tirsdag den 23. september 2008

Liar, Liar.....

I shall keep it short as I am onroute to beautiful Dublin and then my London office, but here is my internal note from this morning as always remain "defensively aggresive"...

The financial landscape is being reshaped almost daily, but there is a few "knowns" from here forward:

The conversion of GS & MS to banks means their leverage will be reduced from 40-50 to 1 to 10 to 1. This is major LIQUIDITY ISSUE, as most hedge funds use Investment banks for prime brokerage. This forces the leverage down for hedge funds - first derivative being excess volatility as seen lately in t-bonds, crude and eurusd. Long-term it will decimate the "population" of hedge fund AND their return (less leverage - less ability to outperform)

CDS market is in total disarray - relevant? Absolutely - this is a 70 trillion US Dollar market according to BIS - there are NO RULES, and all CDS will have to be closed with issuer (Imagine where the bids are for closing out? Guess? Real bid minus 50%?) ---- this has extreme issue on ALL MAJOR BANKS in the world. If Mark-to-Market on those bids it will erode capital reserves(if any left) even further - solvency still major issue for financials

The 1987 crash happened mainly due to illiquidity in hedging (among other things the program trading..) - we have signs the CDS market could take us close to the brink, most likely around Mid-Oct..

My sources expect at least 10% redemptions from hedge funds (main index down > 5% this month alone) --- equal to 200 bln. US Dollar.. IF this happens we will see more selling of in US dollars, EMG, stocks........

The week-end plan takes US' Debt-to-GDP Italy's level - and its VERY likely US Government debt can trade below Corporate Debt (Yes, it has happened before in US history!)
I see 780 S&P - 8/10% US yield (next 18 month) --- US dollar will fall 25% from here (Note Singapore have publicly stated they will stop investment in overseas market and invest more in Asia - as per my note from Singapore)

There is major liquidity crisis in many money markets - the Swedish money market almost at standstill this morning.......

Most credit, swap and CDS spreads back to at or above pre-plan level - not good sign.....
Biggest risk now: is serious recession and that retail investors have finally realise the havoc caused.

All in all - there was plenty of "hope" but as least so far it has not helped the market......

I am officially advising being "defensively aggresive" - scaling positions to volatility, and from risk point of view, we need to keep alertness especially on spill-over effects from CDS and money-markets. The biggest risk remains in my opinion illiquidity of forward swap as single risk - but so far... everything ok there... relatively..

Best wishes,

Med Venlig Hilsen Yours Sincerely Steen Jakobsen, Chief Investment Officer, Saxo Fund Management Saxo Bank A/S -London
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