Fake the "fade" before the Fed ........Macro

Dear Investors,

Had a great evening with my now former associates and my partner Jesper tonight - we went to watch my old soccer club B.93 (http://www.b93.dk/) fight for promotion to 1. division only to see them draw a boring 0-0, but the away game is our to win on Saturday!

Then a nice dinner in one of my favourite restaurants in Copenhagen, Pierre Andre: http://www.aerislifestyle.com/0632, but during the dinner conversation we agreed on three major things (or rather Jesper and I agreed)...

1. Zlatan Ibrahmimovic is the most overrated player in soccer....http://www.youtube.com/watch?v=yObIYDOv1Qc
2. Obama is the most overrated President (http://www.gallup.com/poll/113980/Gallup-Daily-Obama-Job-Approval.aspx)
3. ...and finally.... Fed credibility or lack of it means: You have to fade the "fake" from Fed....

The meaning of # 3 being: The Fed has a tendency to "leak" certain things to the press ahead of the FOMC, this time they are telling market on the quiet: "....listen do not tell anyone, but we are NOT interested in raising rates now..."...

Then Paul McCulley of Pimco sees right through FOMC- arguing Fed can hikes rates but keep the quantative easing in place.... (http://europe.pimco.com/LeftNav/Featured+Market+Commentary/FF/2009/Global+Central+Bank+Focus+June+2009+Exit+Strategy.htm)

Hence the need to "fade the fake before the Fed" - or in other words - Fed has been known to use Medley and other "reliable" sources to manage expectations, our feeling is this time, they may be doing more of the same... Fed knows asking for more help for the banks right now is impossible considering the morale hazard already in place, but also more importantly six month on "artiticial life support" is enough by any political standard, hence the need to "fund" other projects..... like engineering lower mortgage rates - again - for mainstreet Americans.

On the strategy side I remain focused on hitting some singles.... went long EURUSD this a.m @ 1.3855 ish.... and long S&P @ 904.50 ... Puma Macro MTD: +37 bps for now.... small in number of trades and size for now..

FX:

Looking for some more consolidation inside 1.3830 - 1.4100 ish top - before break-down based on Eastern Europe and the "fade the fake before Fed" arguments above...

Like SGD, JPY(long) - feel nervous about ALL EMG as risk appetite is changing....to the negative in my eyes..

FI:

Can't get excited but two of the smartest guys I know wants me to buy short-end G-7, and look for curve steepners... I'm in on that trade but will not execute before FOMC is out of the way...

COMMODITIES:

Considering the amont of "exit strategy" & reflation talk going around Gold have performed miserably - (yes I know I advocated long @ 930.00)...... Looking for net short, same goes for crude - the world is in denial on unemployment, growth and true state of the economy - Crude will trade sub 40 US Dollar THIS YEAR...

EQUITY:

From technical point of view - I wish that we could test higher levels like 935.00 ish.... as good "top formations" normally have one or two retest before caving in and falling..

Much smarter people than me are pointing out:

• We have had a 90% down day - i.e: 90% of all stocks in Dow has been down the same - normally sign of top...or in this case reversal
• Both volume and the fact the leaders has been "poor quality stocks" indicates this was COVER RALLY more than based on sound economic policies..
• Sentiment has become almost euphoric - even Cramer is feeling on top again.....We moved from most negative sentiment in my career to the most bullish in less than four month - Hip, hip, hurrah...
• We have some interesting cycle dates coming up: Early July (around Non-farm)....
• Divergence is in place in almost all stock markets.....
• Obama disapproval rating is on the rise- (click link above)...
• Time is not working for the Administration in the sense the moratorium on foreclosures is running out, Obama can only do so many public speeches telling us to "feel" better, the TALF not working, we are getting closer to mid-term campaigns - meaning the Washington Senator' and Congressmen, God forbid, will need to go talk to their actual "voters" - and explain my Main Street got Royally burned while the "greedy bankers" were bailed out... hard one for even smooth talking "tosser" like myself..
• 880 my 1st target - AND - I still believe in new lows this year...
  

OVERALL:

Looking for SQUARE positions into Fed meeting - but trigger happy on options on down-side in stock markets- also looking for FX to lead the break of range... shortly.....

Safe trading,

Steen Jakobsen

Aren't we forgeting the true meaning of Christmas? You know, the birth of Santa. Bart Simpson. Weekly Investment Meeting

The three driving PREMISES remains:

1. Cost of funding drives market and valuations
2. Price of liquidity new unknown (tax on money)
3. No prior analogy historically will work (because this is different, very different)

Conclusion

Zero visibility from here - main topics for 2009 being:

Negatives:

• 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)

Positives

• 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:

1. S&P500 will see 500.00 in 2009
2. Yield in Europe & US will go to zero
3. China growth will be less than 3%
4. Tension in the EU will increase
5. Oil goes below 30.00 maybe even 20.00 US dollars
6. EUR/USD will see both 0.9500 and 1.4000 in 2009?
7. EMG underperforms everything else...
8. 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.

Allocation:

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.

Equity

• 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.

Commodities

• 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.

