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

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Strategy>

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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

Central bankers are lost... totally lost....AGAIN..

My "models" are very close to confirming a BEAR MARKET. No less, no more. The key final ingredients will be Bernanke's speech tonight - if the market, as it has done in the past, sell of during and after his finish, we will have first real bear market since 2000.

The only thing that will be able to help this market out is rumors. Rumors of Sovereign Wealth Funds (One wonders why considering their track record so far!!!), and inter-meeting rumors of cuts.

Having said all thay I am still in NEUTRAL mode - there is to much consensus in the market, which concerns me always. No less after having read the F.T piece about Ray Dalio of Bridgewater: http://tinyurl.com/3dgapx - he made it his business to NEVER correlate with other managers, something I have always done, but to much less success than Bridgewater!

Strategy trading:

Fixed Income

Unchanged. Still waiting for cycle change in yields - we are close to breaking triple bottom, but for now holding out for "surprise" upside either through more liquidity (read: reflation) or better than expected US data.

Foreign Exchange

Long AUD.CAD - starting to accelerate - looks fine.

Long EUR P, 1.44 (spot @ 1.4710) 1 month

Long JPY C, 104 (spot @ 108.25) 2 weeks

Long EURSEK, and Long NOKSEK.

NOKSEK flirting with 1.20000 today, break should lead to 1.2500. In times of recession these two economies are VERY different.

Sweden is VERY open economy, with most of the Swedish companies being US dependent. This could be seen through Q3-4 in 2007 when the Swedish stock market significantly underperformed other European Indices. This is continuing, and as a rule to exception Riksbank is more negative than the local banks, leaving door open for much, much higher EURSEK.

Norway on the other hand, will see demand for oil and fish, BUT.. if oil starts to react to RECESSION fear, it should also find support around 7.90000.....

Commodities

My biggest change - I have been drumming for GRAINS and Crude for almost two years now, but now I am getting square.

It has to be said I am a very defensive fund manager, but the upcoming USDA Crop report tomorrow got me worried. Following the "real experts" it seems we, the financial people are, too bullish in the wrong time of year. An excellent link http://www.agriculture.com/ag/

I sold my long time holding of DBA yesterday @ 34.45 -

I also as stated yesterday sold Crude(Feb) @ 96.95 - We have been trading in- and out so we are now comfortable short from 103 USD net, which have taken us above the critical 102 $ line.

Remember the play here is merely for Crude to "catch up" with the recession story - another way to play this could be to short SHIPPING........

Equity

Tried the long side into close yesterday, did not feel right and our model continues to ask us to wait for confirmation, which I will respect.

Early last week I put downside break @ 60/40, it is now 75/25, we really need "something tangible" from Bernanke tonight, next week in Congress or at the next meeting. Note that market got 50 bps @ 75% probability, almost destined to disappoint.

OVERALL

Still in day-by-day play, but getting feeling new trend emerging... Crude right now trading 93.70, having broken critical 95.55 - and gold offered to... 850/55 test will be critical, I am net buyer net seller, but not before those levels.

Theme: Recession light - and the repricing needed plus re-coupling, the US is not, not alone in lower growth rates..

I am attending conference tomorrow with Lawrence Summers, sponsored by Skagen Fonds, I am looking forward to asking him about "strong US dollar policy" if I get the chance....

Stay lucky,

Steen

Recession - stagflation... it's here now..

I always get a little disappointed when the market "joins" me in my market analysis, as it means I will have to find something new - the recession/stagflation is now main stream, meaning need for new paradigm; I will spend rest of week fine tuning this, my gut feeling ---> High inflation, better than expected growth but need to figure the model out.

Strategy:

House keeping:

Selling my Long DBA today - chart is showing Crude and other commodities reaching saturation point, and with recession around the corner there is bound to be repricing of GROWTH/Inflation assets like agri, gold and crude.

Sold Feb., Crude @ 96.95 with stop above 101.00 today...

Other positions:

Foreign Exchange:

Long AUD/CAD - AUD economy keeps steaming ahead - long resources, Asian investment inflow - Loonie look overprice - the Canadians wants it weaker... positive carry...

Long EUR/SEK - Long - market like it the other way, I think too much priced in on inflation and growth, I agree more with Riksbank, than with with market on future path ....

Put on decent size 1.4400 EUR put 2 month yesterday - - With French government calling for growth over inflation, and making weak US dollar G-7 issue.... is one thing, but the "cheap" J-curve of US goods should move EURUSD down again, add to this that its time for Europe to join re-coupling on weaker growth. The German Retails Sales this morning was SHOCKER - Germany is more than 15 pct of European consumption - Spain in freefall - Italy, being Italy, you add up the numbers!!!!!!

