onsdag den 30. juli 2008

The ability to delude yourself may be an important survival tool - Jane Wagner

As the title suggest either I am totally wrong, which is utterly likely or "the market" need serious dose of reality or maybe is this about how asynchronous the world markets are right now.

First day back in the job and the headlines deems more trouble ahead:
  1. WTO break down for real. This is serious blow to globalisation and add to the ever present theme of how globalisation has gone into reverse gear - as transportation costs have taken more than 50% of some products price. (leading ultimately to local production - like steel is now cheaper to produce for US market in the US relative to China)
  2. Fed extend TAF facility
  3. SEC extends no short on US financials
  4. State of New York going towards bankruptcy http://www.nypost.com/seven/07302008/news/regionalnews/crisis_puts_ny_in_sell_hell_122211.htm
  5. Australia worse of than the US http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/07/30/cnoz130.xml

In other words the game continues - I am surprised, and yet not, that foreign exchange volatility so low - 1 month EUR volatility atm <>

I find most people I talk have turned bullish the US dollar - the cyclical aspect in place - I am getting tonse of reasons why the US dollar should have turned prime among themStephen Jen of MS who writes elegantly yet does he have magic wane?

His arguments goes:(my summary)

  1. ECB done hiking rates
  2. Fed funds bottom of cycle
  3. Oil and US dollar - arguing stronger US dollar and lower oil will benefit all countries - hence work
  4. USD vs Asia already moved significantly
  5. Failure of GSCE crisis to take EURUSD above 1.6000 seen as weakness

Its all well argued but as per usual I disagree, not that anyone cares!

I find a more compelling argument for relatively stronger US dollar in the weak EMG currencies, the first moves is ALWAYS into US dollar first before finding a new harbour - I am still of the opinion that this was normalisation of EMG risk which made for strong US Dollar short-term, next comes the move into JPY and EUR again.

Secondly, it seems the overseas part of the US investors base is getting cut back - to more normal levels, which also favors US dollars.

On the rate front though; there is no doubt in my mind; The US likely to ease before hiking and the ECB likely to hike before easing - both will ease in the end, but the US is going from bad to worse the numbers will prove this in the next 2Q - and where I before saw 2008 as worst part of this crisis I now fell we need to move into 2009 to see full impact on the micro level on the economies.

I also note the rallies happens on low volume while drops happens to big volumes, it is likely this is all a song-and-a-dance before the market goes into holiday mood?

Note also reliable good friend of mine sees strong t-bonds into month-end. He has been in the past -


Need more overview having been off; feel compelled to add EUR calls vs US Dollar, to remain long December EURO calls in rates, to looks for buyign crude, shorted AUDJPY on above story plus major moves in STIR rates.

The world has become smaller again - all talk of decoupling should stop and soon, the sooner the worlds owns up to this RECESSION the better - what we need is for economic agents to change behavour not to pretend this is NOT happening. More tomorow. Happy to be back - I apologies for being all over the place just getting my thought straight here.


tirsdag den 15. juli 2008

Dumb, dumber, Bernanke, Paulson & Cox

PP, Panic Paulson & BB aka Bully Bernanke at the Senate yesterday......

I had to break up my holiday and go back to office to watch this game of Russian roulette! The end game is getting closer!

Now the policy makers in all their might have decided I can't net short 17 financial companies (http://www.sec.gov/news/press/2008/2008-143.htm)

What a f...... joke! Fortunately, I, and others can still acess the CFD market outside the US, plus with the amount of stock issued by those financial companies (as a true reflection of their inadequate business models) is massive - making "borrowing" relative easy.

It is like these types think bullying me and other hedge funds will make us less right ?

I also find it interesting that several foreign banks are on the list, how so? Not sure I would like other central bank to decide over my stocks if I were ECB and BOE? Or does it mean similar action will be introduced in Europe and Japan?

As my motto always goes in times of desperation: "Justice will prevail in the long run.."

There is NOTHING logical in Fannie & Freddie rescue - debt is debt whether its on the balance sheet of Fed, the Administration or with shareholders!

It does not change the fact the asset value of FRD / FNM is collapsing - yes, there is several news stories carried by the media about how this is a safe play for the US Administration, but put in 8% default rate and things looks very different.
Shiller Composite 20 Index (Source: Bloomberg)

BB, Bully Bernanke, testimony was as per usual non-event, except from the fact the guy can't make up his mind (or his is playing to his audience?) on the economy;

Now again he is more concerned about the economy than the inflation making my bet on Dec Euro call slightly more interesting as we passed the magic 97.00 level again (97.05 now).
One year Fed rates from now (source: CS)

I do not know what posssed people to believe BB would actually hikes rates - he comes from the School of Irreponsible spending - EVERY TIME you face a mini-crisis LOWER rates is the first mantra of all its students.

Furthermore, like Greenspan, he wants to keep the job, it pays better than being non-celebrity Professor at Princeton.

On the strategy side I have to look at the SEC action in more details, but to me there still lacks some blood in the street.

