"Politics is Hollywood for the ugly" - Ronald Reagan

Finally we can get back to the markets - I tend not to like Hurricanes, political scandles, and other "front page news" which takes the focus away from the market - it tends to neutralise the gravity of the market for a while only to make the following move even more volatile.

I find it a joke that "the market" trades on crude oil prices- and the crude pit trade on the EURUSD - it merely states: No one has ANY conviction this part of the cycle.

The case for pro and con can be made with equal conviction in my opinion - but anyone arguing US is now over the worst should be taken out and SHOT right away - what a joke!

Real disposable income collapsing, lending tighther than... . and credit creation has all but stopped.

Whether Lehman gets safed or not is irrelevant - just as irrevalent as Lehman is as an institution. Tell me what Lehman did for improving your life?

Investment banks are dead - never to come back - hopefully the young aggressive people of today will realise this and get a real job - I certainly would not recommend anyone to enter this idiotic business of screwing your customers with fee-upon-fee structures.

Let me give you an example - A very good friend of mine put his trust in medium sized danish banks and their proclaimed expertise in wealth management - result: In a portfolio of 50%50% stock to bonds he managed to lose more than outright buying stocks for 100%!

Surprising ? No not at all, as he has like 250 different funds, paying entry fee, plus running costs for all of them - the fund manager must be happy..... I have NO FAITH in any banks - their primitive, cruel approach of let's get maximum fees from clients does not bode well for my return as customer.

The good news is that in the future there will similar structures to INDEX funds for wealth management - I have not found institution clever enough to do this yet, but it is coming...

Enough rambling on the uselessness of banks - the game has become more complicated but as I prepare to do presentation in Marbella in Spain this week-end let me you through my thinking;

1. Credit creation the real issue at hand - tighter lending standards, falling asset prices, and write down by banks has taken minimum 1 trillion US dollar away from the consumers.
2. The consumers is facing triple headwind: Falling disposable income (higher energy and food), worsening employment situation(going to 6.5%?), and less credit.
3. Corporations is facing less demand, higher input prices and increased regulation(environment, energy, and consumer protection)

Credit Creation (down) + Consumer demand(down) + Corporate profit ( Down) = ?

The easy thing would be to say recession/depression, but as all things in life it's matter of valuation - clearly the market is finally embracing the recession as theme - if it is priced in - then there is fair chance of better than expected outcome for us all, but if... market is merely embracing it in "writting" and not in practice we got issues -

What would be the signs the market clearly has prepared for the worse?

Lower commodity prices - Tick
Lower inflation expectations - hmm...not yet
Revision of earnings cycle - Tick for 2008 - but 2009 still very high, so no tick
Lower short-term yield - hm.... getting there but no....
Central banks taking the side of weaker growth rather than inflation - No tick
Government desperately trying to "reignite" the economy through incentives/tax cutes/fiscal spending - It's happening but not yet implemented

The final conclusion must be: Yes, we have move towards more realistic expectations - but there is still major gap between what people think and what they prepare for - this final leg could be what we are facing in September and October.

We continue to think September/October will dictate the year but also the next 2-3 years - if there is REAL efforts to stop to erosion of the housing market then there is fair chance - if FRD/FNM not nationalised - even bigger chance -

The policy of crisis management in the banking sector needs to move to one of looking forward - so far the best qoute comes from Chairman Franks, Democrate: "I dont want to comment on housing market as its really the media who fuel this crisis" - Ergo: If we stop talking about the issues then thinks will be ok ? What a joke - disgrace

http://www.cnbc.com/id/15840232?video=831708400&play=1


Strategy:

Long JPY, CHF - bought EUR c today 1.5015 ish - @ 1.4520 spot -
Long FI - bunds, Long December 2008
Equities - short DAX and S&P - vs long Pharm, defense stocks, water, solar.....
Commodities - small long Crude - Long Agriculture.

Good luck,

Steen

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