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.... http://www.andykessler.com/

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 needs......plus 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.

mandag den 18. juni 2007

Monday morning quarterbacking

A few days ago I was concerned on the TREND change in global rates, interesting piece in The Times by Kaletsky this morning, he names four major factors in the low yield environement;

1. Regulatory and account pressure on pension funds to shift their portfolio from equities to bonds.

2. Japanese savers desperate need for yield ...

3. Currency manipulation by Asia

4. Sovereign Wealth Funds

1+2 is still in place, so 3+4 may have changed! MAY? Are you freaking joking me?

China sold 5.8 Bln. US of government bonds NET last month - 1st drop since October 2005. Mind you they still go an easy 414 bln. US or 10% of the total outstanding debt! (foreigners own more than 50% of US debt overall)

Sovereign Wealth Funds, SWF, have 2.5 trln. USD under management according to Morgan Stanley report - same institution says the move FROM fixed income to equties will increase long-term yield by 30-40 bp.

But.. here we re-enter the real world, there is serious evidence June-September Quarter is very seasonally positive for bonds:

Measured by 10-y notes generic yield the move in bp direction has been since 1995:
-2.26 bps for June-September, 1.47 bps for March-September

This ties pretty well with CONSENSUS (If you could hate words Sociademocratic & consensus would top my list!) that Core-Inflation will be waning over the course of the summer.

More interesting for us contrarians is the move SEC to remove the Tick Test, or the short-sell rule of NYSE. The rule says short sellers can not go short a stock they dont own unless it has been paid. This maybe hubris ?

The most intesting topics though is how New Zealand again intervened to no luck. However despite being libertarian, I firmly believe that when Central banks decides to make a stand, the do make a stand ... remember 2000 and EURUSD intervention ? That the market tests them is only natural, ultimately ALL central banks and politicians who believe they can CONTROL the markets will fail and pay the price.

I note the increased tension in the Middle East; Barak tells Sunday Times he will launch a military offensive against Hamas in the Gaza Strip. (Sorry for taking you back to the REAL world!)

I am humbled, which is hard yes, by how the performance of carry-trading continues.

Table I: G-10 carry-basket ( 916 bps ...Sharpe 1.65%)

Money machine? Sure does look like it! Well something will have to give - do not miss week-end press on how Bear Stearns Internal Hedge Fund is strugling to find new investors. Merril Lynch sezied 400 mio. in assets and are looking to auction these off later in the week!!!!

Nice colleagues!

Well, bottom line here; data is too light to change the direction of late last week, so bar some new escalation in Middle East and no spill-over from Bear Stearns Hedge Fund - the carry-traders will be in place. I am slightly disappointed about market reaction to Friday, but I am sure most people by Wednesday will think like me; Why fight the windmills?

Fund is short US dollar vs EUR. Long NASDAQ. Very little VaR at play while we recover from beig so wrong last week. MTD: +14 bps. YTD: 43 bps.


fredag den 15. juni 2007

Another one bites the dust...and another one

Friday, bloody Friday....no it's not U2 and Queen I am refering to but my believe in new paradigm and my experiences in trading on Fridays!

CPI-core saved the day and market is flying into YIELD again! My generic modelsin carry are up 872bps in G-10 YTD and EMG carry passed 1009 bp for the year!

We exicted all our core views and turned long EURUSD and NASDAQ as our model indicates we could in the 5th wave for equities.

The fixed income market seems in balance and market is clearly short stock weightings. We will add some more on Monday should levels hold. NOw we are back at watching housing markets and I got feeling that the speculative areas have seen solid buying recently. I noticed Icahn bought in Florida real estate!

MTD: +5 bps, YTD 34 bps. Not good. Nice week-end

torsdag den 14. juni 2007

"You are not, you are not, not alone" - The Police

Well I feel alone! Market is ever more bullish day by day. I have the sense of giving up and going long the whole market and just join the "no worries" camp.

Yes, fixed income have rebounded, the 10-year yield is down from 5.30+ but its still up more than 40 bps in the last one month.

The Central Banks continues to hike, today Swiss National Bank move rate 25 bp and move up their inflation expectations, but still no one cares.

The think to watch today is the reaction to Goldman Sachs trading - they report better than expected earnings but in pre-markets the stock is down a 2.0-2.5% @ 228 from 233.64 close. Why? Only the Gods knows, but GS impact on S&P Index is pretty large as seen in the below chart.

Table I: Goldman Sachs & S&P cash index

I am hard at work at designing new monetary index, which includes todays new "liquidity" generators, credit derivatives and similar structures.

