Showing posts with label Crisis. Show all posts
Showing posts with label Crisis. Show all posts

Wednesday, October 8, 2008

Too many people are thinking of security instead of opportunity. They seem more afraid of life than death.

Too many people are thinking of security instead of opportunity. They seem more afraid of life than death.
James F. Byrnes (1879 - 1972)


Dear Investors,

S&P from here 800 or 1200? (click chart to get larger version)

We are in period which mildy could be said to be "volatile", but we are getting towards the total panic needed in every crisis. I will not try to be brave or give any advice but I will give you my scenario for this tumultous time.



  1. To stop this crisis the Government & Central Banks needs to get ahead of the curve not behind. This entails giving LARGER THAN exepected rate cuts, bigger than expected capital injections into banks - and redoing their communication policy - broadbased comments are not appreciate in a market market looking for laser-precise answers to the enigmas of the financial markets

  2. Adding stocks to my personal account going from 99.5% cash to 50% cash-I have been - remains 85% in cash in my funds- and in the PA account I have been 99.5% long cash - I have this morning added a number of stocks onto the PA account -( pardon this being danish stocks but my private bank does not seem to have noticed there is equity markets outside Denmark) - but I added: Danske @ 88.00, Novo @ 263, Maersk B @ 34.500. I have NO PREDICTIVE POWERS - but really - if you like me, have been 100% cash for the last year you need to start allocating somewhere... I am starting now (For disclaiming purposes I also added Danske & Barclays to my hedge fund accounts...)

  3. The outlook from here is a bifurcation: Either bounce to 1200-1300 or direct to sub-800......(check the chart)

  4. Carnage is fully pricing collapse now - remember a while back I wrote about this mechanical fund who in their September newsletter proclaimed: "It is dangerous to be in the market, it is even more dangerous to not be in the market!" - I kid you not that fund is now down 70% for the year - so my point is: The last of the "remain invested jerks" are disappearing - the financials market equivalent of a clown sorry joke: Jim Cramer wants to sell all my stocks and go to cash! (He is ALWAYS wrong - only beaten by Greenspan, who is the best inverse indicator ever)

  5. The policy reaction function is different in the US and Europe. One must acknowledge that Europe have greater power to do "UK like" baning bail-outs than the US - All options are open to Europe but due to the idiotic EMU construction it does lack European Treasury to co-ordinate anything - meaning it look and feels like piece-meal solutions, but at least they are not bounded by Congress. In the US Bernanke & Paulson are limited by needing broadbased political support - and we know how that works in the US --- or rather how that DOES NOT work - the US election cycle could... and I mean could mean we need to BUY EUROPE vs US - the trigger would be full fletched banking support in Europe which US can't copy ==> outflow from investors -- I am getting closer and closer to triggering UPSIDE EURUSD based on this.



Strategy




Despite being almost the parma bear on this- I simply can not be NET SHORT stocks any longer , so... I remain 85% long cash, but I am now using the 15% to buy UPSIDE STRATEGIES... on S&P, USDJPY and banking shares........




In our Weekly Investment meeting we came up with three "premises" which one needs to learn, respect and understand:





  1. Cost of funding drives market & valuations (old fixed income theorem now moved into fx, equity and commodity)

  2. Price of liquidity essential and REAL PRICE (tax on money)

  3. No prior analogy historically will work (This is different, very different)



I will let Mark Twain end this blog: "I am more concerned with the return of my money than the return on my money".




Good luck,




Steen








Where is the Market Going ?

(click on chart to enlarge!)

Monday, October 6, 2008

Monday, Monday, .......Midday update

Classic fund manager dilemma - although this is not like anything I have seen before in my career, I feel tempted to go square from short everything more on a gut feeling than anything else - and trust me gut feelings are overrated so I will stick to our key targets (see below)

Massive rate cuts are coming - maybe even before the open today or tomorrow open - The authorities thinks in steps:

1. Bail-out

2. Rate cuts

3. Direct intervention (in bonds and stocks)....

We did step 1.) now and step 2.) is coming if not working either - we will move to step 3.) which will be unprecedented in Europe & North America but not in Asia....

The reaction off rate cuts could be: 2 min.'s rally or a longer bounce based on cheaper funding - there may still be pockets of desperation but it will be cheaper.....


I maintain as per my blog Friday - merely refinancing/bailing-out mortgage portion of risk will only help temporarily - We know the banks are "misrepresenting" the trust, this morning papers full of how Lehman told the less than honest truth about their true need of capital.

Direction key determinator will be bond market, and probably Bunds... if we are going to see action 2.) and 3.) we need furhter flight to quality.


Statewide banking guarantees - well ,well, it will not work - when everybody does the "arbitrage" goes away, its against EU regulation, it increases financial long-term burden(more debt), Widens funding rates for governments(through higher bonds premium) and it floats capital market with bonds..... Ergo: back to square one... but it does mean banks can keep their depositors, it also ironically means there is LESS CHANCE of bail-out for next bank in trouble - as the customers are already safed, why safe the bank frame-work?


