12/13/19 was down a whooping -1.29 and the model projects the component on Friday's kill will drop between -0.30 and -0.60. There is a good chance that packers still have some more expensive hogs purchased that will cushion the drop we will see in the component. This will be the other half of the cash settlement index for the ZZZs and it looks like I will get my ears pinned back on the pair of long ZZZs I opted to ride into cash settlement.
The first half of the cash settlement index for the ZZZs was 59.80 posted on Friday when the component on Thursday's kill came in down 0.16. It was good to see the cutouts hold up Friday with a piddling little gain of +0.22. The model calculates that packers' gross margins are $47.08 per index hog. Packers will gladly keep the lights on with margins like that. We are still quite in the dark about how well packers are doing because Index hogs only make up about 27% of the kill and the report on cutout sales represents and even smaller percentage of the pork production.
One thing we do know, though, is that packers are holding their hogs back and finishing them to heavier and heavier weights. On Friday the packer hogs were +2.31# heavier than the non-packer hogs. On 10/31/19 packer hogs were -0.75# lighter than non-packer hogs. I keep thinking this indicates packers believe the price of hogs is headed higher and I prefer to follow their lead rather than the fund managers on Wall Street.
By the time the afternoon reports came out packers had purchased 113.6% of the moving average daily purchases of total hogs and 119.6% on the index hogs. Usually on a Friday the percentage will be in the 120% range so packers most likely will have purchased quite a few more hogs by the end of the day but it is doubtful they will have sweetened their bids very much.
The current seasonality low of 54.67 set on 9/24/19 is still holding and I think there is a good chance that it will stick. There is a strong tendency for the seasonality low to be set about the time the ZZZs go to cash settlement although there is a lot of variability. In the last eight years the earliest it was set was on 9/3/18 and the latest it was set was on 4/11/18 when it dipped to 52.97.
Over the weekend I happened to pick up an old copy of STOCK MARKET LOGIC by Norman Fosback that has been in my book shelves for more than twenty years. As I thumbed through it I came to page 155 where I had highlighted the following:
"The Seasonality Indicator is potentially one of the most useful of all short term market indicators. But not surprisingly, it is a bit more complex and the profit opportunities,
while ultimately enormous, are not so readily apparent."
After a bit more discussion he followed up with the following question:
"How then can you use seasonality to benefit you and increase the value of your own portfolio?"
I don't have an answer to his question, but this I know, "Because of the biology of hog reproduction, the seasonality in the hog market is more consistent and has been repeating itself for a longer period of time than that observed in ANY OTHER market."
After I re-read what Fosback said I reviewed what would have happened if June, July or August futures would have been bought when the ZZZs went to cash settlement. It showed mixed results with losses some years greater than I care to risk. This year may be one of the years when it would work well since the summer futures may have been beaten down too much in sympathy with the beating the VVVs and ZZZs have taken. So I will continue HODLing the summer futures on my boat and will add a few more NNN and/or QQQs when and if there is another dip.
This has alerted me to the possibility that a sophisticated strategy of selling winter hogs in June and July and buying summer hogs in December and January could be enormously and consistently profitable year after year BUT just buying summer futures in the winter and selling winter futures in the summer is NOT the answer even though I think it will work very well this year.
If anyone has any ideas on how to pin the tail in this donkey, kindly let us all know.
Best wishes,
Doc