torsdag den 20. december 2007

Why things can only get worse with Investment bank, there dont understand seems....

When you read this article you understand why Barclays is losing their shirt....

Volatility is only up because of hedging ? Where does volatility come from then? The Sky? or is it not the UNCERTAINTY about future path for economic numbers which create financial volatility.

Volatility is not a derivative of the financial market alone, its more a function of the UNKNOWN path rates, inflation and growth takes - so according to Barclays vols should go down in January, I, on the other hand, I, the farmers son, think they will go up.

Never in my time as a trader has there been more INSECURITY and UNCERTAINTY around.. hedging ? My foot..

Happy Holidays to you all and may the trading Gods be with you in 2008.

Steen Jakobsen

The Short View
By Gillian Tett

Published: December 20 2007 02:00 | Last updated: December 20 2007 02:00

Christmas is the season to watch reruns of old movies. But even before the holiday starts, financial markets are getting into this spirit.

Never mind that analysts are now muttering darkly that 2008 could produce stagflation - a concept that, until recently, seemed as dated as The Sound of Music . In the equity markets, another oldie is now back on investors' radar screens: equity market volatility.

Until recently, this was an issue that investors generally ignored, since volatility has been extraordinarily low in recent years. But in recent months, volatility indices have soared, both in terms of tangible market swings (measured as realised volatility) and in terms of the cost of buying insurance against these market swings (measured by so-called implied volatility). Indeed, the change of mood is so marked that volatility measures tracking volatility have leapt too.

So is this rerun back to stay? In the short term, perhaps not. Barclays Capital thinks that one reason implied volatility (or hedging costs) has risen this autumn is that investors have been trying to reduce their levels of risk, by hedging the equity positions they hold.

However, risk-averse behaviour typically peaks at the end of year, when investors square accounts. Thus Barclays suspects hedging activity will fall next month, prompting a temporary downturn in the implied volatility indices.

But in the longer term, there are signs that volatility is "entering a new regime", as Deutsche Bank says. After all, if you think that credit markets are even half-right in their current levels of gloom, equity prices look too high. That suggests implied equity volatility levels will probably start rising again once the January impact ebbs away. Savvy investors who want to hedge their equity positions might be wise to do this as soon as hangovers clear on January 1.

Med Venlig Hilsen | Yours Sincerely
Steen Jakobsen, Chief Investment Officer, Saxo Fund Management
Saxo Bank A/S -London
40 Bank Street, 26th Floor | Canary Wharf|London E14 5DA
Phone: +44 (0)207 151 2010 | Fax: +44 (0)207 151 2001
Please visit our website at:

mandag den 17. december 2007

Credit Crisis part II.... coming to theather near you...

Yes, there is big FOR SALE sign going on right now, the irony being that what we have seen so far was merely the beginning, the next move in the credit crisis will impact the prime lenders....

This is from internal note I sent out this morning>

Well, what can I say, seems someone been "stealing my research!"...

Now it even mainstream to publish this.... so when will Credit Crisis Round II come into play ones wonder....


From The Sunday Times
December 16, 2007

Can this be the worst crisis in 35 years?
John Waples, Business Editor
HOW is this for a dichotomy of views: "This is the worst financial crisis since 1972." Not my words, but those from the chairman's mouth at one of our biggest banks. And then, at the other end of the scale, the chief executive of a mid-sized corporate-finance house who pointed to a raft of takeovers taking place and suggested that if share prices stay this low, there will be a lot more deals next year.
The first "off record" conversation was deeply disturbing. He believed this financial crisis would spill well into 2008, the write-offs from the big banks would continue – particularly if rating agencies downgraded debt – and the only way out was for a number of banks to raise fresh funds in the market. He said last week's $100 billion bail-out from the world's central banks would not be enough.
The bigger concern, he said, was if the credit crisis spilt over into the wider economy, dragging America into recession and then seeped into the rest of the world. If this happens, then not even China will escape. Unlike Black Monday in October 1987, this time there has not been a stock-market crash, instead it looks like a deep and more prolonged slide.
As a result there are some painful facts – big corporates are now paying closer attention to their fixed and variable cost bases, and redundancies are inevitable in the new year.
A lot of the companies bought over the past two years are no longer worth what they were acquired for. This will lead to a further set of write-offs from banks. At the very simplest, this is because the take-out multiples that were being offered even eight months ago are no longer available.
On the more positive side, the views of the mid-sized broker should not be ignored. Share prices in companies in the FTSE 250 and under are being pummelled on even a whiff of negative news. But you just have to look at those that have received bids, such as Northgate, the information-solutions firm, Kiln, the insurer, and Close Brothers, the corporate-finance house, to see that buyers are seeing value at these levels.
Among Britain's top 200 quoted companies, nearly 10% now have dividend yields higher than interest rates. That suggests that investors are growing increasingly concerned that the dividends and growth cannot be maintained, or that stocks are merely oversold. If there is a conclusion to be drawn from this, it is that polarisation of opinion will continue: the big banks have more pain to come and shares will continue to be smacked. But there is still value to be found.
Beware the gnomes
IF the government starts to tinker with the tax treatment of offshore trusts held by rich foreigners living in Britain, it will undo all the success achieved over the past decade in establishing London's status as a world financial centre.
Our ability to attract the cream of world finance is down to the lenient way we treat the tax affairs of nondomiciles. This has resulted in the City being the envy of rivals New York, Frankfurt and Paris.
But, as my colleague Ben Laurance explains on page 7, that status is now at risk. This opportunity has not been lost on Switzerland. Zurich is working particularly hard to attract big corporates and the super-rich. It is negotiating bespoke tax deals and is starting to attract the attention of the private equity and hedge-fund world, as well as the big firms that want to cut their corporation-tax bills. It is a threat we should wake up to.

fredag den 14. december 2007

How to trade noise?

Short Friday notice:

Retail Sales yesterday does change the agenda slightly, for the Goldie-lock people this is sign growth could be some 50 bps higher than expected at the start of the week, but to me, the ever sceptic of any numbers from the US, its bound to be revised down to norm later. PPI also surprised on the upside, and how could it not?

Inflation is real... unlike sighthing of Elvis, but using the core-inflation measure is like pretending Elvis does live!......Anyhow;


Still feel we have 4th wave correction type on our hands.. something like 1440-00 in the Dec future 1430-00 in the SPC.

Fixed income:

Bought myself some gamma and direction yday - feel market will prove Fed wrong on growth, but not on inflation, but mostly its bet on more "satefy" runs to come with S&P testing the above low, plus banking sector results starting to come in now, and with LEH+BoA not doing much to help the issue on crisis.


Still long the US dollar trade, as I write we break last weeks low of 1.4525 - looks to me like there will end of year demand, and I stick by my earlier analysis, when Jan-Nov is down for US dollar, then in 7/8 December is opposite, and DON'T forget EURO is now FUNDING currency....

Long USDNOK, USDCAD, EURGBP.................


Long crude, long grains... need say no more....

Nice week-end


onsdag den 12. december 2007

Who takes the most drug Fed or the long only equity types?

I am sorry but I have to copy and paste this from the highly entertaining Fintag commentary:

Bernanke: Here, take some more drugs. They are on the house.
Dow: But this stuff isn't good enough. I want my money back.
Bernanke: It is all I have for another couple of months.
Dow: We need strong stuff. The kind that sets our hearts fluttering.
Bernanke: If I gave you more, the USD would collapse.
Dow: Stuff the dollar.
Bernanke: And Chinese inflation is reaching a decade high and we are importing it too.
Dow: I want to get to 14000 again. What is wrong with you?
Bernanke: I am doing the best I can to get 3M libor down but it won't shift.
Dow: Bring back Greenspan. Bring back Greenspan.

Yes, both Fed and market is on drugs, the action this morning in New York, merely shift the addiction from one type of drugs to another, some people would say they(The Fed) moved from heroin to methadone, but the real issue and what people tend to forget is that methadone ADDICTIVE as well!

Helping the bank industry by printing yet more money is going to do ZERO, ZILST, NIL, NOTHING to the overall climate - sure the banks should "theoretically" do better, but note the brackets around the T-word!

The massive up and down volatility is a clear indication of complete and utter lost ness on behalf of the market and to me, and I am prone to the negative analysis of the world that I do admit, its tell sign of far worse things to come.

Today, the day after Fed and this morning’s major ‘surprise’ liquidity injection, you know where the markets went?

Nowhere - we had a lot of noise, lots of loses I am sure, but at the end of day it is exactly where I found it this morning before opening the blinds to the beautiful ocean view in my Copenhagen office.... so in other words "much ado about nothing"......

If I was Bernanke, and not I am NOT a school teacher like him!, I would be extremely disappointed in the market reaction, at the time of writing S&P is lower than before the announcement 1492.00 vs. 1489 right now.

Stepping back - I have been "gone" from the blog for a number of reasons, the main being I have done a few air miles of travels in the last month or so - dominantly to the Middle East region. Being an expert on nothing and novice on most things in life, I was struck by the firmness of the development in Middle East and Israel.

The vibes I am getting is similar to my early days as a trader in London. Yes, there is challenges but we can do anything, we are here to change things, to move towards a better place - something I find utterly missing in the US and certainly in Europe, in both places everyone and anyone is busy maintaining status quos, and should you think I am rambling about politics you are wrong.

