EMMA program was down 1.1% in December and down 1.95% in 2017 overall.
2017 was marked by choppiness in our focus commodities. Although we lean more heavily on fundamentals we tend to end up in positions that rely on trends. When prices seesaw due to events or weak fundamental drivers, we experience whipsaws from sharp reversals. Natural gas in December demonstrated this in a dramatic way. We positioned ourselves long in November in anticipation of a cold winter, but shifting weather and production forecast caused the front month contract to plunge ~20% then rebound to the starting point when La Nina showed up. We cut losses for risk control but performance suffered.
2018 is supposed to be a year for commodity bulls – Goldman Sachs, Bloomberg among others have written extensively about it. The opening salvo came from palladium, copper, then oil in the 2nd half of 2017. With projected weakness in the dollar and robust global growth it is hard to make a bear case. 2018 is also supposed to be the year inflation shows up, which raises the prospects of higher interest rates and the dreaded yield curve flattening/inversion.
Equity markets are in full-on risk-on mode. FOMO is back. Despite what many say, the old-age of bull market is not a good indicator of an imminent breakdown. Repeated sector rotation and the breadth of rally in the stock market lend credence to the strength. The liquidity unleashed by QEs does not appear to be exhausted just yet. Everyone knows this cannot last but this is the classic scenario of when the music is playing, you gotta keep dancing (bitcoin anyone?).
In normal times, the erratic nature of Trump’s decisions and his tumultuous working relationship with Congress would have added much volatility to markets. Efficient markets are built upon perfect information, and that is obviously less true today than recent times. But this is no normal time, and when volatility returns, triggered either by war, rising interest rates, or China etc it’s likely to be ferocious. The stock market at this point has a highly asymmetrical risk profile: incremental reward; large potential downside. Beware the boiling frog problem, or the turkey problem, whatever it is called.
At Kronos, we profit from price volatility, and we are direction-agnostic. From a trading standpoint, 2017 was disappointing but 2018 should be packed with big macro and trends, up or down. We look forward to it.
If you're interested in our performance data and disclosure documents please reply to this email.
Jeff Lee, CTA