lørdag den 3. oktober 2009

A consensus means that everyone agrees to say collectively what no one believes individually. Abba Eban

This morning I went through several "economic analysis" reports, and I must admit I got more confused the more I read.... an example on credit:

One respected analyst talks about how credit is not coming, probably never will: Meredith Whitney, then another senior and respected analyst talks about how the next cycle will be phase two: Credit cycle begins: Russell Napier, CLSA (It has to be added Mr. Napier does foresee it will end in tears) but they have opposite views of the credit:

Ms. Whitney argues that big corporates are ok, but small business, which constitutes more than 50% of the country's workforce & 38% of GDP, can't get credit and are unlike to get any.

In other words: The view of the credit market is pretty similar to the views held on the stock market.

There was two major take aways from me from the research:

US Yield curve is sending out small warning signals about Fed potential policy change

We need to watch the US yield curve 2-10 - this comes courtesy of my good friend: Andrew Baptiste over at Morgan Stanley: (click on chart for larger version)

What is major league interesting about this chart is the fact we have had tripe top around 260-ish three times, the most recent in September - the way this works is: The steeper the curve - the more stimulus/growth is priced in (I know this is slight simplification as I did small thesis on this when I studied economics some 300 years ago :-)..... but hang on: IF there is top in place around 260 - why would the curve come back down?

Well, if Fed started indicating/managing market expectations they would move short-term rates, it would mean 2-year bonds would be sold off - increasing the yield - everything being equal (I just so wanted to say that!).... I.e: inverting of curve would "signal" tightening - This is kind of interesting as Fed talks in the past two weeks have changed from being "accommodative" for the long-term to ... "when we move it will not be in small steps"....

So....bottom line: In my long, too long experience, if there was only one single "economic- indicator" I was allowed to watch it would be:.... Yes, the yield curve.

The yield curve is traded, arbitraged by people looking to scalp 1 bps, one basis point, nothing on the yield curve is left unintended - very much unlike stock valuation where at best we have a 50% correct picture of the corporate earnings and at worst simple lies!

I will be following the 2-10 yield curve for signs...... - and let me stress... IF 260 BPS goes on the upside I could mean we have avoided "recession" and recession light" and we are moving into new bull market, but one thing at the time.

We are close to getting the answer to the critical question: Is this a new bull market or merely bear-market correction

To round of my first point let me introduce two charts or rather two likely paths - which I borrowed from Independent Strategy, David Roche's firm in the presentation: Lipsticking the pig: (click on chart for larger version)

The two points made above may be old news for all of you, but for this one-dimensional danish speculator it offers some new insights...

Other important headlines:

Strategy for coming week

We have bought some EUR.USD volatility as the risk-of mode did not, yet, impact downside in EURUSD - the Asia central banks are extremely busy buying EUR selling US Dollar - reflecting the falling current account surplus with the US (China will run C/A deficit in 2010/11 - meaning the end of supporting the US dollar - please do not tell Geithner/Bernanke this... :-) .. but either way.... there will major move in the coming week.. we own 20 delta strangle 1.4250 /1.4850..

We also did same exercise in STOXX50 - despite our "tendency" to favor the odds of further downside- but we respect the "plunge teams" which works around the clock: (click on chart for larger version)

...as for my own long-term model - I am still:

Short S&P from 1063is

Short Wheat from 451-ish

Short EURUSD / long JPY....

Looking to seel 2-10 yield-curve....looking to buy EURSEK... an contemplating long-term negative position on Denmark - where the economic conditions is in free fall.

Safe trading and nice week-end


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