Short-selling ban will by "law" disappear three days after President sign bail-out into law - Will be interesting - my estimate it will increase liquidity and get volatility back down, plus obvisously take CDS spreads down, as they have been the short financial proxy of choice.

Strategy:

Cash 90% - now, +5%
Small long US dollars versus EUR
Was small short european stocks - but awaiting resolution on rates...
Long Dec - EDZ
Long CHF vs GBP options
Small, small upside option on stocks...

We are entering the acceleration part of this market, one which creates more losers than winners...........I am keeping my powder dry - awaiting better risk/reward.

Our KEY targets remains:

S&P 867-00 (Was 1100 untill early August)
EUR 1.3500 - almost reached, we move it down to 1.30000
Yield 10 yr - when the US dollar hoarding done we expect the final bubble of this cycle: low interest rates to start playing for real. We see LT rates in the US in 8-10% in 2009....
GOLD --- 1000 US Dollars
Crude- 80-100 for balance of this crisis, then 200 US Dollars next year.

Trade smaller size, be active, be prudent, listen not to what they say, but observe what they do....

Steen

Dear Reader, not much time, but Ambrose Pritchard, the highest "ranked" economic journalists in our universe writes it better than me... READ IT or you are lost...

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3141428/Germany-takes-hot-seat-as-Europe-falls-into-the-abyss.html

From internal note:

Read this or you could be lost......

This is an excellent summary of the risk we face - note the very dire words chosen by experienced in-the-know journalists -

I believe the next few days is similar to the extreme volatility we saw before GBP devalued in 1992.... It could also, unfortunately, be similar to 1987

We in dying moment of a 10 trl. US dollar balance exercise which is costing many banks there livelihood, and we will see MAJOR RATE CUTS this week in our opinion......Germany, as per usual, is so behind the ball, with the loser Trichet, that it could cost Europe SEVERE RECESSION.......

We will keep u posted all day - remember morning meeting 845...on trading floor..
Steen

Germany takes hot seat as Europe falls into the abyss
We face extreme danger. Unless there is immediate intervention on every front by all the major powers acting in concert, we risk a disintegration of global finance within days. Nobody will be spared, unless they own gold bars.
By Ambrose Evans-Pritchard
Last Updated: 11:26PM BST 05 Oct 2009
Investors will learn today whether the Paulson bail-out - fattened to $850bn (£480bn) by Congress - can begin to halt the death spiral in the credit system. So far, the response looks terrible.
Germany is now in the hot seat. The collapse of a rescue deal for Hypo Real Estate on Saturday threatens a €400bn (£311bn) bankruptcy that nearly matches the Lehman Brothers debacle for sheer scale.
Chancellor Angela Merkel has been forced to pull her head out of the sand, guaranteeing all German savings, a day after she rebuked Ireland for doing much the same thing. Reality intrudes.
During the past week, we have tipped over the edge, into the middle of the abyss. Systemic collapse is in full train. The Netherlands has just rushed through a second, more sweeping nationalisation of Fortis.
Ireland and Greece have had to rescue all their banks. Iceland is facing an Argentine denouement.
The US commercial paper market is closed. It shrank $95bn last week, and has lost $208bn in three weeks. The interbank lending market has seized up. There are almost no bids. It is a ghost market. Healthy companies cannot roll over debt. Some will have to sack staff today to stave off default.
As the unflappable Warren Buffett puts it, the credit freeze is "sucking blood" out of the economy. "In my adult lifetime, I don't think I've ever seen people as fearful," he said.
We are fast approaching the point of no return. The only way out of this calamitous descent is "shock and awe" on a global scale, and even that may not be enough.
Drastic rate cuts would be a good start. Central bankers still paralysed by a misplaced fear of inflation – whether in Europe, Britain, or the US – have become a public menace and should be held to severe account by our democracies. The imminent and massive danger is now self-feeding debt deflation.
The lesson of the 1930s is that any country trying to reflate in isolation will be punished. The crisis will ricochet from one economy to another until every one is crippled. We are seeing it play again in this drama as our leaders fail to rise above their narrow, parochial agendas.
The European Central Bank – which raised rates into the teeth of the crisis in July – has played a shockingly destructive role in this enveloping slump. Its growth predictions this year have been, and still are, delusional. Neglecting its global role, it has vastly complicated the fire-fighting efforts of Washington.
It could have offered "cover" to the US Federal Reserve this spring when Ben Bernanke was forced by events to slash rates to 2pc. It could at least have signalled an end to monetary tightening. That is how an ally ought to behave.
Instead, it stuck maniacally to its Gothic script, with equally unhappy consequences for both sides of the Atlantic, as well as for China, Japan, and India. The euro rocketed yet further, which it turn set off an oil shock as crude metamorphosed into an anti-dollar with leverage.
The ECB policy was self-defeating, even on its own terms. It merely drove headline inflation even higher, while deeper forces of underlying debt deflation pulled the real economies of Germany, Italy, France, and Spain into a recessionary vortex.
Far from offering reassurance, the weekend mini-summit of EU leaders served only to highlight that nobody is in charge of this runaway train. There is still no lender of last resort in euroland. The £12bn stimulus package is risible.
Angela Merkel has revealed her deep limitations. It was she who vetoed French efforts to launch a pan-EU rescue package, suspecting that any lifeboat fund would prove to be Trojan Horse – a way of co-opting German taxpayers into colossal transfers of wealth to Latin Europe.
In that she is right, but it is too late now for dysfunctional EU political games. By demanding that those who caused the damage should pay for it, she crossed the line into caricature, or worse.
Her comments echo word for word the "we're alright Jack" attitudes of Euro-pols during the first US banking crises in 1930-1931, until the storm hit Europe and the entire cast was swept away by furious electorates, or simply shot. Thankfully, this EU stupidity is at last drawing serious criticism.
"We have to make sure Europe takes its responsibilities, like the US:
action must be taken quickly and in a concerted manner," said IMF chief Dominique Strauss-Kahn.
As for the US itself, it has not yet exhausted its policy arsenal. It can escalate further up the nuclear ladder. The Fed can cut interest rates from 2pc to zero. If that fails, it can let rip with the mass purchase of US debt.
"The US government has a technology, called a printing press," said Fed chief Ben Bernanke in November 2002. (His helicopter speech).
In extremis, the Treasury/Fed can swoop into any market to shore up asset prices. They can buy Florida property. They can even buy SUV guzzlers from the car lots in Detroit, and mangle them in scrap yards.
As Bernanke put it, the Fed can "expand the menu of assets that it buys."
There is a devilish catch to this ploy, of course. It assumes that foreign creditors will tolerate such action.
Japan entered its Lost Decade as the world's top creditor, with a vast pool of household savings to cushion the slump. America starts its purge with net external liabilities of $3 trillion, and a savings rate near zero. Foreigners own over half the US Treasury debt, and two thirds of all Fannie, Freddie, and other US agency bonds.
But the risk of a dollar collapse is one for the distant future. Right now the world faces the opposite problem. There is a wild scramble for dollars as a $10 trillion pyramid of global lending based on dollar balance sheets "delevers" with a vengeance.
This is a "short squeeze" on those who have used the dollar for a vast global carry trade. International banks are facing margin calls on their dollar leverage. It is why the Fed is having to provide $1.25 trillion in dollar liquidity for the entire global system, according to estimates by Brad Setser from the Center for Geoeconomic Studies.
The crisis engulfing Europe, Asia and emerging markets, makes life easier for Washington. The United States is becoming a safe-haven again.
The Fed can now hope to pursue monetary stimulus "a l'outrance"
without being slapped down by the currency, debt, and commodity markets. Take comfort where you can.

