Futures Fundamental Analysis

, by Schwager, Jack D.; Turner, Steven C.

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ISBN: 9780471020561 | 0471020567
Cover: Hardcover
Copyright: 5/29/1995

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Written by a foremost authority and one of the bestselling authors in finance. The most comprehensive book on futures trading, A Complete Guide to the Futures Markets, is now divided into three volumes--this is the first. It provides readers with a synthesis of market analysis as well as practical trading considerations. Analytical techniques are evaluated within the context of the existing world of trade.

PART ONE: PRELIMINARIES

The Great Fundamental versus Technical Analysis Debate

(4)

For Beginners Only

(20)

Purpose of This Chapter

(1)

The Nature of Futures Markets

(1)

Delivery

(1)

Contract Specifications

(2)

Volume and Open Interest

(1)

Hedging

(6)

Hedging Examples for a Commodity

(3)

Hedging in Financial Futures

(1)

General Observations Regarding Hedging

(2)

Speculation

(1)

Types of Orders

(3)

Commissions and Margins

(1)

Tax Considerations

(5)

PART TWO: FUNDAMENTAL ANALYSIS

Fourteen Popular Fallacies, or What Not to Do Wrong

(14)

Five Short Scenes

(2)

Scene 1

(1)

Scene 2

(1)

Scene 3

(1)

Scene 4

(1)

Scene 5

(1)

The Fourteen Fallacies

(12)

Viewing Fundamentals in a Vacuum

(1)

Viewing Old Information as New

(1)

One-Year Comparisons

(1)

Using Fundamentals for Timing

(1)

Lack of Perspective

(1)

Ignoring Relevant Time Considerations

(1)

Assuming That Prices Cannot Decline Significantly Below the Cost of Production

(1)

Improper Inferences

(3)

Comparing Nominal Price Levels

(1)

Ignoring Expectations

(1)

Ignoring Seasonal Considerations

(1)

Expecting Prices to Conform to Target Levels in World Trade Agreements

(1)

Drawing Conclusions on the Basis of Insufficient Data

(1)

Confusing the Concepts of Demand and Consumption

(2)

Supply/Demand Analysis: Basic Economic Theory

(16)

Supply and Demand Defined

(4)

The Problem of Quantifying Demand

(1)

Understanding the Difference Between Consumption and Demand

(3)

The Need to Incorporate Demand

(2)

Possible Methods for Incorporating Demand

(5)

Why Traditional Fundamental Analysis Doesn't Work in the Gold Market

(1)

Types of Fundamental Analysis

(16)

The ``Old Hand'' Approach

(1)

The Balance Table

(1)

The Tabular and Graphic Approach

(9)

Regression Analysis

(1)

Econometric Models

(1)

The Analogous Season Method

(1)

Rank Classification Method

(1)

Index Models

(3)

Applying Technical Analysis to Fundamental Data

(28)

Methods of Trend Definition

(1)

A Practical Example

(4)

Detrending Data

(6)

The Need to Incorporate Data Lags

(6)

Measuring Time Lags

(4)

The Danger of Optimization

(2)

Lags for Data Availability

(1)

Weighting the Indicators

(1)

An Example of an Index Model

(3)

A Final Caveat

100

(1)

The Role of Expectations

101

(7)

Using Prior-Year Estimates Rather Than Revised Statistics

101

(4)

Adding Expectations as a Variable in the Price-Forecasting Model

105

(1)

The Influence of Expectations on Actual Statistics

106

(1)

Defining New-Crop Expectations

107

(1)

Incorporating Inflation

108

(7)

Seasonal Analysis

115

(34)

The Concept of Seasonal Trading

115

(1)

Cash versus Futures Price Seasonality

115

(1)

The Role of Expectations

116

(1)

Is It Real or Is It Probability?

