FED's biggest problem is that the economic data is improving too fast - Macro Blog

On the eve of the FOMC meeting I will dare to suggest that the 'real issue' for FED is the fact that the data is better than expected!

Yes, lending is still weak, yes all in all housing is still dismal, and most of the improvement is in sentiment index', but... that the whole plan of Obama or the Harvard School of Economics as some people with tendencies for compartmental disorders.

Yes(again), you are reading this correct!

Obama has been successfull in creating the illusion of doing something, not unlike him winning the Nobel Prize on intentions alone!

He has now succeed in getting everyone to buy-into his 'hope' (Do not worry - it is ALL hope - no substance).

This leads me directly to todays FOMC meeting - the mere talk of EXIT STRATEGY gets people nervous, but it is hard for Fed to not change their communication:

1. Because its too tempting, always, for politicians and bureaucrats to take claim for something they nothing to do with (See chart below where US PMI surges past China and Europe)



Source: Societe General Cross Asset Research

2. It is paramount for Fed to create another illusion, the illusion that they have a plan for how to take the easy monetary policy back, for how to sell their old bikes, ladies hats on their balance sheet in the future.

This should be tied in with the massive shortening of term debt-structure which has been happening in the US: (see link below)

• Maturity of outstanding US Debt is down to 50 mth from 70 month
• Almost 50% of debt is due in the next 12 month (Will Fed hike making it more expensive for themselves to refinance?

http://fabiusmaximus.wordpress.com/2009/10/30/maturity/

It seems that the thinking in Fed is to 'pre-alert'the market, to communicate is the tool. Some observers Financial Times, and other insiders feels this meeting is too early - but that is it imminent.

http://blogs.ft.com/money-supply/2009/11/04/the-fed-and-its-extended-period-language/
 

Another interesting aspect as pointed out by the excellent research done by Societe Generale Cross Asset Research is the fact the world has a potential for a "decoupling"  (See PMI chart above)

Where early on it seemed the US was lagging China and Europe, it is now clearly the US which is in the lead as seen by recent surge in PMI data!

This would be major game changer - as the US Dollar has become the funding currency of choice.

Imagine if the market would/should/could starts repricing a rising rate structure in the US (it sort of makes sense the US needs to pay more...) while Europe lags - that seems to call more for 1.10 EURUSD than 1.70/1.80 which the consensus in the market.?

At the end of the day the market is in my opinion unprepared for the next move(s) in monetary policy, fiscal stimulus & geo-events.

In other words: Across all products VOLATILITY IS TOO LOW relative the uncertainty of path, which is the true volatility curve.

FOMC tonight I have no clue about - the way the market is setting itself up indicates to me there is 60/40 chance of major disappointment for the RISK-ON people, but as it is always the case with central banks, politicians and people in general: It is not what they say but what they ACTUALLY do do which decides......

Strategy:

Still same positions - massive P&L swings - but will await tonight & most likely Friday Non-farm before moving from aggressively short this market back to neutral. Justice will prevail! :-)

Safe trading,

Steen

FOMC, FOMC and FOMC

The issue as an investor right now is between.......

The need for intervention to work

The world needs a good close to 2009 - the time buying and excessive public spending is a project which can not be seen as failing (that it will fail.... is different agenda all together..)...

This entails the "smart money" is betting that the O-team will do ANYTHING to keep the momentum going into mid-term election and the agenda being one of FIGHTING BUSINESS - which mimicks the F.D.R - New Deal version 2.0 (do yourself favor and read F.D.R's inauguration speech)....

This could mean sell-off post FOMC today, but "quality buying" below ---- then rally into close of 2009 ....and then in 2010/2011 we will resume NEGATIVE tractions and new lows in the market...

The need for gravity to work

The buying of time is running out, the gap betwen "presumed" impact and realised is still huge and growing ... unemployment is rising.. everywhere, credit not reaching the consumers, and the new new growth is sub 2.0% looking 5-10 years forward. My favourite economist, John Makin, goes as far as saying 1% 2nd half 2009 growth is unrealistic, and that -2% is likely. http://www.aei.org/docLib/08-EO-Aug-2009g.pdf

The critical level of 1000-1050 reached and many "guru's" now looking for top in place..

We will focus on FOMC for now - and keeping things light... but here as few thoughts:


Agriculture:

We like it again, both from momentum but also fundamental value. China's growth is tax on farming prices - expect steep rise in autumn. Long DBA.

Fixed Income:

Still long Danish Fixed Income...