Friday, October 3, 2008

A little learning is a dangerous thing but a lot of ignorance is just as bad.

A little learning is a dangerous thing but a lot of ignorance is just as bad.
Bob Edwards

I have decided to explain the crisis and why the plan is useless once and for all to myself - it is really an economy of scale issue as it is the question I get the most (Yes, I know you are wondering why people even bother to ask me anything being an European Elitist Arrogant High-horse something as a "friendly anonymous visitor to my site called me!)....these days....but let me try:

The background is this:

Imagine you have a bank - for arguments sake let us call it : Banque Paulson & Bernanke - their corporate motto's is: "We create moral hazards better than anyone else -faster".....

This bank BP&P got an asset side which really mimics a traditonal portfolio:

A little stock, a little government bonds(10%), a little (sorry a lot) of mortgages(30%), a little lending(40%), a little Real Estate(20%) and other on-and-off balancesheet vehicles...

- It is - obviously- all funded day by day in the money market.

The portfolio is leveraged 10 times - which happens to be the average leverage in commercial banks.

Now - the market (portfolio) is down 15% - meaning you are insolvent by 50% -- i.e 10 x 15% = 150% minus your capital = -50% - but your "bank" --- allows you to keep the portfolio because tomorrow they "hope" the market will be better.....(The Church going traders I call them..)

Then one day the Congress and its two parties called We-got-zero-clue and We-got-even-less-clue gets call from The White House - some geezer who doesn't know what an CDO is shouts: "Fire, Fire - pants on fire ......." Please send in the Mortgage Firebrigade..... fast!

Congress goes into panic and decides they will buy ALL MORTGAGES and ALL MORTGAGE INSTITUTIONS in the country.

Fine.....but hang on... lets go through this...

If the GOVERNMENT buys only the mortgage loss from my portfolio what happens next?

Well if we deal a market-prices the mortgage portfolio is off my book @ 20 cents in the dollar... so my cash goes up but the loss remains in place plus taking 30% of loss off still leaves me short a few bucks...but even if they bail-out out without loss' on my mortgages I am still short: (100 USD - 30% in mortgages equals 30 USD x 10 leverage = 300 USD x 15% loss = equals 45 USD loss....so I am getting 45 USD back - but I am down 50 USD net - leaving me 5 US dollars short (Yes, this is constructed portfolio but.. point is still the same....)

