If two men agree on everything, you may be sure that one of them is doing the thinking (Lyndon Johnson)

A quick Saturday blog from me: I have finally figuered out what Obama/Geithner/Bernanke modus operandi is based on: http://en.wikipedia.org/wiki/2012_phenomenon  or more dramatic: http://survive2012.com/

The only way to explain their actions and policies must be based on knowing its futile anyway!

I found the Mayan prophecy when reading a thriller and it struck me as the only sensible explanation for the comment/actions/policies enacted under what surprisingly to me now look an even more incompetent administration than that of W. Bush!

Another far more elegant commentator who is having a hard time not only with Geither et al, but also the never ending praise of China is Hugh Hendry: http://scribd.com/doc/22520780

His latest monthly report is so well written had there been a Nobel Price for financial market commentaries he surely would have won it for 2009 - unless obviously Obama runs away with it as he has once considered writing a commentary, which these days seems enough to win a Nobel price, but PLEASE READ IT. It is concise and raises several issues which I myself agree with:

• The non-demise of the US Dollar
• The non-believe in the Chinese miracle (where is the consumer for their production?)
• Deflation - double-dip

Last week was big range trading - there was some "noises" that the "too big to fail means to big to live" could see regulation next week as the lobbyist fails to make their voice heard: http://www.bloomberg.com/apps/news?pid=20601087&sid=az7AcisnxsCA&pos=6

It seems Dimon agrees (or playing the game?): http://wallstreetpit.com/12093-jamie-dimon-too-big-to-fail-must-be-excised-from-our-vocabulary

The charts for banks should cause some concern:



Meanwhie the good old Dow Theory still not decided whether to confirm Primary & Secondary Bull Market or to make divergence indicating top in place for now....:



On the markets I have increased LONG US dollar exposure - and added slightly to option downsides - the odds of "see no evil - hear no evil " long environment is rising ... Even the bears now embrace this line of thinking as Goldman Sachs and others are now proclaiming more incoming STIMULUS is coming with the Job Summit in December -

Intentions are good - action better (Steen Jakobsen)... It seems to me that the last Deficit Summit brought nothing - I expect Job Summit will bring... Nothing ... The Obama policies are the worst nightmare this world have seen - when the Chinese engine have filled the last few storage facilities with useless products no one wants to buy - the day of reckoning is in ........This is 1999 all over - no values, no metrics for fair-value.....maybe the Mayan Calander is right ? :-)

Safe trading,

Steen Jakobsen

PS: I will be in London for most of next week, but will try to update... nice week-end...

A hero is no braver than an ordinary man, but he is braver five minutes longer. Ralph Waldo Emerson (1803 - 1882)

Our family office had its first real macro meeting in a long time... with following conclusions......(or lack of it....)

Economics:

The incoming data continues to be good although we have noticed some deteriation recently relative to expectations.

We are simple people and use the rough guestimate delivered on Bloomberg by Citibank as benchmark. (CESIEUR and CESIG10). The better-than-expected data topped around end of August and into early September.

This week have seen very disappoing ZEW but very good US numbers continuing the a trend of
"cyclical" difference between the US and Europe, where the US is perceived to be further ahead on the curve and hence should perform better. (S&P over STOXX50)

This week is full of data and it will be interesting to monitor the development post this week and going into the G-20 meeting in Pittsburgh 24-25. September (http://www.pittsburghsummit.gov/)

We should note from 10.000 feet, the paradox of better economic data still does not rhym with the high Jobless Claims and the rising unemployment.

The lead-lag factor does not explain why this "recovery" which many ivory tower economist in investment banks are busy calling much better than in 1930s (due to Industrial Production presently doing better -maybe slightly overlooking the fact there is NO MANFACTURING left in the US)......

Conclusion:

The data still improving - but the velocity is dropping and a few "dark clouds" have been seen.

We need another fiscal stimulus, a new cash-for-clonkers, further expansion of Fed's balancesheet to keep the boat afloat....... but bottom line: No reason to fade the economics .....yet

Foreign Exchange

We had quiet a lengthy discussion on the US Dollar and it's direction. Jesper playing devils-advocate saying the pro-cyclical aspects of the US Dollar should be supportive (Improved balance of trade, Current Account and the US being ahead in the pro-cyclical loose monetary policy.

