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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Thursday, July 29, 2010

Shoes... dropping... PART2

I am not sure why I am talking about shoes dropping in these series of posts... Blame lack of knowledge of spoken English I think... But this is the closest expression to what is happening to the markets I know of.

Talking to other traders, especially on the FX side, makes me think about decoupling effect. I am talking about US decoupling from the rest of the world. The difference in the economic data in the recent days had been obvious. As a result Dollar is being sold heavily, while equity and commodities seem to have broken risk relationship.

I think the US is the most flexible economy in the world and adjustments to market conditions happen there faster then everywhere else. Therefore, what we see in the US will happen to the rest of the world sooner or later due to open borders, global trade and finances. Globalisation will be blamed in the end for spillover effects into other economies. What can you do about it? The obvious answer is protectionism. Trade barriers, subsidies and preferential treatment of local companies might help one country to weather problems in other countries. But I am not sure how much value will be eroded in the end... time will tell.

While everyone, except on FX side, is reluctant to gamble on the US GDP markets tomorrow, technical picture is slowly deteriorating for equity indices and oil. S&P is looking to post an outside bearish reversal day if it closes below 1103. Coupled with a failed attempt to push through 200d moving average and what appears to be a lower high should make people nervous:





Oil, despite initial strength seems to be falling under 200d moving average as well:



As I said nobody wants to make any bets going into GDP numbers tomorrow. I won't make any either...
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