Foreign Exchange:

Strongest view: Short GBP - into quantative easing .... also long DXY (US Dollar index over FOMC for break - or stop out if FED goes further into QE)....

Like NOK - looking to short AUD....

Commodities:

Can not buy GOLD when we now world is entering long-term negative growth cycle, with excess capacity everywhere.... risk of crude like long pain..... was short took it back pre- FOMC

Crude: Short... for now.. .cyclical - but likes long-term prices action...

OVERALL:

Cold as ice, slowing getting into market, but it is hard to restart the engines ...also as we were so wrong during the summer months.....

Safe trading,

Steen

Pre FOMC

Dear Investors,

Nothing much to add to the equation - positions remains the same - I used the spike in EURUSD to add some put 1,3900 mid-July (from 1.4080 ish spot level)

Some of the leaks pre FOMC remains that they will not move, on the other hand it seems clear that the economic data prepared by Fed staffers believe in "Green shoots" - the same message is carried by OECD latest report: http://news.xinhuanet.com/english/2009-06/17/content_11556269.htm

I remain with my firm believe that July+ August will be extremely nasty for the equity markets, but for the next 48 hours "anything can happen" as the Socialist State of America rolls out all of it PR-machinery to make the world believe the US is doing fine, if not great......

I will leave for Hamburg for business meeting shortly - reporting back tomorrow post FOMC and pre ECB.

Stay lucky,

Steen

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

The game of undermining the US Dollar is under way...

I note, through friends of mine, how the Shanghai Group backed Russian proposal on using national currencies in mutual settlements and introducing a commen currency. Mededev own wording: "The current set of reserve currencies and the main currency - the US Dollar - have failed to function as they should" ... http://en.rian.ru/business/20090616/155268544.html

The meeting included China - so the China/Russia link is showing up more and more, and it again goes to my point on how Asian and EMG countries overall are focused on getting their proper share of political and economic power - they want to keep the flow "local" - which will have material impact on unemployment levels in Europe and the US. (Increasing "natural unemployment").....

The more short-term critical aspect becomes one of how this "Think Local - Buy Local" will derail all the global intiatives in G-7, G-10, G-20 as the economic impact will be one of less recycling of current account surpluses, meaning less financing for the indebted US and Europeans......

The growth rates in Asia, EMG will outperform G-7 by more than the norm going forward, although I suspect the REAL DATA will be that Asia + EMG will barely grow while the USA+ EUROPE will be in recesison for far longer if this game Think Local- Buy Local continues.

The other topic is again one of the FED trying to "talk to/leak to" the market that they are not even close to raising rates....

FED weighs FOMC statement: http://www.bloomberg.com/apps/news?pid=20670001&sid=arWqPRMOr14A

This combined environment of Fed "not" going to hike - surprise, surprise, plus continued talk of diversification away from US dollar- got me long: EURUSD and S&P again .... (took profit yesterday on short S&P and short EURUSD).....

Puma Macro MTD: + 27 bps (3 trading days).

Safe trading

Steen Jakobsen

It is disappointing to be short & long this market....

Click on chart to enlarge

Dear Investor,

Nothing much to add we are now into 6th or 7th week w. extremely tight range trading going on.....the GDP today was a disaster - but in the land of the Happy.. its no problem, but do spend 5 min. reading through this: http://www.ritholtz.com/blog/2009/04/gdp-down-61/

I am still recalibrating my model - but right now the mechanic part of my model is long, while the discretionaty part SCREAMS - selllllllllllllllllllllllllll......making me close to neutralising the positions.....

Bigger, broader macro piece tomorrow post the FED meeting...

Positions:

Short EURUSD, Long EURSEK, Long Gold, Short S&P and DOW Futures........

Safe trading,

Steen

The measure of who we are is what we do with what we have. Vince Lombardi

Investment meeting

Economics:

The incoming data has stabilised in velocity but the expected improvement is not coming. Yesterday "worse than expected".... Industrial Production, Empire State Index, and Net long-term TIC flows once again raises our alert to the lack of tracktion for what can only be described as the Mother-of-all-fiscal stimulus' in the US and abroad.

The same pattern emerges from Europe - and we are left wondering if the AMEX announcement of February deliquent loans rise to 5.3% is the first sign of the financial industry now having to pay the final price of this cycle, namely the loss on their private clients? Still to early to judge, but not imcompasing this final loss into the rallying financial sector stocks could be grave mistake.

Conclusion: Stabilised but economic data impact on overall market direction relatively benign.....

