Monday morning quarterbacking

Dear Friends,

Well the market is back in 'jolly mode' - the lesson goes: Bad economics is good for stocks(WSJ article)- and easy money will last forever. (Where did we hear that before? Oh, yes - the "Greenspan" put)

Now we have the Geithner/Bernanke put - leading into the FOMC last week, there was 'rational' people like me, who thought maybe, just maybe the FOMC could see how they are now creating the exact same mistakes Alan-I-am-the-most-useless-centralbanker-in-history-Greenspan did, by promising the market NO hikes - whatever happens ....

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

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

I will let the "picture stand" for a few minutes so you, yourself, can contemplate how deeply misguided the Treasury Secretary is in even the most basic economic-one-on-one!

Another headliner being thay Goldman Sachs not only depend on cheap government money, but apperently they are also doing the work of God - at least that's what the CEO Blankfein says: http://www.dailyfinance.com/2009/11/09/goldman-sachs-is-doing-gods-work/ . Look I am a declared Agnostic, but with a firm believe in morale and the ten commandments, but telling someone you are doing the work of God is that on the border of blasfemi?

I refuse to be drawn into the discussion of what a serious CEO calling upon God in his defense for his industry does/tells me.... - as I remember a born again Christian President doing so for too long.......and the issue of everthing from Wars, violating individual rights......

The week-end did give some justification to my long held believe that over time justice will prevail:

 Warren Buffet got caught with his hands in the tax payers pockets, as he did not feel too big to take some tax credit from the US Government, making sure there is less money for the 10.2 mio. unemployed et al: http://online.wsj.com/article/SB125729682025626851.html and if you want facts, not CNBC hype maybe looking at this website could help level some of the God-like stature he likes to take upon himself. http://taxprof.typepad.com/taxprof_blog/2009/11/warren-buffett-.html

Last week was by all accounts an extremely expensive week for me, if nothing else, it shook my confidence as the Friday last big down close confirmed my long held view that a top was in place Mid-October, now it seems we need the classic re-test of old highs to see if there is more momentum above those levels - most of my positions is now under water, although still some distance away from the allowed 5% loss, but time-decay is very expensive.

The strategy for this week, will be to observe, recalibrate, because despite my lack of income from the portfolio last week, it is abundently clear to me that the financial market lives in a Fantasyland.... so while the market tracks higher, I will leave the final verdict to beyond the old highs, as I do firmly believe 10,2% unemployment is AN ISSUE - if nothing else to the miliions of families presently losing their jobs around the world.



My believe in mankind, the markets are positive, but we need the "forest fire" first, and if in the process people will start calling less on God, have higher morale standards, less leverage, and everyone will see how destructive egoism is, then I will be very pleased. On the issue of inspiration I found this link on a truely remarkable man: http://www.tradethepicture.com/2009/11/lewis-gordon-pugh-video/ His message is for the environment, but as a trader, a person, there is some very interesting lessons in this.....if only..

Safe trading,

Steen

Silence is Golden

The market is now slightly oversold on my model - the top seems to be firmly in place and now we will await end-of-month-buying or not.

No doubt many fund managers are 'screen watching' over the next 48 hrs, potentially having to act on Monday should we take out 1050 in earnest.

It's not easy being a fund manager these days, actually never is, but 2009 the story very quickly became one of:

In 2008 we had the worst financial crisis, probably ever, and as expected 2009 became the worst year on the real economy. The numbers, the long line of unemployed confirms it.

Then the different governments decided to spend 5%-6% of GDP to 'safe the world from breaking down' but all they really did was to circle the wagons on their croonie friends in Wall Street - that's not a political statement, merely a matter of fact.

Now at the end of 2009 the banks - the major banks- are making billions on tax subsidized trading revenue (borrowing at zero with Geithner/Bernanke and placing them in...... Bernanke/Geithner long bonds) - you could say the its look very much like what a certain Madoff was doing recently, but do not let the facts come in your way.

Along the way, there was a public apology from Mr. Greenspan, effectively renouncing his Ayn Rand - Objectisvim and 'Efficient Market Hyphothesis' along the way. For many of you this may be relatively irrelevant if not for the fact that the whole principle idea of letting the market rule themselves came out of these two central "theories" - which Greenspan wholeheartdly subscribed to.

http://www.disclose.tv/action/viewvideo/10908/Alan_Greenspan__I_was__terribly__wrong/

The only real issue with Ayn Rand and EMH being it leaves "morale" to the markets - and I must say: I have wrestled with the "morale" issue for a long time, but as its often the case in practical life, the answer came through observing the nature - in this case the banks, the politicians and the bureaucrats.

