Too many people are thinking of security instead of opportunity. They seem more afraid of life than death.

Too many people are thinking of security instead of opportunity. They seem more afraid of life than death.
James F. Byrnes (1879 - 1972)


Dear Investors,

S&P from here 800 or 1200? (click chart to get larger version)

We are in period which mildy could be said to be "volatile", but we are getting towards the total panic needed in every crisis. I will not try to be brave or give any advice but I will give you my scenario for this tumultous time.

1. To stop this crisis the Government & Central Banks needs to get ahead of the curve not behind. This entails giving LARGER THAN exepected rate cuts, bigger than expected capital injections into banks - and redoing their communication policy - broadbased comments are not appreciate in a market market looking for laser-precise answers to the enigmas of the financial markets


2. Adding stocks to my personal account going from 99.5% cash to 50% cash-I have been - remains 85% in cash in my funds- and in the PA account I have been 99.5% long cash - I have this morning added a number of stocks onto the PA account -( pardon this being danish stocks but my private bank does not seem to have noticed there is equity markets outside Denmark) - but I added: Danske @ 88.00, Novo @ 263, Maersk B @ 34.500. I have NO PREDICTIVE POWERS - but really - if you like me, have been 100% cash for the last year you need to start allocating somewhere... I am starting now (For disclaiming purposes I also added Danske & Barclays to my hedge fund accounts...)


3. The outlook from here is a bifurcation: Either bounce to 1200-1300 or direct to sub-800......(check the chart)


4. Carnage is fully pricing collapse now - remember a while back I wrote about this mechanical fund who in their September newsletter proclaimed: "It is dangerous to be in the market, it is even more dangerous to not be in the market!" - I kid you not that fund is now down 70% for the year - so my point is: The last of the "remain invested jerks" are disappearing - the financials market equivalent of a clown sorry joke: Jim Cramer wants to sell all my stocks and go to cash! (He is ALWAYS wrong - only beaten by Greenspan, who is the best inverse indicator ever)


5. The policy reaction function is different in the US and Europe. One must acknowledge that Europe have greater power to do "UK like" baning bail-outs than the US - All options are open to Europe but due to the idiotic EMU construction it does lack European Treasury to co-ordinate anything - meaning it look and feels like piece-meal solutions, but at least they are not bounded by Congress. In the US Bernanke & Paulson are limited by needing broadbased political support - and we know how that works in the US --- or rather how that DOES NOT work - the US election cycle could... and I mean could mean we need to BUY EUROPE vs US - the trigger would be full fletched banking support in Europe which US can't copy ==> outflow from investors -- I am getting closer and closer to triggering UPSIDE EURUSD based on this.

Strategy

Despite being almost the parma bear on this- I simply can not be NET SHORT stocks any longer , so... I remain 85% long cash, but I am now using the 15% to buy UPSIDE STRATEGIES... on S&P, USDJPY and banking shares........

In our Weekly Investment meeting we came up with three "premises" which one needs to learn, respect and understand:

1. Cost of funding drives market & valuations (old fixed income theorem now moved into fx, equity and commodity)


2. Price of liquidity essential and REAL PRICE (tax on money)


3. No prior analogy historically will work (This is different, very different)

I will let Mark Twain end this blog: "I am more concerned with the return of my money than the return on my money".

Good luck,

Steen

Where is the Market Going ?

(click on chart to enlarge!)

Monday, Monday, .......Midday update

Classic fund manager dilemma - although this is not like anything I have seen before in my career, I feel tempted to go square from short everything more on a gut feeling than anything else - and trust me gut feelings are overrated so I will stick to our key targets (see below)

Massive rate cuts are coming - maybe even before the open today or tomorrow open - The authorities thinks in steps:

1. Bail-out

2. Rate cuts

3. Direct intervention (in bonds and stocks)....

We did step 1.) now and step 2.) is coming if not working either - we will move to step 3.) which will be unprecedented in Europe & North America but not in Asia....

The reaction off rate cuts could be: 2 min.'s rally or a longer bounce based on cheaper funding - there may still be pockets of desperation but it will be cheaper.....

I maintain as per my blog Friday - merely refinancing/bailing-out mortgage portion of risk will only help temporarily - We know the banks are "misrepresenting" the trust, this morning papers full of how Lehman told the less than honest truth about their true need of capital.

Direction key determinator will be bond market, and probably Bunds... if we are going to see action 2.) and 3.) we need furhter flight to quality.

Statewide banking guarantees - well ,well, it will not work - when everybody does the "arbitrage" goes away, its against EU regulation, it increases financial long-term burden(more debt), Widens funding rates for governments(through higher bonds premium) and it floats capital market with bonds..... Ergo: back to square one... but it does mean banks can keep their depositors, it also ironically means there is LESS CHANCE of bail-out for next bank in trouble - as the customers are already safed, why safe the bank frame-work?

Short-selling ban will by "law" disappear three days after President sign bail-out into law - Will be interesting - my estimate it will increase liquidity and get volatility back down, plus obvisously take CDS spreads down, as they have been the short financial proxy of choice.

Strategy:

Cash 90% - now, +5%
Small long US dollars versus EUR
Was small short european stocks - but awaiting resolution on rates...
Long Dec - EDZ
Long CHF vs GBP options
Small, small upside option on stocks...

We are entering the acceleration part of this market, one which creates more losers than winners...........I am keeping my powder dry - awaiting better risk/reward.

Our KEY targets remains:

S&P 867-00 (Was 1100 untill early August)
EUR 1.3500 - almost reached, we move it down to 1.30000
Yield 10 yr - when the US dollar hoarding done we expect the final bubble of this cycle: low interest rates to start playing for real. We see LT rates in the US in 8-10% in 2009....
GOLD --- 1000 US Dollars
Crude- 80-100 for balance of this crisis, then 200 US Dollars next year.

Trade smaller size, be active, be prudent, listen not to what they say, but observe what they do....

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

Credit crunch or not..? This remind me of 1998

I did internal Saxo Bank interview and instead of printing it I will leave it for you in link:

http://www.saxobank.com/?id=993

Steen