The summer is supposed to be the time where you can catch up on your FASB reading at the beach or get to the bottom half of your work to-do-list. Unfortunately, the markets and the U.S. Treasury printing presses are not taking any time off.
Before the ink had dried on the demise of the Euro, very few experts would have bet on a 1.30 USD/EUR exchange rate before 1.15, and many were thinking parity at some point in 2011. In the last two months wheat prices have risen 60%, peaking when Russia halted exports due to drought. After a momentary panic, the market suddenly realized that there actually was enough wheat to feed the masses and prices have come down. During the first week of July, the U.S. stock markets took a tumble with the S&P dropping to 1,022 as the weak dollar and fears of a double dip took the market to its knees, despite no change in the jobs situation and more pessimistic news about the shape of the U.S. economy. To add to all this, U.S. equities then reversed its trend with most major indices posting 7% gains for July, the best monthly return for 2009. The Dow is down 227 points as I write this blog!
Even the mighty were caught off guard with Goldman reporting ten days of trading losses in the second quarter with three days of losses exceeding $100 million vs. no trading day losses in Q1. According to the Wall Street Journal, Goldman CFO Viniar said, “the company was caught off guard by the market’s volatility.”
Of course a good risk management policy does not take the summer off either, and a disciplined approach to hedging, despite what you might think, feel or hear about where prices are going, should be indifferent to these types of whipsaws. So, put on your rolling hedge or buy the out-of-the-money option and head to the beach as no one can predict where the markets are going, and neither should you.