OVERALL

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.

Safe trading,

Steen

The Chinese use two brush strokes to write the word 'crisis

The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger - but recognize the opportunity. John F. Kennedy




This morning CRISIS version 1.0 hit european newspapers and media - for the first time every single media got SPECIAL EDITION on the crisis -
I find that somewhat positive as they so far have been talking about this AS IF... the crisis comes...

Second observation; what u dont die from you get stronger from?

The fact the market didnt total collapse this am in europe is good sign, same as asia... is there temp. lows in S&P in ?

Clearly the big losers are Paulson, Bush, and Washington, but cud the winner be "capitalisme" and the markets... ? I think so.. the plan would have been disaster.....


Other news:

• Ireland guarantees ALL bank deposits - wow, thats interesting.....
• Danish Nationalbank except all forms of collateral including old bicycles(i.e: non-traded stocks)
• O/N USD rates in 8-10% as we have turn money (September into October) - showing not enough collateral in the system for some of the banks.....
• This will be one of the worst month on record for hedge funds - we expect redemptions to exceed 10% of AUM at least , i.e more than 200 bln. US Dollars....

Strategy

We are trying to defend an excellent month by taking very small risk into the month-end - our primary focus has been stocks this month, next chapter in this story could very well the major move in the US dollar. Which way? Still unclear, the path of least resistance should be weaker US dollar based on their extreme need for funding from overseas, but for now it seems there is considerable repatriation going on from US based investors away from EMG back into the US, but to me this is merely matter of time, but tide is turning.

The issue as my good friend Lars keeps pointing out; the EUR is major disaster in every aspect, economically, cyclically, and policy-wise. Trichet will once again be forced to move away from his dogmatic views and into the REAL WORLD, as the Eruopean banks are collapsing one-by-one.

Left? CHF and JPY, I guess, if anyone can tell me what the Japanese investors will do the next three month, having savings exceeeding ALL THE SWF-funds in the world, I will tell you where the JPY (and US dollar goes)... keep me posted.

Moving into Q4 we could have potential for big positive return if the policy makers can stay away......Mind you the starting is low - the real deal though will be whether or not the REAL NEEDY, the US consumer with mortgages gets help or not - with the failure of the deal yesterday we are one step closer to proper solution - maybe?

Positions

Small long S&P from this morning, short T-bonds, long front-end US rates, long CHF vs GBP & EUR...

Good luck, and be safe

Sidelined for now...

Wednesday, May 7, 2008
Sidelined for now...

Been doing a lot of reading and research last 5-6 days and to be honest not really getting me anywhere - there are several conflicting themes playing out right now:

1. Inflation vs. Reflation. Clearly commodities are pointing to inflation risk, but market understand that ultimately commodity spikes leads to deflation rather than inflation, which is the scenario central banks wants the least.

The reflation scenario is based on that EMG countries, realising slower growth is busy ramping up demand through infrastructure investments, and in the US tax rebate and soon to be announced help in mortgages makes for perfect ingredients in reflation soup.

For now the reflation themes wins - but the risk being crude above 150, even towards 200 US dollars could reverse EVERYTHING back to credit crunch.

I take note that the US is building its strategic reserves in times of record high crude prices – and it seems from the “intelligence environment” that Bush has approved covert operation in Iran and that the Pakistan lease is getting shorter (Stratfor analysis). The main outside risk right now to the bullish market is on of geopolitic tensions in the Middle East, if so our year old call for 170 USD crude could be validated.

2. Coupling or decoupling. The bulls wants to believe in decoupling as it free up arguments for why you should be invested in EMG and Asia/Middle East.

The truth probably in the middle rather than either side. Europe clearly (Latest factory and retails data confirming IFO) in period of downward adjustment of growth forecast - while Asia is booming.

On the corporate level the managers are all guiding higher as they can not see things slowing(for now), which lead me to an excellent argument which Alain Bokobza, Head of European Equity & Cross Asset Strategy from Soc Gen made to me in private presentation today; the issue with corporate often more one of bottleneck than lack of orders, companies like Siemens guided lower due to constraints on delivering on orders(Which cost them fines) rather than lack of demand, the same goes for much of the infrastructure industry, but end of the day having orders, not being able to deliver will lead to lower margins, and this is before "recession cycle" really starts to impact demand/orders. The infrastructure business is problaby overvalued and overexposed, and that’s without considering the industries long term contracts with its lack of control over rising labor and input costs!

Growth and FX differences. The Middle East and Asia clearly needs to let their currencies strengthen or face further social unrest. The food crisis is now for real, the best and fastest way to limit the negative impact is to let currency go stronger - this will be followed by fiscal stimulus, probably in the shape of subsidies hands out (I see more and more talks about Alaskan like once-a-year dividend).

Bottom line; one part of the world is facing rising inflation, the other likely to see deflation, and central banks are confused where to turn first.