I, on the other hand, argued for the POLITICAL ASPECT being key driver- and here I have to add that one of the "macro mistakes" I have made over the summer has been to let my "hate" - and yes it is hate for politicians and central bankers cloud the decision making - the fact
they are implementing wrong policies, delaying the inevitable has NOTHING TO DO with our trading approach.(At least theoretically)

Politicians are simple people (Just look at Porno Berlousconi) - they try to do what they tell you! The London G-20 Summit roadmap has been followed to the point - the next main agenda being regulation .... and a hard one.

Back to the US Dollar here is my argument for weaker, a much weaker US Dollar:

The recycling of capital from the CONSUMING America to the EXPORTING Asia meant:

Lower yield, stronger US Dollar and a temporary equlibrium condusive for stock markets (bubbles). Now the US consumer is DEAD and gone.

The logic (I hear you laugh at me for using logic in this market :-) should be for rates now to go up, for the exporting Asia to increase their home bias and for the US to increase its domestic saving (which is happening)...... This is first part of the argument.

Then you add the geopolitcal aspect of China, Taiwan and now Japan increasingly trying to go it alone without the US on the foreign policy. Asia corridor policy I call it.

This week-end the new Premier indicated Japan no longer is happy to just bow and say: Ai,Ai.. Mr President.

They want their own footprint - own standing forces, which is new dimension.

Extend this to their allocation framework, their sovereign wealth funds, and a pattern of "less export of surplus" capital in the US markets and an increased investment in Asia region (Through stock and natural resources) and the US Dollar financing begin to look.... nervous....

We continue to believe China will "buy" Taiwan rather than fight it. It's cheaper and easier!

Well, we ended nowhere really on the discussion.

Being the FX guy I think both 1.5000 and 1.6000 maybe even re-testing last year highs is possible...but not in a straight line. The US dollar index could test new lows with the highs in the stock market coming end of September / Mid October.

We also monitor EURNOK and EURSEK. Selling EURSEK below 10.20 and EURNOK below 8.6000.

Conclusion:

Accepting sliding US Dollar - but also acknowledging the MASSIVE negative sentiment in place.

Equity

We define this as the 9th ining. Our projected cyclical top will be end of September / Mid October. The Euphoria is bigger than the volume in the market presently, but never the less, it is paramount to sit tight on long positions in this market while the market overextends itself.

Looking for catalyst for top in place- I, personally, think it will be political or event based, but on the calendar there is several other options: Non-farm payroll, G-20 meeting, Chinese Communist Party Anniversary...... (add to the list yourself).

We also take due notice of the DIVERGENCE in almost all stock markets. Prices higher, but momentum indicators are not following, and the relatively low volume, but bottom line: We respect the upside.

The price target is roughly 1080/1120 on a overshoot. The present envelop top is around 1062.00 (as of Friday) rising 10 figures per week, ie. 1072.00 by Friday or two points a day...... Adding three weeks obviously takes us to 1090-00 region..... and the you add some VAT and you got 1080-00 / 1120.00 expected top.

It is important for us to stress that the top coming up most likely will be a correction inside this mini-bull market as we do no expect the polticians/central banks to back away before we move into 2010. In other words we are looking at 10-15% correction in October/early November, with a rebound having probalities.

Fixed Income

Jesper made key comment: Relatively to where equity is trading its to expensive (price) - Relatively to how we see the world in Q4 and 2010 it looks fair......

The point being - the US Administations wants/needs rates to be low to mitigate the the recast in ARM loans and the replacing of bank loans by issuance of bonds. The key dominator/measure for succes of US Administation is the 10y yield!

There are good Taylor-rules reasons why we could see 3% break....low inflation expectations, slow job recovery......(although we feel the 3% threshold will only be broken in tandam with a correction in the stock market)

The EXIT strategy was cancelled at Jackson Hole, and confirmed CLOSED at the finance minsters G-20 meeting recently - the upcoming meeting will be more of the same and some public a..-covering with tough talks about bonus' et al.

