when in doubt......go on holiday?

My colleague David Karsbøl have developped a model based on the supposed short-term model of The US Treasury mentioned in Paul O'Neills book, where he states based on only weekly data alone The Treasury's growth model exceeded Wall Streets economist forecast accuracy (Mind you that's an easy goal to set yourself!), but the point being this:

David models continues its free fall indicating we are now moving into solid negative growth and consumer demand.

The later is best seen through the spectrum of credit cards - The US consumer has always been willing to flaunt the plastic even when they have negative equity, but in the land of designer credit cards things are turning to the worse:

Moody's Investor service reports that the charge off rate, which measures defaults as percentage of loans outstanding - rose 6.05% in in March, from 4.64% a year earlier.

The charge off rate peaked above 7% in the 1991 and 2001 recession.

The underlying trend indication is for worst to come as:

1. The repayment amount are decreasing. The US consumer is simply paying less into the bills, obviously indicating either consumption preference or lack of hard dollars...

2. The amount of people skipping 3rd and 4th payment also on the rise.....again not exactly the best sign..

The thing to understand, and this is important.... The financial "melt-down" in banking has been avoided (for now) by Bernanke and his Merry Men's circling of the wagons, but the next phase is one of considerable weakning global demand, the tail risk being we will revert back into credit crisis, as personable income collapse, margin erodes, corporate defaults starts to rise, and banks continues to hoard capital.

Trichet, a man who at long last is gaining some respect from me, hit it spot on yesterday: "The worst could be to come, and an ongoing, very significant market correction is in process"...

My respect for Trichet is rising(note: rising - not gained!) as maintaining unchanged ECB rates does the job for now - it gives him some credibility vis-a-vis inflation, and he realise, correctly, cutting rates not doing anything to real economy as the banks are in trouble.

He also, between the lines with his insight into the European banking system, indicates the European banks needs to earn up to the credit issue and the incoming freight train called potential stagflation.

The European banks are heavily subsidised through the liquidity provision in place, with Spanish banks issuing mortgage backed paper at 101 with ECB and seeing the actual price in the market trading @ 90 bid at best - talk about indirect support.

In terms of the temperature of the market, the bullish consensus hitting new highs, and CNBC commentators, their guests, can not stop talking the market higher - I have been neutral but I am slightly concerned about the market from here;

1405-10 in the S&P was supposed to get us flying, now in the 4th week we trade 1395-1435 and

VIX volatility is coming off - we are due for volatility spike and a range break-out.

I feel downside is the more likely as Q1 earnings was massive disappoint overall.

Stripped for oil companies, the 441 companies who reported so far saw profit tank 30.2% this quarter and 26% in the last.

Energy companies now make up 50% of all profit in the S&P!

Not exactly reason for joy - the fact is the market became oversold in January and March, and now its overbought, the next bigger directional play will be based on how the real economy tracks from here - my take as described above being a path of grinding slower growth, something a very smart friend of mine calls: growth recession indicating negative quarter by quarter growth but probably not outright recession numbers.

It should also be noted Q1 from growth perspective saw one-off factors which will be hard to copy in Q2 - Germany and Europe saw unusually high investments rates- probably covering the fact that most European companies faced bottle-necks in production, input materials and labor.

While in the US the massive inventory build was hardly a choice situation for US companies...but as always I am merely putting odds on this not making predictions.

Strategy

Moving away from Beta long, to net short exposure on market as of today; short banks-, big europeans industrials, and net indices - all on valuation and lack of technical upside break.

Still like credit overall in high grade names.....

EMG- extremely overpriced - looking to sell.......

FX - still firmly believing in new cyclical final low for US dollar- pricing in 100 bps hikes in the US a joke right in front of prolonged slow-down..........Long CAD, AUD, EUR vs. US dollar.

FI - mean reversion play long Bunds @ 113.38 ish... mainly options...

Commodities- stopped in agri- and still long long-term puts in crude....but looking for normalisation of commotidies to gradually reflect growth slow-down.

Best of luck,

Steen