Weekly Macro Meeting

The three PREMISES:

• Cost of funding for drives market and valuations
• Price of liquidity new unknown (tax on money)
• No prior analogy historically will work (because this is different, very different)
  

Conclusion:

Last week: We are seeing the financial effect now impacting the economic situation - making this the "worst part of the curve".

This week: We have moved into grey-zone between recession and depression ==> Bias on downside increasing

Allocation:
Last week: Watch the transitions period - we are clearly policy dependent. We maintain 85% cash = EXTREMELY DEFENSIVE

This week: We called the transition - although the Social democratic Nationalisation has created pressure in EEC and EMG countries as they stand outside the "circling of the wagons".

We maintain 85% cash - but up from intraweek 65% - as we need further information to make long-term call.

Keeping cash @ 85% is not only impossible in order to make excess return, it is also extremely punitive in general allocation theory, but this is not time for being brave, rather it is time to look for opportunities, so as negative as we are - we are looking to reduce our cash portion relative quickly should we get more transparency.

Targets:

S&P 500: Down to test our long-term minimum target of <765-00>

Fed funds: 0.50% by Q2 2009 /ECB: 1.50% by Q2 2009 /10y yield: 4.5-5.0% by Q2 2009 /2y yield: 1.00% by Q2 2009

Crude: 50-60 by Q1 2009 /Gold: 750 by Q1 2009 =========================================================

Economics

Bias: Negative growth & inflation

David Karsbøls economic forecasting model continue to fall indicating waning growth & inflation
Key leading indicators all point to lower growth

Fed 1 years forward expected rate is +26 bps - which we deem to be too high - We expect further cuts in Fed funds

EDCB 1 year forward expected is -121 bps - which we also deem to high - We expect minimum 250 bps cuts from ECB

Australia and any commodity country will decelerate the most - we are entering bust-cycle for commodities, which will hurt these countries

On the premise of "cost of capital", I.e savings we favour economic relative performance from: Switzerland, Singapore, China, & China - and underperformance from: UK, Scandinavia, Spain, Portugal, USA, Canada, Australia, New Zealand
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FixedIncome

Bias: Neutral

Banks can not releverage their balance sheet meaning less demand for Government issuances
Central banks will need to buy their own government bonds as no one else will!!!!

High Yield is still struggling - Corporate leverage spreads widening - Financial tightening - 8 year Ford pay 27% yield

Danish Mortgages: Still under pressure - Lack of guarantee in mortgages makes for widening spreads plus weaker DKK currency

Still favour BUNDS over Treasuries

We will go long TIPS (ETF: TIP US ) - as breakeven has gone negative - indicating NO INFLATION expectations

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Equity

Bias: Negative

Our team does not believe earning actual results to be major theme - although there are low expectations

The key driver in equity will be: Hedge Fund Redemption. There is talk of > 200 bln. US Dollar and most of it in November & December

Using our three premises sectors to be overweight are: Utilities & Telecom. Underweight's are: Energy sector and consumer cyclical

There is some silver lining in equities - looking at P/E based on trend earnings (I.e smoothed earnings) we are trading all BEAR MARKET LOWS: Presently 12,2x versus previous lows of 15.7x(2002), 14.2x(1990), and 13.7x(1987).

The issue being where the E in P/E should be priced...but in terms of medium- and long-term allocation we need to move into equities soon or we lose upside allocation potential

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Commodities

Bias: Negative

Gold: The governments will need to sell out of their stocks plus if we should be buying Gold as inflation hedge, then with break-even turning negative, we should be selling Gold. We are net short GOLD through medium term Put bought.

Crude: Getting closer to "critical levels" for both producing countries and producing companies - 70 $ seems to have some budget rate implications - hence fall below could trigger two thins: 1.
Foreign Exchange

Bias: Neutral

US dollar: The US needs to fund themselves- there are two ways: 1. Much cheaper currency 2. Much higher yields - Second choice will not help the economy, hence must number one play - we are at turning point in this US Dollar strength, but we need further easing in US funding rates, and some better economic data to pull the trigger

JPY, CHF; Two best places to park your currency for now

EMG, EEC: Very very negative. The currencies is 100 pct correlated to their current account balances - with world slowing into recession/depression there will be more pain - unfortunately
Carry trading: Forget it!

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OVERALL CONCLUSION

We fully realise keeping 85% in cash does not make you a lot of money, but with a performance of +400 bps YTD, and our benchmark down everything between 25% and 75% we simply do not feel this is the time to be brave.

We are more focused on finding long ideas in equity, corporate bonds and commodities than in continuing selling them down. We see and understand that in "normal times" this is cheap, but having premise number three: This is different, we have been able to navigate these troubled waters.

The Investment meeting was down right depressive for yours truly, who find himself the most "bullish" of all - but in respecting the framework and the lack of clarity we reassigned the extremely cautious weights to our portfolio.

For arguments sake let me tell you in "normal times" if we have no exposure we would to Beta exposure:

Equity: 35%
Fixed Income: 15%
Alternative Strategies: 20%
Private Equity: 20%
Real Estate: 10%
Cash: 0%

But clearly this is not a time like that.....

Have a nice week,
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 5DA
Phone: +44 (0)207 151 2010 Fax: +44 (0)207 151 2001
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