Commodities

Considering the amount of "liquidity" floating in the system it is disappointing that commodities can not get a bid. The reason for this is relatively simple - China has stopped buying and storing - hence the small demand. Shipping rates confirmes this.

Gold - the team likes gold, but are slightly disappointed in lack of follow through above 1.000 US Dollar - I remain extremely sceptical, but need to reasses this view is US Dollar becomes crisis currency.

We note the extreme condition in Natural Gas - and the continued bid in Sugar.....

OVERALL CONCLUSION:


Allocation:

Beta allocation: @ 75%

The Alpha part needs to look at downside protection.

The strategy being to slowly take Beta down to 25% over the coming
three/four weeks...
Currency allocation: Short US Dollar, long SEK, long small JPY

This is no time for heroes..... be long, be happy....

Safe trading,

Steen (Jesper & Carsten)

RISK OFF is the answer it seems...

Uni. of Michigan horrible! Simply horrible! http://twitpic.com/dun9h

Final note:

Things make sense again... Uni of Mich shows increased worries about health care and jobs.. AND it highlights my continued issue Obama facing serious headwind at home..

90% of all our propriatory indicators are now poised lower..only one's holding in.. being: "weak US dollar" and stock market..

END OF day today could FINALISE DIVERGENCE in place.. but its too early yet..

Look at the charts from earlier today -

Positionwise it was a long, long day entering the market from RISK ON perspective, but we managed to change things around and came home ok - it was not a great day trading wise, small profit, but I think the day answered or will answer some key questions:

• Remember ALWAYS: Market direction comes 90% from political and ad hoc driven events - mostly political ones - Obama headwind at home becoming the gravity of this market - also Bernanke now facing his re-selection (including Senate approval)...
• Fixed income is in cyclical bullish phase as shown through the prisme of tech. trading yesterday and today. Fed stopping the buy-back is POSITIVE
• The gap between perceived growth/profit and reality is just getting bigger and bigger - a jobless recovery is no recovery - even a Central planned economy like the US end of day needs to do one thing only: Create long-term jobs!
• The consensus view will be tested next week: This could be down, down and neutral Q4 - instead of small down, big up... but that's for gurus not speculators like me.

Views per risk class:

FX:

Still think next major move will be strong US dollar overall - concerned about USDJPY leading everything down today- Risk of indicator or US Dollar weakness. I vote for the first.

Pros: NOK, SGD, USD, CHF
Cons: GBP, EUR, SEK, AUD, ERM-general...

FI:

Strongest view - remain very long cash bonds for 90% of portfolio - (Danish bonds)--
Market got too little exposure presently.

EQ:

Net shorted Danish market today, short S&P with 1020-00 two days above ..stop....
Like US better than Europe. Asia less than Europe.....
Sectors: Shipping, mining, banking at major risk here...

Commodities:

Sell Sugar - excessive spec.
Short Crude...
Short Gold.

Looking to buy GRAINS - long DBA ETF

Safe trading,

Steen Jakobsen

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

Sidelined for now...

Wednesday, May 7, 2008
Sidelined for now...

Been doing a lot of reading and research last 5-6 days and to be honest not really getting me anywhere - there are several conflicting themes playing out right now:

1. Inflation vs. Reflation. Clearly commodities are pointing to inflation risk, but market understand that ultimately commodity spikes leads to deflation rather than inflation, which is the scenario central banks wants the least.

The reflation scenario is based on that EMG countries, realising slower growth is busy ramping up demand through infrastructure investments, and in the US tax rebate and soon to be announced help in mortgages makes for perfect ingredients in reflation soup.

For now the reflation themes wins - but the risk being crude above 150, even towards 200 US dollars could reverse EVERYTHING back to credit crunch.

I take note that the US is building its strategic reserves in times of record high crude prices – and it seems from the “intelligence environment” that Bush has approved covert operation in Iran and that the Pakistan lease is getting shorter (Stratfor analysis). The main outside risk right now to the bullish market is on of geopolitic tensions in the Middle East, if so our year old call for 170 USD crude could be validated.