Fixed Income:

Strongest view: Long 116 Put in March - Have mean-reversion model indicating triple bottom in place in 10 y- notes. The weaker numbers, Ex. Treasury Sec. Summers calling for FISCAL STIMULUS, and central banks more than willing to create even more money make it a certainly along death and tax that they will INFLATE the economy with wrong central- and government actions. (Remember how Paulson behind the scene got BoA to buy into Countrywide - nice trade @ 18 now 5 offered - Government intervention at its best)

Commodities:

Short Crude - Feb

Best research qoute of the day: J. K Gailbraith: '.....that finance does not lend itself to innovation, full stop! What masquerades as innovation, he says, boils down nothing more than credit secured on some asset. You can repackage it, slice it horizontally or vertically, repackage, call it a different name, but end of the day, somebody owes money to somebody" - Well said and so right...

Good Luck,

Steen

What's more important growth or inflation?

There is NO one more dangerous than the French when it comes to economics! French Finance minister Lagarde this morning: '...I certainly have a preference for temporarily higher inflation and higher growth' - (link: http://tinyurl.com/yucfgp)

Pretty shocking news! It seems she has forgotten the impact INFLATION has on future planning and the erosion of values - it also runs totally "contraire" to her compatriot in the ECB Mr. Trichet's mantra and it's VERY BAD news for Europe, but unfortunately its what we can expect from Europe. A group of nations with old people and old ideas!

Also in the news; Moody's given up on tracking risk! Pretty brave for them to admit that ANY systematic approach to risk falls short due to financial systems complexity - and indirectly the sheer size of banks today. In other words; Ratings will have even less importance going forward than now, and will be flawed - Conclusion: Volatility should risk on this (link: http://tinyurl.com/37jppk)

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....

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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

Stagflation the name, day-by-day the game

Macro Strategy note #1
January 4th, 2008-01-04

(This come with chart - for those of you who want Word document with full article please forward request to: sj@saxobank.com)

Steen Jakobsen, Saxo Bank, Asset Management

Stagflation light is the name
Day-by-day the game


Happy New Year!

The market is off to predictable start with weaker US growth outlook which ironically leads to higher crude, gold and weaker US dollar.

Ironic because weaker US growth should do exactly the opposite to the prices but market are trading day by day on THEMES not on fundamentals.

The format for my blogs will change slightly this year, again, I will try to run through different assets and charts and take cue from that plus obviously the odd reference to excellent reads.

Interest rate outlook


We came into 2008 very long 119 call in 30 Y notes, playing on the fact that the December reading of retail sales, which got every single Investment house bullish on US growth was a one off, the true drivers of growth(or lack of it) potential being;

1. Credit crunch
2. Housing net net negative impact (General any excess in cycle terms takes 9-12 quarters to unwind; we are now approximately half way!

We took the profit over the last two days as there is major gap in expectations;

Yield spreads 2 y versus 10 y is trading at +109 bps

New recent high. The yield curve overall is steepning. This indicates one or two things; Growth expectations is higher or inflation expectorations higher. For now let's assume its 70% inflation and 30% growth (stock market analyst' is more like 55/45 inflation/growth in outlooks)

Inflation premium (the measure of difference btw zero TIPS and US Treasury) trades @ 213 bps.

This is in line with above.....but then.....

One year Fed outlook as measured by swaps rate indications are at -135 bps.

This means Fed funds should be 135 bps lower in one year from now. Down from -90 post the retails sales number and heading towards low of August and November.

Hang on! Inflation expectations in 2 y vs 10 y is higher, also higher in inflation premium in TIPS vs. Treasury, but lower growth.... so it seems market, at least the bond market, CLEARLY feels that Helicopter Ben is going to give us higher, much inflation.....

This is bad news as it indirectly indicates that we will have lower growth and higher inflation, what's the word for that again? Stag-flation light?

Impact is pretty clear. Its the worst scenario for stocks with expected return quarter over quarter of ZERO, commodities should do ok, but less than in 2007, and ironically bond, short will do best.......

Credit market

I see deal after deal being cancelled in private equity market indicating the LENDING market has dried up for even relatively small deals.

I also note that junk bond spreads, ALL of them, much higher than during crisis in August and this despite biggest injection of capital is my career!!!!!!

Foreign Exchange

There is NO reason why you would own JPY on fundamentals, but little does it matter right now;

- Bias is increasing towards STRONGER JPY not weaker. Amateurs play carry-game while the pro's knows better than to engage in yield carry in high volatility environment.

- Risk reversals (the relative price of buying PUT to CALL on JPY) 25 delta 1m now at -340 bps mid (low in August < -600 bps

US dollar overall is more driven by rate differentials than equity ratio's (The US dollar shifts correlations between relative interest rate differentials and relative stock market performances) so more weakness expected until market moves from the US is DECOUPLED to RE-Coupling occurs.

