I introduced a new graph in the May review that I think will help anyone looking at prices across the front three expirations. I barely commented on the graph in the review. Now, with the benefit of more quotes since month-end, and some tweaking of the graph, I’d like to go over it in more detail.
The graph shows the bid/ask/mid quotes -expressed as a percent of the spot index – for the front three contracts (Aug ’13, Nov ’13, and Feb ’14) for each of the 11 Case Shiller contracts traded on the CME (ten regional contracts plus the CUS/HCI 10-city index). Aug ’13 is the front contract, the Nov. series is typically the most active, and the Feb ’14 contract will be settled on year-end Case Shiller index values, so anyone looking at market-implied index changes for 2013, should pay attention. I sorted the contracts into my predefined areas of “Cold” (BOS, NYM, WDC, CHI and DEN) and “Warm” (LAX, SDG, SFR, LAV and MIA) regions to illustrate how performance between these two higher-level areas differs.
- All regions show sharp increases through Aug and Nov ’13. NYM represents the low while SFR has the highest forward prices. This mirrors the performance of these regional indices over the last year.
- The bid for Feb ’14 CUS contracts is 7.8% above spot levels, and (not shown) +9.8% above Dec ’12 values. The Feb ’14 contract is thinly traded (even within the context of CME Futures), and the Feb ’13 prices were more “optimistic” last year during the summer than where CS index values ended 2012. That said, if the Feb ’14 contract prices are correct, research teams will have to raise their forecasts (as Citi has already done) for 2013.
- Quotes for the Cold regions are generally lower than for those in the Warm regions. SDG and MIA are somewhat low, but on balance, forward prices in California (and LAV) far exceed those of the Cold regions, particularly has one moves into the Nov and Feb contracts.
- Bid/ask spreads vary considerably across regions (with BOS and SFR having tighter spreads) in the Aug ’13 contract. In each of the last two settlements bid/ask spreads in several contracts compressed to <1.0 (<0.5%). Currently BOS (@ 1.8) and SFR (@1.6) are the best, with WDC (@ 6 points) the widest dollar spread, and DEN (@3.2.%) the widest on a percentage basis.
- The Cold and Warm states seem to have different seasonal factors between the Nov and Feb contracts. Generally, the Cold states have lower prices for Feb than Nov (and that shows in calendar spreads) while the Warm states are close to neutral (between Nov and Feb)
- The Feb ’14 bid/ask spreads are generally much wider than Nov ’13 bid/ask spreads. As these are the markets that reflect projected 2013 changes, they merit some attention (and need some help).
- While the HCI/CUS contract has the highest open interest, CUS prices are the weighted average of two very different markets (the Cold and Warm regions). They may be the best trading market but it’s hard to generalize what a view on CUS means given that the underlying components are so different.
- Similar analysis of all contracts (where there are two sided-markets) in longer-dated expirations (to be shown at a later date) shows: a) a continuation of the Warm/Cold divide, but b) overall reversion to 3.5-4% HPA across regions.
As with all observation on CME Case Shiller futures, there is limited depth to the market (and very few trades), so all conclusions should be compared to more fundamental research.
I’d be interested in any third-party reactions to this graph, or the general topic of the direction of forward prices. Please feel free to contact me (email@example.com) if you care to discuss.