Investing

Is Tesla Stock Grossly Overpriced?

Scott Buchanan1 Comment

One of the more polarizing topics in investing is the valuation of Tesla stock. Its peers among the Magnificent 7 big tech leaders sport price/earnings ratios mainly in the 30s. Those are high numbers, but growth stocks deserve high P/Es. A way to normalize for expected growth of earnings is to look at the Price/Earnings/Growth (PEG) ratio. This number is usually 1.5-2.0 for a well-regarded company. Anything much over 2 is considered overvalued.

Tesla’s forward P/E of about 270 is nearly ten times higher than peers. Its anticipated growth rate does not seem to justify this astronomical valuation, since its PEG of around 4-10 (depending on assumptions) is way higher than normal. This seems to be a case of the CEO’s personal charisma dazzling shareholders. There is always a new “story” coming out to keep the momentum going.

Tesla’s main actual business is selling cars, electric cars. It has done a pretty good job at this over the past decade, supported by massive government subsidies. With the phasing out of these subsidies by the U.S. and some other governments, and increasing competition from other electric carmakers, it seems unlikely that this business will grow exponentially. Ditto for its smallish ($10 billion revenue) business line of supplying large batteries for electric power storage. But to Tesla fans, that doesn’t really matter. Tesla is valued, not as a car company, but as an AI startup venture. Just over the horizon are driverless robo-taxis (whose full deployment keeps getting pushed back), and humanoid Optimus robots. The total addressable market numbers being bandied about for the robots are in the trillions of dollars.

Source: Wikipedia

From Musk’s latest conference call:

Optimus is Tesla’s bipedal humanoid robot that’s in development but not yet commercially deployed. Musk has previously said the robots will be so sophisticated that they can serve as factory workers or babysitters….“Optimus will be an incredible surgeon,” Musk said on Wednesday. He said that with Optimus and self driving, “you can actually create a world where there is no poverty, where everyone has access to the finest medical care.”

Given the state of Artificial General Intelligence, I remain skeptical that such a robot will be deployed in large numbers within the next five years. It is of course a mind-bending exercise to imagine a world where $50,000 robots could do anything humans can do. Would that be a world where there is “no poverty”, or a world where there is no wealth (apart from the robot owners)? Would there be a populist groundswell to nationalize the robots in order to socialize the android bounty? But I digress.

On the Seeking Alpha website, one can find various bearish articles with the self-explanatory titles of, for instance, Tesla: The Dream Factory On Wall Street, Tesla: Rallying On Robotaxi Hopium, and Tesla: Paying Software Multiples For A Car Business – Strong Sell . There are also bullish pieces, e.g. here,  here, and here.

Musk’s personal interaction with shares has propped up their value. He purchased about $1 billion in TSLA shares in September. This is chicken feed relative to its market cap and his net worth, but it apparently wowed TSLA fans, and popped the share price. What seems even more inexplicable is the favorable response to a proposed $1 trillion (!!) pay package for Elon. For him to be awarded this amount, Tesla under his watch would have to achieve hefty boosts both in physical production and in stock market capitalization. But… said package would be highly dilutive (like 12%) to existing shareholders, so, rationally they should give it thumbs down. However, it seems likely that said shareholders are so convinced of Musk’s value that they will approve this pay package on Nov 6, since he has hinted he might leave if he doesn’t get it.

Such is the Musk mystique that shareholders seem to feel that giving him an even greater stake in Tesla than he already has  will cause hundreds of billions of dollars of earnings appear from thin air. From the chatter I read from Wall Street professionals, they view all this as ridiculous magical thinking, yet they do not dare place bets against the Musk fanbase: the short interest in TSLA stock is only a modest 2.2%. Tesla is grossly overvalued, but it will likely remain that way as long as Elon remains and keeps spinning grand visions of the future.

Looking Ahead: Post-Powell Interest Rates

Zachary BartschLeave a comment

Jerome Powell’s term as Fed Chair ends in late May 2026. President Trump has said that he will nominate a new chair and the US senate will confirm them. It may take multiple nominations, but that’s the process. The new chair doesn’t govern monetary and interest rate policy all by their lonesome, however. They have to get most of the FOMC on board in order to make interest rate decisions. We all know that the president wants lower interest rates and there is uncertainty about the political independence of the next chair. What will actually happen once Jerome is out and his replacement is in?

