Tuesday, October 14, 2008

A complex system that works is invariably found to have evolved from a simple system that works.

A complex system that works is invariably found to have evolved from a simple system that works. John Gaule

It could not be said more elegantly - for something as complexed as a financial system to work we need to get back to simplicity! Design, at least Scandinavian, is based on simplicity and functionality - maybe finance needs to take it cue from design rather than mindless policiticans and policy makers.

I did guest hosting on CNBC this morning - always a good and lively crew in London, but I was somewhat surprised at how EVERYONE is arguing in the past! Listen - Its over! New paradigme, we are now in period of transistion for both the way the markets and banks works, but also for valuation metrics.

The back-fitting and mechanical approach to trading is out/done/busted! In is: risk management, grey hair (I did warn you all about this trend!), alpha and directional players with a view.

The world is full of opportunitites let me mention a few things:

  • UK banks trades almost a tangible values! Something I said long ago Citi and other should as well. (Long RBS, HSBC, Danske)

  • Cash rich companies like Apple, Microsoft, VISA, Mastercard trading at multi-year low multiples, then add Pharma (Novo, Pfizer), Maersk(shipping/oil) and you have value proporsitions not seen in 50, yes even 70 years!

  • High Yield US is 1.000 bps above US government - this means 50-60 pct default versus all-time high of 36-38% (We do need funding rates down before this becomes steal, but it is getting closer + (Benchmark you can use HYG US)

  • Bank loans - trading at 70+80 cents in the Dollar

  • Private Equity deals is extremely cheap

  • Banks are AAA (In the case of Denmark at least)

  • Pakistan Sovereign debt trading @ 85 pct chance of default

Some things are lacking as well:

  • Housing market still has 4.5 mio. unsold homes,

  • The crisis is moving from financial to real economy meaning more savings less spending

  • Bank getting recapitalized helps, but they still need to raise more private capital

  • The "plan" will mean crowding out private capital and most likely creating unfair competitons between public and private banks

  • US election. Whoever wins is a loser as they will have to wind down spending, increase taxes..... and implement stupid regulatory frameworks
So what I am trying to say remains:

This is going to be like in the 1970s:

(Note: Any resemblance with my Senior Partner Lars Christensen on the above picture is random - for the record Paul Breitner is much better looking!)

Disco, Paul Breitner hair, color nightmare, big government(read useless), inflation pressure, non+performance of equity (broadbased indicies), now even Brown wants to do Bretton Wood which was last "seen" in the 1970s - so ...my unqualifed, non-predictive response remains:

  • If this is going to be recession then its 1150-1200 in SnP in Q4+Q1 + as market has priced the R-word, plus manager underweight stock benchmarks

  • If the nasty D-word, as in depression is what we will have then 765.00 our ultimate target comes into play

The fact remains --- Below 1000 in SnP there is 5-7 pct return for cash generating, margin business, below 850 ish its oversold and cheap.. 1100-1300 becomes a game of where economies are going, how fast rates will normalise and how much Bernanke et al can distroy with their mistimed regulation and management.

In closing I will note two more things:

  1. Everyone I know wants to sell rallies, like the whole CNBC crew, my own sales-traders, and analysts -- they are like Cramer - all into cash! Now! The balanced portfolio should add stocks now not sell....

  2. 3.000, yes 3.000 stocks had Morning Star formation in the Us yesterday......(http://www.traderslog.com/morning-star.htm

Remember in chinese language the sign for crisis and opportunity is the same.

Be safe,



Morten said...

I question how you could become bullish over a weekend, though the same problems does not seem to be solved. As you mention, there is still 4.5 mio. unsold homes, the the loan market between banks seems still to be frozen and large funds are still on the verge of close down (which implies huge sell-offs as we have seen the last couple of weeks).
I reckon that the European action just pushed the the crisis to Q3-Q4 09.. we might be lucky that the meltdown warms up.. but that will only happen when the real problems are addressed.

Saxo Macro said...

Must be misunderstanding - I turned "bullish" as you call it when SnP went below 900 because it became cheap and oversold.

As I have stated again and again.. btw 1000-1200 it path-dependent on the economy, where my take is recession is fully priced, depression not.. hence either 1200 ish then sideways for year..like in the 1970s.. or direct to cheapness at 765 ish..

I am open neutral, but buying Danske Bank at .70 of book etc.. makes sense whatever cycle you are in.. Read my friend Yoshi piece on how indexes are wrong...

Thkx for comment