Is it time or not - that's the question...

To make sure I follow my own advice I bought some 970.00 puts December in the S&P - for about 8.25/9.00 per contract. My work on the models keep indicating the top should be near or in place - and the objective on the down-side is minimum 930.00.

Tomorrow I will try to validate this objective - but it was expensive Monday back ignoring the first rule of trading - no edge means no positions...... ;-(

There is so much momentum in the market and I was "surprised" to see how the big Private Equity Funds all talk about EXIT from their long positions - some even admitted: "It is doubtful" how long the "window" for IPO's is open - once again I am reminded of the 1999/2000 analogy... but more on this later/tomorrow.

Also bought some 1.5600 Nov. late GBP puts -clearly there was some technical trading in GBP last week, and the incoming data may surprise - but the "rebound" is built on bank bonus' and profit, but the international bankers (and hedge funds) are leaving the UK is steady stream. I am not one for standing in their way...

Safe trading,

Steen

Back from the sun.....

It's Sunday, the market made a new top last week - and we are entering the "danger" zone where fortunes are made and lost - I got strong feeling this week could be bellwether for the next 25% move in S&P - You know I have been calling for October top since late August and now is the time to make a case either way...

For this week-end my friend Kevin Connors over @ Goldman made me aware of this article in Barrons / WSJ over the week-end: C'mon Ben (Barrons calling for exit strategy----)

http://online.barrons.com/article/SB125573856421291217.html?mod=rss_barrons_this_week_magazine

More tomorrow ... nice to be back ...

Safe trading,

Steen

“The best things in life are unexpected - because there were no expectations”

Market had chance of a 'correction Tuesday but going into the close it looks like another up day....

The strategy for the balance of this week is pretty simple:
S&P futures above 1040-00/1041-00 you are long...below you cut: http://img35.yfrog.com/i/h5f.gif/

Alcoa came out beating top- and bottom line (http://tinyurl.com/yadf3y5) - setting the pace the next 48 hours?

http://stocktwits.com/t/AA (Stock twitter - flow/and latest news)

The Alcoa chart looks pretty much like the S&P - an upward channel with potential break to the topside..: http://www.finviz.com/quote.ashx?t=AA

NOW the disclaimers:

http://www.calculatedriskblog.com/2009/10/consumer-credit-declines-sharply-in.html and Dow Theory also looks like it sending out clear signal of potential divergence as DOW Transport is NOT close to making new highs....: http://img251.yfrog.com/i/6zq.gif/

Strategy:

Core long equity (with time stop around middle of next week latest)Sceptical on fixed income - more and more focus on China waning trade surplus...

US dollar weakness (but it seems Trichet was "pounding the table" about the weak US Dollar over the week-end, but I will dare him to "frank & honest" in the ECB press conference...so... fade the Trichet comment ....sell US Dollars....

Long commodities..

Safe trading

Steen

Don't part with your illusions. When they are gone you may still exist, but you have ceased to live. Mark Twain

It became a long meeting today as we had a full plate with topics:h

• Reserve Bank of Australia hiked rates first...
• "Secret talks" among US Dollar creditors to diversify away....Gold new high...
• Iran - October deadline is getting closer..Aghanistan - where is Obama heading ?
• Earnings season
• Latvia
• Conclusion

We ended with "resigning" to the fact that we will have one more upmove into the middle of October, which has been the main path we have looked at since our initial investment meeting in September.

The possible dates could be both option expiry Friday October 16th or IEA visit to Iran on October 25th.

This leaves us with benchmark exposure to risky assets.

Reserve Bank of Australian hike (+25 bps) & Changed macro themes

Under "normal" circumstances a move like last nights rate hike from RBA would have had the market looking for the next central bank to hike, but since the non-farn payroll number last Friday the macro theme has moved to one of:

Potential for further "help" to the market Obama now talks of tax cuts - fully realising his political capital in Congress is all but wasted.........

The non-farm pay-roll should have led us lower as an individual number, but it merely delayed further back the dead-line for QE exit and it substansiated the need for another look at how the plunge team can work these markets higher.
The implication/conclusion is simple: There is further upside in this market as long as numbers and Obama deteteriates. Ironic - yet true.

