Silence is Golden

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

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

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

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

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

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

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

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

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

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

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

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

Safe trading,

Steen

Mean... Mean Reversion is my name......

Dear Investors,

Triggered a few short dated trades this morning:

• Bought EURUSD @ 1.3840 and
  
• Bought S&P mini June @ 930.00 -
  

It is Monday and market does not like Monday's as the news flow is rich and big..... the "Plunge team" will be in later do not worry at all:...Obama is there to safe us all with his "smooth talking " which mostly reminds me of Sade' early hits ;-)

http://www.last.fm/music/Sade/Greatest+Hits

The FED meeting this week is kind of interesting as market it trying to focus on how Bernanke will talk down those long-term rates - not long ago ALL OF THE SUCCESS of Bernanke was based on his ability to maintain and keep 10 year rates low - now when the rates are trading close to 4 pc I guess the success is something else, little do I know....

Is it me or does the eternal talk of "exit strategy" which dominates CNBC, Bloomberg and other media annoys you much as it does me?

Exit strategy from what?

The biggest manipulated "demand-pull" in history? Or the biggest "cheap talk" about improvements ever in history? Or the 50 ways to cone the investor and electorates?

You make your choise - the problem is that the "dumb" money - read: pensions funds, government agencies, SWF and the like are ALL desperately chasing the return of MSCI, their glory benchmark, which they will trail forever as the MAIN DRIVER right now is China, China and then some more China.

MSCI is simply constructed wrongly for this type of Asia biased rally

The new agenda, which I have written about a few times from the road in Asia is one of China trying to use this crisis to link other countries and currencies to their currency band - creating a "domestic Asian" market which they ultimately channel more and more of their excess saving towards securing excess growth relative to Europe and the US, but also use politically to call more shots - which is the bigger macro issue: Asia is on the road to establish a stronger, deserved role - one of the by product will be one major adjustment of MSCI weights which is so out of touch with the reality that it makes fund managers almost scream......

The Chinese seems to believe, not unlike Obama, that they alone can pull the world out of recession - maybe one day, when they get to understand the true meaning of Say's Law: Supply creates its own demand -- or in Wiki version: http://en.wikipedia.org/wiki/Say%27s_law - they will understand the consumer of the US of A and Europe are toast and I mean toast.....


Did you notice how Russia almost single handedly today made sure the US Dollar saw some strength by virtue of Kudrin comments. It is a joke..... http://www.bloomberg.com/apps/news?pid=20601085&sid=aEVT7Gx4jFpI - and hence my buying of EURUSD this pm....

I had lunch with my good friend Andreas Junge, who I rate for his expertise on freight - he says pretty much ALL of the improvement in freight presently comes from China and dominantly in Iron Ore and in the lines supplying China, whereas many other lines are running with excess capacity ..... in other words: There is presently in freight, as in the financial markets ONE forceful demand factor and plenty of suppliers......

Bottom line - as little as I know, I still "hang with" the program of chance of 1050 only because Asia (China) is determined to give Obama a run for his money on being the most INTERVENTIONIST adminstrations around and unlike Obama, the "rulers" of Asia actually got some money to burn!!!! Hence my conservative expectations of a "good summer" only to be substituted for nasty, nasty Q3 and Q4, but as always I will keep my "postive" attitude in tact.

Strategy:

All markets: Day trade the range - using the most general concept of mean reversion - without drift.

FX: Like weak US Dollar despite Russia saving them today.... Obama is playing with matches and as the old nanny rule goes: Playing with fire makes you pants wet.....

Like SGD and JPY longs.... and own them both....

FI:

60 pc chance of FED hiking? Are you kidding me? FED will ANYTHING to take yield of 10 year notes down - I'm soon buyer of 10y on mean-reversion...

Major buyer of Euro-dollar December.....

Commodities:

Like gold here @ 930.00
Will short Crude soon..
Love grains

Stocks:

Long S&P - with no firm believe but accept the randomness

Safe trading,

Steen Jakobsen

If stock market experts were so expert, they would be buying stock, not selling advice.

