Today is the Best Day of the Year to Buy

Today, the last trading day of 2022, on the close at 4 PM is hands down THE BEST TIME to BUY

• the SPY, 
• the QQQ, and, if you must, 
• the IWM.

Annual returns since 12/31/2000:

Source: finance.yahoo.com

This chart to me - as bad as today's headlines are - doesn't look so bad at all. Today's price (actually yesterday's 12/28/2022 close) looks right in line with the long term trend of nearly all three indexes. 

What to notice about this chart? 

• The QQQs immediately fell in 2001 and took approximately 10 years to recover their losses. Seven years later, the QQQs caught up with the SPY, took off, and just this year came back down to earth. 
• The IWM OUTPERFORMED the SPY and QQQ for 17 years! Since 2019, IWM has been significantly weaker than the others.
• Finally, investors have a down year to buy into. A rare occurrance with these stock market index ETFs.

Here are the numbers: 

2022's SPY 22% decline comes on the heels of last year's 25% increase.2019 and 2020 gains are still intact. The SPYs and QQQs had down years five times in the last 22 years! The QQQs do have a ways to go but they come off the heels of the 2019-2020 boom. And finally, I just don't see it for the IWM. Maybe the time for midcaps is past although I believe it WILL come back.

Bottom line: Its a GREAT time to BUY!

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

Bloomberg Index up 4%, Unleaded Gasoline down 9% in July

The Bloomberg Commodity Excess Return Index rose 4% in July 2022, while the energy index was up 11.5%, ags were down 2.7% and precious metals fell 2.2%. Year-to-date the numbers are not so sanguine with the overall index up 20% and energy still a huge up 57% year-to-date. 

 

Note that both ag and precious metals were down in July. With deep interest in oil and unleaded gasoline note that their prices are very close in lockstep with each other: The outlier is natural gas, a grim result of the Russian War on Ukraine. 

If nothing else, the so-called Great Inflation of 2022 is waning. With the biggest culprits oil and unleaded gas finally showing some break. Still war ravages natgas and pandemic is taking its toll as well.

Why the Bloomberg Commodity Index? Bloomberg is the industry standard for diversified commodity prices. Why the Excess Return Index? Excess return is pure futures price return with no additions for TBill interest. 

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

What to Buy?

Stocks are down, no doubt. Market wizards are all over the place these days predicting the S&P 500 up 40% to down 40%! They are probably BOTH right but assuredly WRONG in their timing. What to buy? Also assuredly, SPY and QQQ. Here are their annual returns since 2000.

SPY = SPDR S&P 500 ETF Trust and tracks the S&P 500 index.  

QQQ = Invesco QQQ Trust and tracks the NASDAQ-100 Index®.

2000 to 2002 were a bust for both indexes arguably on the heels of the dot com bust and 911. 2003 was a recovery year with both ETFs up sharply. QQQs up 50%!

Markets subsequently rose, sometimes barely and sometimes up nicely, until the bust in 2008! Market's fell to their 2002 levels. The stock market time machine went in reverse. 

But who knew the gears would shift in 2009 to erase the prior year losses! The following decade marked a period of unmatched growth, posing new highs almost every year, 2018 excepted. 

After all that, markets posted the three highest gains EVER from 2019 to 2021! This in spite? because of? worldwide Covid pandemic. 

And this year, as of Friday's 7/15/2022 close , we ARE down but really how much? Both the SPY and QQQ are still above their 2020 closes.

HOW will 2022 end? Up 40%? Down 40? No one knows. And let's stop pretending that someone does know.

What to buy now? 

"Now" was NOT in the title for this post because "Now" doesn't really matter. We buy, when we are flush, what history tells us will "outperform" the "other choices" over the long term. Outperformance = the indexes (SPY and QQQ) and other choices are "everything else".  Long-term means lifetimes, earnings years, family, education and retirement. 

For those with lots of cash (another word for underperforming investors), or the young, today's buy will take you back to the middle of last year. But, yes, buy now. 

When to sell? 