2. Coupling or decoupling. The bulls wants to believe in decoupling as it free up arguments for why you should be invested in EMG and Asia/Middle East.

The truth probably in the middle rather than either side. Europe clearly (Latest factory and retails data confirming IFO) in period of downward adjustment of growth forecast - while Asia is booming.

On the corporate level the managers are all guiding higher as they can not see things slowing(for now), which lead me to an excellent argument which Alain Bokobza, Head of European Equity & Cross Asset Strategy from Soc Gen made to me in private presentation today; the issue with corporate often more one of bottleneck than lack of orders, companies like Siemens guided lower due to constraints on delivering on orders(Which cost them fines) rather than lack of demand, the same goes for much of the infrastructure industry, but end of the day having orders, not being able to deliver will lead to lower margins, and this is before "recession cycle" really starts to impact demand/orders. The infrastructure business is problaby overvalued and overexposed, and that’s without considering the industries long term contracts with its lack of control over rising labor and input costs!

Growth and FX differences. The Middle East and Asia clearly needs to let their currencies strengthen or face further social unrest. The food crisis is now for real, the best and fastest way to limit the negative impact is to let currency go stronger - this will be followed by fiscal stimulus, probably in the shape of subsidies hands out (I see more and more talks about Alaskan like once-a-year dividend).

Bottom line; one part of the world is facing rising inflation, the other likely to see deflation, and central banks are confused where to turn first.

Market positioning. Market is now long, and with good reason. Technically 1405 was line in the sand for S&P and next level should be 1450 - however with 100% support from Newsletter analyst’, the market is clearly committed after the 12% move from the lows. Why are we still hovering around 1417 if this was positive?K

Keep your eyes on The Congress, they are working hard to reduce the economic pain for Joe Average American, it will not be long before some kind of relieve in real estate is announced. Similar to Bill Gross I believe its imminent and the "cheapest" way to stop the ever falling housing market.

Fact is for now the Fed has done EVERYTHING to safe the banks, and close to NOTHING so safe the average American. Only 3 in 10 people in the latest Uni. of Michigan survey expected to spend their tax rebate, the rest would use the cheques to reduce debt - if that is NOT a sign of new times and trend in consumer spending, I do not know what is.

Conclusion. Rather than "betting the fund" on something I cant predict I remain open and ready to act, for now the upside looks more likely than downside, but the odds are 52/48 in my optic.Good luck,

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

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

_______________________________________________________

Strategy>

_______________________________________________________

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

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

For all the write-downs, this is the reaction?

I am beginning to get fed up with my sales people "feeding" me one sub-prime story after the other. I understand they are merely trying to do their best, but they are hit by "home bias". The fact we rarely are able to put perspective on too much data when it deals with something close to us.

I often find people who should be expert on their own country, or stock, tend to over-analyse the situation ending up with a negative bias.

As for the banks sales people, they are tired of the outlook for their bonus' being cut due to lousy business models and lack of risk control. The American banks being the worst, and US investment banks the pit of the pits.

I must also admit my good friends in the investment banks have been able to keep myself in the "dark corner". I have listen, I am positioned, and I have done my research, but... what the investment banks and certainly the media forget is that for the deficiencies of the investment banks, the CORPORATES are full of cash, so much that dividends and buy-back programs are on full speed ahead -

The private equity guys are full of cash, but having to reload their model, as 25% cash down is a little to cheap for the banks, so they will regenerate by doing smaller and more capitalised buying, and finally my good friends in SWF will ALWAYS be willing to listen to new investments, in particular if its NONE US dollar, equity-or commodity related.

Yes, Dr. Watson, it is that elementary. To asses the picture you nedd ALL the information, as important as the bank are, the corporate are the NERVE of the system presently.

I will have to admit that the darker sides ofme are seriously concerned about the day the consumers UNITE and stops spending money, but looking at brands like Puma, BMW reporting this morning, it AINT happening right now, as their numbers continue to perform on the upside.

