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, September 28, 2010

Dissociative Identity Disorder

Well, I admit, I might be having a dissociative identity disorder. Ask where market will go next and I can give plenty of reasons for them to go up or down and risks to either direction. And I will be right in both cases.

Here is the story from optimistic identity:


Technically S&P did not have a breather since end of August lows and went through range resistance, bounced off it and posted a new high. Fundamentally we will not have a double dip for the moment and FED will step in to support the markets if it happens. QE-2 (according to Goldman Sachs) will start as early as November. Companies sit on piles of cash saved from cost cutting and M&A activity is picking up. As a result of QE expectations dollar is falling and this will supports commodities.

A pessimistic part of me says:

Stupid, technically this is still a bear market as we have not reached post flash crash highs and weaker dollar is not a sign of healthy demand growth but rather then trying to pump a balloon with holes in it - you can try to make it bigger, but so will be the holes in it and it will eventually burst. This is still a bear market as real incomes will not rise to 2007 levels and we all know what will happen when inflation hits the market without underlying demand strength. Most likely FED's money printing is to end up with big kaboom...

You have countries that borrow money to finance economies with negative GDP growth at 6%. How long will they last? FED wants to have both inflation and low bond yields at the same time. Something have to give. Moreover, these days everyone wants to have their currency weak, especially vs dollar, but this is not the case. What started with Japan, may soon be followed by Switzerland, Europe. Brazil, Canada and other commodities exporters will follow. Currency wars? Protect your own - make life difficult for importers. 


A real me simply says WTF?!?! well, in fact you're both right,  while the optimist is assessing more short term views, the pessimist is looking at a slightly longer time frame. I am personally the pessimist and I think this is not a healthy environment for natural economy growth so I think these market will implode, probably this will be worse then 2008-2009 drop, but timing of this is uncertain. So instead of screaming this is the end of the world I will follow the winners...

I am asking myself, we remember what happens when dollar gets weak... Are we so stupid to repeat these events again?
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1 comment:

  1. David WozneySeptember 28, 2010 at 9:12 PM

    Re: “... what happens when dollar gets weak ...”

    If the stated value, of “Federal” Reserve notes, declines enough with respect to copper and nickel, the 1946-2010 U.S. Mint nickels, composed of cupronickel alloy, could become somewhat rare in mass circulation.

    The September 28th metal value of these nickels is “$0.0586008” or 117.20% of face value, according to the “United States Circulating Coinage Intrinsic Value Table” at Coinflation.com.

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