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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Johnny Canuck who wrote (43312)	5/17/2006 3:50:22 AM
From: Johnny Canuck	Respond to of 68070

Investors may want to hedge their bets: report May 17, 2006. 01:00 AM TARA PERKINS BUSINESS REPORTER Many Canadian companies are not protecting themselves against falling commodity prices because they believe the good times are here to stay, says a report by Standard & Poor's. That means extra bruising for investors when prices for metals and oil drop. The S&P/TSX composite index plummeted 206.34 points on Monday. Despite a modest rally yesterday, Monday's steep commodity-price declines should serve as a wake-up call for investors, who should be shielding themselves by researching the hedging policies of the company they invest in, said S&P analyst Kevin Hibbert. And if they can't find answers in confusing financial statements, they should be asking tough questions of management or calling their financial adviser, he said. Up until now, "people didn't pay that much attention (to hedging) because the exposure was in their favour," Hibbert said. "Be aware of what management is doing to prepare themselves on the downside." Hedging policies are controversial. While they cushion losses when commodity prices are falling, they also stunt gains when prices are rising. In Canada's heavily resource-based economy, "lots of times people buy gold or oil stocks and they think the company should do better when prices go up," but the company is hedged, said Michael Welker, an associate professor with Queen's University School of Business. Investors have to decide how much price-exposure risk they want before they take a stance on hedging, he suggested. There are many different ways companies can hedge. They can lock in long-term contracts to buy or sell goods, so they know what price they will be dealing with in the future. They can also use derivatives, which are basically financial contracts where no actual goods are bought but the contract is tied to the price of a commodity. "Several issuers in the Canadian oil and gas and metals and mining sectors remain largely unhedged to revenue fluctuations as they anticipate market fundamentals continuing to support strong hydrocarbon and metals prices well into the future and the downside risks in their opinion may be fairly remote," said the S&P report released yesterday. For example, Toronto-based Barrick Gold Corp., the world's biggest gold company, announced in late 2003 that it would reduce the size of its hedge book to take advantage of the rising price of gold. In general, "there needs to be a bit more thoughtful disclosure about why (companies are) remaining unhedged," Hibbert said in an interview. "A lot of issuers we looked at had relatively hard-to-follow disclosures." Welker said that "in the United States right now, the Securities and Exchange Commission makes companies give what they call market risk." For example, the companies disclose what a 10 per cent change in prices would mean to their bottom line. The S&P report, which analyzed all of the investment-grade public companies in the industrial sector, found that the sections of financial statements disclosing information about derivatives had "little, if any, meaningful disclosure on the risks for which the derivative contract was initiated or the creation of new risks associated with the use of derivatives." While hedging is seen as a protective measure, it can also expose a company to a different kind of risk, Hibbert noted. Many firms enter derivative contracts where the counterparty is a bank, and the banks are increasing the amount of collateral they require. Hibbert said if a company has to put down more cash as collateral when commodity prices are changing, it could lead to new troubles if the company gets into financial difficulty.