Welcome to the monthly summary of the Dynamic Alpha Macro Fund (DYMIX). This October, we continued to capitalize on our dual-strategy approach, which blends the robustness of a fundamental global macro strategy with the steady performance of a U.S. equities portfolio. Crafted with a meticulous focus on risk management, this combination embodies our pursuit of generating “Dynamic Alpha” in the face of volatile market dynamics.
Our overall allocation this month continues with approximately 50% directed towards U.S. Equity ETFs, with the balance invested in a global macro futures strategy and short-term fixed income. With the global macro strategy in play, we’ve achieved long/short exposure across varied and non-correlated markets, from metals like gold and silver to diverse currencies, commodities, and financial indices.
To dive deeper into the specifics and our macro-observations, especially our recent venture into the crude oil market, continue reading below. From historical insights to supply-demand analysis, this update offers a comprehensive view of our investment strategies and market outlook.
Thank you for being part of the Dynamic Alpha journey. We are committed to keeping you informed and ensuring our strategies align with the ever-evolving financial landscape. With that in mind, as always, if you have any questions, feel free to contact us at info@DynamicWG.com.
Dynamic Alpha Macro Fund
S&P 500 TOTAL RETURN INDEX
Gross Expense Ratio is 1.99%.
* Fund inception was 7/31/2023. Performance is as of 10/31/2023. Performance data shown represents past performance and is not a guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Updated performance information and daily net asset value per share (“NAV”) is available at no cost by calling toll-free 1-833-462-6433.
In the past, we’ve spoken at length about our views on bonds, equities, and gold. So, while we will touch on those briefly before closing this letter, we’ll spend more time on a new position that we initiated mid-month before closing it in late October: long crude oil. Even though the position is no longer in the portfolio, we follow the oil market closely and plan on continuing to invest in this market in the future actively. What follows is a quick primer on the oil market before we discuss our recent trade and our bigger-picture views.
Looking at the oil market is timely due to the outbreak of war in the Middle East. Let’s start with a quick historical context before we break apart the supply and demand for oil today.
Oil was $3/barrel in the early 1970s. The combination of the 1973 Arab oil embargo and the 1979 energy crisis in the wake of the Iranian revolution sent oil to close to $40/barrel by the end of the decade. The price increased by over 10x in a classic “super cycle.”
After a period of more muted prices in the 1980s and 1990s, the price of oil went from $20 in 1999 to $140 in 2008 – increasing by 7x in another super cycle. Instead of a supply-driven bull market as in the 1970s, this was a demand-pull bull market driven by China’s rapid urbanization and development.
In more recent history, after twice hitting a low of ~$35/barrel in 2016 and again in 2021, the price of oil reached $120 in the wake of Russia’s invasion of Ukraine and sits at $81 as we type this letter. The key question for investors is: can oil go up 5x or 10x to a range of $200-$400/barrel in a new, third super cycle? We have an opinion; we’ll return to this question later in the update.
Global supply is roughly 101 million barrels/day, split 40% from OPEC+ countries (the Middle East producers & Russia, plus a few other marginal suppliers such as Angola and Mexico) and 60% from non-OPEC producers (United States, Canada, China, Brazil, and others).
Almost all global supply growth comes from a handful of West Texas counties in the Permian Basin, which is starting to show signs of exhaustion. Other key producing basins in the U.S. (the Bakken and Eagle Ford) peaked years ago and have flatlined in their production.
Finally, it’s important to note that unlike the 2007-2008 time period, when global spare capacity was very low, and there were genuine concerns of “peak oil” supply, today, OPEC+ countries are intentionally holding 4-6 million barrels/day of spare capacity off the market to elevate the global price of oil and allow them to meet their budgetary needs (particularly in the case of Saudi Arabia).
Global demand is also roughly 101 million barrels/day. Unlike global supply – which can be accurately modeled on a country-by-country basis, with detailed projections of spare capacity by oil field – demand is largely guesswork.
During a garden variety recession, like 2001, demand may flatline but doesn’t drop much. During a rare, deep recession, like 2008, demand outright drops.
Adding to the complication of understanding demand is estimating when green investments in new energy technologies and a shift to electric vehicles will cause peak oil demand. To give you a sense of how wide the analyst communities’ thoughts are here, one of our research vendors sees global peak oil demand occurring in the next year or two and a steady erosion of oil usage with a long tail in the decades ahead. Another analyst we follow sees global oil usage increasing year-over-year for a few decades to come and a total oil market of over 200 million barrels/day in the year 2050. With the analyst community split to the point that you can drive the proverbial truck through their demand forecasts, it’s important to have our own opinion on what drives oil supply & demand and devise an approach to trading oil over the course of this decade.
Our Oil Trading Approach
Short-term: War in the Middle East
Let’s quickly address the long oil trade that we placed in early October and which we closed near the end of the month. While economic outcomes are inherently uncertain, our overall assessment of the global economy is that we are set for a hard economic landing, an outcome at odds with the “soft landing” narrative that has become prevalent. Our base case was, therefore, somewhat bearish on oil, given that a recession could easily negate the 20% rally that oil has had from July 2023 – September 2023, a rally driven by OPEC+ supply cuts.
