Meetings are indispensable when you don't want to do anything.

Meetings are indispensable when you don't want to do anything.
John Kenneth Galbraith (1908 - 2006)

This week has the G-20 meeting in Washington as the big highlight - even President George W. Bush will leave his ranch in Texas to attend!

We had our Weekly Investment Meeting this morning and unlike last few meetings we had some "clarity" in our assessment;

1. Financial Solvency is yet again an issue - AIG, Fannie Mae et al all were "maybe" solvent for about two month but with stock markets down 25% plus in September and as credit spreads continues to be elevated they now need further capital.
2. Private consumer solvency is now main issue - yes, interest rates have come down, taking off pressure momentarily, but now the private sector is starting to pay the price: net net we are now worse of than when it was merely a financial sector insolvency. Basically we now got both major parts of the financial sector and the private consumer being insolvent at the same time
3. ==> We are entering final leg of the deleveraging proces

The political reaction to the above will be what we call the "50/50" solution:

50% of the insolvency will be solved through additional capital injection

50% through easier accounting rules, solvency calculations, tax deferences et al.

Problem with this being it as per usual does nothing to the real issue: the solvency - the model used right now is one based on "hope".

Hope the markets will correct and then improve market valuations through better asset prices - good thing religion is so popular these days!

The G-20 meeting does seem to have some "real soluations" on the table - the latest one which Wall Street Journal picked up yesterday does make some sense to me: Spain's Bank Capital Cushion Offer a Model to Policy Makers: http://tinyurl.com/6x6lms

The argument being that the accounting rule change in 2004, which made the companies only take loss' when incurred made sure the leverage increased dramatically, without making provisions for future loss' - should be unwinded.

The Spanish model will give some "cushions" against loss - the issue with this being it INCREASES THE LACK OF TRANSPERENCY - actually almost everthing policy makers does from TARP to accounting changes works the same way: Adding layers of non-transperency!

Back to our Investment meeting:

The investment meeting had following conclusion:

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)

The market has re-entered negative bias - we still look for minimum 765.00 in S&P.

We remain at 75% cash but now we use the 25% for downside plays in markets

We favor being short stock markets, long US dollar (US Dollar balance sheet issue is back with year-end), short commodities and long fixed income.

Our asset allocation model (100% mechanical expects 1 month return of:)

MSCI World: -0.77%,MSCI EMG: -0.84%, Commodities: -1.22%, and Bonds: +0.87%

The model allocates as follows: Short 10% MSCI, Short 34% MSCI EMG, short 7% commodities and long 47% bonds - this is our WORST Scenario: OUTRGIHT bearish. The model is based on our leading Global Indicator Model - and regression analysis of expected return. It is not an exact science, but its a mechanical way of getting expected returns from one consistent source. The expected return from this allocation is: +1.75%

Economics

Incoming data continues to accelerate negatively - our model and forecast does not see any improvement in the next month.

The political landscape is getting more complicated. Treasury only got 40 bln. US Dollar left on the initial 150 bln. USD - and Paulson will soon be back in Congress asking for more, and the Democrats wants him to "fix" the auto-industry - making the bill bigger and bigger.

The fastest deaccelerating economies remains Sweden & Australia (hence best government bond buys).

Fixed Income

Credit remain scarce - credit spreads are not really moving - market starting to look at year-end balance sheet, and we expect serious deteriation of credit facilities and more and more corporate blow-ups like Circuit City yesterday.

We like Bunds over Treasuries. We like TIPS still.

Equity

Earnings forecast still too high - market looking for +15% 2008/2009 earnings. Per share it is at least 35-40% too high - I remain extremely sceptical on all earning forcasts with a positive sign on them - the insolvent private consumer is going to hurt EVERYONE in the business cycle, seems the analyst' have not been in out shopping recently.

I have to warn you - this is only the beginning - the next few month will be the worst part of this cycle - as several forces works against the markets:

• Bankrupt consumers
• Insolvent banks
• No credit creation
• Policy solutions based on hope
• The "everything is "really"cheap "relatively" clowns
• High expectations to G-20 meeting & incoming President Obama

We are short Stoxx50 & S&P. No longs at all.

Commodities:

Crude should hit 50.00$ - Gold below 680.00 - There is no value in commodities in this part of the cycle.

Conclusion

The meeting had higher conviction rate - we are now yet again outright short the markets - break of 895.00 on the close will confirm intermediate top in place - in STOXX50 this translates to 2540.00. Watch VIX above 63.00/64.00 will confirm next bearish leg has started.