- and IF... the others parts of the portfolio continues to fall --- BP&B is still even more insolvent.

Why?

Because you are NOT dealing with the real issues:

1. Funding is done day by day - with massive mismatch in time - Bad business model is environment of scarce credit creation.
2. Leverage - in a perfect storm EVERYTHING becomes correlated. .meaning falling...
3. Mortgages - there are 4.5 mio. unsold homes, so whether government or private sector owns them does not matter - its all math.....
4. Solvency - portfolio of BP&B still insolvent - why should anyone deal with them?
5. Transperency - how do I know BP&B is honest?

The right solution would be to let everyone go bankrupt - but if you want to spend the tax payers money the government needs to think like a Private Equity Fund - buy on the bid, restructure balance sheet,give new management upside in equity, sack the old management, and buy equity upside leverage.

There was God forbid an excellent Swedish model for this before - Imagine that recommending anything Swedish is a first for me......but DO realise this is PURE SOCIALDEMOCRATIC policy and hence I can not support it, but it did work before....

So......if the deal adresss real issues it will work, but I doubt BP&B will survive longer than a few quarters more, and neither should they....

Strategy:

Calling it a strategy is an insult to the word itself, but.....

85% cash
Long USD vs EUR as we broke uptrend since 2000 - meaning lower EURUSD
Small short T-bonds
Small long upside stocks...

Nice week-end

Steen Jakobsen


Wednesday, October 1, 2008

The opposite of talking isn't listening. The opposite of talking is waiting.

The opposite of talking isn't listening. The opposite of talking is waiting.
Fran Lebowitz (1950 .)

So... what did I do? I talked ;-) to my friends at Bloomberg - I put this link in as todays text as it pretty much states what I think right now (I am really sorry you have to both listen and see me)...

http://www.truveo.com/Investment-Strategy-part-2/id/3216682401

Thursday, September 18, 2008

Reality is close by....

This very simple fund manager have noticed one major change in the last 48 hours which I will call significant: More and more people have started, finally, to realise this is serious crisis - probably the worst crisis in my years in the market. That's a positive, because if we engage on the issue instead of disengaging there is fair chance REALITY will kick in.

I personally think we are 1-7 days away from getting change to marked-to-market practise - It does not make a lot of sense, even on a good day, to take somethingwhich is not priced relative to its intrinsic value. Take a house - even if a mortgage trades @ 20 cents in the US dollar, you would expect the house to trade 40-60% of price in sale?

The biggest joke is Morgan Stanley recent reporting - they made pretty much all their money from having issued debt - as this debt goes down they book the profit - they issue @100 - market is now 80- hence 20% profit - but the only problems being .. to take this profit.. you need to go bankrupt! Welcome to the world of finance.

This fund manager have reduced his EXTREMELY negative portfolio to 10% of Friday's position. There could be bounce or not - there could be more Socialist ideas like banning ALL short-selling etc - (for the record if anyone thinks banning short-selling helps the market - they need to get their school money back!).....

I am now 85% cash - and awaiting Monday --- still small long upside EURUSD, small downside in S&P - (deep-in-the-money Puts)...... rest I leave for the market to figure out.

I have become "crisis fatique" - and if even my local business newspaper have realised something is rotten in the state of Denmark - I will step aside......

This does not mean I have become positive- it merely indicates that too many indicators are at 10 standard deviations -reflecting lack of transparency even for veteran trader like myself.

Stay safe.

Steen

Monday, August 18, 2008

Change is the law of life. And those who look only to the past or present are certain to miss the future - John F. Kennedy

When I was younger and more mobile I used to love the US - when you hit the ground in New York or any other place in the US you felt the vibe, the tempo and expectations you could be anything with your life!

Fast forward 20 years and I get the same feeling when I arrive in Singapore - although this time obviously I'm old and none the wiser. While just back from the US there is mood of surrender and for good reasons.

During the last 20 years the US got addicted to capital - and Asia addicted to creating jobs. The recent circuit breaker: lack of credit - has not only slowed down the globalisation but also created situation where major decisions needs to be taken.

The Asian decoupling theory is a life and well. I attended panel discussion this week-end, why on earth they wanted my opinion I still don't know, but the interesting part of the session was the focus and questions towards: Real Estate!

Why is it real estate is the 21st century version of the gold diggers of the Wild, Wild, West? My esteemed "colleagues" from Singapore's highest respected banks and brokers seriously suggested REITs in Singapore would be an excellent investment, and even Telecom should do well they argued on the premise of "valuation" - I on the other hand only had one real thing to offer the desperate investors: stop listening to idiots like us, as we have ZERO predictive powers, and at best we probably distort your investment process.

My point here being; if metrics like P/E and valuations are used to argue for stocks being a buy, then by virtue of mathematics if the prices falls another 10 pct then they should be even cheaper and an even better buy? Elementary Dr. Watson, although its probably too simple for the brokers to see.....