If stock market experts were so expert, they would be buying stock, not selling advice.
Norman Augustine (1935 - )

Dear Investors,

I find it scary that our target (long-term) is now in sight: 765-00 - We have been calling for sub-800 but the speed of this collapse surprised even me to be honest - I did expect the politicians to react to get ahead of the curve but in true politician/policy maker fashion they trailed - giving me 50 bps, when 100 bps was needed, leaking all info to press - etc etc.

Now we are awaiting two major events:

One, the Lehman CDS settlement - this has been major driver of the hoarding of capital by banks and funds as the gross amount needed to be settled is said to be > 300 bln. US Dollars.

http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN0841811720081008
9:45 a.m.-10 a.m. Auction participants will submit bids and offers for the debt backing the credit default swaps, which will be used to determine the initial recovery rate of the swaps.
10:30 a.m. Auction administrators Creditex and Markit will publish the initial recovery price and the open interest for the contracts will be published. The open interest reflects the amount of bids and offers that have been made, and will show if there are more buyers than sellers, or vice versa.
12:45 p.m. -1 p.m. Participating dealers will submit limit orders for the debt on behalf of themselves and their clients to fill the open interest
2 p.m. The final price of the auction will be published.

Two, the G-7 meeting in Washington. I got feeling this meeting could start early if not already underway right now. There should be press conference 7-ish PM CET time, but I expect announcement before US open.

The schedule:

All times are (WashingtonTime/ GMT)...
0830/1230 - French Economy Minister Christine Lagarde speaks on the credit crisis at the Council on Foreign Relations.
0830/1230 - Eurogroup President Jean-Claude Juncker delivers welcoming remarks at a conference on the euro sponsored by the Peterson Institute for International Economics and BRUEGEL
0845/1245 - EU Economic and Monetary Affairs Commissioner Joaquin Almunia speaks at euro conference 0900/1300 - Group of 24 ministers meeting.
0930/1330 - ECB Executive Board member Lorenzo Bini Smaghi speaks at euro conference.
1000/1400 - Inter-American Development Bank holds seminar, 'Impact of Financial Crisis on Latin America'.
1015/1415 - IMF Managing Director Dominique Strauss-Kahn speaks at euro conference.
1240/1640 - ECB Governing Council member Christian Noyer speaks at euro conference 1400/1800 - Finance minister and central bankers from Group of Seven nations meet.
1515/1915 - Media briefing by G-24 Chair.
1515/1915 - ECB Executive Board member Lorenzo Bini Smaghi participates in IMF seminar on oil prices.
1700/2100 - South African Finance Minister Trevor Manuel participates in IMF seminar on impact on developing countries of economic slowdown among Group of Seven nations.
1845/2245 - U.S. Treasury Secretary Henry Paulson holds post-G7 news conference.
1945/2345 - ECB President Jean-Claude Trichet, Eurogroup Chairman Jean-Claude Juncker and EU Economic and Monetary Affairs Commissioner Joaquin Almunia hold news conference.
TBA: Other G7 delegations hold news conferences.
TBA: G7 holds 'outreach dinner' with Russia.

We are now in phase where innocent people lose their jobs, pension and net-worth due to bad investment advice and the ever go-happy-crowd of stock manipulators calling for buy-on-dips, through my optics this is the "fundamentals" right now:

• S&P in 900-1000 is oversold; getting cheap...


• S&P sub 800 is cheap... and should give excellent return on 2-5 years horizon.


• Our target remains 765-00....... we are 85% in cash - and we will await this weekend moves and NOT ENTER any new positions before Monday.....

My thoughts go out to all those who fights the markets today, to the poor Icelandic population, to everyone forced to "do something or else"....... this will be day to tell your grandchildren about, for once I am relieved I am a boring, defensive, and sceptic..... I am scared and so should you be.

Be safe - with the best wishes,

http://www.youtube.com/watch?v=jHPOzQzk9Qo

Steen

A little learning is a dangerous thing but a lot of ignorance is just as bad.

A little learning is a dangerous thing but a lot of ignorance is just as bad.
Bob Edwards

I have decided to explain the crisis and why the plan is useless once and for all to myself - it is really an economy of scale issue as it is the question I get the most (Yes, I know you are wondering why people even bother to ask me anything being an European Elitist Arrogant High-horse something as a "friendly anonymous visitor to my site called me!)....these days....but let me try:

The background is this:

Imagine you have a bank - for arguments sake let us call it : Banque Paulson & Bernanke - their corporate motto's is: "We create moral hazards better than anyone else -faster".....