US Dollar and Gold

It is pretty simple: Market wants something tangible - and that got me thinking: What did the market want during the "crisis" ? Yes, indeed something tangible. That sort makes no sense, unless... you do not really believe in "new Nirvana" around the corner?

Gold is being bought as an insurance policy, as a bet vs. debasing, as the only "tangible currency" and as storage of wealth. If you look at the attributes for those conditions it is not exactly positive association you get - in other words: We are long Gold, we believe in all of above, but we must acknowledge it also implies we firmly believe we can exit those positions ahead of everyone else. It is indeed a suckers game.

The central banks are clearly sellinh, swapping Gold out in order to contain the rise in the Gold price, but to no avail so far... to us Gold symbolises to some extent what is also going on the Obama's popularity - there is no longer any believe in change, there are really only the hard, tough, dry long way home - a fact no one wants to prepare themselves for, so we continue to "like" the debasing - despite the fact is really more of warning signal than anything else.

http://ftalphaville.ft.com/blog/2009/10/06/75836/the-world-and-the-dollar-reacts-to-robert-fisk/?source=rss

Iran & Aghinistan

Obama is now fighting with his own Generals over Aghanistan - he lost Olympics bid, and he is having more press conferences than there are minutes in a day.......and then we got Iran - the IEA deadline is October 25th, and with intensive leaking of information going on presently there seems to be reason to a little concerned (and long WTI Crude?) - but hang on - is it not pretty similar to the lead up into Iraq ?

We do not know, but the geopolitical risk is back in fashion and over the cause of Q4 this could become a driver for yield, commodities...

Earnings season

We do not per se have any strong convictio on the earnings season, but note that market expects above expectation earnings with the risk being on the outlook for balance of 2009. We also note the report from Hausmann Funds called:

Forward Earnings Imply a Return To Near-Record Profit Margins by William Hester:

1) analysts have penciled in earnings growth of more than 40 percent over the next year, and then another 22 percent between 2010 and 2011

2) Analysts expect sales to jump 5 percent next year and then another 8 percent into 2011, according to Bloomberg data

3) Analysts are forecasting that profit margins will reach almost 8 percent next year and then 9 percent by 2011, far above their recent trough and far above the long-term average of about 6 percent.

4) Assuming that analyst expectations for strong margin recovery are correct, the P/E is already at least 1.7 points above the long-term average. Assuming a 7 percent profit margin on next year sales, the P/E ratio would currently sit about 3 points above the long-term average. And at the long-term average profit margin of 6 percent, the P/E ratio on forward operating earnings would sit 5.5 points (nearly 50%) above the long-term average

Given these expectations, the ability for companies to beat earnings estimates may eventually become more challenging. Since aggressive profit margin expectations are already assumed, big earnings surprises would require companies to deliver those already expected high profit margins, and probably stronger than expected top-line growth too.'

Well, it is tough days to navigate the market, but.... at least something is going on...

Safe trading,

Steen Jakobsen

Sunday night quarterbacking...

I'm sitting here a Sunday night watching the Baltimore Ravens vs New England Patriot, so what is more relevant than some Sunday night quarterbacking:

Let me offer some direct thought on these markets - no apologies - only the gut-feeling - and let me stress that I'm a simple speculator with no predictive powers, but for now it seems the stars are lining up for further correction....

There is, as always, a big risk of ...bottom fishing tomorrow, and there may too much "consensus" on downside... but on the other hand... if we came down from Mars today - looked at correlations, the incoming data, vix, technincal levels, yields, .... .we wud probably objectively get a little concerned...

This could be time to forget the ........narrow trading ranges, the scalping move towards as a bare minimum to buy some volatility...

I "like" when several indicators points to the same conclusion - and I must say the additional "index" analysis I enclosed(see below in this blog) .. on the "end of recession" in my, obviously biased assumption, concludes that.... the "perception" of the new reality is much better/higher than the reality... which also confirms why unemployment keeps rising - why Obama is having political problems, why geopolitics is finally back in the frame (note: We have not discussed geo-risk for more than 18 mth!!!!)....).........

Also the rhetoric has changed.. there is a certain amount of complacency among policy makers - they feel vindicated - succesfull.....