The treasury markets can give us a hint. The yields on government debt tend to follow the federal funds rate closely (see below). So, we can use some simple logic to forecast the currently expected rates during the new Fed Chair’s first several months.

https://fred.stlouisfed.org/graph/?g=1NwVQ

Here’s the logic. As of October 16, the yield on the 6-month treasury was 3.79% and the yield on the 1-year treasury was 3.54%. If the market expectations are accurate, then holding the 1-year treasury to maturity should yield the same as the 6-month treasury purchased today and then another one purchased six months from now. The below diagram and equation provide the intuition and math.

Since the federal funds rate and US treasury yields closely track one another, we can deduce that the interest rates are expected to fall after 6 months. Specifically, rates will fall by the difference in the 6-month rates, or about 49.9 basis points (0.499%).  This cut is an expected value of course. Given that the cut is between a half and a zero percent, we can back out the market expectation of for a 0.5% vs 0.0% cut where α is the probability of the half-point cut.* Formally:

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Does Trump Weaken the US Dollar?

Zachary Bartsch2 Comments

Talk to some economists and they’ll tell you that exchange rates aren’t economically important. They say that exchange rates between countries are a reflection of supply and demand for one another’s stuff. So, at the macro, it’s a result and not a determinant of transnational economic activity.

For individual firms at the micro level, it’s the opposite. They don’t affect the exchange rate by their lonesome and are instead affected by it. If you have operations in a foreign country, then sudden changes to the exchange rate can cause your costs to be much higher or lower than you had anticipated. The same is true when you sell in a foreign country, but for revenues. This type of risk is called ‘exchange rate risk’ since it’s possible that none of the prices in either country changed and yet your investment returns change merely because of an appreciated currency.

Supply & Demand

Exchange rates are determined by supply and demand for currencies. Demand is driven by what people can do with a currency. If a country’s goods become more attractive, then demand for those goods rise and demand for the currency rises. After all, most retailers and wholesalers in the US require that you pay using US dollars. Importantly,  it’s not just manufacturing goods that drive demand for currency. Demand for services, real estate, and financial assets can also affect the supply and demand for currency. In fact, many foreigners  are specifically interested in stocks, bonds, US treasuries, and other investments. The more attractive all of those things are, the more demand there is for them.

Of course, the market for currency also includes suppliers. Who does that? Answer: Anyone who holds dollars and might buy something. Indeed, all buyers of goods or financial products are suppliers of their medium of exchange. In the US, we pay in dollars. Especially since 1972, suppliers have also included other central banks and governments. They treat the US currency as if it’s a reserve of value, such as gold, that can be depended upon if they need a valuable asset (hence the name, “Federal Reserve”). This is where the term ‘reserve currency’ comes from – not from the dollar-denominated prices of some internationally traded commodities. Though, that’s come to be an adopted meaning.  

Another major supplier of currency is the US central bank. It has the advantage of being able to print US dollars. But it doesn’t have an exchange rate policy. So, it’s not targeting a particular price of the US dollar versus any other currency. The Fed does engage in some international reserve lending, but it’s not for the purpose of supplying currency to foreign exchange markets.  

The US Exchange Rate in 2025

One of the reasons that the US has such popular financial assets is that we have highly developed financial markets and the rule of law. People trust that, regardless of the individual performance of an asset, the rules of the game are mostly known and evenly applied. For example, we have a process to follow when bond issuers default. So, our popularity is not merely because our assets have higher returns. Rather, US investment returns have dependably avoided political risk – relative to other countries anyway.

