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.
Steen

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!!!!!)

Stocks

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!

Commodities

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

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:

http://www.saxobank.com/?id=993

Steen

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 broken..it 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 look.........like 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.

Positions..

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

Good luck,

Steen