Sunday night quarterbacking...

I'm sitting here a Sunday night watching the Baltimore Ravens vs New England Patriot, so what is more relevant than some Sunday night quarterbacking:

Let me offer some direct thought on these markets - no apologies - only the gut-feeling - and let me stress that I'm a simple speculator with no predictive powers, but for now it seems the stars are lining up for further correction....

There is, as always, a big risk of ...bottom fishing tomorrow, and there may too much "consensus" on downside... but on the other hand... if we came down from Mars today - looked at correlations, the incoming data, vix, technincal levels, yields, .... .we wud probably objectively get a little concerned...

This could be time to forget the ........narrow trading ranges, the scalping move towards as a bare minimum to buy some volatility...

I "like" when several indicators points to the same conclusion - and I must say the additional "index" analysis I enclosed(see below in this blog) .. on the "end of recession" in my, obviously biased assumption, concludes that.... the "perception" of the new reality is much better/higher than the reality... which also confirms why unemployment keeps rising - why Obama is having political problems, why geopolitics is finally back in the frame (note: We have not discussed geo-risk for more than 18 mth!!!!)....).........

Also the rhetoric has changed.. there is a certain amount of complacency among policy makers - they feel vindicated - succesfull.....

My simple assumption remains... 60% chance of top in place - if this week is net down week, I think its time to add some chips to the table.. but there is long week ahead of us.... but...... the negative compounding is back biting at the bulls......and as long as water does not run up walls. there is a certain logic to the honeymoon of Obama, the stock markets, and the feel good factor being over...

A few charts: Break down in yield is NEGATIVE says John Murphy: http://blogs.stockcharts.com/.a/6a0105370026df970c0120a5bb206c970b-pi

Volatility have seen a low..: http://blogs.stockcharts.com/.a/6a0105370026df970c0120a6124c50970c-pi

And finally.. .some "quant" analysis of the actual economy - as a anti-dote to the CNBC sensational driven data analysis:
http://www.philadelphiafed.org/research-and-data/real-time-center/business-conditions-index/ads_long.pdf

http://www.philadelphiafed.org/research-and-data/real-time-center/business-conditions-index/ads_2000.pdf

http://www.philadelphiafed.org/research-and-data/real-time-center/business-conditions-index/ads_compare.pdf

Definition and background:
http://www.tradersnarrative.com/the-aruoba-diebold-scotti-index-the-sp-500-3059.html

Strikes me as super interesting..

Night and safe trading,

Steen

Weekly Macro Meeting

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)

Conclusion

This week: Reality hurts! Redemption, Dirigisme, tension in EMG+ EEC all points to further deleveraging in the economy ==> Bias on ACCELERATION on downside for risk assets

Last week: We have moved into grey-zone between recession and depression ==> Bias on downside is increasing.

Allocations:

This week: 85% cash maintained - short in commodity direct and indirect through stocks, short gold, long TIPS, Bunds,long USD,JPY,CHF vs EUR, LVL, HUF, GBP, long down-side in Stoxx50 and S&P500

Last week: We called the transition - although the Social democratic Nationalisation has created pressure in EEC and EMG countries as they stand outside the "circling of the wagons".
We maintain 85% cash - but up from intraweek 65% - as we need further information to make long-term call.

Targets:
S&P 500: Down to test our long-term minimum target of <765-00>

Fed funds: 0.50% by Q2 2009 /ECB: 1.50% by Q2 2009 /10y yield: 4.5-5.0% by Q2 2009 /2y yield: 1.00% by Q2 2009

Crude: 50-60 by Q1 2009 /Gold: 700 by Q1 2009 =========================================================

Economics

Bias: Negative growth, consumer demand & inflation

Incoming data continues to disappoint- below is the Surprise Index compiled by Citigroup, it rates better than expected data in ratio to worse than - not exactly time to smile is it?

(Click on chart for larger version)

We see increased tensions in the Non-in regions: EMG and EEC.

Hungary is being called the new Iceland, and Argentina is threathning to nationalise the pension funds......

EMG+EEC return is 100% correlated to their current account surplus' - in this global slow-down C/A balance deteriate and does the political will of these emerging countries to maintain "open trade" and non-intervention.....unfortunately.

On the premise of "cost of capital" key component, the saving surplus countries: Switzerland, Singapore, China and Japan will do "less bad" than overleveraged: EEC+EMG, UK, P.I.G.S, Canada, Australia and New Zealand.