This bank BP&P got an asset side which really mimics a traditonal portfolio:

A little stock, a little government bonds(10%), a little (sorry a lot) of mortgages(30%), a little lending(40%), a little Real Estate(20%) and other on-and-off balancesheet vehicles...

- It is - obviously- all funded day by day in the money market.

The portfolio is leveraged 10 times - which happens to be the average leverage in commercial banks.

Now - the market (portfolio) is down 15% - meaning you are insolvent by 50% -- i.e 10 x 15% = 150% minus your capital = -50% - but your "bank" --- allows you to keep the portfolio because tomorrow they "hope" the market will be better.....(The Church going traders I call them..)

Then one day the Congress and its two parties called We-got-zero-clue and We-got-even-less-clue gets call from The White House - some geezer who doesn't know what an CDO is shouts: "Fire, Fire - pants on fire ......." Please send in the Mortgage Firebrigade..... fast!

Congress goes into panic and decides they will buy ALL MORTGAGES and ALL MORTGAGE INSTITUTIONS in the country.

Fine.....but hang on... lets go through this...

If the GOVERNMENT buys only the mortgage loss from my portfolio what happens next?

Well if we deal a market-prices the mortgage portfolio is off my book @ 20 cents in the dollar... so my cash goes up but the loss remains in place plus taking 30% of loss off still leaves me short a few bucks...but even if they bail-out out without loss' on my mortgages I am still short: (100 USD - 30% in mortgages equals 30 USD x 10 leverage = 300 USD x 15% loss = equals 45 USD loss....so I am getting 45 USD back - but I am down 50 USD net - leaving me 5 US dollars short (Yes, this is constructed portfolio but.. point is still the same....)

- and IF... the others parts of the portfolio continues to fall --- BP&B is still even more insolvent.

Why?

Because you are NOT dealing with the real issues:

1. Funding is done day by day - with massive mismatch in time - Bad business model is environment of scarce credit creation.
2. Leverage - in a perfect storm EVERYTHING becomes correlated. .meaning falling...
3. Mortgages - there are 4.5 mio. unsold homes, so whether government or private sector owns them does not matter - its all math.....
4. Solvency - portfolio of BP&B still insolvent - why should anyone deal with them?
5. Transperency - how do I know BP&B is honest?

The right solution would be to let everyone go bankrupt - but if you want to spend the tax payers money the government needs to think like a Private Equity Fund - buy on the bid, restructure balance sheet,give new management upside in equity, sack the old management, and buy equity upside leverage.

There was God forbid an excellent Swedish model for this before - Imagine that recommending anything Swedish is a first for me......but DO realise this is PURE SOCIALDEMOCRATIC policy and hence I can not support it, but it did work before....

So......if the deal adresss real issues it will work, but I doubt BP&B will survive longer than a few quarters more, and neither should they....

Strategy:

Calling it a strategy is an insult to the word itself, but.....

85% cash
Long USD vs EUR as we broke uptrend since 2000 - meaning lower EURUSD
Small short T-bonds
Small long upside stocks...

Nice week-end

Steen Jakobsen

when in doubt......go on holiday?

My colleague David Karsbøl have developped a model based on the supposed short-term model of The US Treasury mentioned in Paul O'Neills book, where he states based on only weekly data alone The Treasury's growth model exceeded Wall Streets economist forecast accuracy (Mind you that's an easy goal to set yourself!), but the point being this:

David models continues its free fall indicating we are now moving into solid negative growth and consumer demand.

The later is best seen through the spectrum of credit cards - The US consumer has always been willing to flaunt the plastic even when they have negative equity, but in the land of designer credit cards things are turning to the worse:

Moody's Investor service reports that the charge off rate, which measures defaults as percentage of loans outstanding - rose 6.05% in in March, from 4.64% a year earlier.

The charge off rate peaked above 7% in the 1991 and 2001 recession.

The underlying trend indication is for worst to come as:

1. The repayment amount are decreasing. The US consumer is simply paying less into the bills, obviously indicating either consumption preference or lack of hard dollars...