The outbreak of war in Israel allowed us to put on a defined-risk, tactical trade. Our calculus was that oil would not move much based on any military action by Israel to go after Hamas. But any escalation in the region that directly involved war between the U.S. / Israel against Iran, whether that led to the closure of the Strait of Hormuz or otherwise, had the potential to send oil spiking above $100 very quickly. The trade was worth putting on despite being a low-probability event. We closed the trade ahead of our risk point, as the price action was weak and didn’t reflect the scenario of a wider conflict.
Long-term: Grinding Bull Market Driven by Lack of CapEx
Our long-term view on oil (next 3-5 years) is one where a lack of Capital Expenditure (CapEx) by most large oil companies – and a desire by those companies to return free cash flow to shareholders – will lead to a grinding bull market in oil for years to come.
We do not believe that oil can sustainably reach $300 or $400/barrel. That seems unrealistic, as demand destruction will kick in and decrease prices. We currently do not subscribe to the view of an imminent third grand super cycle in oil prices, acknowledging that market conditions can fluctuate and defy expectations. Instead, we foresee a more muted bull market in oil that grinds to perhaps $150-200, driven by the lack of CapEx previously mentioned, a resolve by OPEC producers to balance their budgets with higher oil prices, and a lack of global supply growth ex-OPEC as U.S. shales finally tap out.
We firmly believe that the demand side of the equation will support such a move over a multi-year period: oil is irreplaceable. It goes into everything we wear, live in, and use as a society, from plastics to makeup to medicine to housing and transportation. Light-duty cars and trucks only account for 20-25% of oil demand. Even if this demand segment were to drop precipitously, global growth in emerging markets such as India could ensure an increasing demand for oil, at least for the next decade or two.
Therefore, as we look past any coming recession, our investment view is bullish crude oil, just less so than the super cycle folks. Our analysis may lead us to consider establishing a long position in oil futures next year; however, our decision will depend on a continuous assessment of the market’s evolving dynamics.
We continue to expect a hard-landing recession. Our short Nasdaq 100 and long gold positions contributed the most to our October performance. Our long position in 2-year Treasuries treaded water but could be poised to increase in value in the months ahead. Our current market assessment suggests the possibility of ending Fed interest rate hikes and potential cuts; however, these projections are subject to change based on future economic data and market developments. In fact, we believe that rate cuts will likely need to be deeper and more aggressive than many think as the lagged impact of Fed rate hikes continues to catch up with small businesses, commercial real estate, and the bottom half of U.S. consumers.
As always, we continue to be nimble, and if the data and/or our views change, we can pivot our positioning and find other trades within the 40+ markets we have available. This is also why we maintain a strategic allocation to U.S. equities in our overall fund strategy, balancing a buy-and-hold approach with active global macro long/short positions.
OUR GLOBAL MACRO LONG/SHORT INVESTMENT UNIVERSE
E-mini S&P 500 NASDAQ E-MINI Nikkei 225 Russell 2000 e-mini MSCI EAFE Index MSCI EM Index
Crude oil Natural gas NY Harbor ULSD RBOB Gasoline
An investor should consider the investment objectives, risks, charges, and expenses of the Dynamic Alpha Macro Fund carefully before investing. The Fund and summary prospectus contain this and other information about the Fund and should be read carefully before investing. To obtain a prospectus, please call 1-833-462-6433 or access online @ https://regdocs.blugiant.com/dynamic-alpha-macro/
The views, opinions, or advice contained above are solely those of the author and do not necessarily reflect those of Ceros Financial Services LLC or its affiliates. The strategies and/or investments referenced may not be appropriate for all investors, as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
All investment strategies and investments involve the risk of loss. Nothing within this communication constitutes financial, legal, tax, or other advice, nor should any investment or strategy be undertaken without fully understanding all the risks associated with such an investment or strategy.
Ceros Financial Services, Inc., member FINRA/SIPC, serves as a distributor of the funds and is a commonly held affiliate of Advisors Preferred. Advisors Preferred and Ceros are not affiliated with the funds’ subadvisor. Dynamic Wealth Group serves as the subadvisor to the Dynamic Alpha Macro Fund.
The performance figures reported are historical and should not be taken as an indication of future performance. Investment in the financial markets involves risk, and there is always the potential of losing money when investing in securities.
The views expressed about market trends, including opinions on bonds, equities, gold, and the crude oil market, are based on current market conditions and are subject to change without notice. These views should not be construed as a recommendation for any specific investment or financial strategy.
Discussions of supply and demand, including historical context and future forecasts, involve estimates and assumptions that are subject to significant uncertainties. Actual future conditions (including oil supply, demand, and prices) may vary markedly from the analysis presented.
The commentary regarding our trading approach and investment views, including short-term trading outcomes and long-term market predictions, represents the opinions of our investment team at the time of writing. They are not a promise or guarantee of future investment strategies or performance.
Our economic outlook, including predictions of a hard-landing recession and its impact on investments such as Nasdaq 100, gold positions, and U.S. Treasuries, is speculative and should not be relied upon for making investment decisions. Economic conditions are complex and can be affected by various unforeseen factors.