I am talking about markets, businesses, growth, demographics. Ignore Middle East and Asia going forward and you doomed to underperform.

There is decoupling in the world, but it is not US versus the rest of the world, it's US+ Europe versus the rest of the world, and this will have major implications for our investment strategies going into 2008.

My good colleague Mr. John Hardy made an interesting analysis for me; The expected inflation adjusted return from 1919 to now is: +23 excl. dividend (per 5 years) - BUT... when the past 5 years performance has been greater than 50% - then the expected return drops to ZERO, ZILST, NIL, NOTHING...

I call it mean reversion - yes, stock market have positive drift, no it will not always go up, up and up! In order for long term returns to regress we need sub-par return. Now most people think I am lining up for major negative on stocks, I am not, what I am trying to say is:

1. Mean reversion needs to be respected. I.e. Excess return will be followed by sub-par return.

2. 2008 will be about stock picking - just circling 5 stocks in the F.T and then buy them to keep for 12 month only to cash in minimum 25% is gone and done.

3. The world will see slowdown in growth created partly by the credit crisis and partly by laws of maths, which will makes 2007 numbers hard to beat in 2008.

4. There is "forces”, and no they are not evil, in play, i.e.; the Sovereign Wealth Funds, SWF. This is a theme I have talked and written about all year:

Note that EVERY SINGLE time the markets need saving, who steps in to help? SWF! Elementary Dr. Watson....

So bottom line on stocks for me;

Fed is doing everything they can to mess this up. Today action was interesting, I am reminded of smoke and mirror tricks performed by illusionists!

Fact is NO ONE believes a word of what Bernanke says and does! (Am I the only who have noticed that EVERY TIME Bernanke is in the limelight the market reaction is negative?)

There is SWF bid below these markets.... 15-25% below - and add to this that most asset allocators are desperate to increase the weights of EQUITY relative to FIXED INCOME and we have firm bid tone, but... market will still come down 25% from the top, but in today market volatility that’s merely 2-3 days of trading range!

Another note for 2008 - AGRICULTURE, AGRICULTURE - the prices keep rising - today’s confirmation that Fed will continue to print money, secures the asset revaluation of tangible assets aka commodities. Fed is creating so much inflation overall and food inflation specifically that one has to consider getting these guys a calculus for XMAS present!

The food stock is lowest in decades, the totally un-scientific approach to alternative energy means most farmers rather plant to meet demand on ethanol than to feed the world.

Nice going Mr. and Mrs. Politician around the world. Let's see: Saving the eco system or making sure big parts of the world can be fed what's more important?

And…..drum roll…. the winner is? The Eco system....

Al Gore's Nobel Price makes the Nobel Price as credible as Bernanke makes the Fed the same - (Hint: this is ironic in the highest factor possible!)

Note this ticker down: DBA! Buy it keep it.....forever.....

Foreign exchange? Who cares really? US dollar should be stronger right now, but Bernanke insists of trying to make life difficult with his DEVALUATION of everything American - soon the market may show him the REAL LIVE version of life outside the classrooms in Princeton’s, by giving him serious US Dollar crisis.

My take is simple; The US Dollar outlook right now is BINARY - either Fed, and the US administration stops pretending to have strong US dollar policy or they will have REAL DEVALUATION with Middle East and Asia depegging in quick successions.

In worst case I will be taken back to my early trading days in London during ERM crisis in 1992, but this time The Bank of England will not have staring role, but the Fed, ECB, UAE, Saudi Arabia, Singapore, China will.

The time zone for these currencies not good for my health so let’s hope the path of least resistance leads the FED to announce a FULL STOP on printing money and Bernanke returns to the classrooms in the Princeton area.

My predictions have zero value in making money, my views are merely personal notes, and I hope at least I can provoke some responds.

Nice life...

Steen Jakobsen, Copenhagen December 12, 2007

torsdag den 15. november 2007

Carry basket to change?

Full report later or tomorrow, but here is an interesting note on something I gor inspired on from HSBC;

he below is 1 month deposit rates in the different currencies ranked from low yield to high yield. Most G-10 generic carry basket takes three lowest yields versus the three highest, as the below shows, there has been some recent changes, and one likely one pretty soon.

Curr yield

JPY 0.605
CHF 2.075
EUR 4.12

SEK now higher 1 mth deposit than EUR!!!!

SEK 4.22
USD 4.645
CAD 4.65
NOK 5.193

GBP is only one cut away from leaving long basket!!!

GBP 5.875
AUD 6.615
NZD 8.295

Last time EUR was funding currency was funny enough, yes... year 2000, the low of the EUR value. HSBC has shown that being in or out of basket does explain
over- underperformance over time... Rgds Steen

tirsdag den 6. november 2007

For all the write-downs, this is the reaction?

I am beginning to get fed up with my sales people "feeding" me one sub-prime story after the other. I understand they are merely trying to do their best, but they are hit by "home bias". The fact we rarely are able to put perspective on too much data when it deals with something close to us.

I often find people who should be expert on their own country, or stock, tend to over-analyse the situation ending up with a negative bias.

As for the banks sales people, they are tired of the outlook for their bonus' being cut due to lousy business models and lack of risk control. The American banks being the worst, and US investment banks the pit of the pits.

I must also admit my good friends in the investment banks have been able to keep myself in the "dark corner". I have listen, I am positioned, and I have done my research, but... what the investment banks and certainly the media forget is that for the deficiencies of the investment banks, the CORPORATES are full of cash, so much that dividends and buy-back programs are on full speed ahead -

The private equity guys are full of cash, but having to reload their model, as 25% cash down is a little to cheap for the banks, so they will regenerate by doing smaller and more capitalised buying, and finally my good friends in SWF will ALWAYS be willing to listen to new investments, in particular if its NONE US dollar, equity-or commodity related.

Yes, Dr. Watson, it is that elementary. To asses the picture you nedd ALL the information, as important as the bank are, the corporate are the NERVE of the system presently.

I will have to admit that the darker sides ofme are seriously concerned about the day the consumers UNITE and stops spending money, but looking at brands like Puma, BMW reporting this morning, it AINT happening right now, as their numbers continue to perform on the upside.

I guess the good news overall here is; The exodus of good traders and managers from the banks have left, the banking industry with extremely weak top management, look how hard it is to find someone who will run Merrill or Citigroup!, and have put the hedge fund industry in place as the REAL bankers of the 21st century.

That's good news as banks should facilitate not take risk - the new banking model will be one of simplicity unlike the present status of the BoA, Citigroup and Barclays today.

On to the markets;

There are two very likely new developments in the markets which needs to be confirmed but let me take a stap at it>

Fixed Income, the US 2-10 continues to rise, now trading 66 bps, indicating the world is joining me in being concerned about the reflation of the US economy. It also seems that the almost perfect mean-reversion in 10y yield continues to unfold as nice little sinus- function.

If I am right we should move towards 4.7000 yield inside the next 1 to 1.5 month. How could can I think the US yield is going up when media is talking about further cuts?

Well, I think the concern of the weak US dollar is beginning to dawn on even the crazy Central Bankers, I would not be surprised in Bernanke, the central bank, not the alias for the US dollar, begins taking back some of the downside concern.

The Fed is clearly trying to please the market but setting a rate which will continue status qou. That's a discipline he learned from the tosser Greenspan, but what we really need is a dose of Volcker. To earn credibility not only with Wall Street, but with central bankers and investors a like, they should RAISE rates, making the US dollar more attractive as portfolio currency and securing that long-term rates in the US remain in "range" rather than drift between RECESSION and INFLATION.

My point being, the market now will have to change theme to INFLATION. The CPI exl and incl. all the crap they play with means nothing. Gold is at 27 year high, Crude at all time high, food prices continues higher, so much that Mexico's Central banker claims he can not control his inflation due to food prices going up!

China owns the key to the future financial path;

If... they continue to support their currency being "weak" the spill over into the domestic economy will be one of HYPER INFLATION ultimately. The can control the prices and the reporting of those, but keeping a current account surplus in the size they do its a NEGATIVE unless the currency is allowed to appreciate.

So the only way to "safe" this semi Ponzi scheme of bartering, will be for one off Chinese revaluation, which will make the transition period longer.....

Simply put; Gold, crude, commodities, the US dollar is telling me and the US Fed that, either you increase the ATTRACTIVENESS of owning US dollar NOW or we will devalue you into the ground ( i.e REAL US dollar crisis).

The 1st reaction before final collapse of the US dollar must be the market taking the long-end of the US higher, based on inflation and weak US dollar. Hence my surprisingly negative view on 10y notes (prices)....

We are positioned through big 109.50 and 110.50 puts....

The equity market on the other hand, needs one of two days of consolidation, above these levels< 1510 for S&P and 7.859 for DAX. If they manage that I see final 5th wave blow off, as the market is postioned for CRISIS and negative year end.

The earnings have come in better than expected, the write down bigger than expected, but if Citibanks writing of 4, 10, 14, 20 bln. can not get this market into negative what can then?

I think there is growing believe that the US is not as bad as market fears, and also remember, the 1st almost the most difficult (Yes, it is, for everything in life!! ;-)) 2nd time we adopt quicker and better as we got reference frame.

