Shock & Awe: EC Actions and Volatile Markets Provide Harsh Reminder of Hedging’s Value

I had a window of time before my 3pm appointment last Thursday and happened to be walking by a Charles Schwab office in midtown when I thought I would check my stocks. I logged in about the time the market was down about 250 points, and I was thinking why it took the market so long to finally react to the Greek debt situation. Then within about the next thirty minutes a small crowd gathered as we watched the market gap down 1,000. All of sudden I felt like I was re-living the meltdown of the global financial crisis as the talking heads on the news started chattering about the exploding VIX index, rallying dollar, rising credit spreads, bank stock sell offs….

With a global sell off the next day, all eyes were on what would happen on the weekend, and despite resistance just a few days prior to launching what was being called the “nuclear option,” the EC came out with a trillion dollar checkbook just in time before the Tokyo Stock market opened. The markets rallied and the Euro quickly rose back to 1.30 in the face of all of the previous days short selling before sliding back down to the 1.27 range.

Just the week prior, I was speaking with treasury professionals who were forecasting how low the Euro would go in the coming months, and not one predicted any strengthening. So will the European version of TARP save the Euro and buy enough time for debt laden countries to get their act together? Is one trillion enough?

These last few days should be a stark reminder of all of the painful lessons learned during the peak of the financial crisis and the importance of hedging because no one really knows what will happen next and what forces can change the market in a split second.