- Cost of funding drives market and valuations
- Price of liquidity new unknown (tax on money)
- No prior analogy historically will work (because this is different, very different)
Zero visibility from here - main topics for 2009 being:
- Unemployment - we see >10% in both Europe and the US (see more under overall conclusion) - and losing your job makes people STOP ...stop living, stop buying, stop thinking... making it binary - while in the Ivory Tower of the banks they talk like its continues process - its not! You lose your job, you lose it...
- Low oil prices - the impact could be massive on Social tension, geopolitcal risks and earnings power for EMG countries and companies. No one seems willing and able to imagine <20>
- China growh makes it to zero - A story I have carried around since my Asia trip - seems banks now overtaking me..all of the sudden China not growing is the new Black, but even with growth at 3-5% China will be losing jobs, millions of jobs...and the 2009 will be real test for the THIRD WAY (you all know what happened to the 3rd way of Clinton, Merkel and Clinton)
- Psychology so negative it can work positively for the market. If there is 100.000 jobs right now in Bank of America and 30.000 needs to go - then 100.000 are afraid and living like they will lose their job, but when job cuts are done theoretically the 70.000 will start spending again. (The risk being 30.000 jobs become 50 or 60.000 later on)
- Q1 2009 circumstantial evidence would suggest there is "plenty of cash" on the sidelines, some of this should be deployed when we go into 2009?
- Fed/Treasury plans does work. Unrealistic but let us put it up there. Fed takes rates to zero, start engaging in Investment Grade, they borrow not 3 trillion but 10 trillion of the future earnings of America... and it works!!! Hurrah!!!
I have put our target out before but for now we remain with key predictions of:
- S&P500 will see 500.00 in 2009
- Yield in Europe & US will go to zero
- China growth will be less than 3%
- Tension in the EU will increase
- Oil goes below 30.00 maybe even 20.00 US dollars
- EUR/USD will see both 0.9500 and 1.4000 in 2009?
- EMG underperforms everything else...
- Credit spreads will continue to widen.....
Investment meeting conclusion: There is some "nervousness" ahead of the FOMC on the text and its implications. It seems unlikely Fed will deliver more clarity if only because they do not have it themselves, but there will the usual: We will do whatever it takes to restart economy....market looking for minimum 50 bps. Meeting could disappoint.
We are still see incoming data being extremely negative, earnings likewise, and there is growing recognition of our own main theme: Unemployment - when this hit the "Street" it could take us down again to new lows.
This week: Unchanged 90% in cash, 10% deployed in negative stock markets.
Last week: Move from 70% to 90% based on lack of direction and incoming policy response being confusing.
Economics: (David Karsbøl)
- Economy in freefall
- Tankan worst in 30 years
- CPI drop today expected to +1.5% from 3.4% biggest drop ever (?)
- Empire Manu. contracting
- Every single indicator at multi year low, some of the indicators can not go further down due to the way they are constructed!
- Our weekly model remain low - staying low
- The US and Sweden the two most decelerating economies
Main themes: Lack of credit & unemployment rising
Fixed Income:(Jesper Christiansen)
- Where the Government is involved "value is being created"--- i.e lower spreads, but everything else is still showing pain, lots of pain
- Next move from Fed would be to enter Investment Grade and High Yield -- Q1 2009?
- Plenty of value prepositions. On-and-off-the-run Treasury gives you guaranteed 50 bps!
- TIPS underperforming
- US ABS almost unchanged - EUR ABS wider spreads
- Danish mortgage spreads more or less unchanged with refinancing over
- NOK and SEK putting pressure on DKK (deval in 2009?)
- US Government fixed income outperform EU on quantative easing, Trichet talks down rate expectations, massive supply in EU Gov. FI in January
- Credit spread making high after high - Deutsche Bank impact?
- Investment grade starting to do better - FDIC bonds included?
OVERALL: Our mechanical model maintains serious overweight, so do we: (check bottom part of this blog for models allocations) http://saxomacro.blogspot.com/2008/12/market-is-long-hope-hope-and-hopethe.html
Technical Input: (John Hardy - copy version available here: http://drop.io/itvld6d# password: saxobank
Stoxx50 and S&P: Waiting to Bearish stance. Failure to maintain upside break disappointing.
VIX: We need > 60% for bearish sentiment go gain tracktion.
10 yr US: Buy option for downside (price risk) ?
Yield curve in EU and US huge different. Europe is steepning while US is flattening.
EUR looks stretched.
- Market is historically fairyl priced, but based on forward earnings expensive
- Lack of credit remains key issue.
- Unemployment will hit earnings and consumptions.
- Commodity cycle repricing from recession to depression a negative?
- Low low physcology could lift the market.
- Contango begs for being crude for delivery but no one got balance sheet to do so.
- Gold, Silver at breaking point failure would lead to big sell of.
End of the year, we are in wait-and-see mode, however almost as per usual we remain extremely negative on the outlook - believing there have not been a proper pricing of the impact on ACTUAL UNEMPLOYMENT ABOVE 10.0% into stock market and valuations of housing stocks.
There simply is not anything worse the losing your job, except death, and for some people losing their job would be equivalent of that!
When people lose their job everything stops for them. They do not care if stock market goes or down, that Wal-Mart has discount of 50%, that Bernanke talks positively, that the Government wants to help them, they need to be back at work that's it.........
Obama gives us(US) hope, but is it enough, is it too late? I think so - I would love to the positive guy calling for higher markets, lower unemployment, but I am paid to be sceptical, paid to deliver real return (unlike Madoff's)....so for now I will be concerned, more concerned than ever before, but then again, I am merely a poor farmer boy from Denmark.