116

(1)

Calculating a Seasonal Index

117

(9)

Average Percent Method

117

(4)

Link Relative Method

121

(5)

Segmented Seasonals

126

(4)

Deseasonalizing Data

130

(4)

Maximum Gain/Maximum Loss Seasonal Comparisons

134

(1)

Counterseasonal Price Action

134

(2)

Chart Detection of Seasonalities

136

(12)

Conclusion

148

(1)

Market-by-Market Seasonality

149

(35)

Interpreting the Tables in This Chapter

149

(1)

Interpreting the Charts in This Chapter

150

(1)

A Word About the Price Data Used in Constructing Seasonal Indexes

151

(1)

Caveats in Using Seasonal Information for Trading

152

(1)

Seasonal Tables and Charts

152

(32)

Analyzing Market Response

184

(12)

Evaluating Market Response for Repetitive Events

184

(6)

USDA Hogs and Pigs Report

184

(5)

October Orange Production and Yield Estimate

189

(1)

Counter-to-Anticipated Market Response

190

(6)

Repetitive Events

190

(3)

Isolated Events

193

(3)

Government Programs and International Agreements

196

(20)

A Focus on Price Influence

196

(2)

U.S. Agricultural Policy: A Conflict of Goals

198

(1)

Acreage Programs

199

(3)

Acreage Reduction Program

199

(1)

Normal Flex Acreage

200

(1)

Optional Flex Acreage

201

(1)

Paid Land Diversion

202

(1)

The Price-Support Loan Program

202

(4)

Basic Loan Rates

203

(3)

Target Prices and Deficiency Payments

206

(1)

Marketing Loan Program

206

(1)

Farmer-Owned Reserve

207

(2)

Import/Export Controls

209

(1)

Export Support Programs

210

(1)

Summary: Domestic Government Programs

211

(1)

International Agreements

212

(2)

Bibliography

214

(2)

Building a Forecasting Model: A Step-by-Step Approach

216

(4)

Fundamental Analysis and Trading

220

(21)

Fundamental versus Technical Analysis: A Greater Need for Caution

220

(1)

Three Major Pitfalls in Fundamental Analysis

221

(7)

Combining Fundamental Analysis with Technical Analysis and Money Management

228

(1)

Why Bother With Fundamentals?

229

(1)

Are Fundamentals Instantaneously Discounted?

230

(4)

Fitting the News to Price Moves

234

(1)

Fundamental Developments: Long-Term Implications versus Short-Term Response

235

(3)

Summary

238

(3)

PART THREE: A PRACTICAL GUIDE TO REGRESSION ANALYSIS

Introduction to Regression Analysis

241

(8)

Basics

241

(3)

Meaning of Best Fit

244

(2)

A Practical Example

246

(2)

Reliability of the Regression Forecast

248

(1)

A Review of Elementary Statistics

249

(25)

Measures of Dispersion

249

(2)

Probability Distributions

251

(6)

Reading the Normal Curve (Z) Table

257

(3)

Populations and Samples

260

(1)

Estimating the Population Mean and Standard Deviation from the Sample Statistics

260

(2)

Sampling Distribution

262

(2)

Central Limit Theorem

264

(2)

Standard Error of the Mean

266

(1)

Confidence Intervals

267

(2)

The t-Test

269

(5)

Checking the Significance of the Regression Equation

274

(19)

The Population Regression Line

274

(1)

Basic Assumptions of Regression Analysis

275

(8)

Testing the Significance of the Regression Coefficients

283

(1)

Standard Error of the Regression

283

(1)

Confidence Interval for an Individual Forecast

284

(2)

Extrapolation

286

(1)

Coefficient of Determination (r2)

287

(4)

Spurious (``Nonsense'') Correlations

291

(2)

The Multiple Regression Model

293

(13)

Basics of Multiple Regression

293

(3)

Applying the t-Test in the Multiple Regression Model

296

(2)

Standard Error of the Regression

298

(1)

Confidence Intervals for an Individual Forecast Yf

299

(1)

R2 and Corrected R2

299

(2)

F-Test

301

(2)

Reading the Computer Printout

303

(3)

Analyzing the Regression Equation

306

(41)

Outliers

306

(4)

The Residual Plot

310

(2)

Autocorrelation Defined

312

(1)

The Durbin-Watson Statistic as Measure of Autocorrelation

312

(3)

The Implications of Autocorrelation

315

(1)

Missing Variables and Time Trend

316

(11)

Transformations to Achieve Linearity

327

(3)

Transformation to Remove Autocorrelation

330

(2)

Heteroscedasticity

332

(2)

Dummy Variables

334

(6)

Multicollinearity

340

(7)

Practical Considerations in Applying Regression Analysis

347

(14)

Determining the Dependent Variable

347

(2)

Selecting the Independent Variables

349

(2)

General Considerations

349

(1)

Should the Preforecast Period Price Be Included?

