wmeubank@ocp.kcmo.com
Spread Trades Of The Week
JULY/AUGUST PORK BELLIES
All spreads within the old-crop contracts have been weakening in recent sessions, with the front-month May delivery falling close to the full 120-point carry under the July. This weakening spread action is somewhat unusual given that outright prices in the 1990's are high by historical standards.
Because pork bellies are a carrying charge market, there is a downside limit to how far one month can fall under another. In the July/August spread, July almost never stays at a discount to August because the August delivery (the last old-crop month) usually falls beneath the cash price as the storage season closes so as to encourage outmovement of remaining stocks. Therefore, the closer July comes to August, the more attractive the risk/reward ratio for a long July/short August position. We already have one July/August spread on from higher levels. Thus, we recommend entering a second position when the spread shows signs of stabilizing, hopefully somewhere between 50 and 70 points July premium.
JULY/AUGUST SOYBEANS
This spread, between the last two months of the old crop, has followed outright prices higher to levels that are approaching long-term historical resistance near 30 cents per bushel July premium. However, this year has been quite unusual in that all nearby spreads have been climbing relentlessly higher even before the traditional "crop scare" season has begun. During crop-scare season (usually late May through mid-July), potential weather concerns can cause prices and nearby spreads to expand to extremely high levels. So far, the spread's expansion reflects that ending stocks for the current season (ending August 31) are projected to be the lowest in 20 years, at only 125 million bushels.
The tight ending stocks situation might be reflected at a July premium of 30 cents or more over August, as they are both old-crop months. If the spread were to rally to that area and fail, we would recommend buying August and selling July, risking to 40 cents July premium and looking for the July inversion to narrow toward the 10- cent area.
Open Positions
LONG OCTOBER/SHORT DECEMBER CATTLE
At 205 points premium December, with an objective of 100 points
December discount, risking to 365 points premium December.
LONG SEPTEMBER SHORT NOVEMBER HEATING OIL
At 170 points premium November, with an objective of even, risking
to 240 points premium November.
LONG JULY/SHORT AUGUST PORK BELLIES
At 210 points July premium, with an objective of 280 points July
premium, risking to even.
May 5, 1997
Donald M. Selkin
Prudential Securities, Inc.
One New York Plaza,
New York, New York
Added to the WWW 04-18-97
Last updated on 04-18-97
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com