The conclusion: There is NO MORALE limit for people when they spend, invest, use other people money - I will even offer the preposition that man/woman generally have a lack of morale when it comes to dealing with money (and a lot of other stuff - which I will leave for your psychiatrist) but this old trader has lost all faith in the market place - the key issue remaining is the one of: What do you put in its place? I do not know - but 90% of financial people are talking non-sense, and 98% of what is produced in banks are waste not only time but also the paper its printed on - this a reality people needs to deal with, as the new world order in finance is not one where the government will come to rescue - ironic that the "free market system" most likely will be replaced by one where 'accountability' is the true measurement of success - lets see how is prepared for this down the line.

On the markets I have not traded for over a week really - got all the same positions as of last investment meeting - I'm surprised in two things:

The high level of GBP and oil keeping its bid tone - the rest is as expected and I will now await the month-end before putting further chips on the table (For those in doubt of my positions - follow the Twitters)

Safe trading,

Steen

Frontline on the go-go 90s....

Been watching this tonight: http://www.pbs.org/wgbh/pages/frontline/warning/etc/synopsis.html



You have to admire the quality, the pictures, the directing of this 55 min program from PBS (my favourite TV when living in the US - actually 2nd after Yankees/Giants) - and it is a lesson in what an idiot Greenspan was.......

Brew a cup of coffee and sit down and enjoy, please!

Then a comment from a young student lecturing me on why Philosophy is no better than economics as an education - what a talented writer!

Hello Steen,

You don't know me but I have been following your blog pretty closely and we also shared the same roof for a year in saxo bank (where I still work as a sales trader while studying economics in the lovely tiny town of lund). The reason i am writting to you has nothing to do with economics it's just a warning to NOT waste your second life studying philosophy. At least not in a university. Having been to school in a country where philosophy is force fed to every student (something like finnish kids having to learn swedish) i have a few words of advice for you. Typical philosophy class goes like this:

- Teacher tells you to read text (say plato's republic, or socrates' apology if the teacher is kinky) and then write an essey about it. Then the possibilities are:

1. You don't understand it and he does not understand as well. But nietzche did understand and wrote something about it so the teacher knows how to rationalize the bad grade you will get.
2. You don't understand it but he does. He is a genious and of course he is bitter because nobody else in the world understands him, he is still virgin even though he teaches classes with 1/10 Male/Female ratios (the reason i took philosophy classes back in the old days) and worst of all he has financial problems. He fails your paper and you are not even in the mood to ask him why, just repeat the class and hope that next year it's being taught by a less clever teacher. Eventualy you get disapointed, drop out of class and study economics instead.
3. You understand it but the teacher doesn't. He pushes the button, the floor below you opens and you find yourself in a pit of crocodiles, snakes and piranhas. So long sucker, better luck in your third life!

Above all, if you decide to study philosophy anyway, do NOT do it in Greece (and preferably not in UK, sweden or germany either). Try some country that doesn't try to teach it like it's math. If you really really can't find one do this: Study MATH but only socialize with philosophy teachers. They will speak to you without seeing you as a person retarded/severely retarded/too clever to be kept alive.

by the way, very nice presentation, unfortunately in lund 90% of the time we have to hear the swedish (my correction) idiots speaking... But hey, we were founded in 1666, so all our clever guys are long dead, or retired and moved to an island house in greece which they bought back when SEK could still buy stuff.

Best regards,
Lukas

Let the games begin! There are NO RESET buttons on an economy!

Dear Investors,

We are now entering the "high alert" zone for this market - the concept which most business people and media prescribe to: The Reset button or the CTRL + ALT + DEL on your pc is not working for this economy. (The principle: if you buy some time the economy will be back....)

One does not create a new economy, a new approach by printing money - ultimately a process like that runs out of time, money, and velocity.... my friend Trey send me great piece on how this does and does not work:
========================

It is the month of August, on the shores of the Black Sea.

It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.

Suddenly, a rich tourist comes to town.He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to pick one.

The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.

The Butcher takes the 100 Euro note and runs to pay his debt to the pig grower.

The pig grower takes the 100 Euro note and runs to pay his debt to the supplier of his feed and fuel.

The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town's prostitute who, in these hard times, gave her "services" on credit.

The hooker runs to the hotel and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything.

At that moment, the rich tourist comes down after inspecting the rooms and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.

No one earned anything. However, the whole town is now without debt and looks to the future with a lot of optimism..And that, ladies and gentlemen, is how the United States Government is doing business today.

========================

It makes you think does it not? Well anyway I have nothing much to add ....except..
:
Took profit on the long EURUSD in high 1.39s - sold the S and P around here 918.00 - bought some August 870.00 puts - looking to incrase this size, but I am realistic enough to know the "best set-up" for this market going down will be for the S&P to try higher before failing into the cycle turning point coming up on July 5/7 th....

I also added to long JPY exposure spicing the long JPY option with some cash short (from 96.85)....