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Circular AI Deals Reminiscent of Disastrous Dot.Com Vendor Financing of the 1990s

Scott BuchananLeave a comment

Hey look, I just found a way to get infinite free electric power:

This sort of extension-cord-plugged-into-itself meme has shown up recently on the web to characterize a spate of circular financing deals in the AI space, largely involving OpenAI (parent of ChatGPT). Here is a graphic from Bloomberg which summarizes some of these activities:

Nvidia, which makes LOTS of money selling near-monopoly, in-demand GPU chips, has made investing commitments in customers or customers of their customers. Notably, Nvidia will invest up to $100 billion in Open AI, in order to help OpenAI increase their compute power. OpenAI in turn inked a $300 billion deal with Oracle, for building more data centers filled with Nvidia chips.  Such deals will certainly boost the sales of their chips (and make Nvidia even more money), but they also raise a number of concerns.

First, they make it seem like there is more demand for AI than there actually is. Short seller Jim Chanos recently asked, “[Don’t] you think it’s a bit odd that when the narrative is ‘demand for compute is infinite’, the sellers keep subsidizing the buyers?” To some extent, all this churn is just Nvidia recycling its own money, as opposed to new value being created.

Second, analysts point to the destabilizing effect of these sorts of “vendor financing” arrangements. Towards the end of the great dot.com boom in the late 1990’s, hardware vendors like Cisco were making gobs of money selling server capacity to internet service providers (ISPs). In order to help the ISPs build out even faster (and purchase even more Cisco hardware), Cisco loaned money to the ISPs. But when that boom busted, and the huge overbuild in internet capacity became (to everyone’s horror) apparent, the ISPs could not pay back those loans. QQQ lost 70% of its value. Twenty-five years later, Cisco stock price has never recovered its 2000 high.

Beside taking in cash investments, OpenAI is borrowing heavily to buy its compute capacity. Since OpenAI makes no money now (and in fact loses billions a year), and (like other AI ventures) will likely not make any money for several more years, and it is locked in competition with other deep-pocketed AI ventures, there is the possibility that it could pull down the whole house of cards, as happened in 2000.  Bernstein analyst Stacy Rasgon recently wrote, “[OpenAI CEO Sam Altman] has the power to crash the global economy for a decade or take us all to the promised land, and right now we don’t know which is in the cards.”

For the moment, nothing seems set to stop the tidal wave of spending on AI capabilities. Big tech is flush with cash, and is plowing it into data centers and program development. Everyone is starry-eyed with the enormous potential of AI to change, well, EVERYTHING (shades of 1999).

The financial incentives are gigantic. Big tech got big by establishing quasi-monopolies on services that consumers and businesses consider must-haves. (It is the quasi-monopoly aspect that enables the high profit margins).  And it is essential to establish dominance early on. Anyone can develop a word processor or spreadsheet that does what Word or Excel do, or a search engine that does what Google does, but Microsoft and Google got there first, and preferences are sticky. So, the big guys are spending wildly, as they salivate at the prospect of having the One AI to Rule Them All.

Even apart from achieving some new monopoly, the trillions of dollars spent on data center buildout are hoped to pay out one way or the other: “The data-center boom would become the foundation of the next tech cycle, letting Amazon, Microsoft, Google, and others rent out intelligence the way they rent cloud storage now. AI agents and custom models could form the basis of steady, high-margin subscription products.”

However, if in 2-3 years it turns out that actual monetization of AI continues to be elusive, as seems quite possible, there could be a Wile E. Coyote moment in the markets:

Economic Freedom of the World 2025

James Bailey1 Comment

The Fraser Institute released their latest report on the Economic Freedom of the World today, measuring economic policy in all countries as of 2023. They made this excellent Rosling-style graphic that sums up their data along with why it matters:

In short: almost every country with high economic freedom gets rich, and every country that gets rich either has high economic freedom or tons of oil. This rising tide of prosperity lifts all boats:

This greater prosperity that comes with economic freedom goes well beyond “just having more stuff”:

The full report, along with the underlying data going back to 1970, is here. The authors are doing great work and releasing it for free, so no complaints, but two additional things I’d like to see from them are a graphic showing which countries had the biggest changes in economic freedom since last year, and links to the underlying program used to create the above graphs so that readers could hover over each dot to identify the country (I suppose an independent blogger could do the first thing as easily as they could…).

