tirsdag den 6. oktober 2009

Don't part with your illusions. When they are gone you may still exist, but you have ceased to live. Mark Twain

It became a long meeting today as we had a full plate with topics:h

  • Reserve Bank of Australia hiked rates first...
  • "Secret talks" among US Dollar creditors to diversify away....Gold new high...
  • Iran - October deadline is getting closer..Aghanistan - where is Obama heading ?
  • Earnings season
  • Latvia
  • Conclusion

We ended with "resigning" to the fact that we will have one more upmove into the middle of October, which has been the main path we have looked at since our initial investment meeting in September.

The possible dates could be both option expiry Friday October 16th or IEA visit to Iran on October 25th.

This leaves us with benchmark exposure to risky assets.

Reserve Bank of Australian hike (+25 bps) & Changed macro themes

Under "normal" circumstances a move like last nights rate hike from RBA would have had the market looking for the next central bank to hike, but since the non-farn payroll number last Friday the macro theme has moved to one of:

Potential for further "help" to the market Obama now talks of tax cuts - fully realising his political capital in Congress is all but wasted.........

The non-farm pay-roll should have led us lower as an individual number, but it merely delayed further back the dead-line for QE exit and it substansiated the need for another look at how the plunge team can work these markets higher.
The implication/conclusion is simple: There is further upside in this market as long as numbers and Obama deteteriates. Ironic - yet true.

US Dollar and Gold

It is pretty simple: Market wants something tangible - and that got me thinking: What did the market want during the "crisis" ? Yes, indeed something tangible. That sort makes no sense, unless... you do not really believe in "new Nirvana" around the corner?

Gold is being bought as an insurance policy, as a bet vs. debasing, as the only "tangible currency" and as storage of wealth. If you look at the attributes for those conditions it is not exactly positive association you get - in other words: We are long Gold, we believe in all of above, but we must acknowledge it also implies we firmly believe we can exit those positions ahead of everyone else. It is indeed a suckers game.

The central banks are clearly sellinh, swapping Gold out in order to contain the rise in the Gold price, but to no avail so far... to us Gold symbolises to some extent what is also going on the Obama's popularity - there is no longer any believe in change, there are really only the hard, tough, dry long way home - a fact no one wants to prepare themselves for, so we continue to "like" the debasing - despite the fact is really more of warning signal than anything else.


Iran & Aghinistan

Obama is now fighting with his own Generals over Aghanistan - he lost Olympics bid, and he is having more press conferences than there are minutes in a day.......and then we got Iran - the IEA deadline is October 25th, and with intensive leaking of information going on presently there seems to be reason to a little concerned (and long WTI Crude?) - but hang on - is it not pretty similar to the lead up into Iraq ?

We do not know, but the geopolitical risk is back in fashion and over the cause of Q4 this could become a driver for yield, commodities...

Earnings season

We do not per se have any strong convictio on the earnings season, but note that market expects above expectation earnings with the risk being on the outlook for balance of 2009. We also note the report from Hausmann Funds called:

Forward Earnings Imply a Return To Near-Record Profit Margins by William Hester:

1) analysts have penciled in earnings growth of more than 40 percent over the next year, and then another 22 percent between 2010 and 2011

2) Analysts expect sales to jump 5 percent next year and then another 8 percent into 2011, according to Bloomberg data

3) Analysts are forecasting that profit margins will reach almost 8 percent next year and then 9 percent by 2011, far above their recent trough and far above the long-term average of about 6 percent.

4) Assuming that analyst expectations for strong margin recovery are correct, the P/E is already at least 1.7 points above the long-term average. Assuming a 7 percent profit margin on next year sales, the P/E ratio would currently sit about 3 points above the long-term average. And at the long-term average profit margin of 6 percent, the P/E ratio on forward operating earnings would sit 5.5 points (nearly 50%) above the long-term average

Given these expectations, the ability for companies to beat earnings estimates may eventually become more challenging. Since aggressive profit margin expectations are already assumed, big earnings surprises would require companies to deliver those already expected high profit margins, and probably stronger than expected top-line growth too.'

Well, it is tough days to navigate the market, but.... at least something is going on...

Safe trading,

Steen Jakobsen

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