Tag: CUS

CME activity post June release of CS #’s

CME markets have been mostly quiet this morning as Case Shiller numbers came out generally in line toward CME quotes for the Aug ’15 contract.  The two exceptions seem to have been in the BOS and SDG contracts where Nov ’15 contract prices have dropped sharply (as shown in the table below).  There was one trade in SDGQ15 -the only one at the time of this report.

On the other hand, LAX and DEN prices moved higher as upward price momentum (at least in the non-seasonally adjusted numbers) continued.

Bid/ask spreads have recovered to yesterday’s levels after wider quotes before and after the 9:15 release.   While spreads are about the same across all regions and all expirations today, on the month bid/ask spreads are much tighter -particularly in the CUS and CHI contracts, as well as the Q15 and X17 expirations.  (I am traveling the next few days so I may not get the June recap out until during the July 4th weekend.  Please contact me if you’d like to see a specific table earlier.)

As today is month-end expect some filling in of prices on less-frequently quoted contracts and a sharp pencil being taken to some calendar spreads.  Any help would be appreciated as the tighter the month-end quotes, the better the contracts look when I go to market them.

If you have any questions please contact me @ johnhdolan@homepricefutures.com .  I’m hoping that my tech and email problems are behind me as I’ve transitioned to a new server.

 

June2015 post CS

 

Zillow forecast for Case Shiller CUS-10 ( in March)

While trading in longer dated contracts is more at the heart of hedging home price risks, my sense is that confidence in longer-dated markets is a function of believing that shorter-dated contracts are priced tight and correctly (that is to expectations of pending Case Shiller releases).  Tight spot contract prices may also help feed, via debates over calendar spreads, into tighter longer-dated contract prices.

Thus I am a fan of anyone offering early, well-researched views on upcoming Case Shiller releases.  (In case you were not aware) Zillow’s economists have been offering their predictions of the next month’s Case Shiller CUS-10 index for a long time.  For example, this link shows how on Feb. 27- the day the Feb Case Shiller numbers were released -they offered their expectations for the March numbers.

Since March numbers are tallied from generally public data ending in January, it’s completely plausible that an entity with access to data, experts who can manage data, and researchers who focus on home price index calculations, should be able to come up with forecasts 3-4 weeks later.  (Remember, the Case Shiller indices were conceived during a period pre-internet, when data collection and analysis took way more time.  The two-month delay in releasing CS #’s made much more sense years ago.)

The Zillow MOM not-seasonally adjusted (NSA) prediction for March numbers is -0.1%.  (Note that the headline Case Shiller numbers, as well as the CME contracts reference the not-seasonally adjusted series.  Zillow also offers five other forecasts but the CUS-10 NSA forecast should be of particular interest to those trading CME futures.)

Not surprisingly CME prices for the May 2015 contract are not out of line versus Zillow’s prediction.  Recent May contract quotes of 186.6/189.0 generate a mid-market value that is almost unchanged versus the February-released value of 187.81.  Between some tail wind supporting home prices, and negative winter seasonal factors (which one can observe in Zillow’s seasonally adjusted forecasts) stable NSA Case Shiller values are reasonable.

So, please be aware of this Zillow offering.  While one-month forecasts versus a contract trading with a wide bid/ask spread 3 months forward may have limited value today, pay close attention to Zillow’s April 28th forecast of May Case Shiller #’s.  If history is a guide, by that point the May CME contract should be trading much tighter, and Zillow’s forecast will be on the settlement value of that contract.

As always, feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions.

A market for 2015 HPA projections?

With yesterday’s release of the Case Shiller index numbers for Dec. 2014, several research firms have posted their projections for home price appreciation (HPA) for 2015.  What can you do with these forecasts whether you believe them or think that they are too bullish/bearish?

I’d submit that the CME Case Shiller Feb ’16 (G16) contracts gives analysts a tool for both seeing what “the market” thinks as well as a platform for traders to express a view on 2015 HPA.