2. The amount of people skipping 3rd and 4th payment also on the rise.....again not exactly the best sign..

The thing to understand, and this is important.... The financial "melt-down" in banking has been avoided (for now) by Bernanke and his Merry Men's circling of the wagons, but the next phase is one of considerable weakning global demand, the tail risk being we will revert back into credit crisis, as personable income collapse, margin erodes, corporate defaults starts to rise, and banks continues to hoard capital.

Trichet, a man who at long last is gaining some respect from me, hit it spot on yesterday: "The worst could be to come, and an ongoing, very significant market correction is in process"...

My respect for Trichet is rising(note: rising - not gained!) as maintaining unchanged ECB rates does the job for now - it gives him some credibility vis-a-vis inflation, and he realise, correctly, cutting rates not doing anything to real economy as the banks are in trouble.

He also, between the lines with his insight into the European banking system, indicates the European banks needs to earn up to the credit issue and the incoming freight train called potential stagflation.

The European banks are heavily subsidised through the liquidity provision in place, with Spanish banks issuing mortgage backed paper at 101 with ECB and seeing the actual price in the market trading @ 90 bid at best - talk about indirect support.

In terms of the temperature of the market, the bullish consensus hitting new highs, and CNBC commentators, their guests, can not stop talking the market higher - I have been neutral but I am slightly concerned about the market from here;

1405-10 in the S&P was supposed to get us flying, now in the 4th week we trade 1395-1435 and

VIX volatility is coming off - we are due for volatility spike and a range break-out.

I feel downside is the more likely as Q1 earnings was massive disappoint overall.

Stripped for oil companies, the 441 companies who reported so far saw profit tank 30.2% this quarter and 26% in the last.

Energy companies now make up 50% of all profit in the S&P!

Not exactly reason for joy - the fact is the market became oversold in January and March, and now its overbought, the next bigger directional play will be based on how the real economy tracks from here - my take as described above being a path of grinding slower growth, something a very smart friend of mine calls: growth recession indicating negative quarter by quarter growth but probably not outright recession numbers.

It should also be noted Q1 from growth perspective saw one-off factors which will be hard to copy in Q2 - Germany and Europe saw unusually high investments rates- probably covering the fact that most European companies faced bottle-necks in production, input materials and labor.

While in the US the massive inventory build was hardly a choice situation for US companies...but as always I am merely putting odds on this not making predictions.

Strategy

Moving away from Beta long, to net short exposure on market as of today; short banks-, big europeans industrials, and net indices - all on valuation and lack of technical upside break.

Still like credit overall in high grade names.....

EMG- extremely overpriced - looking to sell.......

FX - still firmly believing in new cyclical final low for US dollar- pricing in 100 bps hikes in the US a joke right in front of prolonged slow-down..........Long CAD, AUD, EUR vs. US dollar.

FI - mean reversion play long Bunds @ 113.38 ish... mainly options...

Commodities- stopped in agri- and still long long-term puts in crude....but looking for normalisation of commotidies to gradually reflect growth slow-down.

Best of luck,

Steen

We seriously need a crisis now!

Back - still slightly jet-lagged but I got so much on my mind, and I will try to distil it as best possible:

1. Unemployment is rising and fast

2. US consumers has been max'ed out
3. Asia dream is over for this time....high inflation and negative real rates killing world saving reservoir.
4. US Dollar is on the brink of real crisis
5. 95% of all managers do not understand the risk involved here. A system without a healthy working interbank market is no market.

I know, I know, most people see me as this total pessimistic guy on the economy - and the world, and to some extent that has been right since last spring where I started rambling about the incoming risk of slow down, crisis, and how private equity was dead.

I am not praising myself here, I for one, admits to not having ANY predictive powers, but at all times I do try to put odds on upcoming market moves.

Where in the past being too pessimistic has been wrong 99% of the time, I now think we have seen true paradigm shift, where being too optimistic will reward no one.

Why?Think about it for two minutes:

In a "normal" business cycle the rich nations will invest in the poor in order to get excess return on their capital. The flow will go from rich to poor nations.

Now? We have the "poor" nations, i.e EMG countries pouring money into the US at returns which is sub-par.

This will not work I am sorry. Capital should go where the marginal return is positive and rising not the opposite!