Market positioning. Market is now long, and with good reason. Technically 1405 was line in the sand for S&P and next level should be 1450 - however with 100% support from Newsletter analyst’, the market is clearly committed after the 12% move from the lows. Why are we still hovering around 1417 if this was positive?K

Keep your eyes on The Congress, they are working hard to reduce the economic pain for Joe Average American, it will not be long before some kind of relieve in real estate is announced. Similar to Bill Gross I believe its imminent and the "cheapest" way to stop the ever falling housing market.

Fact is for now the Fed has done EVERYTHING to safe the banks, and close to NOTHING so safe the average American. Only 3 in 10 people in the latest Uni. of Michigan survey expected to spend their tax rebate, the rest would use the cheques to reduce debt - if that is NOT a sign of new times and trend in consumer spending, I do not know what is.

Conclusion. Rather than "betting the fund" on something I cant predict I remain open and ready to act, for now the upside looks more likely than downside, but the odds are 52/48 in my optic.Good luck,

Quick-and-dirty note... Friday..

<<<==== US Investment banker reporting quarter earnings...

Sorry been busy this week - seems my last post: We need crisis now hit something with a lot of people - more interestingly few people seems to disagree.....this week has been boring...except for GE failing to meet their normally 101% coordinated results! Dont forget this company is so big it can "find" earnings and write ups etc everywhere, but it seems time is running out - the credit card is maxed out!

GE is clear sign to me that the next and for me final step in this financial destruction has started -- oh yes market still believes bottom in place - that banks are doing fine etc - but here is my take:

1. Unemployment is rising and fast 5.1% going to 5.5$

2. Destruction of 2 trl. US dollar worth of credit has happened - which by the way is the exact same amount hedge fund got under total management - Less credit less money to spend.

3. 60% of all corporate funding comes from capital markets ! Ouch!

4. GS and Lehman the most leveraged plays in town... ouch.... tier 2 and tier 3 is getting ...so big that GSs CEO comes out and call the credit crisis over ! Nice try, tell me something, as Fintag asked this morning; Who would you rather trust a independent apolitical organisation like IMF calling for doom-and-gloom or a CEO from major inv. bank who just upped his tier 3 capital by 40% - I know what my choice wud be...

5. GE, one of the few true mega global companies.. Is hurting and hard...

6. G-7 - what a joke - even the central bank knows its waste of time - regulation, regulation, transparency....transparency.. all nice words but like VaR, it a word used which few people understand for real and God forbid to ask for clarification of the word.

7. Less than 12 month Freddie Mac and Fannie Mae was being punished for accouting issues, know US Congress gives them lower capital requirement and 200 bln. extra US dollar to play with - again if this fails - i.e the 200 bln is wasted who will then step in ? The Fed?

8. Socialisation of risk - Inv. bank getting away with murder ... they should trade at tangible asset value, hence Citibank shud be @ 10 US dollar. Why should I pay for "goodwill" from lying banking institutions, please I beg you tell me_

9. Volcker is cool ! Soros is cool and finally read this .... Bob was just voted best manager in this LIFETIME, sounds an awful lot but his piece is first class..

http://www.fpafunds.com/news_04022008_rubicon.asp

Positions:

Usual lot: Added short banking this week, more fixed income and long grains..

Long JPY, EUR, MXN, vol and still short Crude (yes, what an idiot)....

Gotta rush to airport .. Nice week-end

Steen

We seriously need a crisis now!

Back - still slightly jet-lagged but I got so much on my mind, and I will try to distil it as best possible:

1. Unemployment is rising and fast

2. US consumers has been max'ed out
3. Asia dream is over for this time....high inflation and negative real rates killing world saving reservoir.
4. US Dollar is on the brink of real crisis
5. 95% of all managers do not understand the risk involved here. A system without a healthy working interbank market is no market.

I know, I know, most people see me as this total pessimistic guy on the economy - and the world, and to some extent that has been right since last spring where I started rambling about the incoming risk of slow down, crisis, and how private equity was dead.

I am not praising myself here, I for one, admits to not having ANY predictive powers, but at all times I do try to put odds on upcoming market moves.

Where in the past being too pessimistic has been wrong 99% of the time, I now think we have seen true paradigm shift, where being too optimistic will reward no one.

Why?Think about it for two minutes:

In a "normal" business cycle the rich nations will invest in the poor in order to get excess return on their capital. The flow will go from rich to poor nations.

Now? We have the "poor" nations, i.e EMG countries pouring money into the US at returns which is sub-par.

This will not work I am sorry. Capital should go where the marginal return is positive and rising not the opposite!

The fact is 10% of the world, I.e, the US, uses 80% of the world savings!In fact the whole recycling story is tied up on two things:

1. Strategic Deals. Energy deals for Middle East and for Asia import of cheap labour
2. Political agendas where Asia got the US "by its balls" by owning trillions of IOU notes.

Nowhere! Nowhere is allocation of capital based on best return profile!!!!!!!!

If you had the choice in investing a sum of money where would you invest?

1. Europe - poor demographics, with tail wind maximum growth of 2.5%....
2. US - poor demographics, saving deficit, real rates of minus 200 bps and weakening US dollar policy, maximum growth of 3.5/4.0%
3. Asia - excellent demographics, high saving rates, EXTREME need for infrastructure investments, minimum growth rates of 4.0/5.0% ?

