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Next Equity Crisis: Timing And Cause Not Knowable

We really appreciate questions as we learn what is important to our followers/clients/readers.

Here is a question recently posed: "I know this is essentially a brokerage employee talking their company's book, but I still have a question for Worldwide Futures Systems. Nobody that I have read so far on Seeking Alpha has addressed this question. What would trigger a major correction? The collapse of inter-bank lending triggered the last recession. That surely wouldn't happen again because there seems to be plenty of cash available."

And here is a full response….

Yes, we are commodities brokers. I am also a CFA and held to high standards.

So, whether you like dealing with brokers or not, I believe that the greatest expertise in managed futures will primarily rest with commodities brokers. Having dealt with many RIAs, directly and through clients, I strongly feel that most of them do not understand managed futures; many RIAs tend to lump managed futures together with commodities indices; managed futures funds; commodities ETFs. In fact, these investment vehicles are hugely different in construction, purpose, historical performance, fee structure, etc. A simple way for an investor to understand this is to call various RIAs and ask them to differentiate these products and then compare their responses to what I have written in detailed form as to actual differences.

Managed Futures: Fact vs. Media's Fiction Part1

Managed Futures: Fact vs. Media's Fiction Part 2

My company does not have a "book"; we are not money managers; my company sells /brokers third party CTA products or third party trading systems for lease. As CTAs or trading systems are not load funds with high entrance fees and as our clients are not locked up in a fund, we believe our interests are aligned with our clients' long term interests.

Managed futures can be a stand-alone product and a very successful one too. Its long term ROR is almost identical to the S&P 500 but is a far less risky investment historically. The largest drawdown of the benchmark Barclay CTA Index is much lower at -15.66 compared to -44% in the stock market. The index's volatility is lower and the standard deviation of monthly returns is lower. However, most investors use managed futures as a hedge against a stock crisis. Managed futures uniquely have zero correlation to the S&P but have consistently gone negatively correlated to the stock index in a market crisis. The Barclay Managed Futures Index made money in 1987, 2001 and 2008. You can't say that for long/short stock programs or hedge fund indexes.

Further, as we do not know of any better way to mitigate risk than managed futures (and past performance is not an indicator of future results…), we promote their inclusion in a portfolio. We are similar to many other commodities brokers in that we offer many of the same CTAs and trading systems but we consider ourselves unique in that 1) the members of our firm have great and extensive individual and collective experience in money management and commodities 2) we offer a few truly unique trading systems; 3) beyond that we actually understand the asset space that is incredibly misunderstood and we aim for very good execution.

As to the next crisis trigger….we do not try to nail what the trigger will be or when/timing of the trigger. We have a perspective that clients will not be able to figure this out and even if figured out, they will not act upon their beliefs…either too painful to act whilst the bull market is still intact, or too painful to act in isolation (outside the investment herd), or too painful to take capital gains and pay taxes, etc…. The law if inertia is powerful for those equity investors in the market since 2009.

Writing what might be the next crisis trigger makes good reading material and might drive investors into a money managers "book." But we prefer to take clients who want to adopt a long term risk mitigation strategy for their portfolio; we try to offer neither greed nor fear as that does not make a long term good relationship. We try to stir investors out of their complacency that what has gone on in equity markets for five years will not continue forever.

I look back on my years in the money management business and cannot see a pattern of predictability or prophecy behind each of the major crises… 1987 crash came out of nowhere… the war in Kuwait came out of nowhere…Long Term Capital funding came out of nowhere…9/11 was surely not foreseen…. The mortgage crisis was long written about by a few now well-known analysts but then relatively unknown professionals; it was ignored until it happened. Even as the debacle was coming into full force, the broad investment community did not understand implications and it was thought to be contain-able.

So what next crisis? The EURO should have collapsed a long time ago… But for Germany, the entire federation would have collapsed. Can't help but think that it could be a war as many a war has started a crisis and there are many wars on the back burner. It might be the FED's retreat from QE.

All that we really know is that we don't know what it will be or when but that we can take steps that can potentially mitigate the equity fall. All we really know is that investors without a crisis strategy are playing a game against the statistical odds…kind of' like having won in Vegas for the past six trips and expecting that win rate to continue ad infinitum.

I hope that answers the question. And please ask more!

Best regards,

Jeannette Showalter, CFA


Follow @RohnShowalter

Risk Disclosure:

This material has been prepared by a sales or trading employee or agent or associated persons of Postrock Brokerage, LLC and is, or is in the nature of, a solicitation. This material is not a research report prepared by Postrock's Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.


The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Postrock Brokerage, LLC believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

Worldwide Futures Systems is a registered branch office and dba of Postrock Brokerage, LLC [NFA ID: 0413763]