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:


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.


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