350

(1)

Choosing the Length of the Survey Period

351

(1)

Sources of Forecast Error

352

(2)

Simulation

354

(1)

Stepwise Regression

355

(1)

Sample Step-by-Step Regression Procedure

356

(1)

Summary

357

(1)

References (Chapters Fifteen-Twenty) and Recommended Readings

358

(3)

PART FOUR: FUNDAMENTAL ANALYSIS APPLIED THE MARKETS

Forecasting Hog Prices

361

(14)

Projecting Supply

361

(3)

Demand Considerations

364

(1)

Price Forecasting Model 1

364

(5)

Price Forecasting Model 2

369

(1)

Allowing for Forecast Error

370

(1)

Projecting Price Highs and Lows

371

(1)

Price Forecasts and Trading

372

(1)

Conclusion

373

(2)

Forecasting Cattle Prices

375

(17)

Bill Gary

Consumption Is Entirely a Function of Production

375

(1)

Long-Term Supply Factors

376

(3)

Feedlot Inventories

379

(2)

Seasonality

381

(7)

Production Seasonality

382

(2)

Consumption Seasonality

384

(1)

Price Seasonality

385

(3)

Major Secular Changes in the Cattle Industry

388

(3)

Conclusion

391

(1)

Forecasting Grain Prices

392

(16)

The Stocks/Disappearance Ratio as a Key Fundamental Indicator

392

(3)

A Background Sketch of Wheat Fundamentals

395

(4)

Classes of Wheat

395

(2)

Production

397

(1)

Disappearance

397

(2)

Annual Wheat-Price-Forecasting Model

399

(5)

A Background Sketch of Corn Fundamentals

404

Production

404

(1)

Disappearance

404

Quarterly Corn-Price-Forecasting Model

401

(6)

Summary

407

(1)

Forecasting Soybean Prices

408

(25)

Anne Frick

The Analogous Season Study: A Fundamental Timing Approach

408

(2)

Background Sketch of Fundamentals

410

(6)

The Soybean complex

410

(1)

U.S. Soybean Production

411

(1)

U.S. Exports

411

(3)

Soybean Meal Usage

414

(2)

Soybean Oil Usage

416

(1)

Ending Stocks

416

(1)

Key Factors

416

(6)

Carryover Stocks

418

(2)

Production

420

(1)

Total Supply

420

(1)

Usage

420

(2)

Price Action

422

(1)

Combining Factors

422

(1)

Consistent Seasonal Patterns

422

(4)

Crop-Scare Rally High

423

(1)

Harvest Low

424

(1)

Postharvest High

425

(1)

February Break

425

(1)

Selection of Contracts for Seasonal Studies

425

(1)

Examples of Analogy Studies

426

(4)

Projection of Spring High and Subsequent Low in July 1993 Soybeans

426

(2)

Analogous Season Approach Based on Price Action: Projecting the July High and the Setback Low in November Soybeans

428

(2)

Incorporating Soybean Oil and Soybean Meal Forecasts

430

(1)

Reports and Sources of Information

430

(2)

Major Reports

430

(1)

Minor Reports

431

(1)

Conclusion

432

(1)

Forecasting Sugar Prices

433

(14)

On Tulips and Sugar

433

(3)

Production

436

(3)

Consumption

439

(2)

Price-Forecasting Model

441

(3)

Forecasting Prices Before the Start of the Season

444

(2)

Conclusion

446

(1)

Forecasting Coffee Prices

447

(22)

Sandra Kaul

Coffee Before and After Export Controls

447

(4)

The Rank Classification Method of Analysis

451

(1)

Evaluating the Producer Nation Balance Sheet

451

(6)

Export Availability

453

(1)

Exports as a Percent of Export Availability

453

(1)

Forward Supply Coverage

454

(1)

The Basics of Coffee Production

454

(1)