Basiscally Ladies and the few Gentlemen, the game is in its 9th inning - the bases are not loaded and this market is tired, tired of talk - there is too much talk -

The down-side will be led by.... banks again - the fact being - the regulators went soft in 2H 2008 -You almost hear them talk to each other: "Let's no rock the boat - if Management says the asset and collateral is worth 99 cents on the Dollar we will have to believe them - the consequences of "true valuation is too frightning......"

Now going into 2H 2009, the "time buying" is running out..... - the moratorium on foreclosures is ending, the fiscal boosting is hard to continue for "morale reason" - the tax revenue is not coming back, the credit is not flowing as the whole construction of help merely made the banks avoid the Socialist US Government.......in short, the Exit Strategy was never "enabled" ...

Feel free to try to fix your computer (i.e: the economy) by pressing the CTRL + ALT + DEL buttons on your keyboard - it is not only the favourite operative procedure by IT staff, but also for politicians and for the vast majority of people who thought they could make money without working (read: getting free leverage)...

This simple man is now preparing the "disaster equipment" - this 2H could be worse than the March down turn - as the scenario we just lived through was the worst possible - a short covering rally, a major shift in sentiment from the worst in my trading career to the an euphoria only matched by the IT bubble in 1999/2000 - soon Greenspan & Bernanke will be known as the people who thought we world was flat.......

With this positive, upbeat note, you are now forewarned... :-)

Happy week-end,

Steen

Weekly Investment meeting...

Finally back to order in the small investment world of Saxo Bank - we had long meeting where we touched on most of the intervention for this past week... - Is it not ironic that 20 bln. here and there has become something "normal" in this market?

I find it terrible and I must say I tip my hat to the brave people seeing this Citibank bail-out as something positive.

Looking at the lead into this week-end it seems Citi's DTA, or more precisely their 'Deferred Tax Asset' was the key issue - being more than 19% (vs. maximum ceiling of 10% of Tier 1 capital)....and 80% of all their tangible assets. I am not tax or accountant specialist but from what I read and being told Citi's Tier 1 capital was mostly........fantasy.... DTA can only be used as capital if expected to be used inside one year - Citi is hardly going to start making money inside this year, next, or even the next five years!

More troublesome for me being, I doubt C is alone using this arcane way of creating Tier 1 capital.

Hence despite being happy for my friends at Citi being saved(for now). I remain extremely bearish on financial stocks especially considering the new Mr. Dirigisme of America: Incoming Treasury Secretary Geithner, seems more than willing to "force" banks to comply with his and his Masters agenda. In other words: Bernanke is bad, Greenspan the worst, but the new Mr. G. looks, sounds and smells a lot like the old guys.

Having learned his craft with Kissinger, Greenspan and Summers it is hardly a surprise he does not represent change but rather mirrors his Master left-leaning interventionist agenda, which I understand from US electorate point of view, but one I can not recommend, not that anyone cares about my opinion in these "small matters". Mind you I will be in the US next week to take a more close look on things in New York and Alabama.

The Investment Committee remained at 75% cash- We clearly see some signs of oversold and crisis fatique, but the with volatility of VIX bigger than 80% the market has simply become one big lottery ticket, where you need 80 pct luck and 20 pct guts rather than models or even rational behavior.

The three driving premises for our research 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)
   

We note the markets are extremely oversold but we also find it hard to find ANY economic reasoning for turning positive or even neutral on the markets.

The 25% invested is being changed around slightly - we have abandon our short Gold, and we recognize our long TIPS not exactly on the roll, on the other hand our long Government Fixed Income and cash still makes our portfolio massively outperform our alternative models - at least for now.

We reached our minimum target of 765.00 and we are in the process of looking for new targets -We stick with a simple S&P500 in 500 -

Looking into 2009 we are preparing ourselves for furher deleveraging - it seems to us the world, slowly, very slowly is figuring out why this credit creation not only was excessive but also directly damaging for long-term growth and behaviour.

We see credit spreads and mortgage spreads widen further into month-end and certainly into year-end - this will become the negative gravity of the markets, while the oversoldness will be the postive force.

Strategy:

We are almost back to neutral:

FX: short NZD (1 month option put) , small short EURUSD from here (1.2892) - we are looking to buy EURDKK again as we do not see Denmark escaping the Norway/Sweden turmoil in environment of widening spreads across all fixed income classes.

EQ: We sold into the close today @ 851.00 ( 1/2 ATR stop)... long STOXX50 puts...

COM: We were long Gold puts now worthless...

We will watch the market for opportunistic moves, but we are in game of protecting our relative ok year rather than being aggressive - as said, this market is for gamblers not investors or even traders.