The diagram to the Feb 16 Calendar barsright shows bids, offers and mid-market values for the 11 CME housing contracts for Feb ’16, converted into percent changes versus the year-end Case Shiller #’s released yesterday.  Recall that the Feb ’16 contract settles on the CS #’s released that month, which will be the index as of Dec.2015.  As such, one might use the Feb ’16 contract numbers (bids, offers and mid-markets) for implied 2015 HPA.

The HCI contract (the one referencing the CUS 10-city index) is quoted at levels that translate into 3.8-4.6% increase in the CUS index between now and contract expiration.  This seems in line with some research reports.  (Recall that different indices- e.g. Zillow, Core Logic, FHFA reference different data, so projections may differ.)   All ten regional markets are also quoted so users may infer forward HPA for specific regions (or trade).

As I noted in yesterday recap. bid/ask spreads in the Feb ’16 contract widened out as many quotes had been a function of Feb ’15/Feb ’16 calendar spreads.  While bid/ask spreads are tighter today, they still have a way to go.  I expect to see much tighter G16 markets over the next few weeks.

Nevertheless one can already see trends (e.g. quotes on SFR and MIA are consistent with those regions performing better than average (defined here as the CUS 10-city index) while LAX and WDC prices are consistent with lower projected HPA.

On can trade outright G16 markets, or trade one region on a spread versus the other (or the CUS 10-city index).  I’m trying to develop inter-city spread trades and would be very open to trade proposals for any regional G16 contract vs. the HCI contract.

Feel free to contact me at johnhdolan@homepricefutures.com if you have any questions or if you’d like to discuss a trade.

CME activity post CS #’s – Jan

Case Shiller futures prices are mixed after this morning’s release of November numbers.

The California markets Jan Post CS(LAX, SDG and SFR) are all higher, while the “winter” regions (CHI, NYM and WDC) are the softest markets.

As of noon, there have been 3 trades (DENG15, DENK15, and SFRX15).

Bid/ask spreads in the Feb ’15 series are all <=2.0 points (as there is now only one month to expiration).  Spreads in longer-dated contracts have also been inching in.  (For example, the bid/ask spreads across the 11 Nov ’16 contracts averages 4.4 points, vs. 5.5 points on Dec. 31).

While the CUS Nov ’16 has been my “benchmark” contract, and has been quoted with <1.0 bid/ask spread all month, the CUS Nov ’17 contract bid/ask spread continues to narrow (today 1.8 points).  I’ve been using the CUSX16 to feed other prices (via InterCity spreads).  Look for IC spreads to start appearing in Nov ’17 later this week.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions.

 

Nov recap (finally) posted

I’ve finally been able to post a recap of activity in the CME Case Shiller (home price index) Futures here.  (I’ve had challenges at the server level, on the trade-entry platform, and with juggling work that have all contributed to the delay.  My apologies.)

Net, trading slowed (to ten contracts) but was dispersed across four regions and five expirations.  There was one calendar spread trade, but no IC trades.

Price levels were mixed with some contracts rallying in response to stronger than expected Case Shiller #’s (at least by quotes in the expiring Nov ’14 CME contracts).  MIA and SFR were slightly higher on the month, while CHI, NYM and WDC were lower.

Bid/ask spread were about flat overall with some contracts tightening (e.g. DEN, MIA) while some widened (e.g. CHI, LAX and NYM).

Open interest fell sharply as 35 options and 36 futures (as of Oct.28) expired.

The CME introduced a new Nov ’19 expiration.  At month-end only the CUS and NYM contracts had quotes for 2019.

The CUSX16 has performed admirably as a benchmark security with a bid/ask spread that has been <2 points for much of the month, and <=1 point for many days.

I introduced one new graph (CUSX16 vs. SP500) that I intend to blog about next week.

