AGEC 420, Lec 35 1

Agec 420

• Fundamental analysis– Regression– HW 8

• Monday – Video on Options– Quiz

AGEC 420, Lec 35 2

Other technical systems

• Stochastic oscillators (%k and %d)

• Elliot wave theory

• Bollinger bands

• Andrew’s pitchfork

• Zig Zag indicator

See www.equis.com/free/taaz/

AGEC 420, Lec 35 3

Reasons to be cynical!

1. Futures is a zero sum gameIf buying is such a great idea -- who would sell?

2. Successful “strategies” -- should be secretSuggests that its more profitable to sell the strategy

than to use it

AGEC 420, Lec 35 4

The disclaimer

• Past performance does not guarantee future results

Should be …

• Past performance gives absolutely no indication of future results

AGEC 420, Lec 35 5

Remember the economics

• How is a price determined?– Supply and demand

• How is a future price determined?– Estimates of future supply and demand

• What causes a price to change ?– Changes in supply or demand

• What causes a future price to change ?– New estimates about future supply or demand –

NEWS

AGEC 420, Lec 35 6

Reasons to be cynical (cont.)

3. The existence of repeating patterns does not mean they have predictive power.

4. Markets are for risk management/transfer– profits result from taking risk– or from having better information than the

market

AGEC 420, Lec 35 7

Fundamental Analysis

Using information about supply, demand and other economic factors to forecast price.

i.e.

What should the price be given what is known about supply and demand?

AGEC 420, Lec 35 8

Markets

• CBOT: http://www.cbot.com/

• CME: http://www.cme.com/

AGEC 420, Lec 35 9

Fund. Analysis – how to ..

a) Gather info on supply and demand• USDA reports, weather, political/trade factors,

• i.e., data on quantities

• Domestic or World ??

b) translate quantity information into a price prediction • use regression analysis to estimate relationships – then

extrapolate

AGEC 420, Lec 35 10

Market Information

USDA Natl.Ag.Stat.Service (NASS)

World Ag. Outlook Board (WAOB)

Links are on the class website

www.agecon.ksu.edu/jafox

AGEC 420, Lec 35 11

Sample USDA Reports

WeeklyMondays -- 10am, export inspections

Ag Marketing Service (AMS)

Thursdays -- 7:30am, export salesForeign Ag Service (FAS)

MonthlyCattle on feed

Natl Ag Stat Service (NASS)

AGEC 420, Lec 35 12

Cattle on Feed (7 state)

• Report today (Fri April 19) @ 2pm• Pre Report Estimates (agweb.com)

Avg. Guess RangeOn feed (4/1) 100.8% 100.0 - 102.7Placements 108.6 102.2 - 117.6Marketing 96.6 95.1 – 100.6

Note: numbers represent % of last year

AGEC 420, Lec 35 13

Cattle on Feed

• Friday, Apr. 19

• Actual vs. Pre-Report Estimates Avg. Est. Range

USDA

On feed (2/1) 100.8% 100.0-102.7 ???

Placements 108.6 102.2-117.6 ???

Marketing 96.6 95.1 – 100.6 ???

AGEC 420, Lec 35 14

Fund. Analysis – how to ..

a) Gather info on supply and demand• USDA reports, weather, political/trade factors,

• i.e., data on quantities

• Domestic or World ??

b) translate quantity information into a price prediction • use regression analysis to estimate relationships – then

extrapolate

AGEC 420, Lec 35 15

Stock/Use Ratio

• Commonly used variable in price prediction for grains

= ending stocks / total use (projected)

AGEC 420, Lec 35 16

Ending stocks

• Ending stock =Beginning stock

+ Production

+ Imports

– Domestic use

– Exports

AGEC 420, Lec 35 17

Stock/Use Ratio

= Ending Stock / (Domestic Use + Exports)

See data for HW 8

AGEC 420, Lec 35 18

Fund. Analysis – how to ..

a) Gather info on supply and demand• USDA reports, weather, political/trade factors,

• i.e., data on quantities

• Domestic or World ??

b) translate quantity information into a price prediction • use regression analysis to estimate relationships – then

extrapolate

AGEC 420, Lec 35 19

Simple regression model

This equation represents the relationship between Price and the Stock/Use ratio

Price = A + B * (Ending Stock / Use)

Regression analysis is used to estimate the values for A and B in this equation

AGEC 420, Lec 35 20

b) Use regression analysis to estimate A and B If A = 4.25 and B = -0.03 then your price

forecasting model is:

Price = 4.25 – 0.03 * (Ending Stock / Use)

c) Find the Stock/Use estimate for the current year, plug it into your model, and you obtain a price prediction.

Steps in Fundamental Analysis