Be safe and must Dirigisme go away,

Steen

If confusion is the first step to knowledge, I must be a genius. Larry Leissner

If Mr. Leissner is right I sure am a genius!

The confusion on my part does not actually go on the long-term picture but more on the short- and medium term pattern.

The fact is that the market consensus has moved to expect Fed to be hiking by 10 bps in one years time from now, while still betting 25 bps in next weeks meeting just to safe guard the economy.

No, my confusion, goes to the pure fact of me being a Libertarian through-and-through although after listening to Soros, Kaufman and others I am beginning to see "clouds on the laissez faire horizon".

Looking back at the last 20 years and really since 1987 Soros is absolutely right this has been the biggest credit binge ever - the whole system was built on the fact that credit was readily available and if there was a crisis Greenspan and his merry men came to the rescue; 1987, 1991, 1997, 2000-2001 .....and now in 2008.

The banks created business models which took advantage of the free-flowing credit and doing the so called financial engineering (talk about contradiction in terms!) they told the investors and public at large that they had invented a money machine. Obviously now we all know, that yet again, this was not the case. The mark-t0-market effect was not duely calculated and compounded. (Read UBS story in FT this week)

Let me give you an example;

I bought a house in 2001 for let's say 5 mio. DKK, took out mortgage based on the valuation on 90% - then I kept the house for 3 years, now the "market" told me it was worth 15 mio. DKK - right.....but surely the mortgage value would be something like initial cost (5 mio) plus inflation x 2, plus replacement value plus average disposable income/ Houseprice maximum ? But no the mortgage value is and was based on the "market value" of it - fair ?

No, a tangible asset can not continue to go up merely because the market "clears" the price higher, there must be fundamental fair value around which the loan valuation is based otherwise we end with a market which is self feeding both on the upside and on the downside.

I would even argue that logically my "quick-and-dirty price" is more logical than a house rising from 5 mio to 15 mio. in 3 years? Nothing fundamentally argues for this being correct ? Am I wrong? This example is one of 1000s but a true one!

If you follow me so far - then, however, if the "market" is not the correct pricing mechanism then what is ? A bunch of useless central bankers? or some other STATE CAPITALISTIC enterprise?

Neither, the "market" needs to smarten up and make sure it does not compound positive and negative movements outside the scope of fundamental value.

Warren Buffet, Jim Roger, George Soros will all tell you the best deals they ever did was based on good fundamental value, not market timing, if that is the case then surely we got some way to for this NEW CAPITALISM to go back to normal again?

I probably argued myself into a hole, my point here is;

Every time the "market" has had trouble the central banks or governments have bailed out the system, this time it may be different. Fed has little ammunition in the bag except for doing Carry-On movies with business as usual, but the banks is in a position where IF they get their balance sheet in order they will move towards my valuation model based on FUNDAMENTALS, which mean they will lend out less and more expensive.

That's the real paradigm shift here - the credit bubble is in process of being de-leveraged - the new world is one where there has been power shift to the savers; i.e the Middle East and Asia, who will have less of a strategic angle on the US and Europe as future export growth for them is being hammered by two unavoidable factors;

1. Lower global growth - if credit is less then growth is less.
2. Rising de facto cost of producing as there "workers" demand bigger and bigger share of production cost.

If you don't believe me then check the two worst performing market this year? China and Vietnam both down more than 40% - sign of the times?

I am very open to discussion here, but the above issue is one which bother me big time, as I believe the old regime and "rules" of trading is being thrown away... and it is time to look at the world from 10.000 feet and with more than day to day glasses.

The good thing here begin, if the market moves towards normalisation on credit creation and lending standards we are in for less volatility and better growth long term as the world again allocates capital to the HIGHER MARGINAL UTILITY - and not as now to dead financial instruments in some alphabet soup no ones understand. Hopefully this will also mean that the talented young people of today will stop applying for jobs in funds like mine and move on to change the world to a better place dealing with real issues like;

Demograhics, the quickly rising population
Food, lowest production to demand in history
Energy, alternatives more needed than ever

Strategy;

FX: Still some EURUSD long, but starting to built reversal trade - if the market is right about FED being done on downside there is risk of dramatic out of the blue correction in EURUSD. My friend Drew Baptiste, Morgan Stanley, warns me it could biggest in the last 1-3 years, but new low in US dollar is ideally needed.

Still long MXN - best performing stock market, long term growth - like it....

JPY - long - still think its matter of time before new lows is coming - the anti-risk trade I know and its costly, but......

FI: Given up on upside for now - think mean reversion still the game. My model turned bullish FI last two days on mean reversion - let's see how it plays out.

EQ: Short versus the 1400-05 major trend line - may work may not - but in it.....

COM; Long grains - what a ride - that vol for you.

MTD: down like 70 bps.

More later in the week more direct market relevant.

Go Liverpool 2night.....!

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