FRDM is an ETF that invests in emerging markets with high economic freedom (I hold some), I imagine they will be rebalancing following the new report.

Leveraged Bullion and Mining Funds to Cash in on the Gold Bonanza

Scott BuchananLeave a comment

Stocks (e.g., S&P 500) are up 12.5 % year to date. That is pretty good for 9.5 months. But gold has been way better, up 40%:

Fans of gold cite various reasons for why its price should and must keep going up (out of control federal debt and associated money-printing, de-dollarization by non-Western nations, buying by central banks, etc.). I have no idea if that is true. But if it is, that raises the question in my mind:  for the limited amount of funds I have to invest in gold, can I get more bang for my investing bucks, assuming gold continues to rise?

It turns out the answer is yes.  A straightforward way is to buy into a fund which is 2X or 3X leveraged to the price of gold. If gold goes up 10%, then such a fund will go up 20% or 30%. Let’s see how two such funds have done this year, UGL (a large 2X gold fund) and a newer, smaller 3X fund, SHNY:

Holy derivatives, Batman, that leverage really works! With GLD (1X gold) up 40%, UGL was up 80% year to date, and 3X SHNY is up 120%. So, your $10,000 would have turned into $24,000. The mighty S&P500 (blue line) looks rather pitiful in comparison.

But wait, there’s more. Let’s consider gold “streamers”, like WPM (Wheaton Precious Metals) or FNV. They give money to mines in return for a share of the production at fixed, discounted prices, so their cash flow soars when gold prices rise. Year to date, FNV is up 73%, while WPM is up 91%.

And then there are the gold miners themselves. They tend to have fairly fixed breakeven costs of production, currently around $1200-1400/oz.  Again, their profit margin rockets upward when gold prices get far above their breakeven:

Source

GDX is a large fund of representative mining stocks. For icing on the cake, there are funds that are 2X (NUGT) or 3X (GDXU) leveraged to the price changes in mining stocks. The final chart here displays their year-to-date performance in all their glory:

The blue S&P 500 line is lost in the noise, and even the orange 40% GLD line is left in the dust. The 1X miner fund was up 108%, the 2X fund NUGT was up 276%, and the 3X GDXU was up 506%. Your $10,000 would have turned into $51,000.

Of course, what goes up fast will also come down fast, since leverage works both ways. For instance, from Oct 21 to Dec 30, 2024, gold was down a mere 4%, but WPM was down 15%, the 1X gold miner GDX was down 20%, and 3X GDXU down an eye-watering 54%. That means that your $10,000 turned into $4,600 in two months. Imagine watching that unfold, and not panic-selling at the bottom. Gold fell by more than half between 2011 and 2015. If it fell by even 20% (i.e., gave up half of this year’s gains), I could see a 3X miner fund losing over 90% of its value (just a guess).

One more twist to mention here is the “stacked” fund GDMN, which uses derivatives to be long 1X gold PLUS 1X gold miners. It is up 151% this year, which is nearly four times as much as gold. This fund seems to have a nice combination of decent leverage with moderate volatility. It has on average kept pace with the 2X miner fund NUGT, with shallower dips. NUGT has surged way ahead in the past two months as miner stock prices have gone nuts, but that is somewhat exceptional.

Disclaimer: As usual, nothing here should be considered advice to buy or sell any security.

Don’t Cut Rates

James Bailey3 Comments

The Federal Reserve will probably cut rates next week:

I can’t advise them on the complex politics of this, but based on the economics I think cutting would be a mistake. I see one good reason they want to cut: hiring is slow and apparently has been for a year. But that could be driven by falling labor supply rather than falling demand, and most other indicators suggest holding rates steady or even raising them.

Most importantly, inflation is currently well above their 2% target, 2.9% over the past year and a higher pace than that in August. Inflation expectations remain somewhat elevated. Real GDP growth was strong in Q2 and looks set to be strong in Q3 too, and NGDP growth is still well above trend.. The Conference Board’s measure of consumer confidence looks bad, but Michigan’s looks fine.