 

Lessons from CUSX16 contract

As I’ve written earlier, I’m trying to get first-time readers (and the press)  to focus on the CUS Nov ’16 contract as a benchmark of market sentiment for the overall home price market.  A benefit of focusing on one contract is that after readers are used to following one price, that contract can be used for examples to illustrate issues germane to the overall market or regional indices.  That is my agenda here today.

The graph below shows the prices of the CUS Nov ’16 contract vs. the Case Shiller (CS) CUS spot index on the same date since Dec 2, 2011, the date the (5-year)  Nov ’16 expiration was introduced.  (Since the CS index is only released monthly the graph looks like a step function).

Note:

  1. During 2012, while the CS index was falling, CME prices were rising.  This highlights that sentiment (which is forward looking) can go in a different direction than indices (which reflect backward looking analysis).   CS indices did turn up later in 2012.
  2. Sentiment can go through periods where there is uncertainty and prices adjust (e.g. the summer of 2013 when market sentiment dramatically changed) or can go through periods of long tranquility (e.g. most of 2014 when, CS index values were coming in at a pace consistent to eventually rising to forward prices).
  3. Since forward prices reflect the cumulative impact of where index values might be some years from now, changes to forward prices seem to be much more volatile than changes to CS indices (which are moving averages across only a 3-month period).  (e.g. May – Sept 2013).
  4. Market prices and index values now seem to be moving in the opposite of 2012 in that -after a very long period of stable forward prices – contract values are falling (falling from 2010 on Sept 11 to 205.4 last night), while the CUS index level continues to rise.  I’m not suggesting a complete parallel to 2012 with a lower CUS index value at any time in future (absent seasonal factors) but, since the index values and contract prices must converge at expiration the question as to what level the market “expects” them to converge now seems to be much more open to debate.

CUS Nov16 graph

In my experience as market maker, changes in sentiment tend to correspond to increases in trading.  (May-June 2013 remains the high volume month over the last few years).  There have already been 12 CME trades by Oct. 10th, which while still not a lot, is more trades in the first ten days of any month that I can remember going back years).  Net, trading picks up when sentiment changes, and sentiment – at least as evidenced by the Nov ’16 (benchmark) contract –  has changed.

Please feel free to weigh in on the debate as to where the CUS index will be in Nov ’16 and/or to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog or any other aspect of hedging home prices.

Aiming at Q14: Zillow forecasts vs bid/ask

Since so much of the CME Case Shiller futures trading takes place in the front contract, readers should be aware of any tools to help them in their projections of near-forward Case Shiller values.  One of the best resources is the publicly available Zillow Real Estate Reserach blog http://www.zillow.com/research/april-2014-case-shiller-forecast-6997/ (link) where my sense is that their analysts have demonstrated a good track record in forecasting the next month CS index numbers.

Their call for the June release of the CUS 10-city index is a 1.9% month-on-month gain (NSA).  That forecasts fits it neatly between the current spot index and bid/June ZHI forecastask levels on the Q14 (Aug) CME contract (see graph below).

The graph shows the historical CS index values, bid/asks spreads on the Aug, Nov and Feb contracts, the mid-market levels, and my interpretation of the ZHI forecast for the June release.

Note: the Aug ’14 bid/ask are 3.6%/4.9% above spot levels.

As such, it would appear to me that some combination of the following factors must play out for CS index levels over the next 3 months:

  1. Increases in the CS index levels will need to slow between June and Aug (despite ever more positive seasonals)
  2. The Q14 contract levels will rise,
  3. The ZHI is a tad too bullish, or
  4. Recent slowdown in HPA will overwhelm strong seasonals resulting in a slowdown in June-Aug (release dates of April-June levels) CS index growth

I’m neutral on which of the four is most likely.  I just invite people to read the Zillow work, and to the extent they disagree that they consider using the Q14 futures to express their views.

 

Less is more: Narrowing focus to CUS, NYM, LAX for early June

Since there has been so little trading in the first halves of the last 3-4 months I’d thought that we might have more luck with early-in-the-month trading by suggesting that trades focus on a smaller set of contracts.  As such, I’ve pulled together information on the CUS, LAX and NYM contracts,for the November expirations into this handy table.  I’m happy to respond to inquiries on other regions. This is just an experiment to see what happens if trading is focused on a narrower set of contracts during an otherwise slow period.

