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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Monday, July 12, 2010

A different approach - what could earnings season bring us?

This time, without looking at macro picture, I will have a look inside major variable that has been driving equities and commodities markets or risk assets recently - earnings. It is difficult to analyse every company in S&P, so I will focus on Dow Jones instead. First company to report in DJ Industrial average is Alcoa:

Honestly I have no idea what the fundamentals of this company are. I only know that price of aluminium at LME was under pressure since the beginning of this year. and obviously the revenues of this company very hit. Is it a sell ahead of earnings? I am afraid so. Recovery off  $10 psychological support, despite beeing a decent one in % terms, occurred on low volume. That means it was more of a short covering rally rather then new longs being established. Moreover the rally was not strong enough to push the share above the gap (10.75-11) and we reversed off it. So the market is not putting strong conviction on earnings of this company. Under $11 it is a sell, but only when momentum confirms this or we turn lower after consolidation.

I will go ahead a little bit and look at the next company - Intel. Everyone says they like tech companies:



Well, everyone, but not the market... a series of lower highs this year confirms the down trend. This equity probably would need something very big to break past $21 (channel resistance, 50d and 200d moving averages). Volume off the lows is not encouraging either. As for Alcoa, if momentum turns bearish under $21 its a sell.


Situation looks different for JPMorgan however:



despite lower volume the market managed to break the channel and is now testing 50d moving average. IF broken, next target is 41.5 - convergence of 100 and 200d moving averages.

so for the remainder of the week the strategy is the following: sell ahead of and tech and buy ahead of financials... happy trading everyone!



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1 comment:

  1. Sergiy PavlyukJuly 13, 2010 at 4:24 PM

    Alcoa gapped as high as 11.34 on the open following yesterdays earnings release. But the market was quick enough to fall towards 11 again and is trading on the lows of the day. As indicated in the post trend for this stock remains down. Close below 11 would probably open further downside as momentum turns bearish on daily. Next to report is Intel, which I will have a look at in the new post rather then here.

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