Performance Update: 09/30/2023

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October 2, 2023 by Matt McCracken

Performance Report: 09/30/2023

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All performance data for our strategies is net of all fees and expenses.  All performance data for indexes or other securities is from sources we believe to be reliable.  All data is as of 09/30/2023.

Investment Strategy

MAP: Full ($500k+)

MAP: Mini

MAP: ETP (<150k)

S&P 500 Index2

Balanced (AOM)2

Global Balanced2

Aug Return




























I'll start off by recapping my Conclusion from last month.  

I think it's worth noting that we are entering the most perilous seasonal period for stocks.  If bad things happen, they tend to happen in September and October.  I always get a kick out of studies completed by my industry that quote the long-term harm that is done if "an investor misses the 10 best days of the market."  What these studies fail to point out is the 10 best days invariably come right after the 10 worst days.  

In a world that is experiencing unprecedented monetary inflation, it's important to maintain some exposure but I believe staying clear of high-beta, cyclical stocks is a prudent strategy for the time being.  I will continue to provide exposure to securities that support my thesis but will only emphasize those that should have little correlation to the S&P 500.   

So the markets behaved predictably during this perilous season and while we avoided big losses by avoiding cyclical stocks and bonds, I did retain some exposure to non-cyclical, defensive securities that fell as well.  Thus, while equity and bond investors saw sizeable losses this month, we experienced mild losses. 

The bond space is where the real carnage took place.  Just a few days ago, a client posed a rhetorical question to me, which was, "Whatever happened to the notion that bonds are supposed to protect portfolios when stocks go down?"  Bonds have decidedly not protected equity investors during this cycle, actually, they have done quite the opposite by further contributing to losses.  TLT, the largest long-term US Treasury fund, fell 8.2% in September and capped off Q3 with a 13.8% slide.  These are big numbers for an asset class that is supposed to provide some buoyance for equity portfolios during rough times.

By avoiding the carnage in the bond space and moving away from cyclical stocks, my strategies continued to widen their margin of outperformance on a risk-adjusted basis.  The third quarter was profitable for us as sizeable gains in July were larger than our modest losses in September and August.  My Full-sized strategy has delivered returns that are nearly four times that of AOM, our primary benchmark, since inception. 

I'd like to address what is becoming the sizeable outperformance of my Full-size MAP strategy.  The only difference in exposure between my Full-size strategy and my other two is commodity futures exposure.  My Full-size strategy which is comprised of accounts in excess of $500k is able to invest in various contracts that are simply too large for my other two strategies.  A single commodity, orange juice (OJ), has been largely responsible for this year's performance disparity.  OJ is a large contract which was $32k when I first bought it and is now sitting at $52k.  The gains in OJ contracts have contributed 2.6% of the YTD returns in my Full-size strategy but, unfortunately, my other two strategies have not participated in these gains.  

My Mini-sized MAP Strategy participates in smaller commodity contracts, mostly mini-sized contracts (thus the name).  Unfortunately, there is not a mini-sized contract for OJ.  The ETP MAP  strategy is for accounts less than $150,000 that cannot trade futures contracts and are limited to Exchange-Traded Products (ETPs) for commodity exposure.  On the equity side, all exposure is identical across all three of my fully managed strategies.  

I realize that this is frustrating for my smaller accounts and I long for the ability to provide everyone with equitable exposure.  My goal in starting my advisory firm was to allow investors of all sizes to access capital markets in a profitable way regardless of where equity and bond markets go.  

While my smaller accounts have not participated in OJ, I am confident that the same price action OJ has experienced this year will take place in other commodities that you do have exposure to.  OJ is a small market and thus it's difficult for the FED to manipulate.  Further, there is a real possibility that there will be an OJ shortage this year or next which could bankrupt any funds going short the commodity.  So while the FED is busy shorting the likes of corn and sugar depressing the price well below where market forces would otherwise price these commodities, the FED is limited in how it can manipulate OJ.   Just as the physical market for OJ is demanding much higher prices, the physical market for corn and sugar will eventually do the same.  This I have no doubt.  And all of you will participate in corn and sugar as well as other commodities such as soybeans, oil, and natural gas.  The following are excerpts from an article that appeared on this week titled "Veteran Investor David Roach Has a Contrarian Call on Grain Prices, says Prices Will Soar", which supports my thesis:  

Grain prices have been in a freefall of late as investors bet on a resurgence of supply from the U.S., Russia and Ukrain - but veteran strategist David Roache disagrees....Roche expects a 13- 15% annual increase in wheat prices over the next two years.

His comments come as wheat prices remain down around 29% year-to-date and at their lowest levels since September 2020, with short positions - bets that prices will fall - recently hitting a three-month high.

You can read the entire article by clicking on the above link.  I want to primarily focus on the issue of the elevated short positions.  As my 2023 Investment Thesis states, every short position will eventually have to be closed.  The shorts can close or "cover" their position in cash if the market permits it.  But technically, they are obligated to cover by providing the underlying commodity.  If there is a shortage, or the threat of a shortage, then the holders of short positions, which are sitting in swanky, high-rent offices in Chicago, New York, and Connecticut, will have to provide the market with real wheat, sugar, and corn, not their paper derivatives.  How in the world will Wall Street bankers and hedge fund managers, who have never set foot on a farm and likely never had a spec of dirt under their fingernails, deliver these commodities?  The short answer is they simply cannot.  But they are legally obligated to do so.  If and when the market demands delivery of the physical product that they are contractually obligated to provide, prices for these contracts will go exponentially higher.  