The credit cake is smaller and more expensive - this keep being my one remaining premises for the balance of 2008 and 1H 2009 the implications is to be seen everywhere:

  • The bank continues their game of the chicken and the egg. MER writes of @ 20 cents in the US - clearly other banks needs to do the same? ==> raising more capital - diluting their already depleted investors even more.......
  • In the Middle East meanwhile the banks can't lend out enough money, as they don't have the deposit to do so - this will turn out to be good luck for them, as I will quote Grouch Marx: I don't want to be part of any club who wants me as a member - Not having enough deposits should in REAL WORLD stop people from lending out money ......but I guess I am old fashioned?

Credit standards been tighten to standards which means the banks just as well could put out sign: WE HAVE NO MONEY!


Source: Wall Street Journal (click on chart to get bigger version)

So now we got: Weak banks at best, less credit, and high energy prices. The market is right now busy selling crude towards the 100 US dollars.

The Investments Banks economics departments (Always the Johnny-come-late)are fighting to have lowest predicted rates for EURUSD, GOLD, Crude and Commodities -- Is it not impressive how they go from 1000 pct bullish to 2000 pct bearish in the space a month?

Maybe they should look at some historic evidence: In commodity bull markets gold and other commodities tends to sell of both 30%,40% and even 50% before reversing - its the nature of commodities - boom-and-bust.

The fact remains: There has been 50 years of underinvestment in mining, and upstream/downstream production. The US has not built a refinery since the 1970s, Europe not since 1980s, so good luck to the crude bears - IF, and that's a big if, you can get the oil out of the ground, there is not enough capacity to make into petrol et al, but don't let facts get in your way....

The down move in commodities does tell us one significant thing though: It confirms the "world" finally has accepted we are slowing down - and in some places significantly.......I put it like this:


Click on chart to get bigger version

This is Alpe Huez - The US is in the lead close to the peak - Europe on the other hand is at steepest part of the mountain - where things are slow and tough, meanwhile the Middle East and Asia is still on the flat part leading into the mountain, but they are AT the mountain now - that's part one.

Part two goes like this: although the US is in the lead their rider is: obese and driving a old 1970s bike, and the chain is about to fall off- the European rider is: OLD, very old, driving a 1980s bike, although he is VERY ELEGANT, meanwhile the Middle East rider is young and aggressive, his bike is made of gold and he is slightly on the heavy side... the Asian rider is light, drives a state of the art bike, and is dressed somewhat in a style between 1970s disco and retro....(by now I am pretty sure I have pissed off pretty much ALL nationalities and religions, but do stay with me...)....

The point being, the US may be closest to the top, but with no breaks the downhill will be an issue, furthermore the European rider will probably run out of energy before the goal line, while both the Middle East and Asian riders will catch up to the two in front - The winner? Most likely being Asia with a close 2nd to the Middle East.

In a world where credit is scarce - currencies and countries with high savings, surplus on current accounts, high birthrate, intellectual capital (as in educational system), and capital incentive, and political stability will outperform the other: hence in my world: SGD, CHF, NOK, SEK and JPY the favourite currencies.

My favourite fixed income market being the ones with some inflation fighting credentials.... Japan (by virtue of deflation), Switzerland and to some extent core Europe........

The favourite themes will be ones which caters for the micro changes of the world:

  • Falling birthrates in Europe and Japan (in 20 years more than 30% of the Japanese population will be 70 or older!)
  • Energy component now 50% of production cost... i.e: production will become more local - China will face stiff competition from energy costs)
  • Water (both Singapore and China extremely short water)
  • Savings - positive cash-flow
  • Supply side of mining
  • Pharma - with obesity and starving numbers both rising - never been bigger need for pharma industry to produce pills..

In closing, again, crisis is good, very good - it reallocates capital to higher marginal return - if so we will enjoy continued growth in the world - but if Congress, Trichet, Bernanke, Paulson, ECB, BOE, and all the Western worlds politicians continue to ignore fact - we are in for worst crisis in my lifetime - however the path of least resistance indicates to me that we will see:

  • 2-5 years of sub-par return in equity indices (but not in individual selective stocks)
  • No inflation
  • Fed will cut ...and not hike the next 2-3 years
  • ECB will cut before year is over
  • EURUSD will go to 1.45 max - before hitting 1.7000
  • Crude could trade 100- 130 balance of year but will take out new highs in 2009
  • If buying financial assets in banks buy their bonds not their stocks
  • Fixed income will do fine - oil spikes are deflationary history tells us......
  • Overweight selective Asia, but recognise the mountain part is coming
  • Average yourself into positions, volatility is dead certain to increase...

Strategy

We are slowly building portfolio to reflect the above - finally thank you to all the people I met in Singapore - it was a long and hard week but it proved once again that Asian Tiger is roaring and it's now taking is rightfull place in the world in terms of resources, capital markets and the future.