I know I risk looking like the idiot I am but going out talking about major move in November and December, but I have spend considerable time on this and in the end, compounding the divind yield, the buy backs, the SWF's and the corporate and prviate equity people being FULL of cash, the market is not ready yet.... WHEN and that's when unemployment start to rise, you got your signal.....


Short 10 y notes.
Long GBP p USD c, 2 weeks
Long Dax
Long DBA (Agriculture ETF)
Long 2/10 US

Performance> still -185 bps since 1st draft.. getting no where.

Good luck and.... be careful out there..

mandag den 5. november 2007

If even super models shun the US dollar then...??

If even Supermodels are fading the US dollar then something is about to
change.... :-)

This week could be interesting because there is actually some key events and data; I am keeping firm eye on US trade, I expect massive improvement based on freight data....Non ISM today also interesting...bottom line; I m turning my main themes towards INFLATION, yes inflation:

If we use Phildelphia Feds Survey as gauge the inflation is rising and fast..... add to this gold + crude and something got to give...

Bernanke speaks on Thursday, and as dumb a.. as he is, even he has to understand that DEVALUING the US dollar endlessly will distort faith in US financial system, we are in my opinion on the EDGE of MAJOR US dollar crisis - I believe even the central banks starting to realise this when Dubai cant get workers due to peg vs US dollar, when China decides to STOP implementation of domestic Chinese investing into HK, when India needs to let their currency strengthen....

The bottom line; This Ponzi scheme is dependent on China stance on their currency, if they maintain weak Yuan we will hape hyperinflation in China & Asia, if they let currency go, there will be "wash out" of equity investors.... but a revaluation of Yuan ONLY way to keep the game going.. but as always mere Farmers son... steen

fredag den 2. november 2007

A little more confusing action post Non-farm?

Well, the numbers came in better than expected +166 k with revisions being minimal......!.. The reaction is slightly surprising it seems the market is now TOTALLY focused on financial system being at risk again. Some meaker report from Canafa broker on Citigroup got everyone to dump the market or is it merely time for a correction?

It is tough there are a number of reasons why this market should be ok:

1. Sovereign Wealth Fund buying below in every dip. The portfolio shift from fixed income to equity is work in progress.
2. Valuation, hmm.. everything is relative, but with 100% guarantee that Fed will cut rates at any sign of trouble it is highly likely the Ponzi scheme will continue.
3. Seasonals. November-December normally makes for excellent return in stock market, however as this past October showed, history is no predictor.

On then negative side:

1. High overvaluations in the 25% of the stocks in the NASDAQ which consitutes 75% of all trading volume.
2. Technincal pattern - there is clear break-down here in German Dax index. IF we close below 7.859-00 my model is short 1 unit.
3. An overdependence on Fed coming to the rescue. God forbid they actually own up to their responsibility and stay away from "directing" the markets.

I am none committed on the equity side - but letting the models take the positions.... The US dollar no one seems to be short based on todays action... Fixed income I hope Fed cuts otherwise these low rates appeals to shorting...

Overall, very small risk, and running smaller than normal allocation per trade, as we need better signal generation.....

On the positions side:

EURUSD - we tried short EURUSD on the numbers as there is major divergence on the daily chart above the top... seems we were joining the wrong crowd as we were stopped out inside 5 min of taking the position at the new high...

EURSEK - Bought EURSEK. The move is properbly more technical than fundmental, but note how the Swedish stock index being lagging the STOXX50 recently, seems that underperformance is taking its fight to the FX cross. We are long from 9.2620, w. 1 ATR stop on the position.

EURNOK - Norges Bank is getting fed up with the strong NOK. The economy still amazingly strong, but we have broken some significant levels, and the strength of the NOK will work its way as monetary tightning shortly - we are long 7.8420, w. 1 ATR stop on the position for now.

DAX - Short 7.863 -00 on our initial posiiton, we need close below 7.859-00 tonight to keep the position, but not a full conviction trade.

USDNOK - Long 7.6000 USD c NOK p - its pretty much the same trade as EURNOK, but USDNOK is trading a extreme low levels, I may be early on this but...5.35/5.40 now versus 6.4000 in the beginning of the year!!!! Clearly USD weakness part of it, but....

Long 109.50 10y Notes puts December - ouch, this one hurts thought I would have support from numbers but little did it help....The position is based on, so far, profitable trading of the mean-reversion of the 10y rate, which follows close to Sinus function, maybe this time its wrong, but still plenty of time.... Everything the Fed does is inflationary, but as of today markets seems more focused on recession than inflation!!!

Results: - 161 bps since I restarted log.

Nice week-end

Full steam ahead for next weeks logs.

mandag den 22. oktober 2007

US weakness ? Not anymore...

Seem I am the only one thinking this week-ends G-7 was much closer to getting actual wording on the weak US dollar. I note with some interest this headline from The Guardian :

(America vetoes G7's dollar alert) add to this following text from post G7 press conference:

"WASHINGTON (Thomson Financial) - Euro group president Jean-Claude Juncker said the euro zone will continue to monitor exchange rates closely following the euro's strong rise against the dollar.

He said the euro zone and its G7 partners are monitoring exchange rates 'in particular in light of recent sharp moves' in currencies.

The euro set a new record of 1.4318 usd earlier.

Juncker told a news conference at the G7 meeting in Washington that the euro zone had noted 'with great attention' that the US authorities had reaffirmed to their G7 partners that a strong dollar is in the interest of the US economy.

Markets should be aware of the risks of one-way bets in currency markets, he added.

European Central Bank president Jean-Claude Trichet said the US authorities' comment on the strong dollar was 'very important' and he fully subscribes to US Treasury Secretary Henry Paulson's comments that a strong dollar is in the US interest."

You got mixture for a cocktail which I call 2000 in the reverse! In other words, 2007 will soon become like 2000, only this time it's to sell EUR vs USD, not the other way around.

We are still VERY long USD calls vs EUR, NOK and CAD.

In the stock market we took profit on short STOXX50 into the close Friday- we will most certainly sell again, but... rule of thumb is to wait 24 hrs before initiating new trade.

The SUPERFUND SIV, "sponsored" by Paulson, is getting a lot of bad press and rightly so, I will not add to this equation but note this: It will only move risk from 2007 into early 2008.

If you are in doubt whether there is new round of credit weakness coming let put this to you:

1. RBS and Barclays ... went to Fed, yes Fed to borrow money.. Not a sign of gr8 things to come. Barclays went lower than August 17 low todat and rightly so. It is a bank runned by fair weather guy who cant see any issues anywhere.

2. Robert Rubin will NOT sign Citibanks accounts. He is simply afraid of the new legislation which makes his personal fortune liable if Citi is sued. He is as smart as they get.. and he is not signing anything with C in it!!!

3. The Average decline from Oct. 3 to Nov. 8 in years ending with 7 has average decline of 14.2%. 11 such incident has happened only one deviated (small gain of 1.7%) (source: Peter Eliades, Stock Market Cycles)

4. There are 5.000 stocks in the NASDAQ, but the top 50 stocks accounts for more than 75% of volume. Equals = massive speculative. This is not broadbased.

I am certain the next move is about tangible vs non-tangible asset.

Gold will do well as the US continues to use printing press to create US dollar to sustain their excess demand. Inflation is coming and fast. Gold has become new reserve currency.

In the same mold crude and agricultural products. I am keen on DBA US and other related commoditiy funds.


Fx: Long USD vs NOK, EUR, and CAD
FI: Took 50% of big 10y position off. Strong seasonal into Nmovember.
Commo: Buying gold and crude on dip. Note that Crude makes cyclical high most often in October (>10%) with December being the low.
Equity: Flat, but short Cramer favourites: RIMM, GOOG, AAPL and AMZN
Selling Barclays today....for fall-out this Q4

Performance: +67 bps since live update started.


fredag den 19. oktober 2007

Back from Paris.. sorry for lack of updates...

Maybe I shud add that these updates are as live as when I m in my office in London or Copenhagen, unfortunately the next quarter takes me around the world once, but....

Leading into G-7 I got some feeling in Paris, or rather a confidence that the french feels they can get some sort of 'action' which could stop the weakning US dollar. The french do talk extensively, but this time there seem to be odd confidence I have not seen in a while. I know the media is busy saying this is non-event, but since then has the media been AHEAD of time?

I got strong feeling, which could be proven wrongly shortly, that we are inside 1-3 EURO from top of the EURUSD cross. I remember moving back to Europe in 2000 from the US and how EVERYONE was betting their house the EURO would go to zero even dissolving.......people forget quickly.

I will follow up with more detailed analysis this pm....

Otherwise straight to the positions..

FI: We are and haven been long 10y notes since the last blog...and this time size through Dec 110 calls...

FX: We are VERY long US call vs EURO and NOK - and obviously losing some money.....
We are also long JPY less size but with nice 116.00 strike...

Equity: Initiated one unit short (of maximum 3).. yesterday in STOX50 (4.464)...
We are also short AMZN and will add some more single stocks 2day - basically I am going to short the idiot Cramers index of high risers.... !!!

