When in doubt tell the truth - Mark Twain

Now in Singapore after a long flight out of Europe - Had a nice dinner with very smart group of people in Singapore last night who made me, once again, realise why travelling is so important for a fund manager like myself.

The early take-away from my Asian experience:

1. Increasingly the focus of all Asians will be the north-south corridor of internal Asia rather than across corridors into the US & Europe - adjusting your investment outlook to this new world order is in my simple opinion the most important change one needs to make to understand - let alone make money in the next few years.

2. RMB faith. There is tremendous support/believe in China's ability to compete as currency in the international market. The concept being that the US ultimately will devalue themselves out of the trouble, this is what they have done in the past and this time it is no different - Europe meanwhile will put up more and more protectionist measures as highligthed by Mr. Dirigisme Sarkozy, who makes Karl Marx look like an amateur in the game of Socialisme. Asia accepts JPY will go stronger, but they prefer the RMB as storer of value through the next few years.

I respect this concept, but I have a hard time being a 'hard line Liberal' to accept ANY model which is based on 'economic planing' and allocation through central planning. I can't see China going it alone, but I think the above argument extremely valid and I am not one to argue based on my simplistic views of the world.

3. China will link periphael Asian currencies to the RMB. This to me is truely new idea, but again from 10.000 feet perspective it makes sense: China can use the present crisis to extend "guarantees" to Indonesia and other weak foreign reserves nations serving multiple purposes: access to their resources, building co-depence on China reserves, secure military export, and align China interest with that on the linking currency. Truely if done it will catapult China status and have geopolitical implications not presently priced in.

4. Appetite for corporate Asian credit. A favourite theme of mine, seems to have fans in Asia to - there is so much dislocation in short-term corporate bonds, that the upcoming refinancing will make for excellent plays which taken correctly could yield 15-35% p.a. There was NO APPETITE - and I mean zero, zilst, nada, ingenting, keine interest for Europe or the US - This is the first time I have seen Asia so 'local' in their investment outlook. Clearly a tell sign things are to change.

5. We all had positions we did not want. Around the table pretty much all of us, where in positions we did not like: The US Dollar, fixed income, short equities.

This tells me one of two things:

1. Either we need further erosion as we all take profit too early not truely acknowledging this is the 'right' trade despite our reservations.

2. There is room for major (suckers) rally as 'we' move into what we really like.... altough talking from personal experience I never seem to have any positions on I really like, the ones I understand normally losing me money, and the ones I do not believe in being the profitable ones.

Overall I am very keen on Asian stocks (versus short Europe) - I am, probably naively, starting to believe Japan could outperform.

• They have total savings in excess of all Sovereign Wealth Funds in the world
• The dividend yield on Nikkei is now higher than JGB's - why would you then buy Japanese Fixed Income?
• The premise of scarcity of capital makes the Japanese productio model appealing (think Toyota)

I hate travelling! Yes, hate is the correct word! However I am again totally humbled at how being on the ground explains so much more, and having the luxury of meeting people ten times smarter than myself and hearing them talk about the markets, makes me realise its all worth it - especially having been 'carried' to Asia on Singapore Airlines new 777-300 which makes travelling overnight as much of a pleasure as it can be: Check this: http://www.flatseats.com/Micro/index.htm

Strategy:

We are still long 75% cash, the 25% deployed in:

Negative Stoxx50, long jpy, short gold, short EURUSD & EURJPY. Small long TIPS, looking to buy selective Japan, SGD, utilities.

Finally, may I suggest you read my Singapore colleagues blog which is truely timely, wise and to the point: http://saxocapital.blogspot.com/

Safe trading,

Steen

We must believe in luck. For how else can we explain the success of those we don't like?

We must believe in luck. For how else can we explain the success of those we don't like?
Jean Cocteau

Day two in the biggest rebalancing since 1987 puts the stock market is positive mode and with good reason - personally I believe that the climax in fear & panic has been reached - what comes next week is the final deleveraging of portfolio which will still have to happen:

1. Redemption still a real issue
2. Banks will need to find even more capital - Markets are down 20% this month - and with 10x leverage the banks needs capital and fast.
3. Still too many "hopers" around - we maintain our minimum target if 765.00

Inspired by the article this morning in the New York Times: http://tinyurl.com/56gudn - I had my equity stragist Christian Blaabjerg do this chart: (Click on chart to enlarge)

To make this work "faster" we have even done 2-year average - the picture remains the same - we have come a long way, but there is still some way even on average to call this cheap. This is not exact science at all - and as John Boogle says in the article: You have to look at the alternatives - which is sooooooo true. We firmly believe stocks will be +/- 5% for a long, long time maybe 10 years before breaking higher, but the alternatives could be even worse!

Why would interest rate stay this artificially low forever? The credit cake is not only smaller, it is more expensive, so lending the US Government money @ 4.00% is total joke, when I get 3% dividend yield in actual private corporations. This theme could be the saviors of stock markets, if, and this is a big if, the fund managers tries to embrace true diversification as teached by Swenson at Yale Endowment http://tinyurl.com/6gzwlw (if you havent read or bought this book yet, you may be doomed)

The month is soon to be over and it looks ugly again - check this overview: (Click on chart to enlarge)

but it is still much better than long-only funds! Further redemption will follow these kinds of results.