I guess the good news overall here is; The exodus of good traders and managers from the banks have left, the banking industry with extremely weak top management, look how hard it is to find someone who will run Merrill or Citigroup!, and have put the hedge fund industry in place as the REAL bankers of the 21st century.

That's good news as banks should facilitate not take risk - the new banking model will be one of simplicity unlike the present status of the BoA, Citigroup and Barclays today.

On to the markets;

There are two very likely new developments in the markets which needs to be confirmed but let me take a stap at it>

Fixed Income, the US 2-10 continues to rise, now trading 66 bps, indicating the world is joining me in being concerned about the reflation of the US economy. It also seems that the almost perfect mean-reversion in 10y yield continues to unfold as nice little sinus- function.



If I am right we should move towards 4.7000 yield inside the next 1 to 1.5 month. How could can I think the US yield is going up when media is talking about further cuts?

Well, I think the concern of the weak US dollar is beginning to dawn on even the crazy Central Bankers, I would not be surprised in Bernanke, the central bank, not the alias for the US dollar, begins taking back some of the downside concern.

The Fed is clearly trying to please the market but setting a rate which will continue status qou. That's a discipline he learned from the tosser Greenspan, but what we really need is a dose of Volcker. To earn credibility not only with Wall Street, but with central bankers and investors a like, they should RAISE rates, making the US dollar more attractive as portfolio currency and securing that long-term rates in the US remain in "range" rather than drift between RECESSION and INFLATION.

My point being, the market now will have to change theme to INFLATION. The CPI exl and incl. all the crap they play with means nothing. Gold is at 27 year high, Crude at all time high, food prices continues higher, so much that Mexico's Central banker claims he can not control his inflation due to food prices going up!

China owns the key to the future financial path;

If... they continue to support their currency being "weak" the spill over into the domestic economy will be one of HYPER INFLATION ultimately. The can control the prices and the reporting of those, but keeping a current account surplus in the size they do its a NEGATIVE unless the currency is allowed to appreciate.

So the only way to "safe" this semi Ponzi scheme of bartering, will be for one off Chinese revaluation, which will make the transition period longer.....

Simply put; Gold, crude, commodities, the US dollar is telling me and the US Fed that, either you increase the ATTRACTIVENESS of owning US dollar NOW or we will devalue you into the ground ( i.e REAL US dollar crisis).

The 1st reaction before final collapse of the US dollar must be the market taking the long-end of the US higher, based on inflation and weak US dollar. Hence my surprisingly negative view on 10y notes (prices)....

We are positioned through big 109.50 and 110.50 puts....

The equity market on the other hand, needs one of two days of consolidation, above these levels< 1510 for S&P and 7.859 for DAX. If they manage that I see final 5th wave blow off, as the market is postioned for CRISIS and negative year end.

The earnings have come in better than expected, the write down bigger than expected, but if Citibanks writing of 4, 10, 14, 20 bln. can not get this market into negative what can then?

I think there is growing believe that the US is not as bad as market fears, and also remember, the 1st almost the most difficult (Yes, it is, for everything in life!! ;-)) 2nd time we adopt quicker and better as we got reference frame.

I know I risk looking like the idiot I am but going out talking about major move in November and December, but I have spend considerable time on this and in the end, compounding the divind yield, the buy backs, the SWF's and the corporate and prviate equity people being FULL of cash, the market is not ready yet.... WHEN and that's when unemployment start to rise, you got your signal.....

Positions:

Short 10 y notes.
Long GBP p USD c, 2 weeks
Short EURSEK
LONG USD c NOK p
Long Dax
Long DBA (Agriculture ETF)
Long 2/10 US
Long USD.JPY

Performance> still -185 bps since 1st draft.. getting no where.

Good luck and.... be careful out there..

US weakness ? Not anymore...

Seem I am the only one thinking this week-ends G-7 was much closer to getting actual wording on the weak US dollar. I note with some interest this headline from The Guardian : http://tinyurl.com/38pxxd

(America vetoes G7's dollar alert) add to this following text from post G7 press conference:


"WASHINGTON (Thomson Financial) - Euro group president Jean-Claude Juncker said the euro zone will continue to monitor exchange rates closely following the euro's strong rise against the dollar.

