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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Friday, July 2, 2010

Dead cat bounce or change of sentiment?

Yesterday's price action in risk assets was unusual if not confusing to most people. What started as a bounce in Euro and Pound on some 'not so bad' news on Spanish debt issuance and PMI's developed into full blown capitulation of dollar bulls. For once we traded on fundamentals with disappointing data from the other side of Atlantic sending commodities, equities as well dollar lower.

At the moment I do not buy sentiment shift towards dollar and I continue to believe dollar will have negative correlation to other risk assets. And yesterday's move was a bull trap or dead cat bounce in Euro and Pound. However... there always has to be however...two other scenarios are possible with very dramatic impact on economies:

1.Stagflation: everyone will dump dollar on bad news and buy commodities and equities (correlations of risk assets remain in place)
2. Deflation: people will dump dollar and commodities along with equities as happened on yesterday, July 1st (total breakdown of risk correlations)

Today's trading session will give more information on  which way we are going to trade into second half.
It is also important to check how market will react to good news but there were no any recently.

In view of the above and possible sentiment shift towards risk assets correlation I remove conviction sell equities and commodities vs  long dollar  on uncertainty. Until now this strategy played out well and remember trend is your friend until it ends.

In the afternoon, after US data comes out, I will publish further analysis and long term charts...
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Thursday, July 1, 2010

A problem of relativity

I mentioned earlier that market was the best leading indicator. Since we have reached a top in April this year I made a suggestion that economic data was going to get worse. And it did earlier then I thought... disappointing employment, housing data in the US , fears of double-dip in Europe and slowdown in Asia dominate the news. No wonder risk assets performed bad.

I never was able to understand someone saying that "valuations look attractive for stock markets" or "this is a good buying opportunity given the drop we have seen". Based on what are you people make these calls?! This is the problem of relativity to my mind. I think that using relativity to call change in the trend is dangerous. Technical analysis relies on historical patterns and it uses relativity in extrapolating future price movements as trend continuation tool and not a trend change tool. A bad period of someone using relativity to determine trend change would look like this:


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