onsdag den 11. november 2009

There is no atheist in a fox hole - Weekly Investment Meeting

We had our weekly investment meeting and to say the least there is a matter of different opinions. In the blue corner we got the resident equity bull Mr. Lars Thørs, who sees no evil, hear no evil(but highly profitable) -and in the red corner we got yours sincerely who is on the verge of committing public Harakiri in frustration over how much B.S there is flying around on a daily basis.....

The gist of the conversation goes as follow:

There are really three if not four different scenarios for balance of 2009 and 2010:

Note: The X-axis is time, and Y- the return(yield)....

(Click on diagrams to enlarge)

Note: The different scenario's with impact on macro and asset allocation.
(Click on diagrams to enlarge)

In our opinion there will be a movement from presently: Sweet-spot through Double-dip into Crisis 2.0 over the next 6-9 month, but we could be wrong a below we have assigned our consensus vs. the market in terms of odds.

Note: Limus Capital view relative to consensus

The conclusion on the outlook is: It's either going to work or not, we do not see how a V-shaped recovery can be established - but oddly enough here we are at odds with some of the major players in the macro world, who all seems to think the bubble in US Treasury is the biggest, but while we agree on the overvaluation we feel that if we move out of the Sweet-spot then it will be due to increased concern about rising yields on Treasuries - in other words - a starting crisis of confidence.

This scenario is based on several key points:

Maturity of both banks and government debt has shortened considerably making the next 24 month the biggest issuance period in monetary history

There are simply not enough demand to take the supply in our opinion, which in turn will force the rates higher. The US Government has shortened the average maturity from 70 month in 2000 to less than 50 month early this year (http://tinyurl.com/ydbnnqj) - this happens as the public debt reaches USD (8 trillion US Dollars), but more importantly almost 50% of that debt expires in the next year! 

This should on its own create some concern, but at the same time the banking system has done exactly the same exercise according to Moody's report out this week: http://tinyurl.com/yhf2nm4

The average maturities of new debt issuance by Moody's rated-banks around the world fell from 7,2 years to 4,7 years over the last five years! This constitutes the shortest average maturity in history. Practically it means the banks will face maturing debt of (10 trillion US dollars) between now and 2015 - or between now and 2012.

Let us not kid ourselves, there is always some debt maturing - T-bill normally constitutes 30-35% of funding, but the point being that even the slightest crack in confidence could have a snowball effect on confidence and catapult  rates higher, as the shortened maturity increases the demand for higher yield and in a world of falling disposable income (due to higher unemployment) - the private sector savings will be in great demand across all assets not just funding the mighty US of A.

More stimulus & how Obama could be forced for more to 'print money again despite a political lack of will to do so

The recent talk of town among Obama's clones is to not only keep up the spending but even to increase it as he did too little to start with! Lately former Labour Secretary Robert Reich and Paul Krugman have called for such measures. The philosophy was reflected in my 'analysis' on earlier blog this week.

From Monday morning quarterbacking, Nov. 9, 2009: Geithner said it best this weekend: "If we put the brakes on too quickly, we will weaken the economy and the financial system, unemployment will rise, more businesses will fail, budget deficits will rise, and the ultimate cost of the crisis will be greater," he told reporters in Scotland. "It is too early to start to lean against recovery."

Ok, let me get this straight: So if we continue spending tax payers money then: we will have smaller deficit, lower unemployment, less business failures, and smaller ultimate bill for resurrecting the world? If that does happen I will be playing for Denmark upfront in the next World Cup in soccer in South Africa next year (despite my 45 yrs and less than fit fitness level)

My friend Daniel Arbess, who runs the Xerion Hedge Fund inside Perella, Weinberg Partners had some excellent point on how US and Europe is mired in deflationary forces for two out of three macro themes working presently:
  • Consumer deleveraging. Rising unemployment ==> Deflation
  • Improving earnings via cost reductions and cheaper finished product imports from China ==> Deflation
  • Zero rate policy drives investors to speculative investments ==> Inflationary....
Dan has several others good observations among them that such a "global imbalance" is continuing leading to some sort of confrontation.

But all of the above really talks about is a double-dip, the fact that post the biggest stimulus in world history, the result was not even back to trend growth, and in 2010 without more stimulus then Crisis 2.0 will come back to haunt.

In order to make this more operational this our expected returns in the different scenarios:

Click to enlarge

It is worth noting that the key in Crisis 2.0 is the LACK OF POSITIVE RETURN from government bonds - this is the main driver of the worst to come scenario.

In normal markets long Government bonds would perform in times of crisis, in this one we have -3,9% expected return and the only positive being a much smaller volatility relative to Sweet-spot.

The way we use this is not as a way to make money, but these three basic possible scenario's are the ones we need to navigate. (The above is very much work in progress)

Right now we are in the sweet-spot for better or worse, and the expected return on this is close to 16%! 

Something which will please the market, but we(Limus) have a much smaller 1 in 4 odds vs. 2 in 5 odds among the consensus investors for this - again we stand almost alone with our projections, but as Groucho Marx said in wire to his club wanting him as a member : "PLEASE ACCEPT MY RESIGNATION. I DON'T WANT TO BELONG TO ANY CLUB THAT WILL ACCEPT PEOPLE LIKE ME AS A MEMBER"

Investment outlook conclusion:

There is nothing on the horizon indicating the see-no-evil-hear-no-evil lose monetary policy will end - on contraire - the central banks, the pundits, the politicians all firmly believe spending more money will create smaller deficits, higher long term growth, in this environment keeping to your Beta exposure is the only option. Our Beta model is very simple and can be executed through ETF's:


We continue to hold a negative outlook on the market in Limus Capital Partners, but our outside partners are either neutral or major bullish on the market. 

The correct allocation presently is to benchmark everything (the exercise of Beta-chasing) - in our case: Beta model long plus some down-side protection through our Alpha plays (which is the ones we describe mostly here on the blog)

The charts and most of the work done for this presentation was courtesy of my partner Mr. Jesper Christiansen.

Safe trading,


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