Financial conditions are loose, with stocks at all time highs and credit spreads low. Its only September and we’ve already seen more Initial Public Offerings than in any year since 2021 (when the last big bout of inflation kicked off):

Source: https://stockanalysis.com/ipos/statistics/

Crypto prices are back near all time highs and crypto is becoming more integrated into public stocks through bitcoin treasury companies and IPOs from Gemini and Figure.

The Taylor Rule provides a way of putting all this together into a concrete suggestion for interest rates. Some versions of the rule say rates are about on target, while others including my preferred Bernanke version suggest they should be closer to 6%. To me this is what the debate should be- do we keep rates steady or raise them? I see good arguments each way, but the case for a cut seems very weak.

I look forward to finding out in a year or two whether I or the FOMC is the crazy one here.

* The Usual Disclaimer, hopefully extra obvious in this case: These views are mine and I’m not speaking for any part of the Federal Reserve System.

Bears and Bulls Battle Over Nvidia Stock Price

Scott BuchananLeave a comment

Nvidia is a huge battleground stock – – some analysts predict its price will languish or crash, while others see it continuing its dramatic rise. It has become the world’s most valuable company by market capitalization.  Here I will summarize the arguments of one bear and one bull from the investing site Seeking Alpha.

In this corner…semi-bear Lawrence Fuller. I respect his opinions in general. While the macro prospects have turned him more cautious in the past few months, for the past three years or so he has been relentlessly and correctly bullish (again based on macro), when many other voices were muttering doom/gloom.  

Fuller’s article is titled Losing Speed On The AI Superhighway. This dramatic chart supports the case that NVDA is overvalued:

This chart shows that the stock value of Nvidia has soared past the value of the entire UK stock exchange or the entire value of US energy companies. Fuller reminds us of the parallel with Cisco in 2000. Back then, Cisco was a key supplier of gateway technology for all the companies scrambling to get into this hot new thing called the internet. Cisco valuation went to the moon, then crashed and burned when the mania around the internet subsided to a more sober set of applications. Cisco lost over 70% of its value in a year, and still has not regained the share price it had 25 years ago:

… [Nvidia] is riding a cycle in which investment becomes overinvestment, because that is what we do in every business cycle. It happened in the late 1990s and it will happen again this time.

…there are innumerable startups of all kinds, as well as existing companies, venturing into AI in a scramble to compete for any slice of market share. This is a huge source of Nvidia’s growth as the beating heart of the industry, similar to how Cisco Systems exploded during the internet infrastructure boom. Inevitably, there will be winners and losers. There will be far more losers than winners. When the losers go out of business or are acquired, Nvidia’s customer base will shrink and so will their revenue and earnings growth rates. That is what happened during the internet infrastructure booms of the late 1990s.

Fuller doesn’t quite say Nvidia is overvalued, just that it’s P/E is unlikely to expand further, hence any further stock price increases will have to be produced the old-fashioned way, by actual earnings growth. There are more bearish views than Fuller’s, I chose his because it was measured.

And on behalf of the bulls, here is noob Weebler Finance, telling us that Nvidia Will Never Be This Cheap Again: The AI Revolution Has Just Begun:

AI adoption isn’t happening in a single sequence; it’s actually unfolding across multiple industries and use cases simultaneously. Because of these parallel market build-outs, hyper-scalers, sovereign AI, enterprises, robotics, and physical AI are all independently contributing to the infrastructure surge.

…Overall, I believe there are clear signs that indicate current spending on AI infrastructure is similar to the early innings of prior technology buildouts like the internet or cloud computing. In both those cases, the first waves of investment were primarily about laying the foundation, while true value creation and exponential growth came years later as applications multiplied and usage scaled.

As a pure picks and shovels play, Nvidia stands to capture the lion’s share of this foundational build-out because its GPUs, networking systems, and software ecosystem have become the de facto standard for accelerated computing. Its GPUs lead in raw performance, energy efficiency, and scalability. We clearly see this with the GB300 delivering 50x per-token efficiency following its launch. Its networking stack has become indispensable, with the Spectrum-X Ethernet already hitting a $10b annualized run rate and NVLink enabling scaling beyond PCIe limits. Above all, Nvidia clearly shows a combined stack advantage, which positions it to become the dominant utility provider of AI compute.