Strategy:

We were long some 1010 Calls on the rebalancing - which we took of late yesterday, still have stoxx50 2800 & 3100 in place for final stretch of the month - still long 95% cash, but having we look to make some +400 bps in our Macro Strategy & +200 in our CTA account - which means we will playing safe for balance of the week.

Stay safe,

Steen

Weekly Macro Meeting

The three PREMISES:

• Cost of funding for drives market and valuations
• Price of liquidity new unknown (tax on money)
• No prior analogy historically will work (because this is different, very different)
  

Conclusion:

Last week: We are seeing the financial effect now impacting the economic situation - making this the "worst part of the curve".

This week: We have moved into grey-zone between recession and depression ==> Bias on downside increasing

Allocation:
Last week: Watch the transitions period - we are clearly policy dependent. We maintain 85% cash = EXTREMELY DEFENSIVE

This week: We called the transition - although the Social democratic Nationalisation has created pressure in EEC and EMG countries as they stand outside the "circling of the wagons".

We maintain 85% cash - but up from intraweek 65% - as we need further information to make long-term call.

Keeping cash @ 85% is not only impossible in order to make excess return, it is also extremely punitive in general allocation theory, but this is not time for being brave, rather it is time to look for opportunities, so as negative as we are - we are looking to reduce our cash portion relative quickly should we get more transparency.

Targets:

S&P 500: Down to test our long-term minimum target of <765-00>

Fed funds: 0.50% by Q2 2009 /ECB: 1.50% by Q2 2009 /10y yield: 4.5-5.0% by Q2 2009 /2y yield: 1.00% by Q2 2009

Crude: 50-60 by Q1 2009 /Gold: 750 by Q1 2009 =========================================================

Economics

Bias: Negative growth & inflation

David Karsbøls economic forecasting model continue to fall indicating waning growth & inflation
Key leading indicators all point to lower growth

Fed 1 years forward expected rate is +26 bps - which we deem to be too high - We expect further cuts in Fed funds

EDCB 1 year forward expected is -121 bps - which we also deem to high - We expect minimum 250 bps cuts from ECB

Australia and any commodity country will decelerate the most - we are entering bust-cycle for commodities, which will hurt these countries

On the premise of "cost of capital", I.e savings we favour economic relative performance from: Switzerland, Singapore, China, & China - and underperformance from: UK, Scandinavia, Spain, Portugal, USA, Canada, Australia, New Zealand
=========================================================

FixedIncome

Bias: Neutral

Banks can not releverage their balance sheet meaning less demand for Government issuances
Central banks will need to buy their own government bonds as no one else will!!!!

High Yield is still struggling - Corporate leverage spreads widening - Financial tightening - 8 year Ford pay 27% yield

Danish Mortgages: Still under pressure - Lack of guarantee in mortgages makes for widening spreads plus weaker DKK currency

Still favour BUNDS over Treasuries

We will go long TIPS (ETF: TIP US ) - as breakeven has gone negative - indicating NO INFLATION expectations

=========================================================

Equity

Bias: Negative

Our team does not believe earning actual results to be major theme - although there are low expectations

The key driver in equity will be: Hedge Fund Redemption. There is talk of > 200 bln. US Dollar and most of it in November & December

Using our three premises sectors to be overweight are: Utilities & Telecom. Underweight's are: Energy sector and consumer cyclical

There is some silver lining in equities - looking at P/E based on trend earnings (I.e smoothed earnings) we are trading all BEAR MARKET LOWS: Presently 12,2x versus previous lows of 15.7x(2002), 14.2x(1990), and 13.7x(1987).

The issue being where the E in P/E should be priced...but in terms of medium- and long-term allocation we need to move into equities soon or we lose upside allocation potential

=========================================================

Commodities

Bias: Negative

Gold: The governments will need to sell out of their stocks plus if we should be buying Gold as inflation hedge, then with break-even turning negative, we should be selling Gold. We are net short GOLD through medium term Put bought.

Crude: Getting closer to "critical levels" for both producing countries and producing companies - 70 $ seems to have some budget rate implications - hence fall below could trigger two thins: 1.
Foreign Exchange

Bias: Neutral

US dollar: The US needs to fund themselves- there are two ways: 1. Much cheaper currency 2. Much higher yields - Second choice will not help the economy, hence must number one play - we are at turning point in this US Dollar strength, but we need further easing in US funding rates, and some better economic data to pull the trigger

JPY, CHF; Two best places to park your currency for now

EMG, EEC: Very very negative. The currencies is 100 pct correlated to their current account balances - with world slowing into recession/depression there will be more pain - unfortunately
Carry trading: Forget it!

=========================================================

OVERALL CONCLUSION

We fully realise keeping 85% in cash does not make you a lot of money, but with a performance of +400 bps YTD, and our benchmark down everything between 25% and 75% we simply do not feel this is the time to be brave.

We are more focused on finding long ideas in equity, corporate bonds and commodities than in continuing selling them down. We see and understand that in "normal times" this is cheap, but having premise number three: This is different, we have been able to navigate these troubled waters.

The Investment meeting was down right depressive for yours truly, who find himself the most "bullish" of all - but in respecting the framework and the lack of clarity we reassigned the extremely cautious weights to our portfolio.

For arguments sake let me tell you in "normal times" if we have no exposure we would to Beta exposure:

Equity: 35%
Fixed Income: 15%
Alternative Strategies: 20%
Private Equity: 20%
Real Estate: 10%
Cash: 0%

But clearly this is not a time like that.....

Have a nice week,
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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