Best wishes,

Steen Jakobsen

Monday, January 7, 2008

Monday morning Quarterbacking


A number of interesting stories over the week-end for the market:

Fed Vice-chairman admits they have no clue....

http://tinyurl.com/3aue55

Mr. Kohn is making market and himself even more confused - Fact reamins Fed is lost, now forced to go 50 bps on January 30th, despite they should be hiking - if that's a success I should be playing for Denmark upfront!

M&S follows Next, PC World, Curry's and Land of Leather to confirm that UK is DOOMED. The financial sector is going down and so is retail.

http://tinyurl.com/2wkph3



तbout leverage or high stake poker. Interesting how major building marks gets involved in major paradigm shift. Remember the Rockefeller Centre being first bought then sold as part of rise and fall of Japanese economy?

http://tinyurl.com/2dq9c5

Barrons, the ever negative indicator on stock market ran interesting piece:

http://tinyurl.com/ywe4zu


I know a few of you can not access so here is some main pointers;

DJI skidded 566 for the week, or 4.2%. It was the Dow's worst three-day start since 1932, the depths of the depression.

Q4 returns (and note these....!!!!):

- Dow Q4-2007 = - 4.5%
- S%P Q4-2007 = - 3.8%
- NAS Q4-2007 = - 1.8%
- Russel Q4-2007 = 4.9% !!!!!! Russel is the broadest index, i.e caputering the biggest trend.

It was Dow's first fourth-quarter loss in a decade! (So please let's stop talking about year-end effect and the other crap from now on!!!)

For the year, The Russel 2000 snapped a four-year winning streak and 2.7% for the YEAR!. Yes, the "stock market", the broad market fell in 2007!.......

In other news; Last week had two significant data stories in the US;

1. Manufacturing fell into RECESSION mode!
2. The Private Sector in the US cut 13.000 jobs, the first decline since 2003!

News/Data conclusion: Retail Sales across OECD continues to collapse, stock market very close to being in BEAR MARKET - first time since 2000!........and RISING UNEMPLOYMENT will soon subistitute lack of growth as key headline....

=================================================================================
Strategy;

We came into Friday with positive bias on fixed income based on our assumption of potential for weak job growth plus propability of NASDAQ move to down-side;

Friday data confirmed our view, but the magnitude of the down-move makes us think this week will see the usual rumors of inter-Fed cuts and some desperate attempts by US Administration to "get things going in the US economy" - and what's the standard tool box for that in todays market? Create some more money; i.e More inflationary impact, so we are shifting our FI bias from lower rates to longer; and add to this that our Agri-play, (DBA) made new highs while articles like this one;
http://tinyurl.com/2u2tbp

is starting to tell "our story" ---> Inflation will soon become THE FRONT PAGE.....but for now more of the same.

POSITIONS;

FX: Very lights, some JPY calls (bought too expensive right now) but home bias will prevail if stock market continues down - i.e Japanese will take money home).... shorted EURUSD (@ 1.4695 ) this a.m, and sold light in GBP.USD [@ 1.9663) with stops 1/2 daily ATR .....

FI: Buying some 10-30 y. puts today March....(Yield reference: @ 3.89 & @ 4.39)

EQUITY: Neutral. I will bet inter-market cut rumor will hit market this week, and I will be waiting to sell on those....

Long DBA - still target of 100% for the year-on-year!...

Commodities:

Waiting for Gold to hit support around 850/840 to buy..if holding..
Crude: Dont like the lack of "follow through" upside- and concerned how "slwoer OECD growth will play into the future pricing"....

OVERALL:

Theme of the day; How poorly Q4 and start 2008 was ----> Early stock market sell of...

US dollar ----> Weaker number could lead to overseas investment by US investors being cut, plus will Europe and Asia catch the "flue"?

Nice day;

Steen

Monday, October 22, 2007

US weakness ? Not anymore...

Seem I am the only one thinking this week-ends G-7 was much closer to getting actual wording on the weak US dollar. I note with some interest this headline from The Guardian : http://tinyurl.com/38pxxd

(America vetoes G7's dollar alert) add to this following text from post G7 press conference:


"WASHINGTON (Thomson Financial) - Euro group president Jean-Claude Juncker said the euro zone will continue to monitor exchange rates closely following the euro's strong rise against the dollar.

He said the euro zone and its G7 partners are monitoring exchange rates 'in particular in light of recent sharp moves' in currencies.

The euro set a new record of 1.4318 usd earlier.

Juncker told a news conference at the G7 meeting in Washington that the euro zone had noted 'with great attention' that the US authorities had reaffirmed to their G7 partners that a strong dollar is in the interest of the US economy.

Markets should be aware of the risks of one-way bets in currency markets, he added.

European Central Bank president Jean-Claude Trichet said the US authorities' comment on the strong dollar was 'very important' and he fully subscribes to US Treasury Secretary Henry Paulson's comments that a strong dollar is in the US interest."



You got mixture for a cocktail which I call 2000 in the reverse! In other words, 2007 will soon become like 2000, only this time it's to sell EUR vs USD, not the other way around.