My simple assumption remains... 60% chance of top in place - if this week is net down week, I think its time to add some chips to the table.. but there is long week ahead of us.... but...... the negative compounding is back biting at the bulls......and as long as water does not run up walls. there is a certain logic to the honeymoon of Obama, the stock markets, and the feel good factor being over...

A few charts: Break down in yield is NEGATIVE says John Murphy: http://blogs.stockcharts.com/.a/6a0105370026df970c0120a5bb206c970b-pi

Volatility have seen a low..: http://blogs.stockcharts.com/.a/6a0105370026df970c0120a6124c50970c-pi

And finally.. .some "quant" analysis of the actual economy - as a anti-dote to the CNBC sensational driven data analysis:
http://www.philadelphiafed.org/research-and-data/real-time-center/business-conditions-index/ads_long.pdf

http://www.philadelphiafed.org/research-and-data/real-time-center/business-conditions-index/ads_2000.pdf

http://www.philadelphiafed.org/research-and-data/real-time-center/business-conditions-index/ads_compare.pdf

Definition and background:
http://www.tradersnarrative.com/the-aruoba-diebold-scotti-index-the-sp-500-3059.html

Strikes me as super interesting..

Night and safe trading,

Steen

A consensus means that everyone agrees to say collectively what no one believes individually. Abba Eban

This morning I went through several "economic analysis" reports, and I must admit I got more confused the more I read.... an example on credit:

One respected analyst talks about how credit is not coming, probably never will: Meredith Whitney, then another senior and respected analyst talks about how the next cycle will be phase two: Credit cycle begins: Russell Napier, CLSA (It has to be added Mr. Napier does foresee it will end in tears) but they have opposite views of the credit:

Ms. Whitney argues that big corporates are ok, but small business, which constitutes more than 50% of the country's workforce & 38% of GDP, can't get credit and are unlike to get any.

In other words: The view of the credit market is pretty similar to the views held on the stock market.

There was two major take aways from me from the research:

US Yield curve is sending out small warning signals about Fed potential policy change

We need to watch the US yield curve 2-10 - this comes courtesy of my good friend: Andrew Baptiste over at Morgan Stanley: (click on chart for larger version)

What is major league interesting about this chart is the fact we have had tripe top around 260-ish three times, the most recent in September - the way this works is: The steeper the curve - the more stimulus/growth is priced in (I know this is slight simplification as I did small thesis on this when I studied economics some 300 years ago :-)..... but hang on: IF there is top in place around 260 - why would the curve come back down?

Well, if Fed started indicating/managing market expectations they would move short-term rates, it would mean 2-year bonds would be sold off - increasing the yield - everything being equal (I just so wanted to say that!).... I.e: inverting of curve would "signal" tightening - This is kind of interesting as Fed talks in the past two weeks have changed from being "accommodative" for the long-term to ... "when we move it will not be in small steps"....

So....bottom line: In my long, too long experience, if there was only one single "economic- indicator" I was allowed to watch it would be:.... Yes, the yield curve.

The yield curve is traded, arbitraged by people looking to scalp 1 bps, one basis point, nothing on the yield curve is left unintended - very much unlike stock valuation where at best we have a 50% correct picture of the corporate earnings and at worst simple lies!

I will be following the 2-10 yield curve for signs...... - and let me stress... IF 260 BPS goes on the upside I could mean we have avoided "recession" and recession light" and we are moving into new bull market, but one thing at the time.

We are close to getting the answer to the critical question: Is this a new bull market or merely bear-market correction

To round of my first point let me introduce two charts or rather two likely paths - which I borrowed from Independent Strategy, David Roche's firm in the presentation: Lipsticking the pig: (click on chart for larger version)

The two points made above may be old news for all of you, but for this one-dimensional danish speculator it offers some new insights...

Other important headlines:

• Ireland backs Lisbon treaty
• Highlights/comments from G-7/IMF Finance minister meeting...

Strategy for coming week

We have bought some EUR.USD volatility as the risk-of mode did not, yet, impact downside in EURUSD - the Asia central banks are extremely busy buying EUR selling US Dollar - reflecting the falling current account surplus with the US (China will run C/A deficit in 2010/11 - meaning the end of supporting the US dollar - please do not tell Geithner/Bernanke this... :-) .. but either way.... there will major move in the coming week.. we own 20 delta strangle 1.4250 /1.4850..

