Tuesday, April 15, 2008

A fanatic is one who can't change his mind and won't change the subject. Churchill

A long life in trading have taught me not to believe in any one model or one approach for making money over time,but I have also learned not to ignore when several micro themes confluence.
Right now there is several smaller themes which in my scope starts to look like something which could lead to massive change in outlook primarily for fixed income and fx - A cyclical turn could be in place inside the next few months and lead interest rates much higher in response to:

a. Reflation from the Fed

b. Inflation becoming front page news

AND it will make and mark the significant low in the US dollar weakness, as the US starts reflating, the yield on long term US debt will increase making the marginal attrativeness of the US dollar rise.

It should be noted that for the foreign exchange market I see one major correction followed by a long protracted narrow range - as this is the way lows and highs in the market is created (think how S&P been in broad band since making all time highs last year)

Overall there are several themes which makes for some nervousness in Camp Jakobsen:

1. The move towards socialisation of risk from banking system to tax payers in the US and later Europe. http://tinyurl.com/6s2ldq Will Hutton - The Observer

This link tells a good story from Soc. Dem former Editor of The Observer, but there is some powerful arguments which should not be ignored. I know for a fact that the "Scandinavian banking model of the 1990s" is buzz words among policy makers around the world.

I firmly believe the end game now is a big fund taking the risk of the books of the banks. It is absolutely clear that Bernanke will do anything to "save" the US economy, the fact he makes things worse by "propping" up the banksin the process will lead to ultimate need for STATE CAPITAL FUND bailing out the mess.

2. US dollar is getting close to the "cyclical turn" I have talked about for month's and there is some concern at Central Banks levels about the level or at least the acceleration of the weakness indicating we are closer to "maximum accepted" weakness than before. (Though listening to the frogs talking about Plaza II is a little overdone even by French normal standards!) Link: Best piece on US dollar in long, long time: http://tinyurl.com/4gt6nz

3. Reflation is imminent in the US - taking yields higher. John Makin made this interesting point in the WSJ editorial. Argument being, Fed not really expanded money base since late last year, now is the time to start doing it, inflation is secondary. http://tinyurl.com/4op9t5

4. Economic and Earnings news will disappoint and take economic data in free-fall from here.



I have no doubt Europe is just lacking the US by 6-9 month, and from my latest trip to Singapore I have no doubt that Asia is slowing, even ahead of Olympics, growth is only kept artificially high through Government infrastructure investments across the region.

5. Cycle analysis --- Enclosed some interesting charts based on long term cycles. I know they are at best probably random, but it is interesting that it looks for low in US dollar in April and low in yields in the US in June!

Strategy---

Foreign Exchange --

There is one final leg down in the US Dollar left - market will see 1.60+. Still long MXN, and long JPY.

Fixed Income --

Long 30y US Bond calls - looking to buy Euro Dollar December, Fed is going to cut more than market perceive.

Looking at trades for when ECB cuts

Commodities --

Long grains, short crude (options)

Equity --

Short S&P and DAX

Good luck,

Steen Jakobsen, Chief Investment Officer, Saxo Asset Management.

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