Volatility needs to go higher in both equity and fx, but do note JPY finally took its expected course - breaking lower..... (USDJPY down)

I have not checked my team of "hopers" - the ones calling for buying of stocks, but if market was cheap on their metrics Friday I guess logic dictates its even cheaper today....(the ever prevalent issue of having machinical approach to game which evolves and changes every day....)

I believe next major volatility phase will be in currencies; (up)

EUR to even higher levels and JPY finally breaking down(stronger) vs EUR, GBP and USD..........but as always my predictions carry the absolute value of ZERO!

We are:

FX: Long EURUSD, short USDJPY, short GBPJPY(options) - may sell EURCHF....
EQ: Short DAX, S&P - long Pharma, mining, water..........
FI: Long Euro December US, Bunds
COM: Neutral for now.....

Good luck and may all the the dirty tricks of PP, BB, GWB not work, because as stated again and again:

This destruction of capital is the best thing that could happen long term - like a forest fire this will reignite the economy, the economic agents and their behaviour back to sound policies away from the intervention of sick masterminding central banks and politicians.

Safe wind...


søndag den 13. juli 2008

One step closer to a true US dollar crisis

The Ponzi scheming by the US continues- making a high-impact Sunday announcement on support for the GSCE's Mr. Paulson showed not only his Socialistic cridentials but also his total lack of understanding of the reason for this dismay.

All the way through the week-end press there was leaked information that The Treasury was in talks with bank on placing the 3 bln. US Freddie Mac papers due on Monday(today) - but it seems there was no luck in the usual Bush strategy of: "I scratch your back, you scratch mine" - so next step was to up-the-ante and go for full blown support.

I must say I am VERY happy I no longer pay US taxes, except the ones induced on my small saving account in Charles Schwab, as with the incoming President Obama, the US is about to see Sweden/Denmark like tax pressure to pay for this financial mess which Greenspan mainly, but lately also the Prof. Bernanke have created.

What I find most ironic is how the US administration policy on the US dollar is failing; they are desperately trying to avoid weaker US dollar but then they announce policies which clearly puts into doubt the long-term perspective of ever paying this debt back.

The top problem right now, as defined by one of the smartest people I know; Why should foreigners fund long dated agency debt and run the risk when Obama and the US in general, dont play by any rules? Socialising the risk, does NOT get me one Iota closer to getting my money back.

Dont forget agencies has been major chunk of foreign central banks and agencies portfolio as the spread for a long, long time was static at 10-30 bps - now the charts below shows the "explosion higher".

Spread 2 yr Agencies vs US T

The incoming President is business hostile, at least financial, there is not a single person in Obama' economic team with connection to hedge fund industry or market in general. It's like having a NFL team runned by someone with a background in farming! (Nothing wrong with farmers by the way - being a farmers son myself;-)

The most important point though remains: by socialising the risk, the US has not improved the quality of the quasi-supported GSCI's they have decreased it.

I am far more confident in an instititution acting in the free market, with governance rules, the ability to price bad performance; as Bob Rodriguez elegantly puts it: (see story below): ""..one does not reward a borrower with a lower interest rate when that borrower has degraded their balance sheet" -

He was talking about the US, I am talking about the agencies.

Its not random US bonds sold off on Friday, when the market got news of this "bail-out" - the bond holders clearly recognized by introducting the rescue the future value of asset held in bonds decreased.

On top of this we see major bias indicating the market continues to buy the US dollar turnaround story - I do NOT buy this. The bias is one of the biggest I have seen, and it point straight north for the EURUSD.

On the stock market I wanted to rave about how the market continues to "hope" - this weekend press had the highest frequency of people calling for low in place for stocks; Everything from Dow Theory, VIX/VXO ratios, moon phases, and the like is being called on to get this mess stopped. I, for one, remain bearish, this is not the end game, there needs to be blow off.

The blood is not in the street yet, but its getting closer. A full blown US dollar crisis could ignite the final leg, which should see US market fall another 10% (the average peak to trough move in recession is 30% - 20% for non-recession)
I am short untill proven wrong, and the short financial sector remains my favourite; Barclays stands out as best short to me.........

Oh, and some worhtless prediction: EUR will see 1.65 this year....


FX: Long EURGBP, Long EURUSD - short GBPJPY..took off USD.SGD short.......
FI: Long December Euro calls in EDZ9......long calls in bunds.....
EQUITY: Long put on dax, short S&P (from this morning).....
Stocks: long pharma, mining, water,solar..... short financials/big cap....

Finally some links you should try out:

Barclays mess:

Loan origination:

Fannie Mae & Freddie Mae issue excellent : http://www.econbrowser.com/archives/2008/07/fannie_mae_and.html

Roubini interview:

I am returning to the hammock, seems the best place to be in this mess.


onsdag den 2. juli 2008

There cannot be a crisis next week. My schedule is already full. - Henry Kissinger

Some parting notes as this fund manager swaps the office chair with the hammock for real - the theme on all my presentations since July/August has been: Why this crisis is good - now it is the time to change both the presentations but also some of the outlook.