He said the euro zone and its G7 partners are monitoring exchange rates 'in particular in light of recent sharp moves' in currencies.

The euro set a new record of 1.4318 usd earlier.

Juncker told a news conference at the G7 meeting in Washington that the euro zone had noted 'with great attention' that the US authorities had reaffirmed to their G7 partners that a strong dollar is in the interest of the US economy.

Markets should be aware of the risks of one-way bets in currency markets, he added.

European Central Bank president Jean-Claude Trichet said the US authorities' comment on the strong dollar was 'very important' and he fully subscribes to US Treasury Secretary Henry Paulson's comments that a strong dollar is in the US interest."



You got mixture for a cocktail which I call 2000 in the reverse! In other words, 2007 will soon become like 2000, only this time it's to sell EUR vs USD, not the other way around.

We are still VERY long USD calls vs EUR, NOK and CAD.

In the stock market we took profit on short STOXX50 into the close Friday- we will most certainly sell again, but... rule of thumb is to wait 24 hrs before initiating new trade.

The SUPERFUND SIV, "sponsored" by Paulson, is getting a lot of bad press and rightly so, I will not add to this equation but note this: It will only move risk from 2007 into early 2008.



If you are in doubt whether there is new round of credit weakness coming let put this to you:

1. RBS and Barclays ... went to Fed, yes Fed to borrow money.. Not a sign of gr8 things to come. Barclays went lower than August 17 low todat and rightly so. It is a bank runned by fair weather guy who cant see any issues anywhere.

2. Robert Rubin will NOT sign Citibanks accounts. He is simply afraid of the new legislation which makes his personal fortune liable if Citi is sued. He is as smart as they get.. and he is not signing anything with C in it!!!

3. The Average decline from Oct. 3 to Nov. 8 in years ending with 7 has average decline of 14.2%. 11 such incident has happened only one deviated (small gain of 1.7%) (source: Peter Eliades, Stock Market Cycles)

4. There are 5.000 stocks in the NASDAQ, but the top 50 stocks accounts for more than 75% of volume. Equals = massive speculative. This is not broadbased.

I am certain the next move is about tangible vs non-tangible asset.

Gold will do well as the US continues to use printing press to create US dollar to sustain their excess demand. Inflation is coming and fast. Gold has become new reserve currency.

In the same mold crude and agricultural products. I am keen on DBA US and other related commoditiy funds.

Postions:

Fx: Long USD vs NOK, EUR, and CAD
FI: Took 50% of big 10y position off. Strong seasonal into Nmovember.
Commo: Buying gold and crude on dip. Note that Crude makes cyclical high most often in October (>10%) with December being the low.
Equity: Flat, but short Cramer favourites: RIMM, GOOG, AAPL and AMZN
Selling Barclays today....for fall-out this Q4

Performance: +67 bps since live update started.

Steen

US dollar is the worst over? 2000 revisited?

....a while back we did some test of one currency pair leading another, which is extremely difficult math-exercise, the only thing we did find was that EURAUD, leads EURUSD.... in high frequency...

then now... I am noting NZD+AUD reacting a little this morning and made enclosed chart.. which is merely.. aud+nzd divided by 2... and eurusd in same chart... is this sign of top in place /

I know evert bank in the world falling overthemselves to put EURUSD outlook higher but........

1. European investors still got issue funding their US assets, maybe they need to take those USD into EUR soon ?

2. US fixed income extremely cheap in currency adjusted basis, plus from mean rever. perspective its cheap..

3.Seems to me there is more CREDIT NEGATIVE news coming from Europe than US recently,..

4. ECB is stubbornly looking for higher rates while consumer sentiment, credit conditions CLEARLY showing risk of more neg. growth..

5. UK is mess, post BOE and Government bail-out... 5. 1.42 1.43 always been touchy area for politicians....

6. EURUSD was .8600 in 2000... now 1.4200 ??? I remember destinctly how NO ONE wanted EURO then, this is the same US momement in my always naive farmers opinion... Steen

Bearish Fatique? Yes, absolutely, time to change? No way!

