Few things are harder to put up with than the annoyance of a good example. Mark Twain.

REVIEW ON MACRO EVENT FROM LAST WEEK

The take is that for Q1-2009 data, news, and central banks action is “better than expected” – this is partly explained by the under-shooting/under-projections done after the miserable Q4, so for the first time in memory both the analyst’ and the economist' downgraded expected incoming data too low.

Despite this the “Green shoots” – the most popular word being used in the market now:


Source: Google Trend

The other “concern” we have on Q1 data is that the improvement in data is mainly in SURVEYS – which mathematically could not go further down due to their construction – but never the less it has to be said loud and clear that Q1 data has been than the expected, and it has given rise to increased hope of this being a real improvement in the economy. Basically the “bar was too low for Q1 – and looks to be too high for Q2”.

ECB did as little as they could without being “called” on their bluff – the 60 BLN. EUR buying is less than 0,5% of GDP (compared to 5% of GDP in the US & 8% in the UK equivalent QE easing) – so this was more a “statement” than a practical implications.

ECB/Europe remains solid behind on the Quantative Easing path, which could be major issue down the line, as competitive devaluations begins in earnest.

TECH. PATTERNS

There is serious divergence in NASDAQ stocks (Vs. the SPX index overall) – technology has been a leader through this crisis – now underperforming…… Short with stop 1% above old high should be stand alone trade for most medium term traders. (http://stockcharts.com/h-sc/ui?s=$NDX&p=D&b=5&g=0&id=p38716996235)

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The bullish sentiment has reached 90% …

Carry- trading in foreign exchange as a metric for RISK APPETITE has made a sharp correction over the last 48 hours – if confirmed this could be early signal.

880/895 remain key level SUPPORT for S&P – a two day close below could vindicate our present NEUTRAL/NEGATIVE bias stand on the allocation

DEFLATION/DISINFLATION vs. INFLATION

This weeks PPI & CPI will reignite focus on the waning inflation as PPI is expected to fall 3.7% % YoY top-line, while Core-CPI is down to minus 0.6% YoY - the market believes the "bottom line story in the Obama plan" is one of reflation and hence inside the next 12 month(as seen by FED funds 1 yr pricing in 50 bps hikes – in Swaps), but this seems way too early days for us.
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We have the position that the velocity of money is still falling faster than the “new” printing …”The hole is still big” and needs to be filled first before inflation takes off. We see at least 12-24 months of disinflation and then the REAL EXERCISE becomes for the Fed and the world’ central banks to take ALL of the monetary easing back.

The analogy becomes: “To put the tooth paste back into the tube!"– An exercise which is even more difficult than the analogy!!!!!! – we remain extremely skeptical to whether an accommodative Fed and White House is REALISTIC enough to see when the punch bowl needs to be taken away.

The lack of final demand in the world – note how shipping rates remains flat – is a concern and most of the EXPORT numbers still coming in from Japan, China, Vietnam etc clearly shows the IMPORT demand from Europe and the US is not there, yet……
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FIXED INCOME

We had long discussion on the “seasonal impact” of summer rallies, but somewhat agreed this year could be different – there is right now a clearly move towards much steeper yield curves, we are now almost at last year high in 2 y vs. 10 y US rates (now @ 235 vs 260 high last year), but on the other hand should equities start falling as predicted in our models, then there could be some safe haven – but in a world with ZERO front-end rates, allocation into fixed income must be seen almost exclusively as move to PROTECT/PRESERVE CAPITAL rather than value proposition.

There is a growing concern among us, that a US Dollar crisis could be the one catalyst which get these markets moving again – we have had remarkable low volatilities considering Swine Flue, Geithner plans 1- through- 50, Non-Farm et al – A break-out in volatility is very likely – and we note that USD vs. JPY is again on the move – almost 102 JPY per USD in early April now @ 96.60 – and if 93.80-ish goes we could have a 5th wave being in action indicating below 87.00 JPY per USD.

We need to monitor trade weighted US index for sign of stress, and we acknowledge that FX could be trigger point for both sides of the risk trade – and this morning the Financial Times carries an interesting article on US rating:

http://tinyurl.com/re447o
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ALLOCATIONS

The focus was to stay with the conservative allocation – our internal numbers clearly shows that since low in March, our “stand” has been expensive relatively vs. our benchmark, but it is important for us all to remember investing is a Marathon not a sprint, despite the increasing pressure from retail & broker level to enforce further allocation – there is also BIG JOB at hand to align our portfolio more correctly – and this will have major priority through the next two to three weeks.

CONCLUSION

We remain with the 40/60 split – we acknowledge and respect the improvement in data, but we also “understand” the bar was set up low –In terms of relative rotation – we were hurt by underweight Sweden, something which does not make STRATEGIC sense as our clients have home bias.

We see approximately 20% risk of further upside – and here 950/1050 broad range should cap for balance of 2009 – while break below 895/880 could be first warning signal for the long to exit.


Steen Jakobsen