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Are you getting paid 5% interest in your Futures account? Buy T-Bills

June 11, 2007

While some may say money makes the world go around - I would argue it may be interest that is more important. You're either earning interest and making money on your money or owing interest and spending money on your money.

As investors, most of us expect to have our money be making money through interest on our investments. I sure do, and it has become rather commonplace to see unused cash balances at stock brokers swept into money market funds which pay a reasonable interest rate.

But how many of you are earning interest on your funds held at a futures broker?

I would venture to guess that many of you have been told that futures accounts don't pay interest, and have your money sitting there only increasing due to trading gains, with no interest gained at all. It is true that futures accounts generally don't pay interest - but it is one of those half truths my mother used to warn me about. The real truth is that while the account itself can't pay interest - you can purchase a T-Bill in the account which earns interest.

For all those within ear shot - let me repeat that. You can purchase a T-Bill in your futures account and earn interest (currently around 5% annually) on your trading capital. You're either with a broker who has been honest and told you this, or you're not and it may be time for a change (call Attain at 800.311.1145).

Why is this not advertised and more widely talked about in the futures industry? Just follow the money. The clearing firms earn the interest on your money when you don't, then share a portion of that interest back to the broker. It is a large portion of a clearing firm's revenues, and with rates climbing the way they are - a nice paycheck for the brokers as well. Nobody wants to spoil the golden goose, and Attain is likely to get booed and hissed by the brokerage community for writing it up in a newsletter.

But we have long recommended investors purchase T-Bills to gain that extra 5% per year, and will continue to do so - as we believe you should make the interest on your money - not us.

How do Treasury Bills work?

Well, first of all - Treasury bills, or T-bills, are short term government debt obligations (meaning bonds). The government issues them every week to cover short term shortages in their cash flow, following the scary logic of you can always pay it back later. Investors lend the government the money for 1 to 6 months, and the government pays the investors back what they lent them, plus interest when the time is up.

The bills are sold at a discount from their face value, meaning you might pay $49,000 for a 180 day, $50,000 T-Bill on January 1st 1st. In 180 days, or roughly six months later on July 1st - the bill matures and you would be paid the full $50,000. The $1,000 difference between the purchase price and face value is the interest you earned.

Now here's the good part for futures traders - the T-Bill can be used as margin. So you don't need to just buy a T-Bill for the amount of funds not being used for margin - you can purchase up to the full account value, and the clearing firm posts the T-Bill to the exchange on your behalf as margin. The clearing firms build in a little buffer for themselves as a risk precaution, and only allow around 90% of the T-Bill's face value to be used as margin, but that's plenty enough for most investors purposes.

Attain recommends holding 80% of your total account value in T-Bills. This allows for the account to go through its normal fluctuations without having to "bust" the T-Bill and cover margin requirements or because there is not enough cash in the account. "Busting" a T-Bill is little more than selling it back before it matures, which costs a little extra in fees - but you do get back the purchase price plus any accrued interest up to that point.

As an example, if you have a $100K account, and buy an $80K T-Bill at the discount price of $78,000, you would have roughly $22,000 in cash left in the account. If the CTA or trading system you're invested in had a drawdown which reduced your cash balance below zero, the T-Bill would have to be busted to bring the cash balance back into positive territory.

One downside to holding T-Bills in your futures account is that the clearing firms have made it nearly impossible for you to read your statements accurately when you hold a T-Bill. They list the Bill's face value, even though the actual value is the purchase price, plus any accrued interest to that date - and they don't include any of the T-Bill's value in your liquidating value or cash balance. For first time buyers of T-Bills, its as if they lost $50,000 in the day following the purchase of the T-Bill - as the totals they are used to looking at don't reflect it.

And one other important note for those investors having their accounts professionally managed. You don't want to purchase a T-Bill in the account the advisor in managing. The interest earned will increase the value of that account, and you don't need to be paying the advisor 20% of the profits due to interest, just pay him or her on the profits due to their trading.