Commodities: No present positions

Bank of America reporting was interesting in several ways;

1. The steep decline in investment banking..
2. The amount of loss provisions...
...but ...
3. Most interestingly, BoA is the cleanest RETAIL bet in the US. BoA is by far the biggest bank and with the biggest exposure to the US at large. I find that as KEY INDICATOR in that consumers are more hurt than present numbers indicate......

Add to this that SIV's and off-balance sheet vehicles seems to be coming back to the surface of the trouble water indicating ROUND 2 is about to start.

After having been EXTREMELY confident in August that this evolve into crisis, I am far more prudent this time. I think the odds are 60 vs 40 for a full blown crisis, but we need to break 1520-1525 in S&P ....

On the FX market, make no mistakes; the fact we brokes 115.80 yesterday made excellent medium term forecaster like Andrew Baptiste calls for bare mimumum of 111.61 low tested with real chance of 105.00.

My comment: Why not ? Despite some renewed disappointed in Japanese economic numbers, they JPY should based on their growth and future yield path have been much lower. I think 100.00 is fair value. JPY is quasi Yuan so follow G-7 for related follow through. In terms of positioning JPY carry is back in force although not in same size as in late July.

Performance MTD etc... up later - report running late today......


torsdag den 11. oktober 2007

Thursday before the Friday 2..

Well so much for "fading" the moves in fixed income, they came right back down today. Relatively good claims numbers and slightly better trade data was the menu for today.

Trading wise...we got stopped in long FI, small loss, Dax - broke the magic 8.100 in the future (-9 bps).. all in all loss account from overnight was down 15 bps.

We initiated new postions based on our model and general outlook. The Fixed Income sector is clearly doing some reflation we have sell signal from momemtum model in bunds, bobl, 2y, 5y, and 10 y. We now need confirmation for this but going into end of Europe session it looks valid. We initiated short bunds & bobl#s - the theory being short the most aggresive inflation hawks, I.e: ECB relative to Fed.

We also bought some EUR p USD c based on a couple of things:

1. The interest spread differential have moved 2.5 std. dev. in favor of the US dollar without any luck so far - we feel its days is closer.

2. There are some talks that the European trying to get some sort of consensus for G-7 communique next Friday on the weak US dollar. Getting all of G-7 to agree it much tougher job, but the Europeans seems confident they can agree something.

We feel the momentum is strong on the US weaker play, so we bought some 2 week EUR p USD c, 1.41 ish strike for less than 8% vol. (Yes, volatilities are back to almost pre credit crisis levels)

We also added exposure to energy, gold and agricultur through ETF's as this is beginning to look like smooth sailing in Q4 - I have been slow in acknowledging the technical signals which have been there as I have felt fundamentals have been missing, but.... this market is NOT about fundamentals - its feel underweight risk now that the economies are not falling over a cliff.

Finally, we added, although reluctantly DAX which broke its old high - it still looks like a 50/50 whether its going to stay above the break out level into the close but ALL stocks markets are now long in the model....


BPS: -13.32

onsdag den 10. oktober 2007

It's time to go to real time experiment

Well, this year has had it's up and down for your fund manager, YTD before this month was shy of +200 bps for the year after good performance in July and August, the reversal to normal cost some money. In order to keep head and tail my positions I will start inputting daily postions and thoughts - commentaries welcome.

Present positions (day 1)

Today we moved from long carry into a more risk averse position. Our models showed some nervousness and technically RSI looks to break of many stocks indices.

We also noted that during our model run that fixed income showed clear confirmation of "reflation" idea, but.... we have had two false breaks. Yesterday Gilts broke their buy-entry level only to fall back. The same happened in the belly of the US curve today with 5y breakink 106.11 only to trade higher again. We take this as sign the trades and follow through from Friday has lost momentum.

In itself not that unusual as main bulk of the last two month's Non-farm was the not-present-government-workers to the present government-workers! The reality remains private sector is not producing any jobs at all.

But to the order of business...

We sold EURCHF long with nice profit (1.6704 exit)
We took net loss in EURGBP where the follow through on the weak GBP couldnt carry it pass the 0.6930 in earnest (.6913 exit)
We tried to sell GBPUSD this am only to stopped out - 20437...
We took 1 tic loss on 10y note position 108 23/32

and we initiated new positions in:

EURNOK - Long @ 7.6951 (15% of net value of fund)
EURSEK - We remain short from 9.2017 & 9.1781 (30%)
NOKSEK- short 1.1877 (19%)
JPY c USD p, strike 116, Price 41 pips (Net risk 10 bps)

Dax(Dec)- short 8.055,50 (16%)

10y Notes (dec) - Long 108 23.5/32 (37%)

Return on live porfolio (1): +4 bps

tirsdag den 25. september 2007

US dollar is the worst over? 2000 revisited?

....a while back we did some test of one currency pair leading another, which is extremely difficult math-exercise, the only thing we did find was that EURAUD, leads EURUSD.... in high frequency...

then now... I am noting NZD+AUD reacting a little this morning and made enclosed chart.. which is merely.. aud+nzd divided by 2... and eurusd in same chart... is this sign of top in place /

I know evert bank in the world falling overthemselves to put EURUSD outlook higher but........

1. European investors still got issue funding their US assets, maybe they need to take those USD into EUR soon ?

2. US fixed income extremely cheap in currency adjusted basis, plus from mean rever. perspective its cheap..

3.Seems to me there is more CREDIT NEGATIVE news coming from Europe than US recently,..

4. ECB is stubbornly looking for higher rates while consumer sentiment, credit conditions CLEARLY showing risk of more neg. growth..

5. UK is mess, post BOE and Government bail-out... 5. 1.42 1.43 always been touchy area for politicians....

6. EURUSD was .8600 in 2000... now 1.4200 ??? I remember destinctly how NO ONE wanted EURO then, this is the same US momement in my always naive farmers opinion... Steen

torsdag den 13. september 2007

Bearish Fatique? Yes, absolutely, time to change? No way!

Yes, I am, like most people, hit by bearish fatigue. It is tough continuously having to look for the negative things in life and in trading, but this is such times. The mood reminds me so much of 1992 ERM crisis, lots of waiting, lots of denial, and loads of people buying the "official" explanation.

In 1992 the fundamentals got the better of the political game, and the UK should replace the recent Mandela sculpture with one of George Soros, as his run on the Bank of England did more to the UK economy than anything else since WW II!

Staying on that note, the analogy for the stock market is the same. IF... you really want this stock market to continue its long-term magical rise, then what we need is to replace "the ignorant trading style" with good old traditional value. In other words we need SERIOUS DEVALUATION of the stock market.

I am, despite, being casted as the opposite, extremely optimistic for technology, evolution, stock market and mankind in general. There are at least 50 different stocks I would love to own in the next down-cycle, but the fact remains that right now, as of this moment, the market is defending GBPDEM on the bid in the brokers, or....or in todays terms.. the stock market is slowly edging towards the final 5Th wave correction which should take equities to FAIR VALUE, from there we need to move to CHEAP VALUATION, and then the future is bright.

Do not EVER forget that there are several factors which makes the stock market "drift positively":

- Innovations
- Economy of scale
- Demographics
- Human nature (stock market is game, where we only win whens it goes up...)
- Yield
- Relative risk
- Utility
- Sovereign Wealth Funds

All of the above will make for power full cocktail, but right now.....the market tells me 2008 Earnings growth will be 11.75% after 7.7% in Q2-2007. Let me understand this;

1. Margin cycle has clearly topped. Input costs through the roof, growth velocity has peaked globally.
2. Funding costs of doing the business has risen considerably, as seen in credit spreads and even LIBOR lending rates.
3. Consumer sentiment - collapsing
4. Housing market, everything being equal will need to fall another 2-3 quarters

Does 1 through 4 add up to rise in earnings growth? Apparently!, according to the people in Positive-land.

I have ZERO predictability power but looking at pure chart based trading I note two recent developments:

1. My momentum based models are VERY CLOSE to selling the market. DAX Futures should be sold below 7.375-00 for a 5th final wave according to my medium term model.
2. There is TRIANGLE formation in about all major indices.

1+2 should be resolved shortly, either we get false or no break, and the people of Positive-land will be enjoying their cocktail again on unsinkable Titanic or.....if I am right, they will be running for life-boats.......

A resolution in technical terms will have to happen in the Sep. 13th-28 Sep. window, so this fatigue can soon be followed by some fast paced action.....


Fixed Income: Waiting for Santa Bennie, but long Euribor calls
Foreign Exchange: Building LONG US dollar position, yes long... vs GBP, and EUR..
Equity: Short Dax, adding as per above if broken, and long gamma. Took profit in mining.
Next 7 trading days decides the year in my opinion.


tirsdag den 11. september 2007

A day in positive-land...

Well, once in a while it's good to join the other side, to get a different perspective.

I did that today, first I spent some time reading up on some of the better independent research firms out there BCA & Bridgewater, then I joined Soc. Gen for their lunch presentation with their Chief US Economist Stephen Gallagher, who writes some excellent research pieces week in and week out.

The arguments of the "positive" camp summed up by me are:

- Looking back at prior crisis' there is something missing this time....
- The consumer not going to back down.....
- Fed will do what's needed......

It is hard to argue with them if you only use data since 1982, which 99,9% of them do in their analysis. Yes, then something is missing, but.....