The fact is 10% of the world, I.e, the US, uses 80% of the world savings!In fact the whole recycling story is tied up on two things:

1. Strategic Deals. Energy deals for Middle East and for Asia import of cheap labour
2. Political agendas where Asia got the US "by its balls" by owning trillions of IOU notes.

Nowhere! Nowhere is allocation of capital based on best return profile!!!!!!!!

If you had the choice in investing a sum of money where would you invest?

1. Europe - poor demographics, with tail wind maximum growth of 2.5%....
2. US - poor demographics, saving deficit, real rates of minus 200 bps and weakening US dollar policy, maximum growth of 3.5/4.0%
3. Asia - excellent demographics, high saving rates, EXTREME need for infrastructure investments, minimum growth rates of 4.0/5.0% ?

I think it is very simple, and most intelligent investors seems to agree as the P/E for EMG for a while exceeded the P/E for G-15!

My point here is..... as the viscous cycle continues to compound the more the REAL RATES of growth, inflation , employment, currency rates gets out of whack with fundamentals.

Take Asia - now they got no monetary policy options (its own by Bernanke through the US dollar peg), high inflation (most above 5%) and negative real rates.

The biggest savers in the world is losing money saving !

Short-term that's not an issue, but when the net wealth decreases so does the incentive lend the money overseas.

The US consuming 80% of world savings offers you: more negative real rates than at home PLUS a guarantee for loss of currency value - is that a proposition you will take? No!

The result if this continues is one of stronger and stronger Asian currencies, with consumption falling as REAL WEALTH decreases and consumption comes down.

The saving grace being the STATE CAPITALISM in Asia which will keep pumping money into infrastructures making sure it crowds out private capital.

So this process which has been going on for way too long due to incompetent central bankers like Greenspan and Bernanke is reaching cross road where the worlds needs to face two major ghost:

Inflation and recession.

For balance to be established several things needs to happen:

1. The confidence in the US dollar needs to be restored preferably by increased saving rates and yields and a firm commitment to improve and maintain US competitiveness. This will work as confidence in the US will lower long-term yields, reduce inflation expectations and make investors commit to the "cheap" US dollar by allocating capital into the US.

2 Money needs to flow to highest marginal utility, which means where investment returns are highest. This means re-establishing the banking system to be able create CREDIT which in turn will be used for investments. The world is full of money, but there is ZERO credit. The market needs to flush out bad investment so the sounds investment can attract the proper rate....

3. The central banker should step away from speaking, engaging in the market place, and let market forces play it role. They should monitor inflation and commit to reduce inflation expectations to long-term averages.

Long time ago in the 1980s when I went to University I learned in Polical Science that the economies that survives long-term are the ones with the least amount of public engagement.

The US being the prime example, the very set-up of the US constitution making sure that Congresss and the President can't agree on anything meaning everything is left for the micro level of the economy to work things out. This worked so well during the Clinton years, which was ALL talk and no action (which reminds me of a lot of people I have met both internally and externally recently :-))

The bottom line here:

Never in my long life as a trader has perception and reality been further apart.

No one seems to understand that a capitalistic system with the above rules and no working banking system is the biggest systemic risk ever, and the policy response is one of more STATE CAPITALISME than before.

It is beginning to look a lot like the 1970s:

Big government, central ignoring inflation risk and rising energy and commodity prices.

This time we have a helicopter pilot who thinks its right to collect rent on Federal money - where is Volker when we need him ?

Finally, here is link to lengthy interview I did yesterday on the markets if you are not already bored - the link to the interview is on the right hand side.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUn1XoFl9aB4&refer=home

We had excellent March - took profit - restarting engines now...

FX: Long MXN vs USD, long EURUSD from today.... (@ 1.5545 and @ 1.5665), short EURNOK @ 8.0170

FI: Long 122 US T-bonds calls

COM: Long AUG puts.. Long DBA

Looking to built negative Asian growth portfolio....more on strategy tomorrow.


Med Venlig Hilsen Yours Sincerely Steen Jakobsen, Chief Investment Officer, Saxo Fund Management Saxo Bank A/S -London
40 Bank Street, 26th Floor Canary WharfLondon E14 5DA
Phone: +44 (0)207 151 2010 Fax: +44 (0)207 151 2001
Please visit our website at: http://www.saxobank.com


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