We are still VERY long USD calls vs EUR, NOK and CAD.

In the stock market we took profit on short STOXX50 into the close Friday- we will most certainly sell again, but... rule of thumb is to wait 24 hrs before initiating new trade.

The SUPERFUND SIV, "sponsored" by Paulson, is getting a lot of bad press and rightly so, I will not add to this equation but note this: It will only move risk from 2007 into early 2008.



If you are in doubt whether there is new round of credit weakness coming let put this to you:

1. RBS and Barclays ... went to Fed, yes Fed to borrow money.. Not a sign of gr8 things to come. Barclays went lower than August 17 low todat and rightly so. It is a bank runned by fair weather guy who cant see any issues anywhere.

2. Robert Rubin will NOT sign Citibanks accounts. He is simply afraid of the new legislation which makes his personal fortune liable if Citi is sued. He is as smart as they get.. and he is not signing anything with C in it!!!

3. The Average decline from Oct. 3 to Nov. 8 in years ending with 7 has average decline of 14.2%. 11 such incident has happened only one deviated (small gain of 1.7%) (source: Peter Eliades, Stock Market Cycles)

4. There are 5.000 stocks in the NASDAQ, but the top 50 stocks accounts for more than 75% of volume. Equals = massive speculative. This is not broadbased.

I am certain the next move is about tangible vs non-tangible asset.

Gold will do well as the US continues to use printing press to create US dollar to sustain their excess demand. Inflation is coming and fast. Gold has become new reserve currency.

In the same mold crude and agricultural products. I am keen on DBA US and other related commoditiy funds.

Postions:

Fx: Long USD vs NOK, EUR, and CAD
FI: Took 50% of big 10y position off. Strong seasonal into Nmovember.
Commo: Buying gold and crude on dip. Note that Crude makes cyclical high most often in October (>10%) with December being the low.
Equity: Flat, but short Cramer favourites: RIMM, GOOG, AAPL and AMZN
Selling Barclays today....for fall-out this Q4

Performance: +67 bps since live update started.

Steen

Wednesday, September 5, 2007

Free markets - why are the banks whining?



It is very clear to me that the central banks of the world are in the process of doing a paradigm shift. In all of my trading life we have had the Greenspan put in place. Basically, since 1982 every single market down turn should have been bought, as IF there was ANY type of crisis on the horizon the central bank response was to float the market with more capital in order to stem the tide.

This "safed" the Asian crises, but made the IT-bubble in 2000, post the IT-bubble capital floated into housing, and private equity/hedge funds. The REAL paradigm changed has been the fact that 1989 was the most significant ECONOMIC EVENT in my life. Why? Because it created more wealth by creating 2 billion new capitalist', it created more saving allowing the Western world too deeply dis-safe.

What I see in front of us, it that the CREDIT CARD bill now has to be paid. No longer is it enought to pay the minimum amount on the bill. The card is MAXED OUT!

The paradigm shift happens because the new central bank managements, understand that bailing out the industry right now will not only create a moral hazard but also make the bubble even bigger. They need a resolution to this crisis which comes from somewhere else.

Yes, they will cut rates WHEN, not if, the economies show down turn. All cyclical indicators for the world economy is collapsing anyway, but......the CREIDT issue as seen by the graph here neither can or should they touch.

LIBOR, the London interbank rate is now trading through the FED discount window allowing at least US based banks to arbritrage... this will not happen yet as there is collateral needed for borrowing in the discount window....

This situation illustrates many fold, how this is about the world banks taking ALL their off-balance-sheet investment onto their balance sheets.

Without naming names, clearly, a lot of European banks are not telling the full truth about their loses. (How come some banks continue to have Glitches in their payment system day after day??)

This is to continue, having read Schumpeter at University finally pays off!!!! Destruction of capital is the name of game. Destruction because a lot of those off-balance-sheet products was funded by NON money. This was always smoke and mirror, the only place it really showed up was in the ever rising earnings of the investment banks.

Pension funds and risk averse investors, are now caught with AAA "vehicles" which is downgraded to junk. The mom and pops Money Market Fund is losing 10-15 pct... in a month! New world? Yes for sure.

In all my life as a trader I have never seen anything like this. The stock market is in a total denial, the fixed income in near panic. JPY risk reversals in 3 mos still safely above 5% for JPY calls or 2-3 times the norm!

The only thing which can safe this seems to be the 50 bps the stock market thinks Bennie will give them, but .......even that could be short cutted by another discount rate cut.

I have very few positions as I get stopped out almost inside 5 min off initiating the positins but..

I am VERY long gamma downside in stock market for September. I'm small long JPY, short AUD......

I am still keeping the powder dry, but the longer this goes on, the more I get nervous...

Steen

Tuesday, August 28, 2007

Fall-out or bail-out

Upon time getting back to schedule and writing my daily commentary to "clean" the brain here it goes:

Market has been in 4th wave correction of the drop-out. We saw low of 1375.00 in S&P follow by major correction on the back of what was "relatively inteligent" move by Bernanke and Fed. Cutting the discount rate - did nothing for the credit conditions, but it did give market the smell of "bail-out".

