The end of the shadow banking system...as per Roubini

One of my favourite qoutes happens to be:... Remember I have no predictive powers - well it seems even I have it once in a while... Leh will soon be history - my good friends at Lehman sending me goodbye notes - I am sad to see these good people lose their jobs due to one of the most incompetent management teams in history. Too big too fail ----

Well moving on .. all night Fed, Paulson and their merrymen been busy telling us everything is fine.. but..

• AIG is next - asking for Fed help according to WSJ
• Consortium of banks (9 in all) will put forward 50 bln. to save their own ass
• Bank of America will be nationalised inside one year - why would you buy Merril stocks @ 25-28 USD, when they could have been bought for 13 or less in the market?

Whats next?

Fed cuts rates Tuesday - this could be the 2nd worst Monday in history - be warned....The SEC- useless as they are could reinstitute: uptick rule, no short selling.....The US is moving fast and furious towards: The Socialist State of America.

Friends - be extremely careful now - this is even for old hand like me unique circumstances - fortunes will be lost and made in the next 72 hrs - make sure you understand the game, please!

Strategy:

Still same: Long EUR/USD, JPY, short-end FI, short Dax and S&P- cash at 75%...

Links:

• AIG may seek help from Federal Reserve:http://tinyurl.com/5dxyug
• Consortium of global banks takes action to help: http://tinyurl.com/5zv38w


• Bank of America to buy Merrill: http://tinyurl.com/59eead


• Fed widens collerateral for loans: http://tinyurl.com/6rh564


• Paulson applauds action to aide market stability: http://tinyurl.com/5uurar

Again friends.... be careful out there... remember ending sentence from Hill Street Blues? If not.... http://tinyurl.com/6h93ak

Best wishes,

Steen

The US - the model plan economy - Russia must be jealous

In times like this with changing themes day-by-day I wil try do one daily "quick-and-dirty" thought process - I think this and next month will determine a lot:

Overall news:

Market rallied strong ahead of rumor of Boa buying Lehman yesterday - confirms there are two or three layers of information. Someone knows ahead of time each and single time.

The BoA/Leh is doomed to fail - if done - like Countrywide. CEO Lewis of BoA no longer than a few month ago announced to the world he was never going to touch investment banking again - and now he buys one of the most aggressive investment banks around ? Even at the rumored 3 US Dollars BoA is useless fit, but....

It clearly shows the US economy is now: A: Driven by Fed not the government B: a plan economy which leaves Russia and Libya nothing behind. 600 bln. US dollar is now on the FED book soon the whole of the US banking industry will be "owned" by a bunch of bureaucrats in Washington. Chairman Franks is dangerous person - he is UTTERLY clueless!

Hence I have "officially" lowered my S&P target from the soft 1100 to 700. This will be volatile up-and-down as seen last couple of weeks but as long as water doesnt run up wall this is doomed project - The best analogy I can come up with is:

It's quantum physics - 20% of population claims they understand or can talk about it - but really less than 1% of understands it - Finance is the same. My CNBC indicator is running high at 8.5/10 people talking absolute BS about Fed, the bail-out and showing so little understanding of the issues that is scares me.

We need one final leg down with desperation - similar to the one we see in Denmark presently in the happy-go-lucky real estate sector - let me say one thing in closing this: Justice prevails over time and as such keep cash portion high - buy optionality - the only four certainties in life remains: death, tax, stupid politicians and high volatility.

Markets:

Stocks:

S&P, DAX, Stoxx50: The CNBC crowd out in force all trying to find "break-up" in downtrends on banking, real estate and what do I know. I have one word: GRAVITY.
If anyone can spare me two minutes to explain how bailing out BS, LEH, and Freddie/Fannie (plus Washington Mutual this week-end) is good for the market - I will be all ears. It only
moves the risk from private sector to public sector - the risk and issues remains the same.

Again - call me when unsold homes is below 3 mio. - then we can start talking. Meanwhile my good friend Jesper sends me these two charts - makes you wonder does it not?

(Click on chart for bigger version)


Took of 40% of the downside plays yesterday around 1218 in S&P - reloading through selling cash @ 1252(Sep) now... tight stop.

Fixed Income

Waiting to set up long-term bearish trade - bottom line: US rates could go to 8% if not 10% when this market moves from fear to reality. Built-in is also major
change again to US dollar - We are setting up plays to see USD/CHF below 1.05 in 6 month time (one-touches).

Very long EDZ8 - Dec euro-dollar 9725... Fed is cutting soon - their balance sheet to getting to big for comfort......

FX

(Click on chart for bigger version)

Still long JPY - increased long EURUSD exposure yesterday below 1.4000 - the close from tech-point of view relatively positive - at least we got known "if wrong" stop pegged.


50% almost done - plus on RSI there is small divergence - (lower price action but not lower RSI)... Long one week 1.4200

Commodity:

Also tech. close to bottom- OPEC move will have an impact...

Nice week-end

Steen




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/


Disclaimer
Trades in accordance with recommendations, especially in leveraged investments such as foreign exchange trading and investments in derivatives, can be very speculative and may result in losses as well as profits. Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information contained in this email.

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Leh: promises, promises ==> Fed will be busy this week-end AGAIN!

