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, August 24, 2010

History does repeat itself... or it doesn't?

Just in the wake of last FED's meeting I warned that market psychology can play tricks on us... as a reminder the statement was: "the worse the data is to come the more market will think that FED is to deploy quantitative easing"... but at that time I called for an intra day bounce.

This time market is making a shift again towards expectations of more easing rather then focusing on bad data. And I get a feeling this will not be intra day, but something that will be with us for some time. Looks like it is time to switch to beginning of 2008 attitude when the market was moving up on bad data rather then good one...

This will probably end up with another crisis, but I would not even try to call a top for this as I still remember calling a top in oil at 120 while it rallied for another $27 after..  So where do we start:

1. Dollar  obviously... Dollar index looks to have found a top at 50d moving average... moreover we might see a bearish daily reversal if we close below 82.84... good risk reward play selling it probably through long EURUSD.... in fact I would prefer any currency pair vs USD with the exception of Yen. Dollar index chart:


EURUSD is also bouncing off and while it has fallen through most of the moving averages, if dollar fall to continue, EUR will be the beneficiary of its weakness:


2. Equities and commodities...Need  to see also some sort of reversal pattern today and/or tomorrow to confirm a bounce. S&P still looks weak, but not disastrously weak as it held the range:


Oil is a dangerous play, so need to wait for reversal:


Copper probably would be a better play as there is some support under it (100d and 200d moving averages):


In general feels like any bad news will be met with renewed dollar selling - the scars of 2008 have not healed yet... good news will support the market as usually.... The other possible explanation I can find is that market has bottomed as economic data is set to improve going forward.

Over the longer term I still remain a equities and commodities bear and dollar bull, but you just cannot ignore such signs.
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