I am a part of the team which is responsible for management and hedging of commodities exposures. Some say corporates are good only in following advice from banks or brokerages. I do agree corporates do not have market insight of a bank. But here is a problem. It is not bank or broker or a hedge fund that has biggest risk that markets will go against them. These guys always have an option to do nothing and wait for a better trading opportunity where as we don't. We have to continue to purchase commodities, spend currencies for daily business. Such company is always exposed to changes to market price even if it decides not to hedge. In fact my company has probably one of the biggest short commodities portfolio in the world. Managing such risk effectively is a challenge. It is like being between a rock and a hard place. You get your behind kicked all the time be senior management, whether it was a missed opportunity to hedge or hedge that turned to be out of the money. Critics will say if you lost money on your hedge then you probably bought it cheaper on physical market. let's face it, nobody wants to loose money, full-stop.

So I do not have an option to do nothing as I am always in the position (short in this case). I think people like me have higher motivation to earn positive return on their portfolio then other players. In fact my intention is to bring hedging to a performance benchmark of proprietary trading.

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Tuesday, June 1, 2010

Do you still want to play US recovery theme?

I like NYMEX natural gas market for its reliable technical behaviour and lack of correlation with macro game. Have a look at the most recent update of intraday correlation matrix:



Can this market be a good indicator of true state of the US recovery? I agree that market is oversupplied due to increase in shale gas production. But on the back of it we see some good demand growth which showed up only recently (ask any bank for their estimate). So if you want really to play US recovery theme have a closer look at this market. If you think recovery is to continue this is probably the last asset that has good risk reward ratio to play long despite all its bearishness. Everything else is just too risky.

Flipping this idea around - have the state of the US economy only now got better? And everything else we had seen before was just 'free money at 0% interest rates' idea?

And if there are smart people in the US, they should ask authorities to use more gas and less oil. Mr. T. Boone Pickens has already started pitching this idea and I hope it will get support from the US government. You have my vote on this, sir.

Technically this has been a boring market as we got stuck in a range since the end of April this year (below you will find front month continuous chart), but watch rising momentum. Is it strong enough to propel this market higher this time? Time will tell.



In the other news, the question of double top or no double top in the US dollar index still remains open. See my recent post on this topic...
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