I think it is very simple, and most intelligent investors seems to agree as the P/E for EMG for a while exceeded the P/E for G-15!

My point here is..... as the viscous cycle continues to compound the more the REAL RATES of growth, inflation , employment, currency rates gets out of whack with fundamentals.

Take Asia - now they got no monetary policy options (its own by Bernanke through the US dollar peg), high inflation (most above 5%) and negative real rates.

The biggest savers in the world is losing money saving !

Short-term that's not an issue, but when the net wealth decreases so does the incentive lend the money overseas.

The US consuming 80% of world savings offers you: more negative real rates than at home PLUS a guarantee for loss of currency value - is that a proposition you will take? No!

The result if this continues is one of stronger and stronger Asian currencies, with consumption falling as REAL WEALTH decreases and consumption comes down.

The saving grace being the STATE CAPITALISM in Asia which will keep pumping money into infrastructures making sure it crowds out private capital.

So this process which has been going on for way too long due to incompetent central bankers like Greenspan and Bernanke is reaching cross road where the worlds needs to face two major ghost:

Inflation and recession.

For balance to be established several things needs to happen:

1. The confidence in the US dollar needs to be restored preferably by increased saving rates and yields and a firm commitment to improve and maintain US competitiveness. This will work as confidence in the US will lower long-term yields, reduce inflation expectations and make investors commit to the "cheap" US dollar by allocating capital into the US.

2 Money needs to flow to highest marginal utility, which means where investment returns are highest. This means re-establishing the banking system to be able create CREDIT which in turn will be used for investments. The world is full of money, but there is ZERO credit. The market needs to flush out bad investment so the sounds investment can attract the proper rate....

3. The central banker should step away from speaking, engaging in the market place, and let market forces play it role. They should monitor inflation and commit to reduce inflation expectations to long-term averages.

Long time ago in the 1980s when I went to University I learned in Polical Science that the economies that survives long-term are the ones with the least amount of public engagement.

The US being the prime example, the very set-up of the US constitution making sure that Congresss and the President can't agree on anything meaning everything is left for the micro level of the economy to work things out. This worked so well during the Clinton years, which was ALL talk and no action (which reminds me of a lot of people I have met both internally and externally recently :-))

The bottom line here:

Never in my long life as a trader has perception and reality been further apart.

No one seems to understand that a capitalistic system with the above rules and no working banking system is the biggest systemic risk ever, and the policy response is one of more STATE CAPITALISME than before.

It is beginning to look a lot like the 1970s:

Big government, central ignoring inflation risk and rising energy and commodity prices.

This time we have a helicopter pilot who thinks its right to collect rent on Federal money - where is Volker when we need him ?

Finally, here is link to lengthy interview I did yesterday on the markets if you are not already bored - the link to the interview is on the right hand side.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUn1XoFl9aB4&refer=home

We had excellent March - took profit - restarting engines now...

FX: Long MXN vs USD, long EURUSD from today.... (@ 1.5545 and @ 1.5665), short EURNOK @ 8.0170

FI: Long 122 US T-bonds calls

COM: Long AUG puts.. Long DBA

Looking to built negative Asian growth portfolio....more on strategy tomorrow.


Med Venlig Hilsen Yours Sincerely Steen Jakobsen, Chief Investment Officer, Saxo Fund Management Saxo Bank A/S -London
40 Bank Street, 26th Floor Canary WharfLondon E14 5DA
Phone: +44 (0)207 151 2010 Fax: +44 (0)207 151 2001
Please visit our website at: http://www.saxobank.com


Disclaimer
Trades in accordance with recommendations, especially in leveraged investments such as foreign exchange trading and investments in derivatives, can be very speculative and may result in losses as well as profits. Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information contained in this email.

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Cyclical theme in place? EUR to come off from here?

As you know I have one of my strongest calls as "bying US dollar denominated assets" - there has been some interesting moves in the I-rate environment which could confirm some change is going on.....

A. cyclical moves - ECB rates dropping faster than US one - i.e US has started to cut, Europe only to start..
B. Relative move / Recoupling - Judging from headlines the rest of the world joining us on RECOUPLING now... i.e: US is ahead.. Europe behind on moves to remedy this "recession light"..


Chart 1: 10 y US rates minus 10y Europe (Direction of this spread opposite to expected EURUSD move).. (Click on chart for bigger version)



Chart 2 - EURUSD & 1y fwd expected rates in Europe minus US..... (Click on chart for bigger version)


Note: Very SHARP downmove. Market does not believe in Trichet when he talks hawkisk......



Chart 3: The EURUSD relationship is partly driven by interest rates, partby by stock market return. Below is the
Ratio of Dow to Dax - note how early last year is explained EURUSD moves better than interest rates.. (Click on chart for bigger version)

This weekend G7 meeting have US dollar on the agenda. Very few things, if any, is ever done on these conferences, but there is
growing believe in the "bad of weak US dollar" among the worlds central bankers. An important point, which should not be
neglected.

Steen

Recession, negativisme, and willing central banks..

