Hi Henry,
I think you've really identified what was the undoing of Enron. As you point out they knew energy, both the
products and the trading of them. But when they got into other commodities and industries they did not
have the experience. Excellent point that they got into these other businesses at cycle peaks and paid
inflated prices for assets.
One of the senior guys at are former shop used to say 'if you never lose money you're not taking enough risk'.
LOL.. I've heard that phrase before.
I have a question for you. Several people including Larry R Williams, have stated how the commercials are
usually short, and have an inherent shorting bias in the futures markets. That makes sense for commodities
such as copper, silver, soybeans, crude oil etc. The commercials are in the business and will be shorting to
hedge especially if they feel the price is going to go down.
At first blush, one would think this extends to all the futures, but I'd like your thoughts on if this is the case.
We know that banks and financial institutions have large swap and forward books in interest rate and currency
products. But are the commercials in currencies and say the Eurodollar futures inherently going to be tilting
to the short side, most of the time?
When the commercials are net long, then it probably means higher prices, all other things being equal.
It's also been said that in a market like soybeans or copper, if the price action is in a trading range for several
weeks and open interest is falling, that indicates the commercials closing out some of their shorts and thus the
beans or copper, should break out above the trading range.
Conversely if the price action is in a sideways trading range for a while and open interest is rising that is the
commercials expanding their short position, and thus the breakout in price should be to the downside.
Obviously, the open interest also expands as a contract become the lead nearby month, and then drops off
as the contract is close to either delivery or cash settlement. I'd like your thoughts, on this inherent hedging
characteristic in the financial area.
many thanks
John |