Sell ONLY when you need the cash or when you have to. Which brings us to our next fact. What we do know is that in 2022, for the first time in years, many retired investors will have to sell holdings to meet their RMD (Required Minimum Distribution) withdrawals at large losses. 

For the first time in our short memories, these withdrawals, marked at high 2021 year-end prices, will create losses AND high taxes. This is a double whammy from the deal we made to be IN the market and hold IRAs. Again, living through market declines is the price we pay for superior long-term performance. (Caveat: the government might change this but don't count on it.)

The stock market time machine marches on. The fundamentals of aging population demographics have not changed while Pandemic and War, the predicate causes of today's declines, will.

Why SPY and QQQ? These are the largest most liquid broad based stock index ETFs in the world. You can't buy indexes but almost anyone can buy these-almost at no cost. And, as spglobal.com will tell you, active managers cannot beat the S&P. WHY? That's a subject for another post. SPY is interchangeable with any large S&P 500 or total market tracking fund. Ditto for QQQ and Nasdaq 100 funds.  Finally, why cherry pick 2000 to the present? Cherry picking or not, the results and conclusions do not change over time-using start date 1970, 1945, 1900, 1800 or 1600 (Dutch and UK markets) or more... applicable results are the same.

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

Dow Theory

 The "Dow Theory" ascribed to Charles Dow, founder of the Wall St. Journal, in the late 1800s, is a somewhat vague model of the American economy but goes something like this. 

There are three parts to the economy: industry, transportation and utilities. 

Industry pays utilities for energy to build products and then pays transports to ship products to consumers who then pay industries as products are consumed. Demand for each part depends upon the other. Which comes first? The chicken or the egg? is a universal question.

Dow created three indexes to represent each sector: the Dow Jones Industrial Average, the Dow Jones Utility Average and the Dow Jones Transportation average (originally called "Rails"). Remember, this was before cars and trucking.

The monkey in the wrench here is "Inventory"! Meaning if sales fall, inventory will rise, then shipping will fall and then, finally, once factories reduce production, utilities will fall. A healthy economy will have stable to falling inventories (if factories produce what people want), rising transportation, booming factories and booming utilities-all reflected in the Dow Jones Averages. The basic idea is that it takes time for increased inventories at the sales counter to be reflected in reduced shipment, reduced production and lower utility sales. 

Let's look at these averages since 2000.

Compound Annual Growth Rate

How interesting! In 2000 utilities were still booming as the industrials fell and transport was roughly unchanged. Were factories overproducing? Were production costs too high? In 2001, utilities and transports corrected while factories continued falling. 2002 may have been a capitulation. Production collapsed, as did the utility average and transports took its hit too!

2003 was a big recovery year for all indexes. It looks like transports and utilities were the end of the economy's bullwhip.

Industrial growth continued at a lower pace for the next few years. Note that transports were the canary in the gold mine with 0% return in 2007. 

2008 walloped the markets with their largest collapse since the Great Depression. Oddly enough, there were no wars and no pandemics, just a true economic recessions that took all ships down. 

2009 was the start of an impressive decade of recovery and boom. The fact that transports fell in 2011 while industry grew may be a sign of the strong  inventory control during this period. The hiccup in 2018 may also be a sign of this strong control. Transports took the hit while industrials and utilities barely budged.

Today, the markets may FEEL a lot worse than they were, they appear to be struggling at inventory control. Transports are down over 20% as factories and even utilities struggle.

INDU = Dow Jones Industrial Average
TRAN = Dow Jones Transportation Average
UTIL = Dow Jones Utility Average

YTD as of 7/12/2022

Data Source: barchart.com

As bad as it feels, the economy as seen through these lenses is not very different than the recent past. The headlines may be blaring about "worst ever" but the numbers clearly don't show it. In 2000, it took three years for the markets to recover from the dot com crash and 911. Today-with pandemic and war-only time will tell. 

While Dow Jones Averages have many critics as price indexes and have been supplanted by S&P indexes and many others, they still ARE the most widely watched measures of the stock market and as such, merit our attention here. 