There is no doubt more negative mood on the market than in a long, long time, probably since 1998. This move reminds me of 1998 as a matter fact; coming of the heels of Asian crisis, the Greenspan folks, reignited the great Debt cycle by producing some more money through the printing press - it eventually led to the IT bubble of 2000, but it "safed" the world economy, and gave the derivative of "deflation" through the Asian lower production cost.

The bulls will argue todays market is similar, it is only matter of getting the engines re-started, i.e: rate cuts from the Fed, some of the more optimistic even argue that the mere fact the banks are in trouble will only make the policy makers do more and deeper cuts. That is all fine, but how about the premise that bank are the very INSTRUMENT by which the policy makers express their wishes?

Investment banks are travelling to see ANYONE who have positive current account in order to offer them: "special prices for you my friend" - the very point being the need to cut their external balance sheet exposure and fast, otherwise the origination and other traditional high earners of the banks will dry up due to lack of "room" on the balance sheet.

Am I the only one raising an eyebrow to the almost begging like style the US Investment banks have when offering their company to Middle East and Chinese companies?

Less than one year ago it would have been unthinkable that the Chinese could buy billions worth of stock in a US bank, now it happens weekly, no questions asked. Is that what Paulson calls "movement on the Chinsese issue" when he is praising himself and the administration?

I don't feel comfortable about the Chinese agenda here, but in the investment banks, money is money for now, as they try to survive. Yes, survive, the banks are bleeding to death. This mornings story on UBS is simply disturbing, no less for someone like me who used to work there!

I spend Friday on a rare conference in Copenhagen, invited by Skagens Fonds, and I had a great time listening to Larry Summers and Swenson, from Yale Endowment. Both were formidable speakers, but Swenson left me, 'a market timer', confused on why I exist!

It was exciting stuff and Yale funds are only 40% in stock, 60% in alternatives! True diversifikation if anything - Swenson had several other common sense advice to offer, and I suggest you read up on his Yale model, as its truely exciting and with 16% net return for 25 years its beating S&P hands down.http://bigpicture.typepad.com/comments/2005/09/yale_endowment_.html

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Strategy>

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This morning we closed all our positions.

We had some luck in Crude, short USDJPY and short STOXX50 last couple of days, and with rumors circulating on Friday that Fed is so desperate they could even more inter meeting, I think its time to take some chips of the table.

The positive drift of stocks should NOT be ignored, neither should the fact that most "recession" type like corrections are down about 25% from peak to through.

Right now DOW is down 10-11 pct. leaving us vulnerable for an additional 10-15 pct in the next move, I do however expect some 'rallying' from here in the market, and hence takes constructive stance on the market...

We are:

Long USDJPY @ 107.78

VERY short T-bonds through options

Short EURUSD @ 1.4880

Long S&P @ 1413.00

USDA report on Friday was simply stunning. Read it - and try to understand the ramification for grains and inflation in the world; http://tinyurl.com/yrpthw

Good luck,

Steen

Monday morning Quarterbacking

A number of interesting stories over the week-end for the market:

Fed Vice-chairman admits they have no clue....

http://tinyurl.com/3aue55

Mr. Kohn is making market and himself even more confused - Fact reamins Fed is lost, now forced to go 50 bps on January 30th, despite they should be hiking - if that's a success I should be playing for Denmark upfront!

M&S follows Next, PC World, Curry's and Land of Leather to confirm that UK is DOOMED. The financial sector is going down and so is retail.

http://tinyurl.com/2wkph3



तbout leverage or high stake poker. Interesting how major building marks gets involved in major paradigm shift. Remember the Rockefeller Centre being first bought then sold as part of rise and fall of Japanese economy?

http://tinyurl.com/2dq9c5

Barrons, the ever negative indicator on stock market ran interesting piece:

http://tinyurl.com/ywe4zu


I know a few of you can not access so here is some main pointers;

DJI skidded 566 for the week, or 4.2%. It was the Dow's worst three-day start since 1932, the depths of the depression.

Q4 returns (and note these....!!!!):

- Dow Q4-2007 = - 4.5%
- S%P Q4-2007 = - 3.8%
- NAS Q4-2007 = - 1.8%
- Russel Q4-2007 = 4.9% !!!!!! Russel is the broadest index, i.e caputering the biggest trend.

It was Dow's first fourth-quarter loss in a decade! (So please let's stop talking about year-end effect and the other crap from now on!!!)

For the year, The Russel 2000 snapped a four-year winning streak and 2.7% for the YEAR!. Yes, the "stock market", the broad market fell in 2007!.......

In other news; Last week had two significant data stories in the US;

1. Manufacturing fell into RECESSION mode!
2. The Private Sector in the US cut 13.000 jobs, the first decline since 2003!

News/Data conclusion: Retail Sales across OECD continues to collapse, stock market very close to being in BEAR MARKET - first time since 2000!........and RISING UNEMPLOYMENT will soon subistitute lack of growth as key headline....