The most interesting aspect of this being, that "post-game" analysis tends to focus on that Bernanke is trying to avoid Greenspan classic mistakes of giving the patient what they think they need rather than what the doctor prescribes.

The Kramer's of this world have no feel for reality. If they lose they want their old friend Mr. Fed to help them out. I have been hard on Greenspan for long, long time, and I am constantly reminding people that the very bubble we have right now is created by central banks generating too much capita at too low rates.

Fast forward to now, and let me stress I do not know if this goes from crisis-lite to fall-out, but inrespective of what happens a few things needs to happen:

1. A serious correction of growth forecasts. GS already looking for 75 bps this on the downside. C looking for 50 bps. Me? You know I have no predictability powers but I am more towards 100 bps.. and here is why:
2. Unemployment. Recent studies shows that the 130K plus jobs created this year on average is merely statistical mistake than real jobs. There are a number of reasons why reality is going to hit the economic numbers going forward.
3. Credit condition for Main street Americans is tigher much tigher:
a. food is through the roof b. energy still elevated c. Asset value of your home is deterioating d. Credit linkes being removed. You can not get a mortgage even as partner in GS right now! e. mortgages are rising and fast (despite yields coming of)
4. Global forces: China is looking to hike and that will slow their growth velocity, last week we saw Euroland come in below consensus growth, and the same for Japan. The world is SLOWING down from cyclical top.
5. Earnings will come down and fast. Unit Labor cost is rising much faster than GDP deflator (1st time since 2000)
6. Cash flow. Buy-back programs been very dominant factor in S&P last two years, without it S&P would have been down! Again Net Free Cash Flow have now turned negative (again 1st time since 2000)

These above 6 points remains with or without further crisis, of course if crisis persist then these points will be "leveraged" further.

Then let's return to credit market. I read on the wires that things are going back to normal: hmm... check this chart:



The CP market has NOT moved one Ioata back - there is NO normalisation. This market is behind most of leverage of the hedge funds, Private Equity and banks conduit funds, so in other words, the money lender is out of business.

Another way to look at this is to see how the banks are performing, post this Crisis-Lite:




Better but not back to anything like two month ago.

Well lets cut to the chase here is how I see the market from here (Remember throwing dart will give you better performance than following me!!!!!)

Stocks

Financials will continue to underperform and big MAJOR margin. We need some serious destuction of capital in the banking sector. If German Landesbanks are biggest investors, with State Street, in Conduits then they should be ashamed. No governance, no repurcussions and they cant even fights these vehicles in courts as that would expose them even more. This is MAJOR negative for coming years.

I am short EVERYTHING into 4th week of September - I expect bottom will come in for this year there and we will be smoothly sailing into year-end. Q1 2008 will be crunch time. The credit failures of the last 10 years will have compounded and the write-offs and law suits will be flying by then (Anyone know of public traded litigation stock I can buy?)

Never forget that SWF have plenty of ammunition and so does private equity, although the need to set their targets and funding levels lower - this will stop the market this time.

Foreign Exchange

The BIGGEST risk in the market remains the UNWINDING of carry trades in FX. FX is always the last component to move and the only REAL leverage remaining in the system is in JPY and CHF carry trading. When USDJPY have traded below 110 we are about back to normal (1.6000 EURCHF). This is the bigger risk here, as credit tightning so does conditions for the "free trade" of funding low and placing high.....

I expect a reversion of the weak US dollar based on repatriation of funds from US based investors from emerging markets, from the neutralisation of the theme : US is decoupling.. which a lot of market players have on right now. Finally, US is the only country in easing mode, i.e they will reverse this trend faster than the dogmatic European central banks.

Fixed Income

My arbitrage friends are busy telling me telling curve is wrong, well I am of the opinion that we are seeing correct rates. Remember, as RBS Greenwich tells me, "..the first ease in a given cycle 2y notes traditionally trade 125*150 bps through funds..."...... I.e: We can go even futher down in short-end before indicating cut.

Fed will cut as per my six points above. The cyclical growth and credit expansion have moved from BLOW OFF period, to bubble bursting...recession lite...

Be long short-end, and December Euribor. ECB is ni Catch-22 which will lead them to cut as well... (Just watch Spanish real estate markets!!!)

Norway and Sweden will most likely hike - its not for nothing they are bunch of dogmatic Socialdemocrats!

Commodities

Both energy & grains are in total denial of the changing cyclical forces.
I expect crude- and grain to put in negative performance over the next 2-3 months as the world adjust to "back to normal" leverage and growth.

I am very negative grains based on excessive speculation and indications of better than expected crop in the US.

Crude - Hurricane season always tough to play Crude in this part of the year, but risk is to the downside and as soon as next week.

Gold- Silver: Stay out for now.... but it in bull market and I will look to buy with end of September.

Best wishes


Steen Jakobsen