What lacking is not signs, but the reaction.... the automatic pilot which "bails" them, the economist, and the market out each time.

The central banks DOES realise there is moral hazard in rushing to the rescue, I think the best analogy of the present situation was given by McCulley, of Pimco....

He talks about, having been at Jackson Hole, how the Fed wants to reset the strike price of the Fed put.

I.e: slower and less predicable. That's a huge difference from the present mindset of the idiots like Cramer & Kudlow. Who thinks: Cut= Good No cut= Bad.

He goes on... "Fed does realise that risk aversion has not historically been broken except by cuts if Fed Funds policy rate". Freakin exactly!

So.. what we got is; a New reaction function, which is NOT automatic AND we got CB's, not only Fed, who wants to let the market play out its games, because it is ALL games!

I find it so ironic that the very people who wants and calls for Fed to cut, are arguing stock are cheap based on fundamentals! Why then do Fed have to cut?

Enough on this, I was inspired yesterday by John Makin latest op-ed in WSJ, which calls for Q4-2007 to have negative growth of 0.8%. I could not do his piece justice by trying to para-phrase him but here is the link:,pubID.26775/pub_detail.asp

A few headlines from him:

- Reduced flow of credit to all borrowers, while increasing the cost of borrowing for credit worhty borrowers"
- Every time in the last 50 years that residential investment been this negative - it has meant a RECESSION
- American recessions unusual because it implies "negative consumption growth"
- The Excess of 2000-2001 bubble was in the capital stock, hence no material impact on consumer, and it took eight quarter to run this unwind
- the -0.8% comes from: Flat consumer growth, a negative 1 pct-point from fixed business investment, and plus 0.2 from the rest (which is average since 2001).

Well, I am really not in position to feel confident about neither the Positive-land story or the negative as represented by Mr Makin, but.... I am defensive still.

There is absolutely NO reason to be brave right now. There is still bubble in carry-trading, market believe in Santa Claus (Santa Bennie), and credit market is on a strike not seen since Reagan flighted the flight controllers!

End of this game is how the American consumer reacts, or in worst case, the foreign investors in the US dollar.

The second part have got some headline recently as US dollar index broken the 80,00 pretty much predicting free fall on the cards now.

I remain EXTREMELY sceptical on the US consumer, his headwinds are considerable:

Higher living costs, higher energy cost, no growth in disposable income, higher funding costs.

We have seen major ticket item stocks like Harley Davidson collapse recently, to me that's sign things are NOT that good. A seen by this chart (click on it to enlarge) the HOG stock been drifting down since MAY!.. Leading or lagging? I will let you be the judge.


Fixed Income: Neutral. Long some Euribor calls as ECB too hawkish, but valuation is stretched even though duration data supports long position.

Commodities: Looking to short Soya and Corn. Crude = neutral

Foreign Exchange: Long JPY vs EUR and USD, short US index

Equity: Long Asian real estate, mining, and Asia in general, vs. long gamma position in Dax and S&P500.

Cash: Still 60% ish...

This is trying times for all of us; central banks, hedge fund managers, investors, the real questions to me remains: Is the paradigm shift?

Yes, I believe it is, the consequences will start to materialise over the next six month via increased leadership from Asia, increased SWF impact and repositioning of central banks reserves, but as always I am merely small farmer son from Denmark with less predictive powers than a monkey throwing darts.


torsdag den 6. september 2007

Another big day in the market...ECB & BoE

The Beige book was far more upbeat than market expected - the evidence, though, would have been available at Jackson Hole meeting, but what remains is that the US at large in August were more 'fearing than feeling' the new paradigm of NO liquidity for banks.

I did however, stumle upon a very interesting note from a former colleague; Jessie Tay, UBS, Singapore, she noted that: "In a highly unusual move, FHLB, another GSE, revealed that they have lent 110 bln. $ in August, which I understand to be 6 month to 2 yr funding. They normally disclose quarterly. "The 12 Federal Home Loan Banks lend money to 8,100 thrifts, credit unions, insurance companies and commercial banks at below market rates in order to finance their holding of mortgages. The banks in the system, which was formed 75 years ago, also buy and hold mortgage related assets themselves"...

The irony as she also conclude; so this credit crunch happened DESPITE most financial institutions having access to funding in August. Maybe that's why the pain was not felt YET ?

Staying on credit I noted in FT's Gillian Tett piece yesterday that she qouted international monetary sources as saying : "What is happening right now suggest that the moves by the FED and the ECB just havent worked as we hoped" Interesting someone with sense of the situation?

BOE is unchanged today so is ECB anything else would be surprise. ECB is dogmatic so bigger risk for something ODD to happen there.

Another company goes under in New Zealand the RBA's Costello admits: "...sub-prime hurt confidence". RBA also widen the repos amid credit squeeze.

Basically, nothing have changed, the off-balance sheet to on-balance sheet continues, and in this light we should also see Citigroups closing down Tribecca, and internal hedge fund, which when launched was supposed to get 20 bln. USD under management!

Readers of my "analysis" know I think EVERYTHING in the world is connected to JPY volaitlity, to prove the point here is chart showing ABC/Wash. Post week confidence indicator and JPY vol 12 mos (inversed).... Hereuka! Its another match. (double click on chart and it enlarges)

So... according to correlation, if JPY volatility does not come down then there will be no improvement in US confidence.

Tatical approach

Fixed Income: Clearly the tug of war continues. Central banks can not solve this, there needs to be serious downsizing of balance sheets in the banks.

10y notes made new high and if 5.44% goes in yield, we have new BULL fixed income market. This is justified as duration analysis shows the heavy weights funds (real money) been building potentially forcing others to join them.

I am neutral as I want to see ECB and BOE lingo, plus get feel for unemployment number tomorrow, but I am on the side of the big boys here.

Foreign Exchange:

Between rock and a hard plate. US dollar if Fed is going to give the market its cut, then it become question of... 25?, 50?, 75? If less than 50 bps next few month, US dollar will have strong recovery. The talk of China abolishing US Fixed income does not really makes sense, but I am more prone to buy US dollar than selling them, as the improvement in trade deficit "normally" coincides with stronger US dollar.

High yielder NZD and AUD have seen their highs - reality is hitting them with tight money markets, and sub-prime issues.

Long CHF again from this morning on technical input, also got feeling ECB numbers going to be weaker than Swiss from here.

Long JPY, despite both weak Nikkei and economy. In times of crisis, the Japanse starts to repatriate we saw that in the Asia crisis, and from the price action recently I feel its likely again. Volatility remains elevated.


Still mega long gamma downside.

Good luck with ECB and BOE.


onsdag den 5. september 2007

Free markets - why are the banks whining?

It is very clear to me that the central banks of the world are in the process of doing a paradigm shift. In all of my trading life we have had the Greenspan put in place. Basically, since 1982 every single market down turn should have been bought, as IF there was ANY type of crisis on the horizon the central bank response was to float the market with more capital in order to stem the tide.

This "safed" the Asian crises, but made the IT-bubble in 2000, post the IT-bubble capital floated into housing, and private equity/hedge funds. The REAL paradigm changed has been the fact that 1989 was the most significant ECONOMIC EVENT in my life. Why? Because it created more wealth by creating 2 billion new capitalist', it created more saving allowing the Western world too deeply dis-safe.

What I see in front of us, it that the CREDIT CARD bill now has to be paid. No longer is it enought to pay the minimum amount on the bill. The card is MAXED OUT!

The paradigm shift happens because the new central bank managements, understand that bailing out the industry right now will not only create a moral hazard but also make the bubble even bigger. They need a resolution to this crisis which comes from somewhere else.

Yes, they will cut rates WHEN, not if, the economies show down turn. All cyclical indicators for the world economy is collapsing anyway, but......the CREIDT issue as seen by the graph here neither can or should they touch.

LIBOR, the London interbank rate is now trading through the FED discount window allowing at least US based banks to arbritrage... this will not happen yet as there is collateral needed for borrowing in the discount window....

This situation illustrates many fold, how this is about the world banks taking ALL their off-balance-sheet investment onto their balance sheets.

Without naming names, clearly, a lot of European banks are not telling the full truth about their loses. (How come some banks continue to have Glitches in their payment system day after day??)

This is to continue, having read Schumpeter at University finally pays off!!!! Destruction of capital is the name of game. Destruction because a lot of those off-balance-sheet products was funded by NON money. This was always smoke and mirror, the only place it really showed up was in the ever rising earnings of the investment banks.

Pension funds and risk averse investors, are now caught with AAA "vehicles" which is downgraded to junk. The mom and pops Money Market Fund is losing 10-15 pct... in a month! New world? Yes for sure.

In all my life as a trader I have never seen anything like this. The stock market is in a total denial, the fixed income in near panic. JPY risk reversals in 3 mos still safely above 5% for JPY calls or 2-3 times the norm!

The only thing which can safe this seems to be the 50 bps the stock market thinks Bennie will give them, but .......even that could be short cutted by another discount rate cut.

I have very few positions as I get stopped out almost inside 5 min off initiating the positins but..

I am VERY long gamma downside in stock market for September. I'm small long JPY, short AUD......

I am still keeping the powder dry, but the longer this goes on, the more I get nervous...


tirsdag den 4. september 2007

Do I owe Bernanke an apology?