Attain solves this by holding an investors total cash balance in a master account, then purchasing T-Bills in that account and allocating out to CTAs through related sub accounts.

So why not earn an extra 4% -5% on your account balance. They don't require huge accounts to do so - anything above $30,000 or so is a good starting place. T-bills can be used as margin, they can be busted in a day's notice and turned liquid, and they are considered to be the most secure and safe investment in the world. In short - start using your money to make money - start holding T-Bills in your futures account.

-Walter Gallwas

PS - If you're asking what if I hold my account in Euros? Unfortunately T-Bills must be purchased in US dollars, but for large investors with balances of $1 Million or more - Attain has secured clearing arrangements in which Euro Bunds or Bobls can be held in the account in the same manner as US T-Bills.

IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.

Feature | Week In Review | Chart of the Week |

Chart of the Week

Feature | Week In Review | Chart of the Week |

The Week in Review: Stocks Fall as Interest Rates on the Rise

***Overview***

Stocks pulled back from near record highs last week after a surprise interest rate hike by New Zealand which pushed the Kiwi’s interest rate up to 8%. Once again inflation was cited as the key concern and the reactionary stock selling spilled over into the European and US marketplace. Traders are now speculating that the Fed is more likely to raise rates than cut them as previously speculated. For the week SP futures fell -2.06%, NASDAQ futures were down -1.26%, and Dow futures fell -1.94%. In small cap trading Russell 2000 futures closed -2.29% lower and SP Midcap 400 futures fell -2.60%.

As expected US Treasury futures moved lower due to higher yields. 30 year bond futures were down -1.70% for the week while 10 year note futures fell -0.91%. Likewise the Dollar rallied on the news with Dollar Index futures climbing +0.49% while Eurocurrency futures fell -0.64%.

Trading activity was also heavy in the commodity markets. Most of the action was in the grain markets as a long period of drought across the Midwest now seems more likely then ever. Corn futures rallied +2.42% on the news, Wheat futures were up +1.30%, and Soybean futures climbed +0.49%. Meat prices fell due to the higher grain prices with Lean Hog futures losing -1.86% and Live Cattle futures dropping -1.19%. Meanwhile prices in the softs were mixed with Cotton climbing +1.67%, Sugar was down -6.82% and Coffee fell -2.17%.

Energies had a choppy week of trading with RBOB gas futures ultimately falling -5.23%, followed by Natural Gas at -2.73%, Heating Oil at -1.25%, and Crude Oil futures at -0.49%. Finally metals also moved lower with Copper losing -4.33%, Gold down -3.93%, Silver lost -5.09%, and Palladium lost -0.68%.

***Commodity Trading Advisors (CTAs)***

Are the typical summer markets with lower volatility looming for CTAs?

Despite a slower start to June, many of the managers I’ve spoken to think that we are in store for an exciting summer of trading, with volatility up in the stock indices as compared to last year, grain markets and other agriculture markets moving, and who can forget about interest rates and energy prices. If even ½ of the above turns out as anticipated - mangers like FCI (+10.6% YTD), CKP (+14.2% YTD), Zephyr (+2.5% YTD), Chicago Capital (+2.0%), NDX Abednego/Shadrach (-1.1% / -2.9% YTD), and others stand to perform quite well.

In addition to the above, the exchanges (i.e CME / CBOT) have actively added several new products for the above mangers to utilize that may help to improve investment opportunities. One such product is End of Month Options on the stock index futures. Until now all options expired on the 3rd Friday of the month where the new options will expire on the last day of the month – here is an excerpt from Zephyr Asset’s Monthly Client Report discussing the addition of EOM Options to their portfolio:

“There are a couple of differences between these and the normal options. The main difference is that they expire at the end of the month rather then on the third Friday of the month. The second difference is they trade off of the contract month that the option expires in. For example the June options that expire on the third Friday of the month are based off of the June futures contract which also expires on the third Friday. The end of the month June options are based off of the September futures contract which is currently 15 point higher than the June contract. This gives us even more flexibility, especially during five week expirations, which happens several times a year”.