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

Fixed Income

Bias: Bullish

Change in bias from neutral last week - we have been long Bunds the past week and with some success we see further flight to quality.

High Yield(Ticker: HYG) has performed ok - we are still constructive on this.

Danish Mortgages: Still under pressure - as long as the Government dont guarantee mortgages there will be pressure on DKK & Mortgage Bonds. We see intervention timed with the "conversion" in December - The government does not know this yet, but they will intervene before going on Christmast Break.

Still favour Bunds over Treausury. In cash bonds we favor New Zealand, UK and Austalia - currency hedged.

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

Equity

Bias: Very negative

Our long-term EPS share model indicates we need to undershoot by wide margin on "cheapness" in order to follow standard mean-reversion. Our Chief Economist is all excited about potential for S&P in 400.00 as an analogy to The Great Depression where S&P fell 80% from peak, but unfortunately we are not in position to use this type of counting due to our rule #3: No prior analogy historically will work (because this is different, very different)- However this does not mean David is not right about deteriation beyond our minimum target of 765.00

Sectors wise:

Negative: Energy, Consumer Discretion(..but Fiscal Stimulus plan could change this), Materials

Positive: Financials(The National Champions), Utilities, and Technology

Neutral: Consumer staples, health care, Industrials, Telecom

Top picks: Credit Suisse, HSBC, Microsoft

Top pans: Carlsberg, Nestle, British American Tobacco, Coke, Volkswagen

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

Commodities

Bias: Negative

Gold: In time of writing we have passed our last week minimum target of 750.00 - new target: 700.00. The Central Banks sits on big Gold reserves which pays nothing, does not offer any value ==> They will sell - also correlation with US dollar will accelerate the move.

Crude: Passed the critical 70.00 US Dollar. OPEC this week will take 2 mio. barrels out of circulation - but pressure will continue.

Foreign Exchange

Bias: Stronger US Dollar and risk aversion currencies: CHF, JPY

US Dollar: The fiscal package mentioning this week took US Dollar through the critical 1.3250 level, we have been short from 1.3700 and we are now close to our target of 1.2700.

The key drivers in US dollar for now are:

Dirigisme, the relative more leveraged European banks, and differences in monetary policy expectations - all indicates that down the line 1.10-1.15 could be likely.

EMG, EEC: Very very negative. We are looking for strain in ALL pegged currencies and EEC+EMG. Hungary been hiking rates 300 bps - this smells like UK & Ireland in 1992 hiking to defend, but how is that going to do anything about their structural imbalances? You need to be long CHF, USD, JPY basket vs EMG+ EEC

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

OVERALL CONCLUSION

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

Our Puma Macro model made +123 bps versus Dax return of -1208 bps for the last week - and YTD we are +510 bps versus -43% for DAX .

We fully acknowledge being so extremely defensive dictates being open for any change of trend, but having said that in a world of almost total uncertainty the old rules of Money Management needs to be applied:

1. Preservation of capital

2. Respect and understand compounding

3. Knowing when you are wrong.....

I wish that more socalled advisors would have learned these lessons:

I now daily see "Conservative Portfolios" down 70% and where the standard reply from the "managers" continues to be: Keep calm, this will come back...... but as John Maynard Keynes (keeping with the theme of dirigisme) said: 'The market can stay irrational longer than you can stay solvent'

We are now in phase where people/investors face the most difficult task of all: Remaining solvent - the advice they get is to "stay with your positions - it will come back", but scroll back up to the top of this blog and read our # 3 rule again: It is different this time - negatively.

Safe trading,

Steen Jakobsen

The spread of evil is the sympton of a vacuum - Ayn Rand

The spread of evil is the symptom of a vacuum. whenever evil wins, it is only by default: by the moral failure of those who evade the fact that there can be no compromise on basic principles.
Ayn Rand (1905 - 1982), Capitalism: The Unknown Ideal, 1966


(Click on chart to get bigger version)




I really should not be showing you this chart from my Chief Economist David Karsbøl - it shows how some trades have become so out of whack that there is great oppertunities in the market.

BAA - or Moody's BAA-rated bonds pays more than 500 bps over US Treasuries(I.e: Yield > 900 bps p.a) with defaults never higher than 4% ! The only issue being our negative equity bias, but this is one of the trades you need to put on.