Europe in TOTAL denial on state of growth outlook. 2007 strong countries like Spain, Sweden, Switzerland all seeing waning retail sales - Real Estate sector in UK, Denmark and Spain is in free fall if it was not for the ever bullish realtors "fake" measurements of prices.

Finally stock markets. The enclosed chart shows correlation between NASDAQ and inverted junk bond spread. Theory being; as credit market worsens so should stock markets, the US Inc is NET borrowers of capital day in and day out.

Strategy bias;

Fixed Income:



ISM getting into 2003 lows and approaching 2000 recession like…!!!!
Gap in inflation expectations needs to be monitored. Ben "I got no clue" Bernanke has dropped so much money into market at a time of ALL time high Gold and Food prices...and high inflation expectations - its going to DOOM him..... Fed controls ZERO to 12 month and will be cutting aggressively, market controls the curve and will not follow 1-for-1, meaning steeper curve, and more built "insurance" through higher premium..... I’m net neutral into employment data. I expect POOR number, if and that's a big if they are honest reported!

Net: Neutral, with long bias in 2-5 y sector.

Foreign exchange:

Been long on and off EURGBP for long time. GBP sucks. Use ANY strength to sell GBP.

JPY: Respect Risk reversals. Looking to enter LONG JPY.

EUR: Rates differentials rules - but it is time for RE-COUPLING, i.e. Europe growth to be lowered relative to US, so EURUSD drop in the cards going in February

EMG: Still best value. EMG home bias less pronounced this I hear from Morgan Stanley, if so high yielder’s NZD, AUD should do well and KWD, Singapore should weaken.

Scandies: Used to be my game. NOK and SEK disappointed me. Think further weakness due.

Commodities:

Took profit on Agri-play last night. Still think DBA will double in 2008, but presently lower growth has not played role and market in denial. Early profit in the year always good.

Been long gold - still willing to go long again....

Crude - 100 $ why so difficult to break?

Overall; the last 20 US in crude is de facto US weakness, similar is the last 200 USD in Gold, so... when the cycle turns, expect MASSIVE correction.

Stocks:



Neutral - favour 60/40 odds on that break of long, long sideway action will be to downside due to graph attached.


OVERALL:

Day by day plays for now - Find TODAYS theme - leverage and close before you go to bed. January not for real players, too much new RISK capital around.

May the trading Gods be with all of us in 2008.

Steen Jakobsen

Why things can only get worse with Investment bank, there dont understand ANYTHING..it seems....

When you read this article you understand why Barclays is losing their shirt....

Volatility is only up because of hedging ? Where does volatility come from then? The Sky? or is it not the UNCERTAINTY about future path for economic numbers which create financial volatility.

Volatility is not a derivative of the financial market alone, its more a function of the UNKNOWN path rates, inflation and growth takes - so according to Barclays vols should go down in January, I, on the other hand, I, the farmers son, think they will go up.

Never in my time as a trader has there been more INSECURITY and UNCERTAINTY around.. hedging ? My foot..

Happy Holidays to you all and may the trading Gods be with you in 2008.

Steen Jakobsen


The Short View
By Gillian Tett

Published: December 20 2007 02:00 | Last updated: December 20 2007 02:00

Christmas is the season to watch reruns of old movies. But even before the holiday starts, financial markets are getting into this spirit.

Never mind that analysts are now muttering darkly that 2008 could produce stagflation - a concept that, until recently, seemed as dated as The Sound of Music . In the equity markets, another oldie is now back on investors' radar screens: equity market volatility.

Until recently, this was an issue that investors generally ignored, since volatility has been extraordinarily low in recent years. But in recent months, volatility indices have soared, both in terms of tangible market swings (measured as realised volatility) and in terms of the cost of buying insurance against these market swings (measured by so-called implied volatility). Indeed, the change of mood is so marked that volatility measures tracking volatility have leapt too.

So is this rerun back to stay? In the short term, perhaps not. Barclays Capital thinks that one reason implied volatility (or hedging costs) has risen this autumn is that investors have been trying to reduce their levels of risk, by hedging the equity positions they hold.

However, risk-averse behaviour typically peaks at the end of year, when investors square accounts. Thus Barclays suspects hedging activity will fall next month, prompting a temporary downturn in the implied volatility indices.

But in the longer term, there are signs that volatility is "entering a new regime", as Deutsche Bank says. After all, if you think that credit markets are even half-right in their current levels of gloom, equity prices look too high. That suggests implied equity volatility levels will probably start rising again once the January impact ebbs away. Savvy investors who want to hedge their equity positions might be wise to do this as soon as hangovers clear on January 1.


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