***Day & Swing Trading***

Day trading systems came alive last week thanks to favorable trading conditions Wednesday, Thursday and Friday. Day trading systems thrive on follow-through which simply put means that the market opens at one extreme and closes at the other with little to no intraday change in direction. Wednesday and Thursday we saw big declines in global equities followed by a sharp rebound on Friday, but again the key was the continuation of the early trend throughout the entire trading session and into the market close.

Compass SP had a monumental performance last week with profits of +$6,003.57 on four trades. The bulk of the profits came from a short trade on Thursday that made 20 pts in the S&P, or roughly +$5K. The system is now up ~ 19 % for the month and + 11 % for the year. Phi Plus Dax has started to turn the corner as well with profits of +$3,475.63 for the week. The Dax market was even more volatile than U.S. indices last week and moved as much as 3 % on Thursday. The next tier of systems were in the +$500 range. BetaCon 4/1 ESX made +$530.95 on three trades and Impetus eRL +$470 on two trades. Rounding out these systems was Navigator eRL which made +$120 on five trades for the week.

Elsewhere, OPXP eRL lost -$10 on four trades. McKenna YM lost -$28.59 on two trades. Rayo Plus Dax lost -$286.86 and Voyager eRL lost -$960 after trying to catch the falling knife on several occasions. BWT Zones Classic had the right direction several times but reversal trades got the better of the program it ended up losing -$1,250 for the week.

For the swing traders, results were mixed and ultimately the programs that were actively reversing their positions came out on top. One system that was short was Tzar eRL which made +$4,145 after catching the sell-off and reversing long on Fri morning to catch the rebound as well. Adaptive US Index was mixed in terms of direction, but timed its entries well on both sides of the market for a gain of +$1,902.50 although it doesn’t technically reverse its positions. Tzar ES and NQ were holding long and lost -$497 and -$1,620 for the week.

***Long Term***

Rate futures continued to find sustained pressure last week from better than expected economic data coupled with rising global interest rates especially in Europe on inflationary worries. The strength in the data reduced the likelihood the Federal Reserve would cut rates anytime this year, despite the worst U.S. housing slump in over a decade. European rates continue to find upward momentum due to a strong economic trend that has market pundits worried it could be inflation driven. Government releases for the coming week are trade and inflation sensitive which could give a peek into any sustained growth the U.S. is experiencing at the moment. The recent acceleration of a downtrend has started to bring more activity for long term trend followers as Aberration is short the Sept. Bund currently making +2,670.00 Euros (open trade) and entered a short Sept. TY position with a current gains of $1620.00 (open trade).

The weaker trade in currencies was again dominant as the U.S. dollar gained an advantage on worries of inflation in Europe and poor economic conditions in Japan. Speculation of higher interest rate movement in Europe continued to be the main catalyst after the ECB raised rates last week hoping to tap the brake on growth or at least slow the momentum. The Japanese currency ( 8+ Month Lows) continued to find pressure on ideas that the Bank of Japan will leave interest rates unchanged in the near future due to a lack of Economic growth in recent forecasts. Most long term trend followers remain on the sidelines due to high volatility although Aberration remains short the DX with a loss of -$850.00 (open trade).

The soft commodities posted decent gains during the past week on inflationary ideas. Grains and oilseeds found some added support on long range weather forecasts indicating a good possibility of a hotter/drier summer in the U.S. Weather will probably be the most dominating factor in the coming months despite the idea of a large U.S. corn crop. Soybeans continue to benefit from less planted acres with support also coming from soybean oil which is trading at levels not seen since March ’04. Cotton volatility was also very high as the market continues to gauge foreign supply/demand scenarios. Aberration is currently long BO making +$1756.00 (open trade), Short LCQ making +$20.00 (open trade) and Short SBN making +$593.60 ( open trade).

Feature | Week In Review | Chart of the Week |