Over a year ago I commented on how I was very worried about a trend of hedging and companies doing things that did not relate to their core business.

A reader said:

Christian…I’m sure you’re a great guy.
Put your glasses back on…it will likely improve your vision.


Look at these news

What has occurred is that one of the most profitable car makers in the world who tried to take over VW, and the CEO who tried and showed how smart he was turned out to be a loon! And Porsche has way more debt than it anticipated!

I am not against financial engineering when it is your strength, when it is your core business. Let’s take a look at the other company I pinpointed in the blog entry namely General Mills. According to their latest earnings.

General Mills is feeling the pain of rising commodity prices and a strengthening dollar, which is hurting profits from international sales.

But were they not supposed to be hedged? And have commodity prices not fallen?

General Mills uses futures, swaps and forward currency contracts to hedge against shifts in interest rates, commodity prices and foreign exchange rates. The contracts usually don’t extend more than 12 months in advance, which shields the company from short-term swings but doesn’t protect it from long-term trends.

Really? I call BS! Here is what I think based on the data from American government. Their hedges are working against them because the spot price is lower. But to keep consistent they want to get hedges on future prices which are also more expensive.  In other words a company that has focused on making financial engineering a profit center is getting bitten ROYALLY in the butt!

Again I reference the book called Traders Guns and Money! Hedging has a role to play, but it is not profit center like these companies thought it was…

So maybe I could say to the reader, when did you take off your glasses because it seems my glasses were right where they were supposed to be…