We also did same exercise in STOXX50 - despite our "tendency" to favor the odds of further downside- but we respect the "plunge teams" which works around the clock: (click on chart for larger version)

...as for my own long-term model - I am still:

Short S&P from 1063is

Short Wheat from 451-ish

Short EURUSD / long JPY....

Looking to seel 2-10 yield-curve....looking to buy EURSEK... an contemplating long-term negative position on Denmark - where the economic conditions is in free fall.

Safe trading and nice week-end

Steen

Chasing the end consumer....where is he? Have you seen him?

Todays investment meeting was short, but productive:

We ended up chasing the end consumer of all the "good" and goods that this fiscal stimulus has and will produce.

It is all well and good to analyse things getting better - it's even correct, from the stand-point of corporate earnings, but.... who is this end user? Where does he/she live?

Clearly the US consumer no longer wants to be part of the game of chicken, as their "balance sheet" is in such a bad state: lower house prices, eroded pension funds, and outlook to lower real earnings & potential unemployment

The money is on China and Japan to create more domestic demand - and I am sure it will produce more final demand, but the problem being... their saving rate is 40% or more, so it takes a lot of Chinese to replace just one US consumer.

Chart China - getting bigger GDP but spend less as percentage of GDP (source: David Rosenberg, Gluskin Sheff)

(Click on chart for larger version)

Fortunately China is factor rich on people, but I doubt the local peasants, celebrating the 60th year Anniversary of PROC (http://tinyurl.com/ycorzmo) this week is too concerned about these matters, but the cheerleaders of the world keeps talking about the amazing Chinese story....but may I ask again? Who is buying their stuff.

Looking at the incoming data it is becoming clear that the velocity of improvement is at best stagnant and at worst falling - the past two weeks has not done much good on the upside, except maybe for the 20K better jobless claims last week. The worst being the renewed slow homes sales...

It is also very interesting to note that the main benchmarks of bubble/euphoria/China: Copper, Gold and Crude are all "correcting" their up-move - this could be merely a small correction inside major cycle, but being the concerned chap I'm - I got feeling market is long, very long.....all of the above assets.

Chart 2: Copper, Crude & Shanghai

Our main conclusion remains this:

• Market trades on momentum (nothing wrong with that per se..... although it is EXTREMELY tiresome for old man like me.....)


• It's impossible to define top in place presently (You can do all sorts of analysis, but from technical and valuation perspective it remains a two sided story)


• We note data & commodities does not like last two weeks(see chart)

In the equity space, our resident equity guy, Mr. Carsten Høgh, claims: Nothing is cheap any longer, and that caused some tactical talks on whether stock managers would move to "defend" their positions as we enter Q4?

The fact that most of their "profit" this year has come from low quality stocks with no or small earnings - and from increases in multiples (S&P has moved from P/E of 10 to 18 today.....) would indicate some willingness to scale-down their holdings based on Carsten premise: If it's not cheap, it's close to being expensive - We have expectation that there will be move away from cyclicals and into Big Cap again (Tesco, Wal-Mart, Colgate, Coke, H&M, Diago etc.).

The overriding strong argument for buying stocks remains: cheap funding (read: liquidity), cheap US Dollar and cheap talk in Washington (Obama promises alto - but have much of the items on the G-20 can he ACTUALLY get through Congress?).....which are all good arguments, we have some idea, still, that the next two weeks will be the peak (Read old blog: http://steenjakobsen.blogspot.com/2009/09/next-big-trend-shift-comes-in-october.html)

We are getting close to this END DATE.... and our cyclical model indicated going in to Monday that the markets was slightly oversold, but the key for the next two weeks becomes how much further we can move up before the market finally puts in medium-term top........ We look at Fridays number as as a potential "game breaker" - but as always... it's not a science but more of guess.

STRATEGY:

We remain light in risk and we will be looking to increase negative play as Non.farm is out........for now... the momentum rules..

Safe trading,

Steen Jakobsen