We are working on making synthetic ETF ratio which can cover this one for more direct access - otherwise check out:

HYG: http://stockcharts.com/h-sc/ui?s=HYG&p=D&b=5&g=0&id=p42658334577 or
LQD: http://stockcharts.com/h-sc/ui?s=LQD&p=D&b=5&g=0&id=p42658334577


Another thing you need to watch is this word:
Dirigisme (http://en.wikipedia.org/wiki/Dirigisme)

Sarkozy has turned out to be more Socialist than any prior President - my friend Henri Foch send me this email today and unlike me, Henri is not person to get "carried away".....:
=============================================================
Europe is getting protectionist as the French President suggests creating a fund to nationalise key industries. He mentioned two reasons why to create this fund:

- To gains increasing influence on the economy in order to guide it.
- To avoid foreign investors buying European industries for the cheap

Sarkozy suggested that Europe could run a 'different monetary policy' without violating the independence of the ECB. In order to achieve this he plans introducing an economic council / government which ‘should discuss with the ECB’

After the comment, European shares declined, CEE and other EMK currencies have come under pressure. The quality of the comment is poor and super EUR bearish.
=============================================================

I am sure Sarkozy like Putin soon will be proclaiming: "There is NO CRISIS in France" its a conspiracy of the hedge funds, the Liberitarians and the Economists.... sure is ....

Why are "facts" are so oversold in todays market? Fear, greed, stupidity ? Mankind is supposed to learn from their experiences, that's why we "rule the earth" is it not -

I must say I am getting more and more depressed about the intellectual part of finance (How about that for a contradiction in terms!) - there is too much BETA around........ Beta must die --- Destruction of Capital as per Schumpeter must play out .

Strategy:

FX: We remain short our EURUSD based on:

• Technical 1.3260 was next line the sand. John Hardy, my chartist looks for 1.2700 - and he has been hot recently, so we move our 1.3000 target to 1.2700 minimum
• Fiscal stimulus in the US - Bernanke seems to want job with new administration as he "sanctioned" fiscal plan to the tune of 300 bln. USD in Congress yesterday (mind you getting Bernanke's blessing is the kiss of dead!)
• Europe deleveraging needs to run longer and deeper than the US.

We are looking to add short HUF & LVL vs. basket of CHF and USD

Fixed Income

As printed above - we like Corporate bonds from the "distance" - getting closer - looking to trigger.........

We like TIPS http://stockcharts.com/h-sc/ui?s=TIP&p=D&b=5&g=0&id=p42658334577

Bunds - we are long 116.00 calls for Friday - sold our cash today.

Commodities

We are short GOLD, mostly because I am enforcing the view on the team but in my metrics - fiscal deficits needs to be financed, why not sell something which does not work as inflation hedge, carries no value except illussion of storage - i.e gold reserves to finance the purchase on government bonds .. ?

Target: 700.00 still....

Equities

This is your Captain - we are flying in a straight line towards 765.00 - we do expect some turbulence along the way, so please remain seated at all times during the flight - Thank you for flying with us.

Cash: 85% still - Full Investment Meeting report tomorrow from me...

Finally, my friend, teammate and sparrings partner Jesper Christiansen have launched his own blog - although more "dark visioned" than me, he offers this from different angle than me - try his blog: http://mrtitrading.blogspot.com/

Safe Trading

Steen

"Politics is Hollywood for the ugly" - Ronald Reagan

Finally we can get back to the markets - I tend not to like Hurricanes, political scandles, and other "front page news" which takes the focus away from the market - it tends to neutralise the gravity of the market for a while only to make the following move even more volatile.

I find it a joke that "the market" trades on crude oil prices- and the crude pit trade on the EURUSD - it merely states: No one has ANY conviction this part of the cycle.

The case for pro and con can be made with equal conviction in my opinion - but anyone arguing US is now over the worst should be taken out and SHOT right away - what a joke!

Real disposable income collapsing, lending tighther than... . and credit creation has all but stopped.

Whether Lehman gets safed or not is irrelevant - just as irrevalent as Lehman is as an institution. Tell me what Lehman did for improving your life?

Investment banks are dead - never to come back - hopefully the young aggressive people of today will realise this and get a real job - I certainly would not recommend anyone to enter this idiotic business of screwing your customers with fee-upon-fee structures.

Let me give you an example - A very good friend of mine put his trust in medium sized danish banks and their proclaimed expertise in wealth management - result: In a portfolio of 50%50% stock to bonds he managed to lose more than outright buying stocks for 100%!

