairness, I'll compare these to the SPDR S&P 500 ETF (SPY), an S&P 500 index you CAN buy.

In theory, call writing should beat the S&P during flat and slightly bearish periods. Put writing should beat the S&P during flat and slightly bullish periods.

This long-term chart compares the PBP from its 12/27/07 inception with the SPY:

The PUTW started trading 12/25/2016 and the shorter term comps are shown below:

Source: Yahoo Finance "Historical Prices" "Adj close" downloaded 5/7/2019.

Aside from the obvious long and short term outperformance of the SPY over the PBP and PUTW, we have to acknowledge the writes seem to have fewer drawdowns. Ok, but how do you cherry pick just those periods that have flat to near-flat returns? Short answer: you don't. You can't so I see no way to justify this admittedly peculiar investment strategy.

One last note. There are those who will say that professional money managers do not reflect their stated strategies and further claim that individual investors can easily beat mutual funds and ETFs. My answer: the reason pros apparently underperform individual investors is because pros report audited results!   

For the spreadsheets supporting this post just ask.  

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.

Long Stock versus Synthetic Long Stock

Options give traders options. Suppose you want to buy a stock or ETF, your choices are buy for cash, buy on margin or, using options, enter a synthetic long position. Let's look at a recent example to see what I mean.

For this comparison, I'll randomly pick Planet Fitness stock (PLNT) which is a decent stock and has no dividend. This comparison omits commissions for simplicity.

Source: Yahoo Finance "Historical Prices" "Adj close".

Example 1: 12/28/2018 Buy 100 PLNT at $52.58 for $5,258 Cash
Example 2: 12/28/2018 Buy 100 PLNT on 50% margin. $2,629 Cash + $2629 Margin
Example 3: 12/28/2018 Buy 1 PLNT May 17, 2019 $52.50 Call at $6.15 and Sell 1 PLNT May 17, 2019 $52.50 put at $5.50. $65 Cost + $1575* margin required to short the put = $1640.

Example 1 is a simple buy for cash costing your account $5,258.
Example 2 saves cash by using borrowed funds to buy the stock.
Example 3 is called a synthetic long. It uses options to create the same result as a long position.

Lets see how it works out so far this year. Yesterday, 5/3/2019, PLNT closed at $72.67

Example 1 is up $2009 or +38.21% year-to-date.
Example 2 is also up $2009 but it incurred, for this example, a margin cost of $70.10** for a net profit of $1938.90. This net gain divided by the investment (1938.9/2629) equals a 73.75% return!
Example 3 closed at $2025 ($2035 call - $10 put). This was a return of 123.47%!!

Of course if PLNT were to fall, the results would be very different. Example 1 risks your total investment. Example 2 risks your investment plus interest plus margin calls. Example 3 risks your tiny investment plus the risk of being put the stock, i.e. buying the stock at a very unfavorable price, vastly increasing your investment.

*The margin to sell an at-the-money put is roughly 30% of the strike price. $5250 x .3 = $1575. See your broker for your margin requirement.
**Suppose the annual margin rate is 8%. $2629 x .08 /3 = $70.10 is the cost of the loan for 4 months.

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.