mandag den 30. juni 2008

The end is near? No way Jose!

Been lying in my hammock most day thinking about the markets joining the club of "hopers" ;-)

Hoping that I would get some divine "inspiration" - unfortunately for me, and to some extent you, I ended up in the same City, Same street, and Same building as before: The one named: "Castimonia Decoctor" - (I have included some help here:

Tonight I see how Lehman trades below March low and how volatility increase dramatically:

and if it was not sad enough...also Citi boss Pandit's letter to his employees! Maybe I should submit my fond memories of the Citi culture - I did work there in the late 1980s and enjoyed the powerhouse... Is it me or is memories pretty useless going forward? Funeral party at C? Pandit email to employees - A TOTAL JOKE...

I am not making fun of C, Leh or Barclay - It's pretty sad in my opinion, that the banking system is so lost for real talent.

The fact - as I have stated again-and-again- is that ALL trading talent has left the banks years ago, and so has the Risk Managers of any standard - The hedge fund industry is not only tempting money-wise, but also for quality of life - hence the people left in the banks of today are mere salespeople with little or no understanding of neither risk or trading!!!!

How about checking the credentials of all major banks CEO's ? You think it's random Goldman is runned by a trader? I think not

The fact is, the banking system will soon be depleted even for the best sales people - there are no future in banking - the new banking system is hedge funds, and even some of the hedge fund looks in trouble, with a large part of the industry made of fixed income strategies.

I love how Swenson of Yale Endowment - makes people aware that the difference between the best 25% quartile of the hedge funds in fixed income strategies - and the worst is :------ less than 25 bps! In other word total waste of time - buy some generic exposure instead)

On to the markets; I guess some of the work that convinced me; the catalyst was this "narrow" scientific research;

Leading me to my lists of why the house of: Castimonia Decoctor, is still the place to party:

  1. There has not been spike in volatility as has been seen in ALL major lows - this sell-off is extremely orderly - orderly and market low does not cooperate well.

  2. The above data states: Bottom line is that when the market falls 10% off of a recent high, and VXO stays below 30%, what was bad gets worse. In every prior instance where VXO failed to climb to above 30%, the market continued lower. The MINIMUM additional downside is another 10%. -- hmm....

  3. We passed the cyclical trough period, without reaction

  4. The banking sector again on the run. There is so much more reality which needs to be brought into the boardrooms before this is over. The banking system is the everything to market.....

  5. The yield curves - with the market "believing" both Fed and ECB on hiking spree - there be no easy rides from here

  6. The Fed has finally lost all credibility - Greenspan/Bernanke never had anything with me, but I note the market now ageeing with me (which scares me!)

So.. we are looking to reengage short positions across the board:

FX: Long EURSD, short GBPJPY(options)

FI: Long bunds calls - tiny delta, plus Dec- EURO dollar calls

EQUITY: Short DAX, Short C, Long Novo, Mittal, IVN

Commodities: Watching grains complex, nat. gas.

Strategy in short;

  • New low in US dollar
  • Rates expectations in both US and Europe too high
  • Commodities entering blow-off face w. geopolitical risk increasing day-by-day
  • Cyclical stronger JPY from here - like GBPJPY much lower
  • New lows in banking shares across the board
  • Like Drugs(stocks ;-), steel, agriculture, water- and solar energy

We had excellent June month for the funds strategies, and we are looking for weak data from Unemployment data Thursday, which also carries ECB meeting, so fire works all around this week.

In the S&P the key level is 1270/75 if broken we will see VIX & VXO above 30%

The summer is here, expect more "hammock thinking" from me, but further and further apart in July.

Best wishes


torsdag den 26. juni 2008

Oversold - not undervalued - my new theme

Wow, wow and more wow - this is finally turning into a summer of fun! First things first:

This is extremely good news for long term markets, morale, discipline and education.

The basic problem of the Greenspan + Bernanke era has been one of total neglect for fundamental values and discipline.

Greenspan now clearly shows he was more concerned about his name than the real economy - and in total contrast to Paul Volker - who remains my favourite central banker by a huge distance -

The Fed statement yesterday clearly shows a split FOMC - the wording was not even coherent in its langauge - pretty amazing for a FOMC which have made communication the top priority! -

Central bank premise nr. 1: Act on what the central banks do! Not what they say!

Listen to what they say and make your own judgement - like most financial market people today they are 50% lying and 50% hoping - and hope belongs in church not in the market!

(You may think I am exageerating, but trust me the CFO' and CEO'/Chairmen' in all small , medium- and large banks are sending prayers once an hour to get "relieve"from this turmoil - The financial equivalent of Tsunami)

Talking about lying - then I have to admire my hero over at for saying is as it is:

Fintag says: "Bob Diamond told me that all was fine. I now it turns out he lied. Never trust an incompetent bank"

Finally to some strategy - I am in the OVERSOLD not UNDERVALUED CAMP -

What I am trying to say is: Yes, market down, down and down - and there could be small rally, but as long as the banking chief', the central banks and pretty much 70% (down from 98%) of the traders seems to believe in yet another rescue is close by, then the market will go further down.