Yes, I am, like most people, hit by bearish fatigue. It is tough continuously having to look for the negative things in life and in trading, but this is such times. The mood reminds me so much of 1992 ERM crisis, lots of waiting, lots of denial, and loads of people buying the "official" explanation.

In 1992 the fundamentals got the better of the political game, and the UK should replace the recent Mandela sculpture with one of George Soros, as his run on the Bank of England did more to the UK economy than anything else since WW II!

Staying on that note, the analogy for the stock market is the same. IF... you really want this stock market to continue its long-term magical rise, then what we need is to replace "the ignorant trading style" with good old traditional value. In other words we need SERIOUS DEVALUATION of the stock market.

I am, despite, being casted as the opposite, extremely optimistic for technology, evolution, stock market and mankind in general. There are at least 50 different stocks I would love to own in the next down-cycle, but the fact remains that right now, as of this moment, the market is defending GBPDEM on the bid in the brokers, or....or in todays terms.. the stock market is slowly edging towards the final 5Th wave correction which should take equities to FAIR VALUE, from there we need to move to CHEAP VALUATION, and then the future is bright.

Do not EVER forget that there are several factors which makes the stock market "drift positively":

- Innovations
- Economy of scale
- Demographics
- Human nature (stock market is game, where we only win whens it goes up...)
- Yield
- Relative risk
- Utility
- Sovereign Wealth Funds

All of the above will make for power full cocktail, but right now.....the market tells me 2008 Earnings growth will be 11.75% after 7.7% in Q2-2007. Let me understand this;

1. Margin cycle has clearly topped. Input costs through the roof, growth velocity has peaked globally.
2. Funding costs of doing the business has risen considerably, as seen in credit spreads and even LIBOR lending rates.
3. Consumer sentiment - collapsing
4. Housing market, everything being equal will need to fall another 2-3 quarters

Does 1 through 4 add up to rise in earnings growth? Apparently!, according to the people in Positive-land.

I have ZERO predictability power but looking at pure chart based trading I note two recent developments:


1. My momentum based models are VERY CLOSE to selling the market. DAX Futures should be sold below 7.375-00 for a 5th final wave according to my medium term model.
2. There is TRIANGLE formation in about all major indices.

1+2 should be resolved shortly, either we get false or no break, and the people of Positive-land will be enjoying their cocktail again on unsinkable Titanic or.....if I am right, they will be running for life-boats.......

A resolution in technical terms will have to happen in the Sep. 13th-28 Sep. window, so this fatigue can soon be followed by some fast paced action.....

Tactical.

Fixed Income: Waiting for Santa Bennie, but long Euribor calls
Foreign Exchange: Building LONG US dollar position, yes long... vs GBP, and EUR..
Equity: Short Dax, adding as per above if broken, and long gamma. Took profit in mining.
Next 7 trading days decides the year in my opinion.

Steen

Fall-out or bail-out

Upon time getting back to schedule and writing my daily commentary to "clean" the brain here it goes:

Market has been in 4th wave correction of the drop-out. We saw low of 1375.00 in S&P follow by major correction on the back of what was "relatively inteligent" move by Bernanke and Fed. Cutting the discount rate - did nothing for the credit conditions, but it did give market the smell of "bail-out".

The most interesting aspect of this being, that "post-game" analysis tends to focus on that Bernanke is trying to avoid Greenspan classic mistakes of giving the patient what they think they need rather than what the doctor prescribes.

The Kramer's of this world have no feel for reality. If they lose they want their old friend Mr. Fed to help them out. I have been hard on Greenspan for long, long time, and I am constantly reminding people that the very bubble we have right now is created by central banks generating too much capita at too low rates.