Technical levels:

Looking at our quick-and-dirty scan of the market: http://tinyurl.com/dhbbd9 ...It could seems the momentum if somewhat going out of the market (It could also merely be pre-FOMC and G-20 meeting profit taking....)...

We also note, if nothing else, that the VIX volatility has not follow through on the downside creating "Noise divergence", but it was also noted the VIX failed to rise significantly with the new low 666.00 ish - is this sign of VIX losing its "powers"?

http://stockcharts.com/charts/gallery.html?$VIX

The internal expected reference remains 805.00 ish ..... we opted for keeping the exposure in place awaiting the FOMC announcement tomorrow. (To QE or not to QE - that's the question)

In currency-land, as I touched yesterday we are at a cross road - taking out 1.3100 on London close would make me go flat again, untill then I remain with 1.2000 target, although the Investment Committee at at large was more "open" to downside of the US Dollar.

The month-end effect should not be ignored... where the "benchmarkers" generally needs to buy US Dollar, but the end game of "competitive devaluation of the US Dollar" has in many peoples mind moved forward in particular if the FOMC tomorrow openly embrace the QE or more correct to launch the biggest helicopter in their fleet and start printing money in earnest, which QE end of is and always will be.

Conclusion:

Disappointment with the lack of EMG follow considering the "positive IMF noise".... EURUSD @ 1.3100 on close the key reversal point, Scandies looks good, but firm close below 10.90 EURSEK and USDSEK below 8.5000 would help.....

Macro themes

• G-20: Not much to add- the hope factor is high, and I remind myself it is not what they say they will do, but what they ACTUALLY do do which is important. Many fortunes has been lost on promises delivered by policy makers.


• China: We note China market was down while rest of G-20 was up, and now overnight it was up while G-20 was down? Coincidence? Probably - what I am hearing from China is surprisingly that the Politburo uses the stock market as GAUGE for their policies.. and once again... as domestic chinese investors you are offered two products: 1. Saving in state owned banks with NEGATIVE REAL RATES of 3-5% OR....2. play the markets? Which one will you chose?


• Quantative Easing in the US and ECB(FOMC meeting)..... Our FI manager had strong feeling for potential for ECB lead qualitative-easing (note the difference)... i.e buying of selective papers which is deemed too cheap - an analogy to off-the-runs in the US..... This could very well happen, although from DOGMATIC POLICY point of views it will be hard for BUBA to swallow... the argument certainly both qualified and correct for risk purposes... Why buy Corp Credit at 5.00-7.00% when you can get Ireland, Greece et al at LIBOR +400 ? At least these countries can TAX themselves out of trouble not so for corporates... so really we are saying is that SOVEREIGN offer better value than both corporate spreads and short-term equities (We agreed QE impact on stocks depended more on the mood of the day than a rational reaction, although creating more debt should mean widening credit-spreads, CDS-levels, and weaker US Dollar). Ultimately whether they move to QE or similar drastic action tomorrow (as insiders indicate)....is at best a guess at worst a hope...


• EEC. IMF is coming - and if so, market feels vindicated to thinking Eastern Europe is saved, maybe, just maybe the truth is a little more complexed...but watch the IMF development closely...

Conclusion: We deemed doing anything before FOMC would be too risky, but also agreed on contigency plans for should FOMC come out and play ball with the hopers - then some serious rebalancing could be in order....for now its awaiting more inteligence but watching several key indicators break or fail.

Strategy:

We remain very conservative with cash/fixed income representing approx. 55-60% of exposure, we have some direct- and indirect exposure in equity.....for our benchmark we have moved slightly out of risk aversion, but by small steps - transperency a need.....

Safe trading,

Steen Jakobsen

Back to basics....

Finally back from a busy travelling schedule ....... lots of ideas and thoughts... but for now I will once again do the easy thing and give you my interview done w. Bloomberg this week......

More here tomorrow/Monday.....


http://www.truveo.com/Investment-Strategy/id/229188125

Safe trading,

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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Bear Market is here.... but too early for 1929 like crash?

I am not hiding! I took off all the bullish trades late yesterday which turned out to be extremely lucky.

Only done two trades today:

JPY: Bought some good size 106.50 JPY call for Friday as my good friend Drew Baptiste of Morgan Stanley been telling me if 107.22 goes it#s 3rd of 3rd wave target ting 97 +-

Drew has been extremely right on JPY plus it mixes well with my prevalent view that Q1 is all about risk adjustment and going "home" on investments.