=================================================================================
Strategy;

We came into Friday with positive bias on fixed income based on our assumption of potential for weak job growth plus propability of NASDAQ move to down-side;

Friday data confirmed our view, but the magnitude of the down-move makes us think this week will see the usual rumors of inter-Fed cuts and some desperate attempts by US Administration to "get things going in the US economy" - and what's the standard tool box for that in todays market? Create some more money; i.e More inflationary impact, so we are shifting our FI bias from lower rates to longer; and add to this that our Agri-play, (DBA) made new highs while articles like this one;
http://tinyurl.com/2u2tbp

is starting to tell "our story" ---> Inflation will soon become THE FRONT PAGE.....but for now more of the same.

POSITIONS;

FX: Very lights, some JPY calls (bought too expensive right now) but home bias will prevail if stock market continues down - i.e Japanese will take money home).... shorted EURUSD (@ 1.4695 ) this a.m, and sold light in GBP.USD [@ 1.9663) with stops 1/2 daily ATR .....

FI: Buying some 10-30 y. puts today March....(Yield reference: @ 3.89 & @ 4.39)

EQUITY: Neutral. I will bet inter-market cut rumor will hit market this week, and I will be waiting to sell on those....

Long DBA - still target of 100% for the year-on-year!...

Commodities:

Waiting for Gold to hit support around 850/840 to buy..if holding..
Crude: Dont like the lack of "follow through" upside- and concerned how "slwoer OECD growth will play into the future pricing"....

OVERALL:

Theme of the day; How poorly Q4 and start 2008 was ----> Early stock market sell of...

US dollar ----> Weaker number could lead to overseas investment by US investors being cut, plus will Europe and Asia catch the "flue"?

Nice day;

Steen

Bearish Fatique? Yes, absolutely, time to change? No way!

Yes, I am, like most people, hit by bearish fatigue. It is tough continuously having to look for the negative things in life and in trading, but this is such times. The mood reminds me so much of 1992 ERM crisis, lots of waiting, lots of denial, and loads of people buying the "official" explanation.

In 1992 the fundamentals got the better of the political game, and the UK should replace the recent Mandela sculpture with one of George Soros, as his run on the Bank of England did more to the UK economy than anything else since WW II!

Staying on that note, the analogy for the stock market is the same. IF... you really want this stock market to continue its long-term magical rise, then what we need is to replace "the ignorant trading style" with good old traditional value. In other words we need SERIOUS DEVALUATION of the stock market.

I am, despite, being casted as the opposite, extremely optimistic for technology, evolution, stock market and mankind in general. There are at least 50 different stocks I would love to own in the next down-cycle, but the fact remains that right now, as of this moment, the market is defending GBPDEM on the bid in the brokers, or....or in todays terms.. the stock market is slowly edging towards the final 5Th wave correction which should take equities to FAIR VALUE, from there we need to move to CHEAP VALUATION, and then the future is bright.

Do not EVER forget that there are several factors which makes the stock market "drift positively":

- Innovations
- Economy of scale
- Demographics
- Human nature (stock market is game, where we only win whens it goes up...)
- Yield
- Relative risk
- Utility
- Sovereign Wealth Funds

All of the above will make for power full cocktail, but right now.....the market tells me 2008 Earnings growth will be 11.75% after 7.7% in Q2-2007. Let me understand this;

1. Margin cycle has clearly topped. Input costs through the roof, growth velocity has peaked globally.
2. Funding costs of doing the business has risen considerably, as seen in credit spreads and even LIBOR lending rates.
3. Consumer sentiment - collapsing
4. Housing market, everything being equal will need to fall another 2-3 quarters

Does 1 through 4 add up to rise in earnings growth? Apparently!, according to the people in Positive-land.

I have ZERO predictability power but looking at pure chart based trading I note two recent developments:


1. My momentum based models are VERY CLOSE to selling the market. DAX Futures should be sold below 7.375-00 for a 5th final wave according to my medium term model.
2. There is TRIANGLE formation in about all major indices.

1+2 should be resolved shortly, either we get false or no break, and the people of Positive-land will be enjoying their cocktail again on unsinkable Titanic or.....if I am right, they will be running for life-boats.......

A resolution in technical terms will have to happen in the Sep. 13th-28 Sep. window, so this fatigue can soon be followed by some fast paced action.....

Tactical.

Fixed Income: Waiting for Santa Bennie, but long Euribor calls
Foreign Exchange: Building LONG US dollar position, yes long... vs GBP, and EUR..
Equity: Short Dax, adding as per above if broken, and long gamma. Took profit in mining.
Next 7 trading days decides the year in my opinion.

Steen

A day in positive-land...

Well, once in a while it's good to join the other side, to get a different perspective.

I did that today, first I spent some time reading up on some of the better independent research firms out there BCA & Bridgewater, then I joined Soc. Gen for their lunch presentation with their Chief US Economist Stephen Gallagher, who writes some excellent research pieces week in and week out.

The arguments of the "positive" camp summed up by me are:

- Looking back at prior crisis' there is something missing this time....
- The consumer not going to back down.....
- Fed will do what's needed......

It is hard to argue with them if you only use data since 1982, which 99,9% of them do in their analysis. Yes, then something is missing, but.....