The gains experienced in OJ this year will pale in comparison to what will happen when the massive naked shorts are eventually exposed.  As I've said all along, I cannot estimate the timetable but I know it's an eventuality that must take place.  The physical market always wins over the paper market.  The paper market has pushed wheat prices to less than half of what they were when Russia initially invaded Ukraine.  Since then, the Chinese economy has opened up increasing the demand for food while farmers in the Western Hemisphere have experienced some of the harshest weather in the past three decades thus negatively impacting supplies.  When demand goes up and supply goes down, prices must go up. 

I imagine I'm practically the only investment adviser west of Pensacola, FL that identified the rally in OJ prices this year.  And I can say with certainty, that the same supply/demand dynamics will eventually drive prices in all agricultural commodities.  My confidence is not based on a crystal ball, various technical indicators, or in-depth financial analysis, it's based simply on good old-fashioned supply and demand.  Currently, the paper supply of ag commodities is far greater than the physical supply which is currently driving prices lower but that will change.  When it does, all my clients will participate in a meaningful way.    

Market Update

The third quarter ended with a thud for equity and bond investors.  Given that equity markets failed to eclipse their previous highs, technically, the bear market that started in 2022 is still intact and the trend is still down.   Along those lines, there was one development in September that bears mentioning.  

Equity markets finally started to price yield-oriented equities according to the DOW THEORY.  DOW THEORY states that all securities should be priced relative to the yield on risk-free US Treasuries.  Thus, when the risk-free rate goes up, the future income from equities must be discounted accordingly meaning prices go down.  In the first half of 2023, securities such as REITS (IYR), utility stocks (IDU), and hi-yield bonds rallied as if US Treasury yields were still priced with a "zero-handle" (less than 1% yield). This was an absurd development.  Prices for these securities had never traded at such an incredibly low premium.  Junk bonds were one sector I mentioned in my update last month:   

Junk bonds have continued to defy all odds.  HYG, the largest junk bond ETF, experienced a mild gain in August despite both equities and risk-free bonds declining in value.  I have no idea who is happily buying junk bonds yielding 6% when they can get 5.25% risk-free but somebody apparently is.  

IYR fell 8.4% while IDU fell 6.0%, both in excess of the S&P 500.  Historically, these sectors are considered safehavens and trade with less volatility than the S&P 500.  But that was not the case in September which means the market is starting to price equity yields relative to risk-free US Treasury yields.    HYG only fell 2.1% in September but it did break through a strong level of support so further declines may be in store.    

Historically, the September/October timeframe is when equity markets experience significant changes in trend.  The 2008 Financial crisis started the prior year in October of 2007.  The post-9/11 crash took place in late September.  Both of these bear markets also saw significant bottoms in October.  The dot-bomb bear market was resolved in October of 2002.  The Financial Crisis saw significant capitulation in October of 2008 even if the bear market technically continued into the following March.   The 1998 Asian Crisis was resolved in October.  The 1987 Black Monday Crash was resolved in October.  Going back to the 1960s and 1970's, both major bear markets across these decades were concluded in the month of October, October of 1967, and then October of 1974.  Even the 1929 and 1931 crashes took place in October.  October has proven that it can be a pivotal month and thus I'll be acutely alert in the coming weeks.  


On many occasions, I've pointed out that every stock bear market for the past 100+ years has started, peaked, or been resolved according to a 7-year cycle.  And this 7-year cycle dates back 3500 years.  The fact that equity markets failed to eclipse new highs in 2023 means the bear market that started in 2022 is still valid.  While 2008 was a significant bear market, it was relatively brief only lasting 18 months.  If the stock market bottomed in October of 2022, it would be the second shortest on record.  The shortest bear market ever was the 1987 Black Monday crash which only lasted 3 months.  Most bear markets last 2.5 - 3 years.  So the question is, was 2022 a short and shallow bear market or merely the beginning of something more significant?    

I believe the price destruction in the equity markets last year was simply a matter of sector rotation out of equities and into bonds and not a result of the traditional forces that cause bear markets.  After all, last year was the first time investors could obtain a decent yield in over a decade.  Investors jumped at the opportunity to lock in long-term gains in their equity portfolio to pick up a 5% guaranteed yield.  The usual suspects that cause equity prices to go down are recessions and liquidity events and neither of those were apparent last year.  

What if there is a recession in the US?  How much price destruction would take place now that bonds are a viable alternative?  What if banks start seeing red in their loan portfolio as they have in their bond portfolio?  This is a scenario that our nation's banks have never faced where both bonds and loans are in the red.  There are major headwinds for our economy.  Can credit continue to expand or has it reached terminal velocity?  Our economy is dependent on two things, expanding credit and exporting inflation.  If either of these are jeopardized, then the stock market could get really dicey.  

We know the FED is going to continue to print money and a disproportionate amount of that money will invariably be directed at propping up financial markets. While the economy may experience headwinds, the FED's propensity to print to infinity will perpetually supply a tailwind to the market's back.  So as we enter the season for inflection points, it's critical I remain vigilant as opposing forces play "tug-of-war" with equity prices.  

Outside of equities, I know physical commodity markets will overpower paper markets at some point.  And when that time comes, we will experience significant gains.  When and how it happens is truly a mystery to me but it will happen.      

As always, please do not hesitate to call me at 512-553-5151 if I can be of assistance. 


Matt McCracken   

1) Inception date of 4/30/2019

2) All benchmark prices are obtained through the Yahoo!Finance website.  S&P 500 Index is calculated using the index price.  AOM is the iShares Core Moderate Allocation ETF.  Global Balanced is calculated using a 40% allocation to the S&P 500, a 40% allocation to BND, and a 20% allocation to IEFA.

3) VORR is our "Value over Risk Ratio":  Calculated by taking the total return divided by the sum total of all negative months.  Ideally, the ratio represents how much loss an investor has to endure to get X gain.  A negative RORR score implies there is more risk in the investment than return.