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

Back from Paris.. sorry for lack of updates...

Maybe I shud add that these updates are as live as when I m in my office in London or Copenhagen, unfortunately the next quarter takes me around the world once, but....

Leading into G-7 I got some feeling in Paris, or rather a confidence that the french feels they can get some sort of 'action' which could stop the weakning US dollar. The french do talk extensively, but this time there seem to be odd confidence I have not seen in a while. I know the media is busy saying this is non-event, but since then has the media been AHEAD of time?

I got strong feeling, which could be proven wrongly shortly, that we are inside 1-3 EURO from top of the EURUSD cross. I remember moving back to Europe in 2000 from the US and how EVERYONE was betting their house the EURO would go to zero even dissolving.......people forget quickly.

I will follow up with more detailed analysis this pm....

Otherwise straight to the positions..

FI: We are and haven been long 10y notes since the last blog...and this time size through Dec 110 calls...

FX: We are VERY long US call vs EURO and NOK - and obviously losing some money.....
We are also long JPY calls.....in less size but with nice 116.00 strike...

Equity: Initiated one unit short (of maximum 3).. yesterday in STOX50 (4.464)...
We are also short AMZN and will add some more single stocks 2day - basically I am going to short the idiot Cramers index of high risers.... !!!

Commodities: No present positions


Bank of America reporting was interesting in several ways;

1. The steep decline in investment banking..
2. The amount of loss provisions...
...but ...
3. Most interestingly, BoA is the cleanest RETAIL bet in the US. BoA is by far the biggest bank and with the biggest exposure to the US at large. I find that as KEY INDICATOR in that consumers are more hurt than present numbers indicate......

Add to this that SIV's and off-balance sheet vehicles seems to be coming back to the surface of the trouble water indicating ROUND 2 is about to start.

After having been EXTREMELY confident in August that this evolve into crisis, I am far more prudent this time. I think the odds are 60 vs 40 for a full blown crisis, but we need to break 1520-1525 in S&P ....

On the FX market, make no mistakes; the fact we brokes 115.80 yesterday made excellent medium term forecaster like Andrew Baptiste calls for bare mimumum of 111.61 low tested with real chance of 105.00.

My comment: Why not ? Despite some renewed disappointed in Japanese economic numbers, they JPY should based on their growth and future yield path have been much lower. I think 100.00 is fair value. JPY is quasi Yuan so follow G-7 for related follow through. In terms of positioning JPY carry is back in force although not in same size as in late July.

Performance MTD etc... up later - report running late today......

Steen