Saturday, June 21, 2008

Constructive destruction ---

Saturday morning on the train - the best way to travel by a long shot! - reading up on news and one of the only people I would e ALWAYS listen to George Soros is giving an interview to WSJ's Gregg Ipp - the headlines say it all but do read it -

Soros, the Man Who Cries Wolf, Now Is Warning of a 'Superbubble'

Apart from the analysis on why this is a Superbubble, the most interesting part of the interview for old trader like me, is the admission by Soros that his body or more precise his back helps him in knowing when he is wrong - something I surely recognise and something I keep working on. The more scientific reasoning for this being that the brain can do 20-25 function at any one timw, while our subconsciousness can do billion of iterations at the same - basically with experience we get "feel" and "body answer" to when we can "feel" things are wrong.
This has been shown in several academic papers the easiet reading probably Gladwell's: Blink

but an even more specific and to the point analysis of Soros' Backache is my old friend Dr. Flavia Cymbalista.

She spent considerable time analysing Soros, and even had an audience with him to finess those skills. Read about her and the thinking @ her

Enough about this "holistic stuff":


The focus is slowly coming off inflation and on to stagflation, stagnation: The lesson for us is that on average stock market performance is down 3.0% y-o-y in periods of low growth and high inflation.

This time we will go even further down as the CREDIT DEFLATION is increasing in both size and magnitude every day. The chance of seeing March low is increasing - this could the final 5th leg of the downmove, but what happens next is even more important:

I believe we are in L-shaped recovery move, i.e we will move down(now) in growth worldwide and stay low much longer than market perceive -

The built in rate hikes in both US and Europe is out of control and no based on reality - Buy short term papers.. 2y mainly from here. We are in market for stock picking, seeing values back to long term norm. The last 10 years return of 12% plus, need to averaged down by seeing flat market for a number of year, while the economies reignite.

Looked at the banking sector yesterday and it's performance since 2000:

The outperformance seen in the period 2000-2008 has now disappeard and the banking sector is now back to mean reversion.

I.e. had you been long the S&P Index or the Banking part of it - it would have generated same return - now we only need the bank sector to become "cheap" to get involved.

The "unique money making machines of Wall Street" are broken down and for this is for real this time.

(Advice: If you are under 24 y. old looking for job - DO NOT EVER go to investment bank - its waste of time, it is a relevant as working for Ford or GM)

I have remained short biased in banks, but I am starting to look for fundamental value plays;

Drug stocks - still like the story of producing something for a nickel - selling it for 4-5 $

Water stocks- a very regulated market, but with the environmental play getting more and more media and political attention eventually the market mechanisme will come into play - meanwhile most of these stocks earns you 4-7% dividend yield - not bad place to be: getting carry, plus optionality on upside when regulation could disappear.

I am short airlines - what a joke - I have all media and unions chasing me because I dare to say what everybody knows: SAS is going towards the edge - Here we got company who have 15 year old hedging policy of keeping only 40% of fuels hedged - vs industry standard of 70/75% - a company which is now on its 14th or 15th saving plan, a company where the unions insist on having all nationalities represented in the cabins on all flights, meaning air stewards living in Stockholm, Sweden, flies down to Copenhagen work ! Madness, yes! Socialdemocratic attitude absolutely - some socalled industry expert retorted me by saying:

1. Other airlines also in trouble - oh yes? Why is that relevant
2. The ownership is "rich" as it mainly the Scandinavian countries - Really so tax payers should pay for SAS lack of common sense?

I do not really care about the political aspect here; I am a hedge fund manager, I am short SAS as long as crude is rising and the management maintain 15 y. old hedging policy, if oil starts to drop then I will square my position - but I would not buy SAS even if it was the only stock I could trade - history and market performance talks louder than my simple analysis.

My favourite short in banking is Barclays - the next Lehman situation in my opinion. I will include link tomorrow with a very interesting analysis, why Barclays is one of the most leveraged plays around.

Another play which is getting interesting is straight mortgage bonds: Nykredit ( one of the most consolidated, conservative lender around, are now issuing 7% coupon standing loan to 2041 yielding 7.4% ! Rate 96 ish! This is against CIBOR of 4.5% ish funding - I got to have some of this, but I need this final leg to set me up perfectly, but come Q3 end I will be 80% long in my deposit side in these papers - could be once in a life time investment.

Monday open will be very nervous, generally monday's sees recoveries after Friday's sell-off, but I have noted even in markets with falling oil prices the S&P reaction has been 8-10 figures only, something indicating market is still prone for more downside.

Finally, I will stress again, this is good, very good for the long term - we are now reestablising good fundamentals, spreads, and morale into the markets, which bodes well for the future. The easy ride is over - now is the time to listen to people with "gray hair" - the people who has been "REAL ACTION" - not only the tail wind markets of the idiotic central banks bailing out the immorale bankers and speculators, on that note:

Nice week-end



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