Surprising ? No not at all, as he has like 250 different funds, paying entry fee, plus running costs for all of them - the fund manager must be happy..... I have NO FAITH in any banks - their primitive, cruel approach of let's get maximum fees from clients does not bode well for my return as customer.

The good news is that in the future there will similar structures to INDEX funds for wealth management - I have not found institution clever enough to do this yet, but it is coming...

Enough rambling on the uselessness of banks - the game has become more complicated but as I prepare to do presentation in Marbella in Spain this week-end let me you through my thinking;

1. Credit creation the real issue at hand - tighter lending standards, falling asset prices, and write down by banks has taken minimum 1 trillion US dollar away from the consumers.
2. The consumers is facing triple headwind: Falling disposable income (higher energy and food), worsening employment situation(going to 6.5%?), and less credit.
3. Corporations is facing less demand, higher input prices and increased regulation(environment, energy, and consumer protection)

Credit Creation (down) + Consumer demand(down) + Corporate profit ( Down) = ?

The easy thing would be to say recession/depression, but as all things in life it's matter of valuation - clearly the market is finally embracing the recession as theme - if it is priced in - then there is fair chance of better than expected outcome for us all, but if... market is merely embracing it in "writting" and not in practice we got issues -

What would be the signs the market clearly has prepared for the worse?

Lower commodity prices - Tick
Lower inflation expectations - hmm...not yet
Revision of earnings cycle - Tick for 2008 - but 2009 still very high, so no tick
Lower short-term yield - hm.... getting there but no....
Central banks taking the side of weaker growth rather than inflation - No tick
Government desperately trying to "reignite" the economy through incentives/tax cutes/fiscal spending - It's happening but not yet implemented

The final conclusion must be: Yes, we have move towards more realistic expectations - but there is still major gap between what people think and what they prepare for - this final leg could be what we are facing in September and October.

We continue to think September/October will dictate the year but also the next 2-3 years - if there is REAL efforts to stop to erosion of the housing market then there is fair chance - if FRD/FNM not nationalised - even bigger chance -

The policy of crisis management in the banking sector needs to move to one of looking forward - so far the best qoute comes from Chairman Franks, Democrate: "I dont want to comment on housing market as its really the media who fuel this crisis" - Ergo: If we stop talking about the issues then thinks will be ok ? What a joke - disgrace

http://www.cnbc.com/id/15840232?video=831708400&play=1


Strategy:

Long JPY, CHF - bought EUR c today 1.5015 ish - @ 1.4520 spot -
Long FI - bunds, Long December 2008
Equities - short DAX and S&P - vs long Pharm, defense stocks, water, solar.....
Commodities - small long Crude - Long Agriculture.

Good luck,

Steen

Change is the law of life. And those who look only to the past or present are certain to miss the future - John F. Kennedy

When I was younger and more mobile I used to love the US - when you hit the ground in New York or any other place in the US you felt the vibe, the tempo and expectations you could be anything with your life!

Fast forward 20 years and I get the same feeling when I arrive in Singapore - although this time obviously I'm old and none the wiser. While just back from the US there is mood of surrender and for good reasons.

During the last 20 years the US got addicted to capital - and Asia addicted to creating jobs. The recent circuit breaker: lack of credit - has not only slowed down the globalisation but also created situation where major decisions needs to be taken.

The Asian decoupling theory is a life and well. I attended panel discussion this week-end, why on earth they wanted my opinion I still don't know, but the interesting part of the session was the focus and questions towards: Real Estate!

Why is it real estate is the 21st century version of the gold diggers of the Wild, Wild, West? My esteemed "colleagues" from Singapore's highest respected banks and brokers seriously suggested REITs in Singapore would be an excellent investment, and even Telecom should do well they argued on the premise of "valuation" - I on the other hand only had one real thing to offer the desperate investors: stop listening to idiots like us, as we have ZERO predictive powers, and at best we probably distort your investment process.

My point here being; if metrics like P/E and valuations are used to argue for stocks being a buy, then by virtue of mathematics if the prices falls another 10 pct then they should be even cheaper and an even better buy? Elementary Dr. Watson, although its probably too simple for the brokers to see.....

The credit cake is smaller and more expensive - this keep being my one remaining premises for the balance of 2008 and 1H 2009 the implications is to be seen everywhere:

• The bank continues their game of the chicken and the egg. MER writes of @ 20 cents in the US - clearly other banks needs to do the same? ==> raising more capital - diluting their already depleted investors even more.......
• In the Middle East meanwhile the banks can't lend out enough money, as they don't have the deposit to do so - this will turn out to be good luck for them, as I will quote Grouch Marx: I don't want to be part of any club who wants me as a member - Not having enough deposits should in REAL WORLD stop people from lending out money ......but I guess I am old fashioned?