… I believe that Nvidia at its current price of ~$182, is remarkably cheap given the value it offers. Add to this the strong secular tailwinds the company faces and its picks-and-shovels positioning, and the value proposition becomes all the more undeniable.

My view: Out of sheer FOMO, I hold a little NVDA stock directly, and much more by participating in various funds (e.g. QQQ, SPY), nearly all of which hold a bunch of NVDA.  I have hedged some by selling puts and covered calls that net me about 20% in twelve months, even if stock price does not go up.   Nvidia P/E (~ 40) is on the high side, but not really when considering the growth rate of the company. It seems to me that the bulk of the AI spend is by the four AI “hyperscalers” (Google, Meta, Amazon, Microsoft). They make bazillions of dollars on their regular (non-AI) businesses, and so they have plenty of money to burn in purchasing Nvidia chips. If they ever slow their spend, it’s time to reconsider Nvidia stock. But there should be plenty of warning of that, probably no near time crisis: last time I checked, Nvidia production was sold out for a full year ahead of time. I have no doubt that their sales revenue will continue to increase. But earnings will depend on how long they can continue to command their stupendous c. 50% net profit margin (if this were an oil company, imagine the howls of “price gouging”).

As usual, nothing here should be considered advice to buy or sell any security.

The Little Book of Active Investing

James Bailey3 Comments

Wiley publishes a series of short books on investing called “Little Books, Big Profits“.

I previously reviewed Vanguard founder John Bogle’s entry in this series, the Little Book of Common Sense Investing:

I can sum it up at much less than book length: the best investment advice for almost everyone is to buy and hold a diversified, low-fee fund that tracks an index like the S&P 500.

You could call Bogle’s book the Little Book of Passive Investing; but most of the rest of the series could be the Little Books of Active Investing. That is certainly the case for Joel Greenblatt’s entry, The Little Book that Beats the Market (or its 2010 update, The Little Book that Still Beats the Market).

Greenblatt offers his own twist on value investing that emphasizes just two value metrics- earnings yield (basically P/E) and return on capital (return on assets). The idea is to blend them, finding the cheapest of the high-quality companies. The specific formula is to pick stocks with a return on assets of at least 25%, then select the ~30 stocks with the lowest P/E ratio among those (excluding utilities, financials, and foreign stocks), then hold them for a year before repeating the process. He shows that this idea performed very well from 1988 to 2010.

How has it done since? He still maintains the website, https://www.magicformulainvesting.com, that gives updated stock screens to implement his formula, which is nice. But the site doesn’t offer updated performance data, and his company (Gotham Capital) offers no ETF to implement the book’s strategy for you despite offering 3 other ETFs, which suggests that Greenblatt has lost confidence in the strategy. Here are the top current top stocks according to his site (using the default minimum market cap):

Perhaps this is worthwhile as an initial screen, but I wouldn’t simply buy these stocks even if you trust Greenblatt’s book. When I started looking them up, I found the very first two stocks I checked had negative GAAP earnings over the past year, meaning Greenblatt’s formula wouldn’t be picking them if it used correct data. The site does at least have a good disclaimer:

“Magic Formula” is a term used to describe the investment strategy explained in The Little Book That Beats the Market. There is nothing “magical” about the formula, and the use of the formula does not guarantee performance or investment success.

Greenblatt’s Little Book is a quick and easy way to learn a bit about value investing, but I think Bogle’s Little Book has the better advice.

Are Managed Futures Funds Worth Including In Your Portfolio?

Scott BuchananLeave a comment

Back in February, 2023 I wrote an enthusiastic plug for including managed futures funds in an investment portfolio. That was based on several observations. First, bonds have become often positively correlated with stocks, so the traditional 60/40 stock/bond portfolio provides less hedging or diversification than earlier. Second, during the long grinding bear market of Jan-Oct 2022, managed futures funds shot up, nicely hedging stocks. Third, I had only recently discovered managed futures, so they were for me a shiny new toy.