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

Worst Market Ever???

Is this the worst market ever? The worst economy ever? The worst inflation ever? Well, lets look at commodity prices and see. Let's look at the benchmark Bloomberg Commodity Index since inception in 1991 to 6/30/2022:

BCOM ER =Bloomberg Excess Return Commodity Index
Source: bloomberg.com

The index price is UP from a 10 year bear market but way closer to its low than its high. So, thats the commodity index. Let's look at energy. (The following charts are all Bloomberg Excess Return Sector indexes.)

This chart clearly shows the pain at the gas pump (up 64%!) but interestingly the crude oil price and, to a lesser extent the heating oil price, don't reflect this entire gain. If the feedstock, oil, is not up but the wholesale unleaded gas price is up, this implies that non-commodity factors are affecting prices at the pump.

Mainly these are transport and labor. But wages are not up this much (roughly up 5% this year) so we are left with the same answer for everything in 2022, its the supply disruptions from the non-economic external effects of the double whammy of Covid and a brutal war. 

What about food? 

A lot of the same picture. For the food we eat, agriculture in general and to a lesser extent, wheat, do NOT reflect high inflation. Soybeans, on the other hand, with Ukraine a major world producer DOES reflect food inflation and, of course, this is due to war.

What about livestock?

The wholesale cattle market, as high as it is, is trending LOWER. Pork and corn (mostly used for livestock feed) are near all-time LOWS! While social trends can account for some of these declines, the livestock markets have always been a nightmare of supply variation, storage and transport. Again, if supermarket prices are high, its NOT because of commodity and labor inflation. 

Finally let's look at the traditional measure of inflation, precious metals and, for comparison, industrial metals:

While up, neither is at all time highs. While precious metals "should" reflect price inflation and industrial metals "should" proxy for the economy, they look more in lockstep now than in 2011. Neither reflects worst inflation ever.

While headlines cry wolf, we may have to realize that today's prices are more reflective of external factors, pandemic and war, than true economic mailise. The economy is fundamentally a function of demographics - the first world demographics of increasing retirements and too few young to replace them has not changed. Pandemic and war, hopefully, will!

Why use Bloomberg Commodity Indexes? The Bloomberg Commodity Indexes are the world’s premier DIVERSIFIED commodity indexes. The S&P GSCI index is heavily weighted to energy. Why the Excess Return index? Excess return indexes measure pure commodity futures price returns without adding Treasury Bill interest rates which the “headline” Total Return indexes do.

And, why cherry pick the 1/2/1991 start date and 6/30/2022 end date? These are not cherry picked, they are the index inception date and the current quarter-end.  Finally, why use index prices and not actual prices? Each commodity has a different price measure, prices are indexed/normalized by Bloomberg for valid comparisons. 

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

Who Caused Energy Inflation?

Right now partisans are blaming Biden policies for reducing US oil supply causing high prices. Is this true? Here's US Oil Production:

Source: ARC Energy Charts dated 6/13/2022

Today, production is at its highest level since the mid-2020 lockdown price collapse. We have yet to recover to pre-pandemic levels but production has been rising for the last two years. 

What about demand, is US demand way up?

Source: ARC Energy Charts dated 6/13/2022

Well, we've recovered from lockdowns but US demand looks pretty stable to me. Probably demand SHOULD be higher and is holding back the US recovery. But in fact, this is not demand pull inflation. And this is the conundrum facing US policy makers. US energy policy is NOT the cause of the fantastic rise in energy prices.  What IS the culprit?

Other headlines have blamed US refineries for lower production.

Source: U.S. Energy Information Administration

Refinery production has hardly changed, if anything, its slightly higher for the last few weeks! It's not that. Its not refineries. 

Conclusions

We have to face that US, and maybe world, supply and demand, production and consumption, is NOT the culprit. The Sherlock Holmes maxim "when you have excluded the impossible, whatever remains must be the truth" begs the question, what remains?