There is some cyclical low indication yesterday and today, but these could shift to mid-July if we do not see some sort of demand for stocks - it seems market is in buy-curfew mode.

We are long JPY vs GBP, USD - we are very long Dec- eurudollar calls - got some small mini-rally in STOXX50 (less than 1% of capital)

Looking to add: fixed income and mortage in Denmark.

Core value stocks we are long drugs, steel and mining still - looking to buy water.....

The lack of upside spikes indicate to me this is final leg down, and if so confirmed we will take out March low - easily - in the next 3-7 days- by then the market will finally realise how good this is - and how the bad business models needed to disappear. Constructive destruction rules!

Economic data wise July/August will be trough in my farmer opinion - but for the data and confidence to come back we are talking next year 2009- Q2 earliest.

Finally remember: Gray hair is the new in in markets ;-)


tirsdag den 24. juni 2008

Inflation or not that's the question!

Quit interesting chart from:

Looks at 30 yr stocks as "stock" and correlates with Material stocks. This guy is pretty interesting for charts...

Point here obviously inflation pressure contuining to grow - making Bernanke and FOMC caught tonight.... to "please" market by backing down on hawkishness can be interpreted as
ignoring imminent inflation risk.. in other words.....there will be fire-works tonight.. Keep powder dry.


We took of all downside risk yesterday below 6.600 in Dax, due to: Oversoldness, FOMC, p&l respect, and finally, all the inverse indicators came into play: Greenspan (the worst market guy in history) - sees more trouble -- two weeks ago everything was fine - and the young and bold traders tells me:".... we are soooo close to March low "--- oh yes? What do you think I spend all day looking and thinking about ;-)


The spectre of inflation returned to haunt the global economy on Tuesday as companies ranging from Dow Chemical of the US to South Korea’s Posco unveiled sharp price rises to combat the soaring cost of energy and raw materials.
The moves by Dow, the biggest chemical group in the US, and Posco, the world’s fourth largest steelmaker, came as Charles Holliday, chief executive of the chemical giant DuPont, warned of rising inflationary pressures in the corporate sector.

Wide diversification is only required when investors do not understand what they are doing. (Warren Buffet)

The above picture is courtesy of close friend who send it to me this morning with the comment: "...found one outlining your thought process" - Thankx ;-)

There is a very stubborn bid in the US yield curve - its all across the yield curve, but most disturbing to me is the projected + 131 bps hikes in the 1 year time -

I am even more disturbed as I, as I do most morning, saw NBC evening news from last night on my Ipod:

Everyone and everywhere in the US the combined pain of higher food and energy prices is hurting every day life. Last night NBC was talking about how schools across the US now needs to cut down on school buses - and more and more often choose between: firing teacher, reducing kids on the school bus, or not doing maintenance. This is one of the "richest" countries in the world, and local executives in the schools are now paying for the duo Greenspan/Bernanke is come, easy go policy.

No wonder this link was major headline yesterday:

But in terms of tomorrow wording and action; FOMC, Bernanke is in a corner and that's always dangerous for us hedge fund managers, but ultimately Bernanke is "political" meaning he will have to tone down inflation worries, as higher short-term yields is not helping him or his bosses in the Administration, expect balanced wording with focus on downside on the economy.

Private Equity dead...for longer?

Another must read link is from the private equity house of the past two decades Carlyle Group:

In the letter from the founders I found this telling sentence:

"The credit crunch marks the end of of the period of extraordinary liquidity that began in 2003. For Carlyle, the implications are threefold:

First, the LBO debt has become harder - and more expensive - to secure. Because the mega-buyouts of recent years were possible only as a result of lender' willingness to provide billions of dollar of debt financing on attactive terms, we(and other private equity firms) are unlikely to participate in deals of this size until this credit markets recover.

Second, the slowdown in economic growth resulting from the credit crunch will likely create a more challenging operating environment for some of our portfolio companies.

Third, depressed asset prices may constrain our ability to exit from some of our current investments"

The third implication being the most interesting to me- The Private Equity fund spend 2006 & 2007 busy selling companies to each other in something which looked liked a Ponzi scheme. Private Equity is good, very good long-term, but the game became to simple and too leveraged in the last few years - like banking it is back to normal.

Stocks oversold?

We run number of "simple" scanners on market right now for STOXX50, DAX and DOW JONES - the number of stocks above it 20 day moving average is LOWER than in March low, and almost as low as the January low - makes the market oversold, but not undervalued in my world.


Will enact some negative yield plays on FOMC - Do not think in 100 years that FED will hike this year or next year - so.......but 2 years direct or indirect.