We are: Short Stoxx50, long EURHUF, short EURCHF, short EURUSD, long Bunds - looking to sell crude, to buy some Private Equity & TIPS.

This is extremely important week.

Finally,

I am just back from Dubai - I had the pleasure of spending the Sunday in the Desert - you must try it - makes you realise how insignificant ones life is in the grand scheme of things - but what a place, the quietness and light... amazing.

Safe trading,

Steen

Prediction is very difficult, especially about the future. Niels Bohr

Prediction is very difficult, especially about the future.
Niels Bohr (1885 - 1962)

There is clearly now some established ranges in place in the S&P500 between 860 and 1060 on the downside, bias for me is still "south".

Right now I am watching my friend Drew Baptiste 987.00 level as key trigger for whether long or short, and remains with our negative bias meaning potential for minimum 767.00 based on the trading theme process moving from recession into depression.

I have said continuesly that the stock market performance for Q4-2008 and Q1-2009 will be based on the "perception" of either recession or depression. Despite my own bias towards recession, a severe one, it is more and more clear in the public domain and incoming economic data confirms that the worsening data is accelerating not stabilising.

The best point is our own internal model designed by our Chief Economist David Karsbøl, which measure key indicators. This model has been excellent in catching the trend of incoming data.

Saxo Bank Fundamental Index (Click to enlarge)


The conclusion:

For now we are moving into a "perceptional depression" from a fully priced recession - market impact is retest of low(potential for new lows) & much lower short-term interest rates.

In Europe, and in EURUSD I have become very negative short-term based on the increased pressure for much lower rates in ECB (& BOE).

I can not say I am fan of Kaletsky of The Times in London as he continues to act and speak like a person who uses history to explain the future, which is simply not do-able in my investment world: (http://business.timesonline.co.uk/tol/business/columnists/article4974535.ece)

To remind you our three premises are:

• Cost of funding - drives market and valuations


• Price of liquidity new unknown (tax on money)


• No prior analogy historically will work (because this is different, very different)

Despite this he has an interesting argument: If we assume UK has one of the most leverage economies in the world, then why does it not have the lowest interest rate?

His argument can be read and seen in the above link, but there is some truth in this and the investment outlook conclusion must be:.......Much lower front-end rates.

I hear you already, but it is already priced in! No! Not to the full "depression" extend: UK in 1.00%, USin 0.5 %, Australia in 1.00% etc, not possible? Sure it is, in a depression its all new rules, when you fight to survive as a country, a company and on a personal level. As President Reagan said: "A recession is when your neightbour lose his job, a depression is when you lose yours".

Unemployment rates across the world, will unfortunate rise to at least 1992 levels, and I remember being a young man coming out of a tube at Hammersmith Station in London in 1992, and hearing the newspaper salesman shout: Evening Standard: 3 million unemployed in the UK, Read all about it..........and if you do not trust me on the pain of the UK consumer check this cool site by the BBC http://news.bbc.co.uk/1/hi/business/7457886.stm

Strategy:

Foreign Exchange:

Short EURUSD @ 1.3500 - fancy new lows beyond 1.3260. My chartist John Hardy is very bearish....

Still small long USDJPY through options, mostly as "insurance".

Fixed Income:

We continue to flex between deflation and inflation, right now this a.m, we bought back our short Treasuries around 112 25/32 - looking for some erosion into the Washington Mutual CDS auction tomorrow, plus acceleration of down-side for economics.

We are also looking for post Investment Meeting tomorrow to put on some 1.00 pct UK rates by Q1-2009.

I remain sceptical of lending the US money @ 4.00%, so net long is not happening here......

Equity:

We took profit on ALL our long positions including value trades like banks, pharma, and shipping making a 7%-17% return on them - why?

Well, the "needle" has clearly moved to 60% odds depression from 40% in the last few weeks.. which we now take consequences from.

Commodities:

Short Gold, very bearish.... target sub-700.

ALL in all we are in for exciting week, the financial panic has been avoided, but will we be able to avoid economic disaster? We think so, but right now price action and incoming data dictates us to at least believe it could be DEPRESSION´which is incoming.

Finally, spend 10 minutes reading this unique commentary by Ms Scwartz, 92 years old: Bernanke is fighting the last war. http://online.wsj.com/article/SB122428279231046053.html?mod=special_page_campaign2008_mostpop##

Safe trading,

Steen