First acknowledge inflation is NOT solely a US problem. Its WORLD prices that are rising. While we haven't excluded every possible explanation, the costs and complexity of the global energy value chain remains. Shipping, transport, storage, that is, supply chain disruptions may be the source of today's energy price inflation. The policies and causes of today's disruptions, mainly, pandemic and war, are topics for other posts.

Why ARC Energy Charts? They are industry standard energy information sources with better graphics than US Energy Information data. Both sources are easily accessible by anybody. Sources are 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

SPY Up 0.2% and QQQ Down 1.6% in May

While May was a mostly flat month for stocks and bonds, SPY and QQQ are down sharply year-to-date. 

Daily chart where 12/31/2021 = 1000

SPY = SPDR S&P 500 ETF Trust 

QQQ=Invesco QQQ Trust

BND = Vanguard Total Bond Market Index Fund

Source: Yahoo Finance.

SPY and BND have their worst Jan-May losses since inception (1993 and 2007, respectively). QQQ has its worst year-to-date loss since 2002 (1999 inception). BUT, half of all Jan-May declines, ended higher by their year-end.

What does any of this mean for individual investors? Not much! 

First, lets see the stock market time machine. Exactly how bad IS this decline, expecially in the face of outsized gains of recent years? 

Today's break, as bad as it is, only takes us back one year in the SPY, to the Covid recovery of June 2021; and, in QQQ, to April 2021.  How quickly will we recover to the year-end 2021 highs? No one knows. But all we know is history.

Next, for those who follow Bogle's admonition to "Stay the Course" through market declines, we have to recognize that market breaks are inevitible, and, in the end, market breaks are the price we pay to earn the highest long-term gains of anyone in the market. 

Why the SPY, QQQ and BND? Because anyone can BUY them. You cannot buy an index but these ETFs are constructed and, historically, match the return of the S&P 500, the Nasdaq 100 and the Total Bond Market index-the largest broadest and most popular indexes on the planet.  

Why NOT bitcoin? Two answers: for most people they don't understand it and they don't want it, for others, the complexity of creating and entrusting funds in a bitcoin wallet is a bridge too far, ignoring the fact that bitcoin is just a computer program with no intrinsic value. What about GBTC? The Grayscale Bitcoin Trust has been about the easiest way to own bitcoin, through your trusted broker, since its inception in 2015. But that begs the question WHY? Yes, GBTC has matched bitcoin's speculative gains, it is also matching the current decline.

This is yahoo.com data that anyone can access free. My excel spreadsheet (ETFs 20220602) 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

Commodities Up 1.4% in May - Smallest Gain of the Year

The well diversified Bloomberg Commodity Excess Return Index rose 1.4% in May, the smallest monthly gain of the year. Commodity sectors, though were much higher. And 28.1% was the highest ever Jan-May return in the history of the index going back to 1991.

Source: bloomberg.com

Looking at the above, we see gains concentrated in energy and agriculture. The war in Ukraine will keep the pressure on both of these sectors. Oddly enough, and despite headlines to the contrary, wholesale meat prices (livestock) and precious metals (gold and silver) are DOWN for the year. 

There is another contradiction, not shown here, that corporate profits, usually booming in time of inflation, may be pressured due to the odd Covid driven nature of the price pressures-mainly supply and labor bottlenecks. That is for another post.

So much for the past. What does the mixed message tell us, if anything about the future? If anything, we can look to the predicate causes - Covid and war - showing their effects. This may not be an economic problem, or much less of a problem if these causes go away. Will oil go to all time highs? Will food prices continue rising? Maybe, on both accounts, if the war gets much hotter and if pandemic (Covid AND monkeypox) spreads. 

In the alternate case, if either one or both - war and virus - cools off or goes away, commods can return to their deflationary equilibrium. 

Why the Bloomberg Commodity Index? Because it is a DIVERSIFIED index, not an essentially energy index like the S&P GSCI.  Why the "Excess Return" version of the index? Because it is a pure futures price index unlike the "Total Return" headline index which distorts commodity price returns by inexplicably including TBill interest earned on collateral. This is bloomberg.com index data. My excel 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

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.