Fast forward to now, and let me stress I do not know if this goes from crisis-lite to fall-out, but inrespective of what happens a few things needs to happen:

1. A serious correction of growth forecasts. GS already looking for 75 bps this on the downside. C looking for 50 bps. Me? You know I have no predictability powers but I am more towards 100 bps.. and here is why:
2. Unemployment. Recent studies shows that the 130K plus jobs created this year on average is merely statistical mistake than real jobs. There are a number of reasons why reality is going to hit the economic numbers going forward.
3. Credit condition for Main street Americans is tigher much tigher:
a. food is through the roof b. energy still elevated c. Asset value of your home is deterioating d. Credit linkes being removed. You can not get a mortgage even as partner in GS right now! e. mortgages are rising and fast (despite yields coming of)
4. Global forces: China is looking to hike and that will slow their growth velocity, last week we saw Euroland come in below consensus growth, and the same for Japan. The world is SLOWING down from cyclical top.
5. Earnings will come down and fast. Unit Labor cost is rising much faster than GDP deflator (1st time since 2000)
6. Cash flow. Buy-back programs been very dominant factor in S&P last two years, without it S&P would have been down! Again Net Free Cash Flow have now turned negative (again 1st time since 2000)

These above 6 points remains with or without further crisis, of course if crisis persist then these points will be "leveraged" further.

Then let's return to credit market. I read on the wires that things are going back to normal: hmm... check this chart:



The CP market has NOT moved one Ioata back - there is NO normalisation. This market is behind most of leverage of the hedge funds, Private Equity and banks conduit funds, so in other words, the money lender is out of business.

Another way to look at this is to see how the banks are performing, post this Crisis-Lite:




Better but not back to anything like two month ago.

Well lets cut to the chase here is how I see the market from here (Remember throwing dart will give you better performance than following me!!!!!)

Stocks

Financials will continue to underperform and big MAJOR margin. We need some serious destuction of capital in the banking sector. If German Landesbanks are biggest investors, with State Street, in Conduits then they should be ashamed. No governance, no repurcussions and they cant even fights these vehicles in courts as that would expose them even more. This is MAJOR negative for coming years.

I am short EVERYTHING into 4th week of September - I expect bottom will come in for this year there and we will be smoothly sailing into year-end. Q1 2008 will be crunch time. The credit failures of the last 10 years will have compounded and the write-offs and law suits will be flying by then (Anyone know of public traded litigation stock I can buy?)

Never forget that SWF have plenty of ammunition and so does private equity, although the need to set their targets and funding levels lower - this will stop the market this time.

Foreign Exchange

The BIGGEST risk in the market remains the UNWINDING of carry trades in FX. FX is always the last component to move and the only REAL leverage remaining in the system is in JPY and CHF carry trading. When USDJPY have traded below 110 we are about back to normal (1.6000 EURCHF). This is the bigger risk here, as credit tightning so does conditions for the "free trade" of funding low and placing high.....

I expect a reversion of the weak US dollar based on repatriation of funds from US based investors from emerging markets, from the neutralisation of the theme : US is decoupling.. which a lot of market players have on right now. Finally, US is the only country in easing mode, i.e they will reverse this trend faster than the dogmatic European central banks.

Fixed Income

My arbitrage friends are busy telling me telling curve is wrong, well I am of the opinion that we are seeing correct rates. Remember, as RBS Greenwich tells me, "..the first ease in a given cycle 2y notes traditionally trade 125*150 bps through funds..."...... I.e: We can go even futher down in short-end before indicating cut.

Fed will cut as per my six points above. The cyclical growth and credit expansion have moved from BLOW OFF period, to bubble bursting...recession lite...

Be long short-end, and December Euribor. ECB is ni Catch-22 which will lead them to cut as well... (Just watch Spanish real estate markets!!!)

Norway and Sweden will most likely hike - its not for nothing they are bunch of dogmatic Socialdemocrats!

Commodities

Both energy & grains are in total denial of the changing cyclical forces.
I expect crude- and grain to put in negative performance over the next 2-3 months as the world adjust to "back to normal" leverage and growth.

I am very negative grains based on excessive speculation and indications of better than expected crop in the US.

Crude - Hurricane season always tough to play Crude in this part of the year, but risk is to the downside and as soon as next week.

Gold- Silver: Stay out for now.... but it in bull market and I will look to buy with end of September.

Best wishes


Steen Jakobsen