The jury is still out, but Bennie even telling the market that the moral hazards was the markets issue to deal with not his, was pretty surprising! Bennie definitely gained some delta on my rating radar, but he is still public servant and the Bush/Bennie show was coordinated to almost perfection for most impact.

However, the real dilemma remains the sceptisme with which the fixed income market treats this event. They are telling us, bail-out, go to life boats, while the stocks market guys are enjoying their Martinis on the sun deck, seeing no icebergs or anything in the horizon which should get them take of the party cloth!

Is this is a matter of eventually, the stock market understand that when there are NO funding, there are no party, or is it the "doom sayers" of credit who needs to get a life?

For me its neither or, as both things are facts. Fact is EMG and Carry trading is back in full swing. Fact is there will be both earnings issues and down-turns in the economy, but....the real impact is on the consumers and here I am very pessimistic.

Two in three Americans thinks the US in a recession, according to WSJ poll!
The leverage consumer is stuck; the food bill is exploding, the gas bill..exploding, the rent bill... exploding, and the real income is flat, so this credit crisis is in REAL TERMS a surcharge tax on the consumers (the very reason Bush is trying to "help out")....

From an allocation point of view September have by far the worst seasonal returns:

ADVFN’s analysis found that the FTSE 100 drops an average of 1.37% during September, making it the month that sees the worst market performance of the year. (

This makes me maintain my extreme long cash position: 60% - the bulk of my allocated assets are in Asia, mining and Asia real estate:

Aberdeen Global - An Asia Pacific fund YTD: +13.14%
Merrill Lynch World Mining fund - YTD: 32.86%
Morgan Stanley Asian Prop. - YTD: 10.19%

Even though these trades are part of leverage trades is for the long term. Mining have excellent supply-demand function, demand exceeding supply, Asia as whole will do more "internal investment" amoung each other, something the SWF(Sovereign Wealth Fund) will escalate, and property, well Asia is cheap vis-a-vis more developped economies and as the population grows, and gets richer so does their housing demand.

I am also long technology relative to banking. I was net negative banking but have shifted in to more balanced approach, as I really dont have any gauge on who "wins" the above conflict; the fixed income guys or the stock guys...

Either way the next directional move will be BIG in velocity and in re-valuation as;

1. IF.. stock gets fixed income guys convinved ... there will have to be bought a lot of stock to get portfolios back to neutral weights....
2. However..if fixed income prevails, there is serious revaluation needed. The present forward earnings have hardly budged. In other words the E in the P/E have remained untouched by the credit, add ot this that margin at cyclical peak, and you have dynamic cocktail.

In closing; Im long gamma downside in stocks, I cant afford not to be, looking to way of increasing long US dollar exposure.......neutral fixed income, neutral energy, and looking to sell both grains and energy.

A very confused .....Steen.... safe trading... and as always... toss a dice and you will most likely do better than me..


fredag den 31. august 2007

Pre Bernanke speech thoughts...

It is the big day for Bernanke, in a few hours we know if he is politician like Greenspan or a true central bank who understand his role.

Market is pricing him to cut, in the last few minutes EURUSD, Silver and Gold all rallied strongly into final hours before "ruling" from the Chairman.

Bush attempt to stem negativ PR from sub-prime into middle America, is late, and from what I can understand of it, not really helping a high number of people.

I note Barclays can not balance their liquidity book, but they can bail out Cairn Capital !!! I note that Bear Stearns High Yield fund lose plea to protect them from litigation in the US. (They filled for Chap. 11 in Cayman Island) but lost .....So.. reputational risk have increased significantly for not only BS, but whole industry.

At the end of this road the financial industry will have changed, and to the better. The Laissez Faire pratices sanctioned by rating agencies have been going on for long, but.... at the end of the day the REAL bubble was created by the very people who now, as per markets wishes, should safe them by cutting interest rates.

It is remarkable to listen to CNBC, and in particular the US market people they got on the show. Most of them deals in black-and-white. Cut now or.....

I for one, have reduced my postions to a minimum, I must admit the last three days up-and-down have tired out even an old trader like myself, but there is yet another month in September. Statistiscally the worst month of the year, but for now the BULLS have it...and with a force.

I remain in "combat gear", let me market price action tell me when the bottom is in, for me this is 4th wave before 5th final correction, but I have, as you very well know, been wrong lots of time before ;-)

Nice week-end.

tirsdag den 28. august 2007

Fall-out or bail-out

Upon time getting back to schedule and writing my daily commentary to "clean" the brain here it goes:

Market has been in 4th wave correction of the drop-out. We saw low of 1375.00 in S&P follow by major correction on the back of what was "relatively inteligent" move by Bernanke and Fed. Cutting the discount rate - did nothing for the credit conditions, but it did give market the smell of "bail-out".

The most interesting aspect of this being, that "post-game" analysis tends to focus on that Bernanke is trying to avoid Greenspan classic mistakes of giving the patient what they think they need rather than what the doctor prescribes.

The Kramer's of this world have no feel for reality. If they lose they want their old friend Mr. Fed to help them out. I have been hard on Greenspan for long, long time, and I am constantly reminding people that the very bubble we have right now is created by central banks generating too much capita at too low rates.

Fast forward to now, and let me stress I do not know if this goes from crisis-lite to fall-out, but inrespective of what happens a few things needs to happen:

1. A serious correction of growth forecasts. GS already looking for 75 bps this on the downside. C looking for 50 bps. Me? You know I have no predictability powers but I am more towards 100 bps.. and here is why:
2. Unemployment. Recent studies shows that the 130K plus jobs created this year on average is merely statistical mistake than real jobs. There are a number of reasons why reality is going to hit the economic numbers going forward.
3. Credit condition for Main street Americans is tigher much tigher:
a. food is through the roof b. energy still elevated c. Asset value of your home is deterioating d. Credit linkes being removed. You can not get a mortgage even as partner in GS right now! e. mortgages are rising and fast (despite yields coming of)
4. Global forces: China is looking to hike and that will slow their growth velocity, last week we saw Euroland come in below consensus growth, and the same for Japan. The world is SLOWING down from cyclical top.
5. Earnings will come down and fast. Unit Labor cost is rising much faster than GDP deflator (1st time since 2000)
6. Cash flow. Buy-back programs been very dominant factor in S&P last two years, without it S&P would have been down! Again Net Free Cash Flow have now turned negative (again 1st time since 2000)

These above 6 points remains with or without further crisis, of course if crisis persist then these points will be "leveraged" further.

Then let's return to credit market. I read on the wires that things are going back to normal: hmm... check this chart:

The CP market has NOT moved one Ioata back - there is NO normalisation. This market is behind most of leverage of the hedge funds, Private Equity and banks conduit funds, so in other words, the money lender is out of business.

Another way to look at this is to see how the banks are performing, post this Crisis-Lite:

Better but not back to anything like two month ago.

Well lets cut to the chase here is how I see the market from here (Remember throwing dart will give you better performance than following me!!!!!)


Financials will continue to underperform and big MAJOR margin. We need some serious destuction of capital in the banking sector. If German Landesbanks are biggest investors, with State Street, in Conduits then they should be ashamed. No governance, no repurcussions and they cant even fights these vehicles in courts as that would expose them even more. This is MAJOR negative for coming years.

I am short EVERYTHING into 4th week of September - I expect bottom will come in for this year there and we will be smoothly sailing into year-end. Q1 2008 will be crunch time. The credit failures of the last 10 years will have compounded and the write-offs and law suits will be flying by then (Anyone know of public traded litigation stock I can buy?)

Never forget that SWF have plenty of ammunition and so does private equity, although the need to set their targets and funding levels lower - this will stop the market this time.

Foreign Exchange

The BIGGEST risk in the market remains the UNWINDING of carry trades in FX. FX is always the last component to move and the only REAL leverage remaining in the system is in JPY and CHF carry trading. When USDJPY have traded below 110 we are about back to normal (1.6000 EURCHF). This is the bigger risk here, as credit tightning so does conditions for the "free trade" of funding low and placing high.....

I expect a reversion of the weak US dollar based on repatriation of funds from US based investors from emerging markets, from the neutralisation of the theme : US is decoupling.. which a lot of market players have on right now. Finally, US is the only country in easing mode, i.e they will reverse this trend faster than the dogmatic European central banks.

Fixed Income

My arbitrage friends are busy telling me telling curve is wrong, well I am of the opinion that we are seeing correct rates. Remember, as RBS Greenwich tells me, "..the first ease in a given cycle 2y notes traditionally trade 125*150 bps through funds..."...... I.e: We can go even futher down in short-end before indicating cut.

Fed will cut as per my six points above. The cyclical growth and credit expansion have moved from BLOW OFF period, to bubble bursting...recession lite...

Be long short-end, and December Euribor. ECB is ni Catch-22 which will lead them to cut as well... (Just watch Spanish real estate markets!!!)

Norway and Sweden will most likely hike - its not for nothing they are bunch of dogmatic Socialdemocrats!


Both energy & grains are in total denial of the changing cyclical forces.
I expect crude- and grain to put in negative performance over the next 2-3 months as the world adjust to "back to normal" leverage and growth.

I am very negative grains based on excessive speculation and indications of better than expected crop in the US.

