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Macro Trading vs SP500 1997-September 2009

A lot is made of relative returns and how one strategy or fund does against the SP500.  While not the best benchmark for something like Global Macro it is nonetheless the benchmark that everyone is most familiar with and that is used the most on CNBC and in magazines.  So how does global macro stack up to the SP500?

The chart below shows how $1000 invested in the SP500 and the Barclays Global Macro Index would have done for YTD for 2009.  As you can see the SP500 while getting off to a rocky start is now leading the macro index by 9.68% so far.  While the performance of the SP500 has been impressive the other side of the story is that to get the 18.04% return in the SP500 you first had to go through a -19.56% drawdown in January and February to get it.  Contrast that to the Global Macro Index where you had a -2.06% drawdown and a 6.63% return YTD.  Yeah you are outperforming with the SP500 but the volatility has been huge. (click on chart to enlarge)

Barclays Global Macro Index vs SP500 2009 YTD

barclays-global-macro-index-vs-sp500-2009-ytd

Of course nine months is not usually the best representation of a strategy.  Going from 1997 to the end of September 2009, how has the SP500 done in absolute and relative terms?  Since 1997 the SP500 has given a total return of 42.70% and a CAGR of 3.07%.  The Global Macro Index on the other hand has delivered a total return of 237.91% in the same time and a CAGR of 10.92%.  Looking at the chart below you can see that while the SP500 has periods of serious out performance, over time it has lagged in a big way. (click on chart to enlarge)

Barclays Global Macro Index vs SP500 1997-September 2009

barclays-global-macro-index-vs-sp500-1997-september-2009-1

Not only has the SP500 lagged in total return but when looking at the risk taken to achieve the anemic 42.7% you really have to step back and rethink a long only equity approach.  In fact if you have been in a SP500 index fund since 1997 we excuse you to go bang your head against the wall for a few minutes.  Once you are back look at the chart below of the drawdowns that you had to endure to get that awesome 42.7% total return.  Yes, you see two drawdowns over -45% each.  In 2002 we were down -46.28% and in early 2009 we were down -52.56%.  All this for a return that was not much better then sitting in T-Bills. (click on chart to enlarge)

SP500 Drawdown 1997-September 2009

sp500-drawdown-1997-2009

Looking at the same chart for the Global Macro Index below we can see that the drawdowns are far lower and shorter in duration.  In fact the worst drawdown that we have seen so far is -6.42% in October 2008 and right now we are at new equity highs while the SP500 is still -31.78% below its highs.(click on chart to enlarge)

Barclays Global Macro Index Drawdown 1997-September 2009

barclays-global-macro-index-drawdowns-1997-september-2009

Does this mean that everyone should go out and invest all their money in global macro and buy our weekly global macro newsletter?  No, on the first and yes on the latter.   All kidding aside what this does show is the fallacy of long only equity investing.  While being 100% invested in equities is great when they are moving higher you get absolutely crushed when things come crashing down.  In global macro you are not beholden to the possibility of equity risk premia but instead are able to look for the best risk to reward opportunities out there in any asset class.  This includes stocks, bonds, commodities, currencies, and more.  This flexibility to go where the best opportunities are enables the global macro investor to outperform not in any given year but in a full market cycle.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are a global macro research company and are therefore a bit biased in our investment views.

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EWY South Korea ETF

One of our current positions is EWY the South Korean ETF. We went long a few weeks ago in our model portfolio based on the trend, valuation, and economic characteristics of South Korean stocks.

EWY-South Korea ETF

ewy

Another factor that got us into EWY was the increasing number of Asian countries that have been coming up in our global stock model. Our global stock model looks at technical, economic, fundamental, and sentiment indicators to help find foreign stock indexes that meet our risk to reward criteria.

Apparently we are not the only ones to have found an opportunity in South Korea as the Oracle himself WarrenB apparently is getting long some South Korean stocks as well.

In order to catch our trades in foreign stocks as well as other asset classes like US stocks, bonds, currencies, and commodities then sign up for a quarterly or annual subscription to The Macro Trader weekly newsletter with frequent intra-week updates.

Happy Trading,

Dave@TheMacroTrader.com

GLD Gold ETF and SLV Silver ETF

We were long precious metals coming into 2009 as gold, silver, and even platinum were climbing higher.  Eventually we got stopped out as the group consolidated for the next three months.  The last two weeks gold and silver have been able to breakout of the consolidation and is once again in an uptrend.  We went long in out model portfolio last week and are currently looking to add to our position if the trend continues.

