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Pete, although I agree with the sprit of your statement that it is important
to understand fundamentals, I don't believe that anyone understands
fundamentals completly. For example you virtually have to be all knowing to
know that Sadam ate something that gave him indigestion and kicks out some
UN guys or something. I followed a Copper backwardation for a while and it
was just market manipulation as near as I could tell. Surprise, there was
more Copper in some wharehouse that they didn't count. You can't hardly
believe a word of the news. So what else is new.
Brent
-----Original Message-----
From: Peter [ KKD ] <derivatives@xxxxxxxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: Thursday, December 03, 1998 9:35 AM
Subject: Re: contango/backwardation
>To be a trader worth your salt, you need to understand fundamentals
>completely, but then when it comes to trading you need to forget about it
>totally. This however dosnt detract from its importance......... case in
>point LTCM Euro positions
>Peter
>
>-----Original Message-----
>From: BrentinUtahsDixie <brente@xxxxxxxxxxxx>
>To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
>Date: Friday, 4 December 1998 3:20
>Subject: Re: contango/backwardation
>
>
>>I'll tell you what contango/backwardation means to me, it means that a
hole
>>bunch of fundamentalist traders are going to be taken to the cleaners.
Just
>>another good reason to trade 99% technically.
>>
>>Brent
>>
>>-----Original Message-----
>>From: I4Lothian@xxxxxxx <I4Lothian@xxxxxxx>
>>To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
>>Date: Thursday, December 03, 1998 8:19 AM
>>Subject: Re: contango/backwardation
>>
>>
>>>You normally hear contango and backwardation in relation to New York
>>>contracts. In Chicago the terms I hear used are a "Normal" market (one
>>with
>>>carrying charges ), and an "Inverted" market (one with nearby prices
>higher
>>>than deferred prices). Just different terms to describe the same thing.
>>>
>>>An example of a normal market to an extreme is the Lean Hog market.
There
>>is
>>>a glut of available nearby supply, not much capability to store product,
>>and
>>>weaker demand than anticipated when the farrowings were planned.
>>>
>>>Given our glut of supply in most all commodities, and weak worldwide
>>demand,
>>>there are not any significant inverted markets I can see right now.
>>However,
>>>the corn market of 1996 would be a good example. Nearby prices gained
>>>dramatically on deferred prices.
>>>
>>>Sometimes markets will go inverted when there is a shortage of the
>>commodity,
>>>like the 1996 corn market. Other times you will see an inverted market
in
>>the
>>>first couple of months, despite a glut of supply. This will occur
because
>>the
>>>owners of the commodity, like farmers holding and storing soybeans, are
>>>waiting for higher prices in the future to sell their crop. In the
>>meantime,
>>>processors of soybeans need to buy them to fulfill their nearby meal and
>>oil
>>>contracts. This creates a strong basis, which supports the nearby price
>>due
>>>to the relationship of the cash prices in the country to delivery values
>of
>>>the futures contracts.
>>>
>>>Regards,
>>>
>>>John J. Lothian
>>>
>>>Disclosure: Futures trading involves financial risk, lots of it!
>>>
>>>
>>>In a message dated 12/3/98 7:53:09 AM Central Standard Time,
>>stansan@xxxxxxx
>>>writes:
>>>
>>><< Ketayun:
>>> This is my understanding of these terms.
>>> In commodities, e.g. oil, cocoa, etc., the contracts for
>>> future delivery carry a higher price than contracts for
>>> near term delivery.other factors being equal.
>>> So a contract for oil expiring in 6 months would usually
>>> cost more than the same contract expiring in 30 days.
>>> This is due to several factors one of which is the carrying
>>> cost. This normal situation is called "Contango" but I'm
>>> not sure the origin of the term.
>>>
>>> However, a year ago long-delivery oil was priced below the
>>> short-delivery oil and this unusual situation was referred
>>> to as backwardation. I believe this term is appropriate
>>> because the relationship of long term to short term is
>>> backwards.
>>>
>>> I hope the RT'ers who deal in commodities can give
>>> a better explanation.
>>> BTW at the time of the backwardation in oil occurred
>>> it was explained partly as due to temporary loss of
>>> refinery capacity and was a near term factor only.
>>>
>>> Regards,
>>> Stan R. >>
>>>
>>
>>
>
>
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