Crude - Hurricane season always tough to play Crude in this part of the year, but risk is to the downside and as soon as next week.

Gold- Silver: Stay out for now.... but it in bull market and I will look to buy with end of September.

Best wishes

Steen Jakobsen

mandag den 13. august 2007

Credit crunch or not..? This remind me of 1998

I did internal Saxo Bank interview and instead of printing it I will leave it for you in link:


torsdag den 2. august 2007

Back from the cold...

Had my first three week holiday in my working life! Boy did I enjoy it! Despite being the coldest summer ever I had a relaxing time, but.... to the work at hand: The market.....

Mortgage impacting the rest of world it seems. I was, and still is, somewhat of the opinion that US is in a decoupling mode with the rest of the world. This argument ignores the often cited argument of the US being carrier of all good and bad in the financial markets, but as stated before in growth terms, the US impact is small and getting smaller, but..... the issue here is the SUPERSIZED LEVERAGE of the world, pretty much all of it originates from the US.

It is the US consumer and hit "friends" at the US investment banks, who have engineered a whole new financial structure and in the process taking the already overextended american Joe Six Pack away from ANY financial responsibility.

The US credit bubble was and still is the "Tulip mania" of this century, but that's old news....

My take is this is going to be slow and tidious process. Every time we get positive on the markets some news will hit the frontpages. Right now NO ONE in their right mind wants to be part of the leverage game of private equity funding and other risky projects where FUNDING is an issue.

Several European banks are clearly only lending to core clients and NOT looking to be part of any consortiums.

The usual end user/investor of credit, the Asset Managers of the world, got more than enough issues with explaining why their VaR and marked-to-market numbers are jumping around 25% per day!

So.... the positive credit cycle is could reignite but to do this the banks needs to reopen their credit lines which I believe is unlikely, with their own stocks trading at junk bond spreads.

Think about this:

The outstanding mortgage mess is approximately 750 bln. USD, the total value of the US banks is approximately 835 bln. USD. A kind of low ratio even though US banks are not alone in investing and obvisouly do not carry all of this on their books, but ultimately the US banks are fast becoming the biggest real estate investors in the private sector by virtue of their own greed in facilitating mortgages which should never has been used by the average American.

Everone I talk to, the ones much smarter than me, sees more of this coming. I remain focused on the SWF whom are puttting in more and more of their funds into the equity markets in order to increase their weight for stocks.

On the economy it seems more and more clear to me that the US economy is heading for trouble, the consumer added a negative 0.8% to the economy in Q2 and it looks like 1,5% growth for us in H2 so..... fixed income is looking more and more positive to me... and inflation....? Still there at least if you are consumer paying for food and energy, it is NOT there in terms of core-inflation but at a time where the US consumer is under attack;

1. His home value tanking and fast
2. His running cost in terms of interest rate, food and energy exploding...
3. His stock investments..... starting to trouble???

For now #1+2 is done deal, on #3 is more open question but there are signs which looks more and more like 1998, where Russia went bankrupt and so did LTCM.

Read interesting definion of difference between history and economics yesterday, while reading about JM Keynes. The study of history premise being every event is unique. The premise of economics: That historic events are repetitive. Quit interesting with the truth probably being somewhere in between.

2007 credit bubble is not 1998 but the end result has bigger and bigger probability of being similar.


Long JPY, short USD, short DAX..... looking to short EURCHF, GBP, buy US FI, sell Copper.

Good luck,


tirsdag den 26. juni 2007

US mini-crisis is coming to town near you!!

Sitting in airport lounge on Iceland for the 7Th straight hour courtesy of Icelandair, probably the only airline with less service than Ryanair, made me think about this leverage game.

I engaged friend of mine in New York, who is not only far smarter than me but also more level headed, but the gist and conclusion was the following:

The CDO/leverage credit will cost about 100 bln. USD (his number and he is more in the know than me). Is this isolated or not that's the question?

Being a simple man I think following could play out:

The world is clearly asynchronous. The US is left behind the rest of the world. Private Equity and outsourcing to India has made sure there is not a single real job left in the US, unless you count the bean counters and the Wall Streeters as real jobs?

The world being asynchronous is OK as long as the US leads, as saving surplus is being regenerated back into to the US to pay for the excess consumption, but when the tides goes out;

The foreigners, which the US does not like anyway, stops sending more money ......The sovereign wealth funds have realised that in order to pay for ageing populations long term they need to find better places than the US place their money.

Let's not forget that investors have seen negative return adjusted for currency risk for several years in the US now, so they increase their equity weightings and start doing so closer to home.

The cyclical saving surplus of the Middle East and Asia has reached toppish level, as total currency account surplus' have stabilised, the main beneficiaries been private equity and other highly leveraged entities.

At the same time, probably randomly, the worlds central banks are getting upset about being used as carry vehicles. The Taiwanese, Indian, Swiss, Brazilian and New Zealand central banks have all changed their appetite for "more of the same" indicating this is NOT a one-way street.

Equipped with conspiracy genes, which would make me guaranteed CIA material had I been American I am beginning to see pattern:

1. The US is losing growth....if nothing else relatively....
2. The SWF's wants more for there money
3. Central banks does not like the feeling of being "used"...
4. Interest rate trend broken lines going all the way back to 1989 and the Berlin Wall.
5. Yield curve is steepning faster than most people like
6. Major banks Chiefs on the wire warning about credit: Wulfi of UBS, BoA's Prez....!!
7. Complacency is so big that good friends, who are not only much smarter than me, but have better intelligence tells me; This is going to continue for years!

So.......the CIA material in me.... says.. hang on a minute...... if everyone agrees this 100 bln. US dollar can be contained and without influence on the "game" as a whole either I am too sceptical or..... they are refusing to see the truth ? Could this mean a full blown US dollar crisis and the breakdown of Bretton Wood II, the floated currency regimes in Asia?

Anyway... this is quick-and-dirty thoughts written on the go, but....I got feeling this is VERY DIFFERENT, I do not like the increased media focus on potential issues in credit in the US, and I certainly don't like the fact that 500 bln. US dollar of flexible mortgages in the US needs to be adjusted to much higher levels...

So... being in the country who started the leverage game in earnest, being early leaders, Iceland, could be random, but it could also be sign.... (or should I just join the CIA?)


Equities: Short S&P, DAX
Fixed income: long Euribor, looking to add Europe FI...
Commodities. Missed silver dump - looking to sell Gold.....still like crude.
FX: Short US dollar - considering increasing vol and cash positions based on above.

In closing can I please ask you to read Andy Kessler's classic piece on Blackstone called: Blackstones world of cash. I have admired Andy's writing since his first book and his points are to the point and fresh....

Nice Eve.

Steen Jakobsen

søndag den 24. juni 2007

Test of the bulls....

We need some action from the ever present bulls of this market. The counters already getting themselves ready for rebound;

The most recent 10 week down moves resulted in an average change of +1%, with 7 gains and 3 losses in the following week.

However, the ongoing June SALE in mortgage issues looks to continue, and in the steepning game the 2-10 spread has broken significant levels creating momentum even higher....

I remain short DAX and S&P, but been wrong before :)

BIS in its annual report reminds market of 1998 sell off in USDJPY - something I keep reminding myself of. "There is clearly something anomalous in the ongoing decline in the external value of the yen.. The underlying problem seems to be a too firm conviction on the part of the investors that the yen will not be allowed to strengthen in any significant way".

It is clear that most investors got firm believe this is going to go on forever, which could happen, but from risk management perspective, you have to watch downside in USDJPY.

I am off to Iceland to speak at conference and some facts finding. Back Wednesday.

Portfolio: Same oh, same oh.....bias: short stocks, curve + FI, short US dollars across the board, long CHF and JPY.

Good luck.


fredag den 22. juni 2007

I think and think for months and years. 99 times, the conclusion is false. The 100th time I am right - Einstein

At times it's worth taking a step back and let you be inspired. Once in a while I ask my CQG program to give me its "predictions on the market", i.e Elliot Wave count... this exercise gave this result based on monthly data, so long-term trends:

Crude: Higher. 1st target 87.35 potential for 110.00
Gold: Lower. 551.00 1st even 491.00
EURUSD: 1.4550 potential for 1.7000 (See chart below)
10y US yield: 5.85/6.00% long-term back to 7-8 pct.
S&P: 4th wave correction to 1324.00 or even 1224.00

(Click on chart and u get larger version)

Well, stop a minute you will say, it's a computer doing this! Yes, it is my friends, but as the latest Bloomberg Magazine told us: 1/3 of all equity trading is today done based on algorithms, rising to above 50% in 2009! In other words wave counting, pattern recognition, volatility cones etc is today very much part of the day to day functioning of a fund manager or money manager at large.

The issue being that it's first self-fulfilling, i.e successful but ultimately it will crowd out performance as more and more manager use same iterations to reach investment results.

I fear that present time is one of these things happening. The co-correlation I illustrated yesterday in assets, tells us such a story. Never has the bandwidth of research been so narrow in my life as a trader!

Simply, we ALL use same risk model, same risk prediction , same charts, same metric and same quantitative input, the power of pc's, Internet made this ONE game and perception wise a ONE WAY street.

I do, however, always being sceptical, think this is cross road. Why?