The second trade is long EURGBP 0.7546 / my "favourite" salesperson telling its "key reversal" and other terms I clearly do not have the capacity to understand, as I cant for the life of me think of ONE reason why GBP should do better the Europe. Brown is doing everything wrong, Darling (what a name) is already joke 3 month into the job, and todays GA in Northern Rocks shows the incompetence of the government and its adviser's.

It is very clear to me some significant repricing is taken place, and in the process the "counters" are losing out. Counters are the very people who buy on dips and who thinks this time is like the last few times.....Nothing could be more wrong...

The policy action from the central banks is "print some more money!!!!!!!!!", in the US the FOMC, they are cutting rates and normally the bank will "blow" up their balance sheet to match the expected cut, only problem being that this time the balance sheets of the banks are so stretched they cant even do origination on deals, and one loan after the other gets negated, so the market stuck with banks going around to anyone, like me, with a positive current account, begging me to take some of "their special deals for you, my friend!" off them in order to clean up the balance sheets.

There are several so called investment banks running desperate to find someone with money to spend.

Another thing; SWF, SWF - I noted yesterday and I will note again today; Dubai Ports can not buy a port in the US, but they can 'as much as you like' in the banks? Logic? None! Banks are even more "strategic in nature" than ports..........

The US dollar crisis is very, very close now...... 1.5000 goes and we will see central bank intervention in my mind. The weaker US dollar makes the Fed decision even more difficult, but the Fed does not care about the US dollar, Bernanke has no clue, neither does the rest of adminstration. They should be hiking rates to defend the US dollar, make US more attractive and re-establish their inflation expectations.....but......thats almost as likely as me being drafted to play for Denmark along side Tomasson.

Strategy

FOMC is desperate. Desperate people does desperate things. We are HIGH alert rest of the week......Only Fx positions as of now.. and mainly in options..

FI: Getting hammered on long bond, but hedged through the JPY. Still expect very dynamic move to higher rates inside this week....... Looking to do spread long Europe short-end vs short long end US....

Commodities: Still "pis.... off" at myself for negating trade ahead of USDA report Friday, but...fact remains commodities NEED to reflect "recession mode"......

FX: Short GBP, Long JPY.....

Equity: Neutral, still better buyer than seller....

Good luck,

Steen

Central bankers are lost... totally lost....AGAIN..

My "models" are very close to confirming a BEAR MARKET. No less, no more. The key final ingredients will be Bernanke's speech tonight - if the market, as it has done in the past, sell of during and after his finish, we will have first real bear market since 2000.

The only thing that will be able to help this market out is rumors. Rumors of Sovereign Wealth Funds (One wonders why considering their track record so far!!!), and inter-meeting rumors of cuts.

Having said all thay I am still in NEUTRAL mode - there is to much consensus in the market, which concerns me always. No less after having read the F.T piece about Ray Dalio of Bridgewater: http://tinyurl.com/3dgapx - he made it his business to NEVER correlate with other managers, something I have always done, but to much less success than Bridgewater!

Strategy trading:

Fixed Income

Unchanged. Still waiting for cycle change in yields - we are close to breaking triple bottom, but for now holding out for "surprise" upside either through more liquidity (read: reflation) or better than expected US data.

Foreign Exchange

Long AUD.CAD - starting to accelerate - looks fine.

Long EUR P, 1.44 (spot @ 1.4710) 1 month

Long JPY C, 104 (spot @ 108.25) 2 weeks

Long EURSEK, and Long NOKSEK.

NOKSEK flirting with 1.20000 today, break should lead to 1.2500. In times of recession these two economies are VERY different.

Sweden is VERY open economy, with most of the Swedish companies being US dependent. This could be seen through Q3-4 in 2007 when the Swedish stock market significantly underperformed other European Indices. This is continuing, and as a rule to exception Riksbank is more negative than the local banks, leaving door open for much, much higher EURSEK.

Norway on the other hand, will see demand for oil and fish, BUT.. if oil starts to react to RECESSION fear, it should also find support around 7.90000.....

Commodities

My biggest change - I have been drumming for GRAINS and Crude for almost two years now, but now I am getting square.

It has to be said I am a very defensive fund manager, but the upcoming USDA Crop report tomorrow got me worried. Following the "real experts" it seems we, the financial people are, too bullish in the wrong time of year. An excellent link http://www.agriculture.com/ag/

I sold my long time holding of DBA yesterday @ 34.45 -

I also as stated yesterday sold Crude(Feb) @ 96.95 - We have been trading in- and out so we are now comfortable short from 103 USD net, which have taken us above the critical 102 $ line.