Combining the Producer Balance Sheet Variable Rankings

455

(1)

Ranking the Production Variables: Two Examples

455

(2)

Evaluating the Consumer Nation Balance Sheet

457

(8)

Constructing a Consumer Nation Balance Sheet

458

(2)

Consumer Stocks

460

(1)

Consumer Disappearance

461

(1)

Stocks/Disappearance Ratio

461

(1)

Ranking the Consumer Variables: Two Examples

462

(3)

Deriving a Combined Price Forecast

465

(3)

Expanding the Basic Model

468

(1)

Conclusion

468

(1)

Forecasting Crude Oil Prices

469

(11)

Michael S. Rothman

First Things First: Not All Crudes Are Created Equal

469

(1)

The Supply/Consumption Balance

470

(4)

Consumption

470

(1)

Non-OPEC Oil Supplies

471

(1)

OPEC Supplies

472

(1)

Inventories: The Phantom Data

472

(2)

OPEC Politics: The Critical Determinant of Oil Price Forecasting

474

(2)

Forecasting Oil Prices: A Synthesis of Methodologies

476

(4)

Forecasting Copper Prices

480

(18)

Supply Factors

480

(1)

Demand Factors

481

(3)

Economic Indicators

481

(1)

Inflation Indicators

482

(2)

The Copper Spread as an Indicator

484

(3)

Lagging Variables for Availability

487

(1)

Translating Fundamentals into Timing Signals

487

(7)

Conclusion

494

(1)

Appendix: Understanding the Difference between Nearest and Continuous Futures

495

(3)

Nearest Futures

495

(1)

Continuous Futures

496

(1)

Which Price Series Is Better?

497

(1)

Forecasting Gold (Precious Metal) Prices

498

(13)

Gold Fundamentals: What's Not Important

498

(1)

Gold and Inflation

499

(2)

Currency Price Movements

501

(3)

Economic Indicators

504

(1)

The Relationship Between Gold and Interest Rates

505

(2)

Sentiment Indicators

507

(1)

Constructing a Composite Index

508

(1)

Conclusion

509

(2)

Forecasting Currency Rates

511

(17)

Katherine Jones

Purchasing Power Parity Theorem

512

(2)

Balance of Payments

514

(2)

Interest Rates

516

(2)

Economic Factors

518

(1)

Political Factors

519

(1)

Constructing a Currency-Forecasting Model: The $/DM

520

(1)

When Things Go Wrong: Structural Changes and Impact of Government Policies

521

(4)

Monetary Agreements

525

(1)

Conclusion

526

(2)

Forecasting Interest Rates

528

(16)

Katherine Jones

Structure of the Market

529

(3)

Demand Factors

532

(4)

Supply Factors: The Federal Reserve

536

(4)

Conclusion

540

(1)

Addendum: Pricing the T-Bond Futures Contract

540

(4)

Forecasting Foreign Interest Rate Markets

544

(20)

Katherine Jones

The Interdependence of the World's Bond Markets

548

(2)

Currency Impacts

550

(2)

Political Developments

552

(1)

Economic Growth

553

(2)

Inflation

555

(1)

Monetary Policy

556

(2)

Fiscal Policy

558

(1)

Assessing Risk

558

(1)

A Forecasting Example: British Interest Rates

559

(1)

Regional Factors and Prospects for the Future

560

(3)

Europe

561

(1)

Japan/Asia

562

(1)

Dollar Bloc Countries

563

(1)

Conclusion

563

(1)

Forecasting the Stock Market

564

(31)

Courtney Smith

What Drives the Stock Market?

565

(1)

Selection of Indicators

565

(1)

Earnings Growth

566

(2)

Valuation

568

(6)

Monetary Policy and Interest Rates

574

(4)

The Economy, the Business Cycle, and Inflation

578

(8)

Inflation

586

(1)

Misery Index

586

(1)

Sentiment

586

(3)

Translating Market Indicators into Timing Signals

589

(3)

Tying It All Together

592

(1)

Conclusion

593

(2)

Appendix: Contract Details

595

(30)

Index

625

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Futures Fundamental Analysis

Summary

Author Biography

Table of Contents

Supplemental Materials