Still confused but some trend are emerging...

Foreign Exchange

Patience is the required virtue, US weakness will accelerate....
Overnight the FT front page: "Treasury looks at repatriating tax free".... got some headlines. The first move took out 1.9800 but soon market starting focusing on the text: Treasury said it should be tax natural. Well, being someone who pay excessively much in accountant fees, there is huge difference in flow, stock and tax regime.

The fact the potential change is tax neutral does not mean its not flow positive. I will let it to accountants to explain it to you, but trust me, even income and tax is two very different things in tax terms.

The net impact could be similar to that of the Homeland Investment Act in the US. However this is early days.

Independently of the weakness in GBP, the US dollar looks very, and I mean very fragile.

There is huge bias of people fading this move, we have over 3 std. dev. indication on our flow model, indicating risk of big move... up....

We are long EURUSD through options, long GBPUSD.....

Equity:

Market again concerned about Sub-prime and Alt-A risk. Someone much smarter than me commented that we could be in front of the third leg down in housing:

The first leg, was the "cooling off" period which started two years ago. The second leg was the implosion of sub-prime..and now getting close to the third leg, we have the right (or wrong conditions) of... rising inventories and tightened lending standard which could increase the inventory of unsold homes. We are not yet there, but D.R Horton Q1 numbers create a scare; Volume was down 37% and in value terms (I.e with discount) sales were 41%. California on its own is down 59 %.

Bank Credit Analyst, an independent research firm, is out with report on banking impact on sub-prime loans. The report states that Real Estate Loans and holding of mortgage securities equals 44%, yes 44%, of bank assets. Creating risk of early 1990s repeat of the banking crisis, but BCA concludes: No its different this time, bank are in much stronger financial position this time. Then the devil in my asks: Well, how do banks make money these days? Well from packaging primarily mortgage products in baskets of risk, so.....maybe banks are not poor, but they seem to be running out of products to make future gains on.

Trust me, I worked for Chase Manhattan Bank, in early 1990s (I was VERY YOUNG THEN...!!!).... it was no fun, let's hope the optimists from BCA are rights and I am wrong.

Overall the continued pattern of strong Asian and European stocks markets continue with US behind the curve. I am troubled a strong Non-farm payroll did not have bigger impact on the positive side. I was long, and wrong, and bored....

Option prices on a lot of stocks acting strangely, despite underlying being well bid, the PUT options trade at premiums? Why? Need to hedge or sign of weakness ahead?

We are short NASDAQ-100 Futures and DAX Futures....

Fixed Income:

Its a feast for Fed watchers. The whole board of governors seems to be speaking ....and tonight's FOMC Minutes should be in focus;

How will the replacement of: 'additional policy firming' with 'future policy adjustment' be explained? More flexibility? I think so, but I am probably the only person worse than Greenspan in calling FOMC policy. (Very few know Greenspan was Fed watcher before joining Fed.... his company continuously rated at the BOTTOM in the ranking!)........

We are still long 2-10 y. spread and looking to increase. We are looking for curve to steepen, to reflect increased inflation risk in medium- to long term.

Also want to sell Asian fixed income, based on the rise in export prices we touched on yesterday. Japan should see imported inflation soon.......

Long 2-10 y. spread......

Commodities:

Corn, corn ,corn... we will venture into long position today. The more I read about Corn the more we need to be involved. Also looking to buy Gold as inflation hedge.

OVERALL:

Growth forecast still coming down, look like sub 2.0% for Q1 - watch inflation numbers. Its creeping up. play defensively.......


Med Venlig Hilsen Yours Sincerely Steen Jakobsen, Chief Investment Officer, Saxo Asset 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
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