Remember the play here is merely for Crude to "catch up" with the recession story - another way to play this could be to short SHIPPING........

Equity

Tried the long side into close yesterday, did not feel right and our model continues to ask us to wait for confirmation, which I will respect.

Early last week I put downside break @ 60/40, it is now 75/25, we really need "something tangible" from Bernanke tonight, next week in Congress or at the next meeting. Note that market got 50 bps @ 75% probability, almost destined to disappoint.

OVERALL

Still in day-by-day play, but getting feeling new trend emerging... Crude right now trading 93.70, having broken critical 95.55 - and gold offered to... 850/55 test will be critical, I am net buyer net seller, but not before those levels.

Theme: Recession light - and the repricing needed plus re-coupling, the US is not, not alone in lower growth rates..

I am attending conference tomorrow with Lawrence Summers, sponsored by Skagen Fonds, I am looking forward to asking him about "strong US dollar policy" if I get the chance....

Stay lucky,

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

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

Finally someone(s) more confused than me.....

Fed Minutes - its elementary Dr. Watson.......

Well the usual breed of Wall Streeters having tough time this morning spinning last nights FOMC minutes in a positive light.

What was most significant in the statement was the lack of discussion about changing the bias to neutral. A subject which was strongly discussed in the prior meeting. Bottom line is clear: Fed has no intention of leaving neutral mode anytime soon.

What's more interesting is how the FOMC now is in clear INFLATION ALERT risk mode. This is no surprise to us, but it's not something the stock market was even willing to discuss less than two weeks ago.

Embedded in the FOMC Minutes there was some interesting forward looking forecasts from FED staffers:

• Fed staff reduced Q1 growth forecast........


• Fed increased inflation projections.....'inflation is projected to be higher in the first half than the prior forecast'.... though 'would still edge down in rest of 2007 and 2008'

Sure and I will be playing for Man. U in the Champions League Final. Wishing and hoping is for prayers in Churches not for markets.

Fed governors on the speaking circuit reiterated the inflation scare.......they all put confidence in the fact that inflation expectations remains subdued. This is only matter of time with food and energy again on the rise.

Break-even rates 5years US... (or inflation expectations - CLICK ON CHART for better view)




As seen by the above chart the expected inflation is on the rise, so is the ultimate inflation benchmark Gold...so maybe FOMC should either pray some more or start to do something about the problem, but here comes the issue.

If... the US economy was growing at trend or even above it would be the easiest thing in the world to continue hiking, but alas the growth is risking to collapse.


The lack of consumer spending should according to people far more smart than me be substituted by CAPEX spending (Capital Exenditure) as the corporate balance sheets are stronger than ever....but... whats this then?


http://tinyurl.com/2gkefh (full reference/ CLICK ON CHART FOR BETTER VIEW)





Yes, Houston we got problems! The US been fortunate in the last two decades that every time one sector cyclically ran into trouble another took over. Some of it was technology driven, some of it monetary, but whats different this time (and yes I have been around for more than 20 years trading!) is that the substitute bench is empty, there are no more players to put on the pitch:

• Yield still low historically
• Monetary policy has only just started globally to be normalised (Agg. Mone. growht in January was ALL TIME high still!)
• The consumer is tired. Six in ten Americans looking for recession, and they seem better at predicting markets than Greenspan and his cohorts!
• Corporate US will rather buy back stocks and do M&A to reflect globalisation
• Energy & commodities are in long-term upcycle due to distorted supply and demand

So... I am NOT impressed! Mr. Bernanke bet his integrity on the pause move last year and as any rookie playing in the real world, he looked good for a while...now he looks was he is an academic pursuing a political career in Washington........

Conclusion: FOMC is caught out, they can only wait and pray, as friend said to me on another subject; "...When you are in hole, stop digging".. (Sorry I can't reveal the conversation this arised from .....:-).

Best think FOMC and FED can do now is to stop commenting on the markets, they are in other word even more confused than I am....

Positions:

Foreign Exchange: We are long EURUSD, GBPUSD and short EURCHF & EURGBP

Fixed Income: Short 5 y notes, long 2-10 spread

Equity: Short NASDAQ and Dax Futures, Long Dax puts...

Commodities: Long Wheat

Overall looking to add: NOK, Gold, Crude......

Disclaimer: As always above is meant to provoke you to think outside the box, the likelyhood of me being right is smaller than me playing for Man. U in Champions League Final....

Good Luck into ECB meeting today

Steen Jakobsen