I can not put firm, factual gauge on it, but I am getting feeling the move in the long end of the curve is having some pretty dramatic impacts on the credit culture or the lack of it.

There is need to monitor the policy makers steps on private equity, hedge funds, credit policies etc. Most major changes in the market direction is driven from these policies, or rather the mistakes they create.

Yesterday's bill from senior Senators on China is one of those things which seems to finally get some political traction, if so... it could make world very different place.

CPI next market taking a slow day but keep close eye on Goldman Sachs.

The fund:

YTD: +105 bp, MTD: +76 bp,

Market Bias:

FX: Long US vs NZD, AUD and EUR

Fixed Income: Neutral from short.

Equities: Net short S&P again from 1530.50 with one ATR stop

Options: Very long JPY calls - and VERY wrong..


onsdag den 13. juni 2007

Learn to bear bravely changes of fortune. Cleobulus - MAJOR change in market from last five trading days..

We had major move overnight, again in, fixed income in the US, trigger seems to have been Mr. Greenspan comments, but truth being the 10-y bond auction yesterday was horrible..Indirect bid, which translates to foreign central banks, was a mere: 10.98% versus an average of 15.2% in the last five auctions. It the lowest since March 2006.

Credit default swaps linked to 20 bonds rated BBB- fell 2.5% to 62.38. The most interesting being that its REAL RATES which is rising across the world, as inflation expectations remains contained and even indicates lower inflation in the coming months. Interpretation: Fixed income players simply wants more RISK PREMIUM to take risk! This is major change - as the last three years has seen nothing but lower yield and volatility.

Table 1 10 y. US generic yield

It is MAJOR event when 18 years of trend is broken. Being in bear market for fixed income have serious implications for how cash-flows and future earnings. Anyone with MBA knows how going from zero funding rate to 4% massively changes the cash-flow analysis. Steeper yield curve also make long-term financing, read Private Equity, more expensive and generally there is less of the credit available as the natural consequence of higher yield, is more people fall behind on their credits increasing defaults.

The move yesterday is even more significant from trading perspective as it happened in vacuum of new data!

To illustrate the magnitude of this move I had my associate Carl F. Beck plot the last 1200 trading days changes PERCENTAGE wise day-to-day:
Std. Deviation: 1,29%Average: 0.03%

The change from Wednesday to Thursday last was 3.34% or about 3 std. dev. Changes of 2.9% or above have only happened for 24 trading days.

There is more pain in the system potentially as every single central bank in the G-10 is looking to tighten their monetary policy further.

Price Matrix for future moves by Central Banks (Source; Lehman Brothers)

From strategy point of view we are:

Short US Fixed income, t-bondsLong puts on Dax Julyshort EURUSDShort SilverShort S&P SeptemberShort NZD, and AUD

We have some concern at the disconnect on carry trading, which despite the new rates regime have not moved, however we feel that the size and direction of global real rates will eventually take it toll on carry trading. AUD/JPY and AUD/CHF are by far the biggest positions in the market right now.

Generic Carry model going from strength to strength (note the excess return profile and Sharp! Unreal)


This is crunch time - how the market reacts to this new higher regime next few days important. Keep an eye on mortgages, CDO's and other highly leverage strategies, if this get real legs it could mean excessive move in yields, but risk as always being tomorrow we can not even remember we had the scare.
Be careful out there

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

tirsdag den 12. juni 2007

Chart update 1 year FX vol & 30 y yield

30 year yield is making move on the upside, the big question presently; will the recent move in yield be enough to "scare" leverage?

This is one amazing trend. It just continues lower and lower, but there seems to be some change recently, pause or for real change?

The answer if blowing in the wind...

Difficult, difficult times right now - The major surprise being how US interest rates have moved significantly higher, the move last week is equivalent to a 5 std. deviation move, or as a friend of mine put it; It is something which should happen every 7.000 years!

The fixed income market is now probably close to neutral, which means there is not going to be major bounce from short covering, and with 10y yield flirting with 5.23% (high last week) it is either closing the eyes and buy the 10 y- notes or hang in there and see if 5.26-5.27% goes and lead yield even higher.

The "design" of the move in the yield is utmost interesting as;

1. It's not due to a move up in inflation expectatations
2. Its high lights how dependent the US fixed income market are with rest of world.

Inflation expecatations have moved barely 10 bps while US yield is up 50 bps!

The foreign central banks are staying away from the US fixed income market, no they are not net selling, but they are not net buying anymore, which means short-end of curve which have priced in small move by Fed will be stable while long-end should correct higher again... meaning steeper yield curve......

We are presently slightly short US T-bonds as the test continues in week of relatively positive US data; retail sales and CPI....

More tomorrow..