This was not what the market needed - Lehman makes promises they can not keep - here is prime example of a Management team who though they were Gods - Hubris !

It is a pitty - I got great friends and coverage from Lehman people - but the end game is near.

Paulson/Bernanke will be in the basement printing some more money this p.m

Be careful fellow investors, really careful..... Lehman CDS (Corporate Default Swaps):


LEH now @ 530 - yday: @ 475 : day b4 yday: @ 350

(Click on chart for bigger version)

The good, the bad, and the ugly....

The Good, the Bad and the Ugly was my title for a talk I gave this week-end in Marbella(Spain) - the title came back to me as I was thinking about the market right now (Thank you to all the kind people in Marbella - it was absolutely pleasure meeting you all!)

The good..news being that for the short-term the market, the patient, got a new medicin, although it was one no one would have wanted to see the patient get less than six month ago due to the strong side effects, but as the saying goes, it better to keep the patient alive than letting die.

There is chance of 3-5% move up (as stated yesterday) - the pro's look for 1320-30 ish in the S&P - I doubt this -

I always tell myself the market have adaptive functionality, meaning:

1st time they(Fed) surprised cut by 75 bps the market reaction was+6.5% .

The second time the Bear Stearns 4.3%

This time(Fannie Mae + Freddie Mac) reaction was 2.9%

It will last 2-5 days maximum. (Remember though: I have zero predictability!)

I also have to smile at the major league crap being televised on CNBC, mainly in their US section, one moron after the other goes on and tells me the housing market is done for now - Paulson is their hero, cyclical turn et al - and I do not know what else. Let me respond with one simple chart:

US Existing Home Sales Inventory

4.70 mio UNSOLD homes in the US - tell you what: Sell those 4.70 mio homes first, then tell me the market have stabilised!

The bad...news being that this is merely a pause, a pause in the ultimative end game of capital destruction ... re-reading Hyman Minsky - here is common sense combined with inteligence:

“In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance” -Hyman Minsky

The ugly news.. odds of A real disaster - like 700 in S&P has increased 10-fold. Why? The printing machine is running in amoc - The US is merely moving debt from one box to another - and in doing so they make the ultimate cost to US tax payers more direct and VISIBLE.

The later will become major political issue in the coming Presidential Campaign. The fact people like Bill-I-want-freeride- Gross has been able to push the worst Treasury Secretary in the history of the US around like this will have repurcussions: for Bill Gross, Paulson, but unfortunately to the financial market at large.

Soon, when the US public realise that Bill-bad-toupe-Gross is taking a free ride financed by the US tax payers - the end game of penalising speculators and free-enterprise will become front page. They do have point to!

Obama will leverage this to his use - note he has ZERO people from Wall Street in his advisory team. Ugly indeed - real ugly

Enough on this week-end incidents. The sport freaks among you will realise the picture on this web includes Bjarne Riis, Tour De France winner both as rider and as team owner of CSC Saxo Bank.

http://www.riis-cycling.com/

Let say this: I was, duely, impressed by Bjarne Riis results even before I met him and his Managing Director Trey Greenwood this weekend - but to meet them both and see how humble and serious they take their job was absolute pleasure for old calvanized sceptics like myself: Running Team CSC Saxo Bank is built upon attributes which could be any hedge funds:

Honesty, team work,hard work respect and communication. One thing is to proclaim it, but these two gentlemen left me with no doubt they lived it, provoked it and most importantly believe it.

I know soon to be Team Saxo Bank will contiune to do well with these two, but any team who can have the best team in the world without paying the top salaries, have the only privately approved anti-doping program, and win the Tour de France got something special. I guess Team Riis is really the young George Soros of cycling. He did it his way. Riis is doing it his way.

I wish there were more people like that in my industry - what we need now is a forest fire to clean out the under wood of sick plants and animals, then we need to install an anti-doping program(close the central banks and politicians down), which is ruled on the premise of allocation of capital to highest return. Gone are the free rider days of leverage, leverage and more leverage.

Ultimately this could be good, however this simple hedge fund manager lowered the odds of smooth recovery this weekend as my anti-friends Bernanke and Paulson worked their crap.

Strategy:

Running very simple strategy:

Cash: 65%

Long puts on: DAX, Stoxx50, S&P

Long JPY vs US dollar main - but also CHF.

Long short-end US - rate cut coming soon....

Been "burned" in oil, crude and pharma...but made mow on down-side..

September could end up being worst month this year.....it is now we will see who is The Good, The Bad and the Ugly.

Steen Jakobsen

The morally bankrupt US Government

I have short comments on the weekends bail-out; Now we got:

• Higher energy prices
• Higher food prices
• No credit creation in private sector...

and courtesy of US Government

• Much higher yields! T-bonds down close to two full points in Asia.

The US Government must clearly think we are idiots - the above cocktial should mean higher stock prices for sure - if you live in Fantasy-land!

I am only involved through options but this could be case of 3% up but week down 10%

Excellent link here: http://abnormalreturns.com/ (weekend link fest)

Good luck - the only guarantee for now is: Higher volatility.

Will give full report Tuesday - in transit back to office.

Steen

"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