Credit standards been tighten to standards which means the banks just as well could put out sign: WE HAVE NO MONEY!


Source: Wall Street Journal (click on chart to get bigger version)

So now we got: Weak banks at best, less credit, and high energy prices. The market is right now busy selling crude towards the 100 US dollars.

The Investments Banks economics departments (Always the Johnny-come-late)are fighting to have lowest predicted rates for EURUSD, GOLD, Crude and Commodities -- Is it not impressive how they go from 1000 pct bullish to 2000 pct bearish in the space a month?

Maybe they should look at some historic evidence: In commodity bull markets gold and other commodities tends to sell of both 30%,40% and even 50% before reversing - its the nature of commodities - boom-and-bust.

The fact remains: There has been 50 years of underinvestment in mining, and upstream/downstream production. The US has not built a refinery since the 1970s, Europe not since 1980s, so good luck to the crude bears - IF, and that's a big if, you can get the oil out of the ground, there is not enough capacity to make into petrol et al, but don't let facts get in your way....

The down move in commodities does tell us one significant thing though: It confirms the "world" finally has accepted we are slowing down - and in some places significantly.......I put it like this:


Click on chart to get bigger version

This is Alpe Huez - The US is in the lead close to the peak - Europe on the other hand is at steepest part of the mountain - where things are slow and tough, meanwhile the Middle East and Asia is still on the flat part leading into the mountain, but they are AT the mountain now - that's part one.

Part two goes like this: although the US is in the lead their rider is: obese and driving a old 1970s bike, and the chain is about to fall off- the European rider is: OLD, very old, driving a 1980s bike, although he is VERY ELEGANT, meanwhile the Middle East rider is young and aggressive, his bike is made of gold and he is slightly on the heavy side... the Asian rider is light, drives a state of the art bike, and is dressed somewhat in a style between 1970s disco and retro....(by now I am pretty sure I have pissed off pretty much ALL nationalities and religions, but do stay with me...)....

The point being, the US may be closest to the top, but with no breaks the downhill will be an issue, furthermore the European rider will probably run out of energy before the goal line, while both the Middle East and Asian riders will catch up to the two in front - The winner? Most likely being Asia with a close 2nd to the Middle East.

In a world where credit is scarce - currencies and countries with high savings, surplus on current accounts, high birthrate, intellectual capital (as in educational system), and capital incentive, and political stability will outperform the other: hence in my world: SGD, CHF, NOK, SEK and JPY the favourite currencies.

My favourite fixed income market being the ones with some inflation fighting credentials.... Japan (by virtue of deflation), Switzerland and to some extent core Europe........

The favourite themes will be ones which caters for the micro changes of the world:

• Falling birthrates in Europe and Japan (in 20 years more than 30% of the Japanese population will be 70 or older!)
• Energy component now 50% of production cost... i.e: production will become more local - China will face stiff competition from energy costs)
• Water (both Singapore and China extremely short water)
• Savings - positive cash-flow
• Supply side of mining
• Pharma - with obesity and starving numbers both rising - never been bigger need for pharma industry to produce pills..

In closing, again, crisis is good, very good - it reallocates capital to higher marginal return - if so we will enjoy continued growth in the world - but if Congress, Trichet, Bernanke, Paulson, ECB, BOE, and all the Western worlds politicians continue to ignore fact - we are in for worst crisis in my lifetime - however the path of least resistance indicates to me that we will see:

• 2-5 years of sub-par return in equity indices (but not in individual selective stocks)
• No inflation
• Fed will cut ...and not hike the next 2-3 years
• ECB will cut before year is over
• EURUSD will go to 1.45 max - before hitting 1.7000
• Crude could trade 100- 130 balance of year but will take out new highs in 2009
• If buying financial assets in banks buy their bonds not their stocks
• Fixed income will do fine - oil spikes are deflationary history tells us......
• Overweight selective Asia, but recognise the mountain part is coming
• Average yourself into positions, volatility is dead certain to increase...

Strategy

We are slowly building portfolio to reflect the above - finally thank you to all the people I met in Singapore - it was a long and hard week but it proved once again that Asian Tiger is roaring and it's now taking is rightfull place in the world in terms of resources, capital markets and the future.

Best wishes,

Steen Jakobsen

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