GLD Gold ETF

gld-gold-etf

SLV Silver ETF

slv-silver-etf

In order to catch our trades in precious metals as well as other asset classes like stocks, bonds, currencies, and other commodities then sign up for a quarterly or annual subscription to The Macro Trader weekly newsletter with frequent intra-week updates.

Happy Trading,

Dave@TheMacroTrader.com

Is Global Trade Heating Up? Or Is It Just Leveling Out?

One of the best indicators to see how the global economy is doing is to just look at the CRB index. While we don’t expect it to be hitting new highs anytime soon, it would be nice to see it moving up at least a little. Instead as you can see in the chart below it has only managed to find some type of bottom. If it’s “The Bottom” or just “A Bottom” is besides the point for now. It is enough to see that it is not trending up.

CRB Index

crb

Another good indicator to look at to gauge the strength of the global economy is that of the Baltic Dry Index. Over the last couple of weeks we have seen many blogs and other market commentators mention that the index has been climbing. Of course what they fail to mention is that if you look at the longer term chart of the index, it is still down significantly and it makes the recent rally look insignificant.

Baltic Dry Index-Short Term

bdi

Baltic Dry Index-Long Term

bdi2

Needless to say we think that many commentators are getting ahead of themselves in saying that the economy has bottomed. In fact the vast majority of the economic indicators that we follow are still pointing straight down, without any “green shoots” characteristics. Until we can get some historically reliable indicators pointing to a bottom and/or a rebound we will be cautious as capital preservation is our first priority.

Happy Trading,

Dave@TheMacroTrader.com

P.S. If you are getting value out of our posts, you can do us a favor by linking to us with your site or blog and mentioning The Macro Trader to any of your friends that trade.

Oil, Rig Counts, and Contango

In our subscriber letter this week one of the topics that we discussed was the production destruction as seen in the rig count data provided by BHI-Baker Hughes. They provide weekly oil rig data for the United States and Canada and Monthly numbers for international data.

So what do the numbers show? Well in the United States and Canada the rig count has come down 57% from the highs seen in 9/1/08. This has taken the rig count back to the levels seen in 2002.

US and Canada Rig Count

us-canada-rig-count

Internationally the situation is not quite as bad, but it is still bad. Rig counts worldwide have dropped off 35% and we are back to levels not seen since 2004.

International Rig Count Data

international-rig-count

After looking at these charts it would seem logical to say that oil is going up as production levels are down so much. Long term this is probably right but in the short and even medium term there are a few major issues that have to be dealt with before oil can have another large bull run.

The main problem is what is referred to as the output gap. The output gap basically says that there is a gap between what we are producing and what we are able to produce. While a small gap almost always is existent right now it is very large. Until the economy actually starts to pick up some steam this gap will remain wide. As the economy produces less and less the need for commodities continues to decline.

This drop in demand for commodities has started to slow but it is still dropping. As we showed a few days ago in our post on port data, world shipping data and therefore world trade has dropped off a cliff.

LA and Long Beach Port Data

ports-of-lb-la-data

Until indicators like the Baltic Dry Index and port data start to turn up, oil and other commodities will have a hard time climbing back anywhere near $100 a barrel let alone the $150 we saw almost a year ago.

Another thing that continues to put pressure on oil is the extreme contango that we have seen this year. Contango in the futures market is when the near month contract is selling at a discount to the farther out contracts.

While a bit of contango is not unusal we have had some extreme readings this year. In fact at one point you could have bought oil in the cash market and by selling the contract six months out you would have locked in a 25% return minus the storage costs.

Over the past few months however the spread has narrowed but is still high enough to cause speculators to build up supply until it is time to deliver. Right now contango is at 10% from the June to September. This means that you could be buying oil now and lock in a 10% return. Until the premium is brought down closer to storage costs there will be a lot of artificial demand which depresses prices and makes it hard for oil to go up in a big way.

4-Month Contango Curve

contango

So until demand picks up and contango comes down we will likely not see a large sustained move up in oil. That being said there are and will be many trading opportunities to the long and short side, but we feel as though a long term bull move is still a ways off.

Happy Trading,

The Macro Trader

Dave@TheMacroTrader.com

P.S. If you are getting value out of our posts, you can do us a favor by linking to us with your site or blog and mentioning The Macro Trader to any of your friends that trade.