Note: LAX and NYM constitute ~50 of CUS 10-city index.    Both contracts have electronic options traded (if anyone wants to go there).  Also both contracts might act as good anchors for possible regional inter-city spreads (e.g. BOS/NYM or LAX/SDG) so in tightening spread in these two contracts, there may be spillover benefits to others.

LessismoreB

 

The table pulls together:

  • Outright markets
  • Percent gains (bids/offers) vs. spot index
  • YOY calendar spreads
  • Annualized YOY % increases (for bid-side, ask-side, and midmarket
  • (I hope to add IC spreads later)

Note: Prices are hours old and may have changed.

One interest in setting up this table is for others to make these prices even more dated by posting levels inside these quotes and spreads.  I’ll try to highlight improvements or any trading axes that people might want to share.

Two of the these three regions (CUS, LAX, NYM) already have the tightest bid/ask spreads for the 9 expirations starting in Feb 2015 across all 11 regions.  (DENQ14 and LAVX14 sneak into the top two on earlier expirations).

I’ve only shown the Nov cycle expirations as that’s where open interest is concentrated and those expirations already tend to have tighter bid/ask spreads.

Contract prices and spreads are consistent with the notion that NYM will match or slightly outperform the CUS 10-city index, while LAX looks like it will lag.  (Strength in other areas -e.g. CHI and SFR, bring the CUS contract back in to fair value versus the ten components).

I’m open to other ideas to stir up trading activity in the next few weeks.  Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any ideas or questions.

 

Basics – Understanding CUS10 values using new weights

I just got the answers that I was looking for in response to a reader’s question on how to tie out the CUS 10 index valuation using the recently announced new weights.  The net impact of this corrected approach- this month- was a lower CUS index than a simple weighted average of the price of ten regional components.  It turns out that the negative performance of the NYM index, together with an increase in the weight of the NYM index, combined to pull the CUS index value to the lower 181.43 value than a simple weighted average (of prices) using either the old or new weights.

CUS new weights

 

What this new approach implies is that going forward CUS indices, and therefore “equivalency” prices on the CME CUS (10-city index) futures will depend more on % changes in the ten reference indices than a simple weighted average.

The table below shows my understanding of how the mid-market prices for five November series expirations might be used to value the CUS November expiration contracts and the correct approach going forward in the lower right corner.  That methodology takes the percent changes in contract prices (using the recent CS release as a starting point) times the new CUS-10 index weights to come up with a the percent change in the CUS index.  Note that it turns out -given how forward implied HPA tend to converge in today’s futures prices (not so last summer) -that all methodologies are close to each other, and the actual mid-market prices for the CUS futures (shown in the far left column).

Net, limited impact on the CME markets.

CUS new B

Feel free to contact me (johnhdolan@homepricefutures.com) if you care to discuss this blog or any other aspect of housing derivatives.

 

Shiller highlights graph of CME futures on CNBC

When Professor Robert Shiller was asked this morning, on CNBC, for his views on market expectations of forward home prices, he had a graph prepared to illustrate how the 2018 CUS contract prices were consistent with ~25% gains (over today’s spot levels).

CNBC graph cropped B

 

The graph shows: a) how the recent rally in the  historical Case Shiller index converges to the front contract, b) bids and offers that are relatively tight out to 2016, c) the seasonality that exists in the Case Shiller indices also showing up in the futures contracts, and d) that futures prices show continued year-on-year (albeit slower) gains versus spot index levels.

Maybe with the posting of this graph to the CNBC audience we can cross “lack of awareness” off the list of reasons as to why there is not more trading in the CME Case Shiller (home price index) futures?!?

Please feel free to contact me johnhdolan@homepricefutures.com if you’d like to learn more about these contracts, or if you have any questions.