Managed futures funds hold both long and short positions in futures contracts for a variety of commodities (e.g., oil, gas, metals, cattle), stocks (e.g., domestic vs. international) and other financial instruments (domestic and foreign bonds, currencies, interest rates, etc.). Fund managers usually base their positioning on momentum or trend-following. Historical data shows that if a commodity moves up steadily for, say, a month, there is greater than 50% odds that it will continue moving up for some additional time.  If the fund’s positioning is correct, it makes money the next week or month. If it is incorrect, the fund loses money.

Historically, a good managed futures fund will trade fairly flat or slightly up during a stock bull phase, then step up to give positive return during a stock bear market, to counter the drop in equities prices. We can see below how that worked for managed future (MF) ETF KMLM around 2022. It rose slowly in 2021, then fell back at the end of the year. However, in Jan-Oct 2022 while stocks (and bonds) were painfully grinding down to a 22% loss, KMLM ripped higher by a huge 40%. That seems like a great hedge:

KMLM quickly gave back those gains, for reasons we will discuss. But if you had been consistently rebalancing your portfolio, you would have captured much of those gains.

This sort of performance is why some advisors recommend moving much of your non-stock holdings out of bonds and into managed futures. What’s not to like here?

It turns out that MF funds struggle if there are not fairly long, strong trends in commodity prices. If trends reverse quickly, and then reverse again, then the fund’s positions will lose money over and over. We can see this in the above plot. The story for most of 2022 was interest rates going up and up and up. MF funds were rock stars as they rode that trend for many months. But there was a surprising break in futures trends in November, 2022, as markets suddenly started pricing in an early Fed pivot towards easing in 2023, and so interest rates rose, and bonds and the U.S. dollar tumbled. All the managed futures funds took a sharp hit Nov-Dec 2022. KMLM then went roughly flat for 2023; other MF funds fared worse.

So far, so good. However, it seems like there has been a sea change in futures markets. Before around 2010 or so, there is reason to believe that much of the futures price action was driven by the underlying commodities themselves. For instance, cattle or soybean producers wanted to protect themselves against changes in cattle or soy prices, and so they would buy or sell futures to lock in prices say eight months out. In these situations, there would naturally and normally be months-long trends in futures prices. Wall Street took the other side of those trades. But now it seems to me (can’t give proof reference) that it’s speculators on both sides of the trades, leading to trade algos constantly trying to outguess each other and higher volatility.

For whatever reason, normal trend-following MF has been a bad business for the past 2 years. Here is a continuation of the chart above, showing mid Aug 2023- mid Aug 2025 for KMLM (orange line) compared to S&P 500 stocks (blue line):

The scale is not shown here, but KMLM lost some 30% of its value during that time period. That is NOT the kind of hedge you want to hold.

So, should we forget about MF funds? It turns out that not all MF funds perform the same. My informal research suggests that most MF funds have performed similar to KMLM in the past two years (=abysmally). Since my 2023 article, though, (a) an improved MF ETF (CTA) has appeared, and (b) I became aware of a superior MF fund (AQMNX) of the old-style (non-ETF) mutual fund format. Below is a 3-year chart of KMLM, SP500, and the ETF CTA and the mutual fund AQMNX:

We can see that both the new contenders are up instead of down in the past three years, and both were uncorrelated enough to SP500 to cushion the big Feb-April stock drawdown this year. They handily outperformed bonds (e.g. BND, not shown) during this time period.

There are fundamental reasons why those two funds would behave differently than plain vanilla trend-following KMLM. CTA adds a factor called carry (which I will not try to define) to its algo, and also takes large concentrated bets. AQMNX draws on the very sophisticated quantitative resources of the AQM fund family. It also takes long/short bets on equities (e.g. S&P 500 index), which are not in KMLM.  AQMNX is not available through all brokerages (it is at Fidelity).

As the months roll by and plain stocks soar effortlessly up and up, it may seem pointless to consider any portfolio hedges. But for those who value diversification, these two funds may merit consider consideration. (As usual, nothing here should be considered advice to buy or sell any security).