Danish mortgage bonds - very close to pulling trigger on 7% 2041 Nykredit yielding me 7.28% in 4.5 CIBOR market! -- though if rates does fall I will get converted........

Looking to add water long play ---- long Steel, long Drug stocks (hedged with short S&P).....

Long DAX puts, long EURUSD, VERY LONG JPY.......small long crude .......short Barclays....

Stay dry... this is tough times...


(PS: If you dont subscribe directly to this blog you can do so by sending email to: headlined subscription)

fredag den 20. juni 2008

Constructive destruction ---

Saturday morning on the train - the best way to travel by a long shot! - reading up on news and one of the only people I would e ALWAYS listen to George Soros is giving an interview to WSJ's Gregg Ipp - the headlines say it all but do read it -

Soros, the Man Who Cries Wolf, Now Is Warning of a 'Superbubble'

Apart from the analysis on why this is a Superbubble, the most interesting part of the interview for old trader like me, is the admission by Soros that his body or more precise his back helps him in knowing when he is wrong - something I surely recognise and something I keep working on. The more scientific reasoning for this being that the brain can do 20-25 function at any one timw, while our subconsciousness can do billion of iterations at the same - basically with experience we get "feel" and "body answer" to when we can "feel" things are wrong.
This has been shown in several academic papers the easiet reading probably Gladwell's: Blink

but an even more specific and to the point analysis of Soros' Backache is my old friend Dr. Flavia Cymbalista.

She spent considerable time analysing Soros, and even had an audience with him to finess those skills. Read about her and the thinking @ her

Enough about this "holistic stuff":


The focus is slowly coming off inflation and on to stagflation, stagnation: The lesson for us is that on average stock market performance is down 3.0% y-o-y in periods of low growth and high inflation.

This time we will go even further down as the CREDIT DEFLATION is increasing in both size and magnitude every day. The chance of seeing March low is increasing - this could the final 5th leg of the downmove, but what happens next is even more important:

I believe we are in L-shaped recovery move, i.e we will move down(now) in growth worldwide and stay low much longer than market perceive -

The built in rate hikes in both US and Europe is out of control and no based on reality - Buy short term papers.. 2y mainly from here. We are in market for stock picking, seeing values back to long term norm. The last 10 years return of 12% plus, need to averaged down by seeing flat market for a number of year, while the economies reignite.

Looked at the banking sector yesterday and it's performance since 2000:

The outperformance seen in the period 2000-2008 has now disappeard and the banking sector is now back to mean reversion.

I.e. had you been long the S&P Index or the Banking part of it - it would have generated same return - now we only need the bank sector to become "cheap" to get involved.

The "unique money making machines of Wall Street" are broken down and for this is for real this time.

(Advice: If you are under 24 y. old looking for job - DO NOT EVER go to investment bank - its waste of time, it is a relevant as working for Ford or GM)

I have remained short biased in banks, but I am starting to look for fundamental value plays;

Drug stocks - still like the story of producing something for a nickel - selling it for 4-5 $

Water stocks- a very regulated market, but with the environmental play getting more and more media and political attention eventually the market mechanisme will come into play - meanwhile most of these stocks earns you 4-7% dividend yield - not bad place to be: getting carry, plus optionality on upside when regulation could disappear.

I am short airlines - what a joke - I have all media and unions chasing me because I dare to say what everybody knows: SAS is going towards the edge - Here we got company who have 15 year old hedging policy of keeping only 40% of fuels hedged - vs industry standard of 70/75% - a company which is now on its 14th or 15th saving plan, a company where the unions insist on having all nationalities represented in the cabins on all flights, meaning air stewards living in Stockholm, Sweden, flies down to Copenhagen work ! Madness, yes! Socialdemocratic attitude absolutely - some socalled industry expert retorted me by saying:

1. Other airlines also in trouble - oh yes? Why is that relevant
2. The ownership is "rich" as it mainly the Scandinavian countries - Really so tax payers should pay for SAS lack of common sense?

I do not really care about the political aspect here; I am a hedge fund manager, I am short SAS as long as crude is rising and the management maintain 15 y. old hedging policy, if oil starts to drop then I will square my position - but I would not buy SAS even if it was the only stock I could trade - history and market performance talks louder than my simple analysis.

My favourite short in banking is Barclays - the next Lehman situation in my opinion. I will include link tomorrow with a very interesting analysis, why Barclays is one of the most leveraged plays around.

Another play which is getting interesting is straight mortgage bonds: Nykredit ( one of the most consolidated, conservative lender around, are now issuing 7% coupon standing loan to 2041 yielding 7.4% ! Rate 96 ish! This is against CIBOR of 4.5% ish funding - I got to have some of this, but I need this final leg to set me up perfectly, but come Q3 end I will be 80% long in my deposit side in these papers - could be once in a life time investment.