What lacking is not signs, but the reaction.... the automatic pilot which "bails" them, the economist, and the market out each time.

The central banks DOES realise there is moral hazard in rushing to the rescue, I think the best analogy of the present situation was given by McCulley, of Pimco....

He talks about, having been at Jackson Hole, how the Fed wants to reset the strike price of the Fed put.

I.e: slower and less predicable. That's a huge difference from the present mindset of the idiots like Cramer & Kudlow. Who thinks: Cut= Good No cut= Bad.

He goes on... "Fed does realise that risk aversion has not historically been broken except by cuts if Fed Funds policy rate". Freakin exactly!

So.. what we got is; a New reaction function, which is NOT automatic AND we got CB's, not only Fed, who wants to let the market play out its games, because it is ALL games!

I find it so ironic that the very people who wants and calls for Fed to cut, are arguing stock are cheap based on fundamentals! Why then do Fed have to cut?

Enough on this, I was inspired yesterday by John Makin latest op-ed in WSJ, which calls for Q4-2007 to have negative growth of 0.8%. I could not do his piece justice by trying to para-phrase him but here is the link:

http://www.aei.org/publications/filter.all,pubID.26775/pub_detail.asp


A few headlines from him:

- Reduced flow of credit to all borrowers, while increasing the cost of borrowing for credit worhty borrowers"
- Every time in the last 50 years that residential investment been this negative - it has meant a RECESSION
- American recessions unusual because it implies "negative consumption growth"
- The Excess of 2000-2001 bubble was in the capital stock, hence no material impact on consumer, and it took eight quarter to run this unwind
- the -0.8% comes from: Flat consumer growth, a negative 1 pct-point from fixed business investment, and plus 0.2 from the rest (which is average since 2001).

Well, I am really not in position to feel confident about neither the Positive-land story or the negative as represented by Mr Makin, but.... I am defensive still.

There is absolutely NO reason to be brave right now. There is still bubble in carry-trading, market believe in Santa Claus (Santa Bennie), and credit market is on a strike not seen since Reagan flighted the flight controllers!

End of this game is how the American consumer reacts, or in worst case, the foreign investors in the US dollar.

The second part have got some headline recently as US dollar index broken the 80,00 pretty much predicting free fall on the cards now.



I remain EXTREMELY sceptical on the US consumer, his headwinds are considerable:

Higher living costs, higher energy cost, no growth in disposable income, higher funding costs.

We have seen major ticket item stocks like Harley Davidson collapse recently, to me that's sign things are NOT that good. A seen by this chart (click on it to enlarge) the HOG stock been drifting down since MAY!.. Leading or lagging? I will let you be the judge.

Tactical

Fixed Income: Neutral. Long some Euribor calls as ECB too hawkish, but valuation is stretched even though duration data supports long position.

Commodities: Looking to short Soya and Corn. Crude = neutral

Foreign Exchange: Long JPY vs EUR and USD, short US index

Equity: Long Asian real estate, mining, and Asia in general, vs. long gamma position in Dax and S&P500.

Cash: Still 60% ish...

This is trying times for all of us; central banks, hedge fund managers, investors, the real questions to me remains: Is the paradigm shift?

Yes, I believe it is, the consequences will start to materialise over the next six month via increased leadership from Asia, increased SWF impact and repositioning of central banks reserves, but as always I am merely small farmer son from Denmark with less predictive powers than a monkey throwing darts.

Steen

Pre Bernanke speech thoughts...

It is the big day for Bernanke, in a few hours we know if he is politician like Greenspan or a true central bank who understand his role.

Market is pricing him to cut, in the last few minutes EURUSD, Silver and Gold all rallied strongly into final hours before "ruling" from the Chairman.

Bush attempt to stem negativ PR from sub-prime into middle America, is late, and from what I can understand of it, not really helping a high number of people.

I note Barclays can not balance their liquidity book, but they can bail out Cairn Capital !!! I note that Bear Stearns High Yield fund lose plea to protect them from litigation in the US. (They filled for Chap. 11 in Cayman Island) but lost .....So.. reputational risk have increased significantly for not only BS, but whole industry.

At the end of this road the financial industry will have changed, and to the better. The Laissez Faire pratices sanctioned by rating agencies have been going on for long, but.... at the end of the day the REAL bubble was created by the very people who now, as per markets wishes, should safe them by cutting interest rates.

It is remarkable to listen to CNBC, and in particular the US market people they got on the show. Most of them deals in black-and-white. Cut now or.....

I for one, have reduced my postions to a minimum, I must admit the last three days up-and-down have tired out even an old trader like myself, but there is yet another month in September. Statistiscally the worst month of the year, but for now the BULLS have it...and with a force.

I remain in "combat gear", let me market price action tell me when the bottom is in, for me this is 4th wave before 5th final correction, but I have, as you very well know, been wrong lots of time before ;-)

Nice week-end.
Steen

Fall-out or bail-out

Upon time getting back to schedule and writing my daily commentary to "clean" the brain here it goes:

Market has been in 4th wave correction of the drop-out. We saw low of 1375.00 in S&P follow by major correction on the back of what was "relatively inteligent" move by Bernanke and Fed. Cutting the discount rate - did nothing for the credit conditions, but it did give market the smell of "bail-out".