1. Volatilities are rising from lows and with good reasons. Volatility is NOT initiated from financial products, but rather from economic and political data. Greenspan made sure everyone did the same thing: Trouble? I will cut! Uncertain about future growth? I will cut! Financial distress in financial sector? I will cut!

The Greenspan put worked its magic taking average return in equities and fixed income way above the mean-reversion return expected

But now? We have been changing our "Fed view" three or four times. Fed staffers tells us: monetary policy does not work. Riksbank is lost in their own predictions. BOJ caught in political headlights! Hence.. less predictable actions from central banks and politicians = More Volatility!

2. Complacency - investment banks are so align on everything

3. SWF - they ARE changing the game both in FI and Equities. They will reallocate and it will raise ethical questions as Asian government, put diplomatically, seems to have less of an issue with insider, preference treatments, than European equivalents. The end result. Steepening in yield and LESS money for the US.

4. Saving glut have peaked - so far only circumstantial evidence, but Middle East got more import, less export for now, meaning some of the funding is disappearing.

The Asians will see more opening of markets and hence they will have some destruction of capital as surely they will be invited to the party near closing time.

5. Real rates is rising. Inflation is coming back in Q4. No one believes in break-evens or inflation forecasts from governments. On top of this more and more central banks losing credibility:
(Read: Sweden, RBNZ, BOJ, and to some extent FED). ECB is in the corner and SNB stands alone warning as they should.

So.. back to the PC's predictions:

EUR.USD & 10 y notes: SWF, China buys less US assets, the US economy looks to decouple from rest of the world, as the indirect tax of homeland security acts makes it almost impossible to do day to day business or to keep money in the US. This drives yield higher, and increases an already massive financing needs.

Try to add up: US current account+ overseas buying of stocks by US investors (Clue: the number is bigger than 600 bln. per year!)

Crude: The supply & demand functioning is simply defunct. There is simple logistic issues getting crude to the users. On top of this Middle East have rising import hurricane season is here...

Gold: The most difficult one to explain. It seems market has simply become to bid on ETF's fund etc, and we need clean-out similar to what we saw in natural gas last year?

On this gloomy note - how can you be anything but sitting in the rain in London? Our present strategy :

FX: Turned US negative again. Long GBP.USD (watch the repatriation story in The Telegraph this morning...) Short EURCHF, I am probably the only one LISTENING to Roth in SNB, but....short EURGBP, carry... :-) (and I like my homeland). Short EURNOK. Long EURCZK. Short USDJPY (new), long JPY calls.

Equities: Short Dax spot again, long DAX puts, S&P puts......neutral banking sector...looking to sell...

Fixed income: Long EURIBOR December, trying to find some long-end shorts.. Bunds or T-bonds....Looking to sell agencies....

Commodities: Out of crude again. Looking to buy grains. MTD: +60 bp.

Nice week-end - enjoy the Midsummer.


torsdag den 21. juni 2007

Time to turn once again..... ???

There is something rotten in the State of Denmark - the fixed income market and the stocks market play along known lines, but the fx market seems to be in its own world. Carry-trading has barely moved despite a few more hikes from central banks with "funding currencies" - Taiwan and Sweden!

ABX making new lows yet again, T-bonds threathen to hit old lows and DAX took it on the chin, but.. AUD, NZD, GBP are bid.

My present background themes are:

1. REAL RATES correction will continue. The lack of risk premium in the long-end needs further adjustments. Whether this comes from inflation premium or risk premium really doesn't matter but I did read with some considerable interest the latest Duke University/CFO survey:

Capital spending seen down 1.5% (5.2% vs 6.7%)
Advertising down 0.7% (2.7% vs 3.4%)
Employment down 1.2% (0.4% vs 1.6%)
Wages up 0.5% (4.2% vs 3.2%)
Health care costs +0.7%(7.3% vs 6.5%)
Prices(CFO's own products) +0.6% (2.3 vs 1.7%)

So....spending is seen down, expenses down, and salary/wages cost through the roof.. dis-inflation ? Hardly.....

2. SOVEREIGN WEALTH FUNDS - there are now several multi billions funds - all of them looking to moves funds from fixed income to equity, private equity and commodities....Ipact? Much higher yield ....

3. SAVING SURPLUS CHANGES - Goldman did nice piece last week on how Middle East saving surplus may have peaked. This has been one of the biggest contributors to yield compression in credit and low volatility overall. This will be slow, GS, conclude but could be major.

The above themes leaves me with:

Propensity to be short fixed income, short equity and negative carry or in other words totally contrarian to recent themes and in direct conflict with EVERY single investment banks which tells me to take more more and more risk....

I have to say I find it amazing the amount of carry-trading strategies being introduces right now after a 14% move!!! Greed !!!! Yes...

My smart friends, and let's face, pretty much anyone is smarter than me, keeps telling me the credit cycle bubble in the US market should not have any impact on world growth and risk overall...

Well, again, when everything correlates, as it does right now, just look at how every single hedge fund in the world correlates with r-square of > .80 with SPX and carry ? Then certainly it matters, if nothing else for the very reason that loses in credit markets will have to be covered from the carry-trading profit.

Macro hedge fund returns and inverted 1 y. JPY VOL... hmmmm...

ALL positions are tied up in today's hedge funds - Carry trading in fx, works in tandem with credit spreads, all financed by selling in-the-money USD put vs EMG to pick up decay, vol sell off and spot moves.

Fortunately I can not sell options in my fund - a restriction I take with a good spirit as long life taught me that selling small deltas is like picking dimes in front of steam roller, eventually you will stumble ....and ........ :-)

Well enough from the old man..

Strategy presently:


Took back all markets, bought some 1450 S&P puts for fun, also long DAX puts..
Was short GS and BSC ... took them back......still fancy short financials..

Foreign Exchange:

Short EURCHF, short EURUSD, short AUDUSD, long EURCZK, short EURNOK.

Fixed Income:

Was short Gilts - took them back, now long EURIBOR December.


Was short Crude took it back.

Performance: +60 bp for month (Going nowhere!)

Nice eve


onsdag den 20. juni 2007

From short, to long, back to short.....

Yes, I have split personality - one day I am long, the next I am too scared and take profit.....but that's the conditions for high frequency macro fund like myself - today's issue:

The Merril Lynch liquidation of Bear Stearn High Yield Fund. Merrill did not agree terms with Bear on the credit and will initiate liquidation in an auction today. I do not, per se, expect any issues in placing theses papers, what concerns is more the follow on effect from this. Should these papers trade below their present level it could have serious implication on the ABX Index, which already trades below February low!!!!!!!

Something is wrong in high credit land. Yes, the central bankers tells me their is no spill-over from sub-prime, but having two major investment banks fighting is out via media and auctions does not exactly tell me things are smooth sailing either?

I am still working hard on the liquidity index and spent yesterday reading excellent piece by Soc. Gen's Research team, Stephen Gallagher & Aneta Markowska, titled: EcoInsight, Global liquidity cycle ebbing it strikes me doing one index would probably be too ambitious.

My solution should include: central bank action as measured by real Fed Funds plus minus 1 std. dev. (upper vs lower is 0% at 4%) making the present 3% towards higher end of average.

That's the easy part, now I need to find some way to expand on traditional measures, but as everyone used VIX, credit spreads, and leverage I need to find something different. (note: I get research from probably eight investment banks each morning - and EVERYONE has the same message day-by-day which leads me to think it's value is ZERO!)

So...I need some inspiration if any of you can help?

My present theme, if I have any, would be: Some disappointment with US data next few weeks, which will take yield back down and T-bonds to minimum 108-ish or even 111 16/32 ish.

This should lead US dollar lower, stock markets slightly down, and yield lower. I have felt all year that fixed income was the REAL STORY. The sovereign wealth funds have made big macro difference, so their action needs to be followed. Having sold April-May it seems sovereign are again on the bid for fixed income.

Short-term the lack of new data this week makes sub-prime the front news story.

The auction itself should be ok, but the follow up and the renewed focus on the sub-prime area should lead to some nervousness, this comes at a time, where momentum is coming out of the market on the indices and where we have had a few earning warnings.

The investments banks tells me to be fully loaded during the summer and some evidence from "counting" also indicates this summer could be good:

Since 1914 - the average return from the mid-term year low (2006) to its next peak pre-election is 50% which should mean Dow sees 16.000!

This type of "counting" makes for interesting analysis, but the concept of history repeating itself in mirror image is a stretch as fundamentals and micro changes simply is not the same every four years.......but point being: from analytic point of views there is not really ANYTHING to worry about ... liquidity is getting tighter, long-end has reacted with steeper rates, but private equity and other leverage players will tell you Fed model is still saying equity is cheap.

I do however note that New Zealand does not like the currency being part of global gambling, not that they have succeeded in containing further gains, Brazil have instituted more restrictions and there is yet another rumour of hikes in China.

End of the day, we will not know what and when this paradise like scenario changes but right now the micro changes are making noises which makes me defensive.

Present positioning:

FX: Short EURCHF, new position from today. Took profit in long EURUSD (even though all of above is positive EUR.USD).....

FI: Bought T-bonds, new position from today.....reason above.

Equity: Went from 2 units long Dax to 1 unit short this morning. Stop 1 ATR away.

Commodities: Long Crude on the break in August contract.