I was extremely bearish on the credit bubble, the central banks and the process' driving the capital markets - later on better and more well spoken people have done better jobs of explaining the issues at hand;

It's now well established that we are in a crisis, some countries, including the happiest place on earth Denmark, even have confirmed recession (two quarters in row with negative growth), but what is waiting for us, when I/we return from the holiday?

I have, as I always make clear, no predicitive powers -but I feel there is a need to change some of the outlook from here. To this end I read about 600-700 pages of good research and articles yesterday and this morning;

Bob Rodriquez, First Pacific Advisor(votes best fund manager this century!) put its extremely elegantly @ http://www.fpafunds.com/news_06232008_buyers_strike.asp

His main points:

  • We continue buyer's strike of long term bond and high quality bonds
  • Our yield "hurdle" has been raised to 5% from 4% before we will deplore long term capital
  • "..one does not reward a borrower with a lower interest rate when that borrower has degraded their balance sheet" (Think: mortgage crap; Bear Stearns, TAF, tax rebate, morgage subsidies)
  • There will be major pressue on fiscal policies next five years as baby-boom generation become eligible for Social Securit, Medicare Hospital Insurance Layout, and from 2011 to Medicare - which leads to 2017 where annual social security will exceed cash income in the program"...

Bob and his team write brilliantly - when on his website reading; Crossing Rubicon is a must for anyone.

The next piece which got my attention was the leaving notes from Dr. Bill White, BIS. There is so many classic qoutes in his report: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/30/ccbis130.xml

  • I note his causal link: Credit bubble ==> Temporary Inflation ==> Deflation
  • Do not count on fiscal rescue: Explicit and implict debts of governments are already so high as to raise doubts about whether non-contractual commitments will be fully honored"
  • There have always been excesses in booms - what made this so bad is that governments set the price of money too low, enticing the banks into self-destruction
  • The Central reaction function of lowering rates has only put off the day of reckoning - It worked due to low inflation imports...
  • BIS suggest a mix of "systemic indicators" The objective to slow credit growth - make sure punchbowl is taken away before the drunk run riot - we need policy measures to lean against credit excess

WOW! I thought I was "clear speaking"!

Then I read Lawrence Summers four action points needed (I hate qouting a Socialdemocrat but....): http://www.ft.com/cms/s/0/8342ea3e-463c-11dd-9009-0000779fd2ac.html

  1. Pass Housing Bill
  2. Pass further fiscal measures to respond to economic difficulties
  3. Reform misguided ethanol subsidies, use Strategic Petroleum Reserves
  4. Recognise financial failues will happen

and here comes why I did qoute him: ".....Unfortunately we are in environment where we have more to fear than fear itself, but that's not excuse for fatalism"... Thank you President Kennedy, sorry Mr. Summers.

Mr Bill Gross also add his volume to the deflation camp: http://tinyurl.com/4mf5um

have already bottomed and will gradually rise throughout your (Obama being adressed) first and perhaps second administration. Your term will not go down in history as investor friendly".


  1. The world best bond investors tells me(and you) that yield in medium- and long term should be around 5% (10 year @ 4.00 now) before value.
  2. The next big theme post this inflation scare is DEFLATION (http://en.wikipedia.org/wiki/Deflation)
  3. Inflation is "temporary" - even Fed believes this deep down - making short-end US yield December 2008- 2y notes VERY cheap
  4. Banking sector will go from weakness to weakenss
  5. Construction loans next phase of this deleveraging of credit. 45 bln of 632 bln. of construction loans outstanding were deliquent in June according to FDCI (WSJ today)
  6. This is L-shaped "recovery" - down in growth -and staying down
  7. There is NO FISCAL room for governments to panic - if so they will crowd-out investors
  8. Read up on the Japanese experience - its must know information for everyone next three- five years
  9. Margin still still 200-400 bps too high vs 10 yr average (Goldman analysis)
  10. Consumption in Europe weakens considerably with inflation spikes
  11. The best performing sectors since 1966 in environment of high inflation/low growth has been; Technology(+14% p.a), Basic materials(++9.1%), Telecom(+7.8%) and worst Chemicals(-0.8%) and Media(-1.4%)

Long list, and more is coming as my "Hammock time" increases - my outlook picture is still very positive - this credit crisis cud make or break the financial system, but like a forest fire, what is left will flourish into a bigger and better forest.

The bottom line is: Recession is good, as its the counterweight to excess.

Excess has been plenty the last two decades now is the time for stringent discipline, good fundamentals and as ever adopting to a world where inflation is imported, where central bank have used the full tool box, a desperate US President will take office in early 2009 and the tail-wind of early Europe have moved into gail-force headwind...2010 for break up?

Strategy postions

FX: Long EURGBP, Long JPY vs GBP, looking to go long NOK vs SEK

FI: Long EUR dec, long Bunds calls...

EQ: Long Steel, mining, drug - short: banks

Good luck my friend - over-and-out from here.