The most interesting aspect of this being, that "post-game" analysis tends to focus on that Bernanke is trying to avoid Greenspan classic mistakes of giving the patient what they think they need rather than what the doctor prescribes.

The Kramer's of this world have no feel for reality. If they lose they want their old friend Mr. Fed to help them out. I have been hard on Greenspan for long, long time, and I am constantly reminding people that the very bubble we have right now is created by central banks generating too much capita at too low rates.

Fast forward to now, and let me stress I do not know if this goes from crisis-lite to fall-out, but inrespective of what happens a few things needs to happen:

1. A serious correction of growth forecasts. GS already looking for 75 bps this on the downside. C looking for 50 bps. Me? You know I have no predictability powers but I am more towards 100 bps.. and here is why:
2. Unemployment. Recent studies shows that the 130K plus jobs created this year on average is merely statistical mistake than real jobs. There are a number of reasons why reality is going to hit the economic numbers going forward.
3. Credit condition for Main street Americans is tigher much tigher:
a. food is through the roof b. energy still elevated c. Asset value of your home is deterioating d. Credit linkes being removed. You can not get a mortgage even as partner in GS right now! e. mortgages are rising and fast (despite yields coming of)
4. Global forces: China is looking to hike and that will slow their growth velocity, last week we saw Euroland come in below consensus growth, and the same for Japan. The world is SLOWING down from cyclical top.
5. Earnings will come down and fast. Unit Labor cost is rising much faster than GDP deflator (1st time since 2000)
6. Cash flow. Buy-back programs been very dominant factor in S&P last two years, without it S&P would have been down! Again Net Free Cash Flow have now turned negative (again 1st time since 2000)

These above 6 points remains with or without further crisis, of course if crisis persist then these points will be "leveraged" further.

Then let's return to credit market. I read on the wires that things are going back to normal: hmm... check this chart:



The CP market has NOT moved one Ioata back - there is NO normalisation. This market is behind most of leverage of the hedge funds, Private Equity and banks conduit funds, so in other words, the money lender is out of business.

Another way to look at this is to see how the banks are performing, post this Crisis-Lite:




Better but not back to anything like two month ago.

Well lets cut to the chase here is how I see the market from here (Remember throwing dart will give you better performance than following me!!!!!)

Stocks

Financials will continue to underperform and big MAJOR margin. We need some serious destuction of capital in the banking sector. If German Landesbanks are biggest investors, with State Street, in Conduits then they should be ashamed. No governance, no repurcussions and they cant even fights these vehicles in courts as that would expose them even more. This is MAJOR negative for coming years.

I am short EVERYTHING into 4th week of September - I expect bottom will come in for this year there and we will be smoothly sailing into year-end. Q1 2008 will be crunch time. The credit failures of the last 10 years will have compounded and the write-offs and law suits will be flying by then (Anyone know of public traded litigation stock I can buy?)

Never forget that SWF have plenty of ammunition and so does private equity, although the need to set their targets and funding levels lower - this will stop the market this time.

Foreign Exchange

The BIGGEST risk in the market remains the UNWINDING of carry trades in FX. FX is always the last component to move and the only REAL leverage remaining in the system is in JPY and CHF carry trading. When USDJPY have traded below 110 we are about back to normal (1.6000 EURCHF). This is the bigger risk here, as credit tightning so does conditions for the "free trade" of funding low and placing high.....

I expect a reversion of the weak US dollar based on repatriation of funds from US based investors from emerging markets, from the neutralisation of the theme : US is decoupling.. which a lot of market players have on right now. Finally, US is the only country in easing mode, i.e they will reverse this trend faster than the dogmatic European central banks.

Fixed Income

My arbitrage friends are busy telling me telling curve is wrong, well I am of the opinion that we are seeing correct rates. Remember, as RBS Greenwich tells me, "..the first ease in a given cycle 2y notes traditionally trade 125*150 bps through funds..."...... I.e: We can go even futher down in short-end before indicating cut.

Fed will cut as per my six points above. The cyclical growth and credit expansion have moved from BLOW OFF period, to bubble bursting...recession lite...

Be long short-end, and December Euribor. ECB is ni Catch-22 which will lead them to cut as well... (Just watch Spanish real estate markets!!!)

Norway and Sweden will most likely hike - its not for nothing they are bunch of dogmatic Socialdemocrats!

Commodities

Both energy & grains are in total denial of the changing cyclical forces.
I expect crude- and grain to put in negative performance over the next 2-3 months as the world adjust to "back to normal" leverage and growth.

I am very negative grains based on excessive speculation and indications of better than expected crop in the US.

Crude - Hurricane season always tough to play Crude in this part of the year, but risk is to the downside and as soon as next week.

Gold- Silver: Stay out for now.... but it in bull market and I will look to buy with end of September.

Best wishes


Steen Jakobsen