Swine flu. That’s what I’m here to talk about. This isn’t investment advice – it’s simply a description of recent experiences and an example of how news, events and current affairs can affect markets. You shouldn’t think of it as advice to trade.
When I was a kid, I was captivated by the film Trading Places, starring, amongst others, Eddie Murphy, Dan Aykroyd and Jamie Lee Curtis as the kind-hearted prostitute (?). I’m not going into the plot here but if you haven’t seen it, it’s well worth a watch.
What I will tell you is that towards the end, there’s a scene where you see a busy Wall Street-style trading floor with commodities dealers running all over the place shouting and exchanging paper tickets. One of the commodities in question was pork belly futures.
Oddly enough, Trading Places was on the box the other night and I hadn’t seen it for years so I sat through it. I still love that trading scene.
Here’s the point. Last Friday (24th April), it was rumoured that some Mexicans had caught flu off some pigs. Some of them had died; the Mexicans, I don’t know about the pigs. Saturday, the news was bigger. Swine flu: the end of civilization as we know it... global wipeout... running out of face masks... (where else do you wear a mask?)... drugs for only half the population...
So as I was taking the papers to bits on Saturday lunchtime, the thought came to me. Out of the two thousand-plus instruments on the Tradefair Spreads platform, could there be such a thing as pork belly futures? I did a search which returned “No products found.” So I looked under the commodities menu and on the basis that pork bellies are soft, clicked on “soft commodities.” No sign of pork belly futures but, what’s this... Lean Hogs June. Friday’s chart showed a moderate rise followed by a gentle, then relatively steep decline, below.
Now, even though you can’t contract flu from eating pork (assuming you cook it, which is generally the idea), I surmised that this market would be affected thus: If consumers stop buying bacon, ham and the Sunday joint because of fear, the wholesalers can’t flog it to the supermarkets.
The underlying market and its derivative are bound to suffer and before you can say “oak smoked rasher,” the Agriculture Minister is ordering giant pork barbecues to which no one is invited except the poor piggies and getting his kids to eat bacon sarnies in front of the TV cameras to show everything’s all right.
I did a bit of digging. The US is full of pigs. No seriously, they’re the world’s biggest exporter of pork product. The Lean Hogs Futures price tends to be at its highest around May and June (i.e, where we are now) because that’s when the pigs are herded to market for sale. Another interesting nugget I picked up is that if the price of corn goes up, the pigs go to market earlier because they’re fed mostly corn, and the farmers don’t want to pay the extra cost to feed them.
The following Monday I had another look at the chart but nothing had happened because the Lean Hogs Futures market trades only between 15:06 (weird time, but still) and 19:00. I left the chart open and at about ten past three looked up and saw this:
Why couldn’t I have thought of snorting, sorry shorting, this on Friday? But at least the news was getting worse – from a trading point of view, anyway.
I stuck my £1 short trade on Lean Hogs June and on Monday (27th April) the market pootled up and down a bit and by the end of the day I was £9 in the red (the spread’s pretty wide compared to something like the FTSE and the minimum margin is 150).
When Lean Hogs June finally got out of bed at 15:06 Tuesday afternoon, the market had indeed suffered further and my trade was showing a profit of £80. Down Lean hogs went, and at one point the profit showing was £270. Like the trader that I am, I was pulling my stop losses down (stop losses aren't guaranteed) to protect my profit.
The market rallied a little bit and hit my stop loss probably thanks to the Dow shooting up but I eventually trousered £185.
I got back in the game yesterday (Wednesday 29th April), but not all went to plan. As I expected, there was another overnight decline which gave me an instant profit of £60. But the pigs were staging a fightback and before much longer my profit suffered a £50 shrinkage. I banked the ten quid and tried to ignore it and get on with some work.
Later on I had another look at the chart and decided to risk another £50 by shorting at a pound a point and pulling my stop loss in. Nope, the hogs weren’t having it, they rallied slowly and that was another £50 in the wrong column.
But all in all, this series of trades was a success: total pig profit of £135. It could have been better but that’s the thing about trading; you can’t win ’em all. Think I’ll celebrate with a pint. And packet of pork scratchings.
Until next week, happy trading
Aran - The Tradefair Spreads Team
The above comments do not constitute investment advice and neither Tradefair Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
Risk Warning:
Spread bets carry a high level of risk so you should only speculate with money you can afford to lose. You can lose more than your initial deposit and stake. Before you open an account, please ensure that spread betting matches your investment objectives, familiarise yourself with the risks involved and if necessary seek independent advice.
Article provided / approved by Tradefair Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.
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'Trading, Swine Flu and Lean Hogs' edited by DB, updated 30-Apr-09
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