Monday open will be very nervous, generally monday's sees recoveries after Friday's sell-off, but I have noted even in markets with falling oil prices the S&P reaction has been 8-10 figures only, something indicating market is still prone for more downside.

Finally, I will stress again, this is good, very good for the long term - we are now reestablising good fundamentals, spreads, and morale into the markets, which bodes well for the future. The easy ride is over - now is the time to listen to people with "gray hair" - the people who has been "REAL ACTION" - not only the tail wind markets of the idiotic central banks bailing out the immorale bankers and speculators, on that note:

Nice week-end


onsdag den 18. juni 2008

Inflation comes sailing! Are we too late?

This how inflation looks like!

A few comments from personal view - as per usual not predictive powers..comments more than welcome:

IF.. the LEH( story on how they off-loaded asset to "vehicles" is true it could be major catalyst on biggest story this p.m - too big too fail has been said too often -- look how major australian outfit Backcock & Brown going down and fast!.....Bear etc.. I was around in Chase in early 1990s..not nice!!!!!

  • Small caps & banks getting killed in europe
  • mortgage spreads widening

  • Germany vs P.I.G.S widening
  • US authorities on massive REGULATION CRUSADE.....

  • Inflation totally misunderstood as it come "sailing in" from Asia not induced from US (if you ignore BB and Greenspan feeding frenzy)

  • This is globalisation negative

  • Central bankers left with no credibillity

  • Main bulk of input to US economy spent in Q2- meaning Q3 going to get worse..

  • Yield curve inverted in Europe - killing banking models....
  • Market cant rally even on good Goldman number plus falling crude prices!

  • Market is scared... v. scared.. small investors losing a lot of money--- and on the ready to bail out

Maybe we are all waiting in-vain for the bounce to go net MASSIVE short... I don't know, but this is beginning to feel like 1992 early month before the ERM broke down - we all know the trades, now finesing the entry points---- maybe we are already too late?

tirsdag den 17. juni 2008

Liar Liar

Sorry, sorry friends!

Been travelling trading like a madman, so have not been able to "justify" my views on-line, hope to be back into it this week, so here is my 10 min QUICK-AND-DIRTY views:

Foreign Exchange:

Think market is getting ready to "attack" all-time high, based on a number of things but mainly the mere fact that ECB will hike and FED will not in 100 years risk anything by hiking.

The retractment of former hawkish comments from Fed in Was. Post yesterday and FT/WSJ today seems to confirm this.

We are long, again, EURUSD, EURGBP (from today on weaker than expected BOE outlook).....long GBP p JPY c, dlt 10 - from 2 figures higher - think this one could move to 180 over next 2 month - as market comes back down to earth.....

Fixed Income

Bought 2- and 10 years this morning as we had the above "leaks" but also due to divergence in 10 y contract. Market is SERIOUSLY ahead of themselves on yields.......

Mean reversion in 10 y notes indicate 4.30% as hard roof... 3.70% the next target....

Still LOVE individual corporate bonds - pharma, natural resources...

I note several leverage mortgage fund is under severe pressure both here in Scandi-land but also across Europe. Fixed income funds getting KILLED.........Yield curve inverting takes the European banks into serious earnings crisis......


Looking to see if 132.50 ish holds today in August contract, if so, I am going long into 145-155 range... next..

Iowa floated - major issue for production in the US - NBC News got segment EVERY day this week how to SAVE money on groceries! If that is NOT telling I do not know what is!

DBA (ETF still excellent play)


Been massively short banks, mainly LEH, DBK and BARC - closed all of them, waiting for GS results today, focus now on European banks for me - the inverted yield curve is slow and awfull grind for EURO banks - funding is an issue again - watch how SWAP rates expanding..

Short small STOXX 50 - took of large DAX put play (with profit for once!) - looks to like bifurcation from here:

1. Rebound, based on short-term oversoldness - reaction 2-3% up before final 5th leg down...

2. Directly lower - it seems, even on days Crude tanks, the market is extremely heavy ........

I am 50/50 on those two - and awaiting clarification - 1367/72 close will indicate scenario 1 in play....

Net long individual stocks: pharma, Water, resources, and steel - hedge with short S&P.....

If first scenario plays.. merely taking hedge of......


This is not time for momentum in stock market -deflation history returns are: -3.0% y-o-y, so make damn sure you like your stocks before commiting.

Final notes: Like EURGBP higher to new high - like JPY exposure. Playing FI from mean reversion side . Open on equity awaiting "catalyst" for 5th and final clean-out of downside - possible below March low...on LEH or similar story...

"Announced hikes" being taken back from central banks - politicians in P.I.GS countries standing on the ready to fight Trichet!

I am writing extensive report on my US visist - let me prewarn you its not NICE reading :-)

Good luck,