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, 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

The Chinese use two brush strokes to write the word 'crisis

The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger - but recognize the opportunity. John F. Kennedy




This morning CRISIS version 1.0 hit european newspapers and media - for the first time every single media got SPECIAL EDITION on the crisis -
I find that somewhat positive as they so far have been talking about this AS IF... the crisis comes...

Second observation; what u dont die from you get stronger from?

The fact the market didnt total collapse this am in europe is good sign, same as asia... is there temp. lows in S&P in ?

Clearly the big losers are Paulson, Bush, and Washington, but cud the winner be "capitalisme" and the markets... ? I think so.. the plan would have been disaster.....


Other news:

• Ireland guarantees ALL bank deposits - wow, thats interesting.....
• Danish Nationalbank except all forms of collateral including old bicycles(i.e: non-traded stocks)
• O/N USD rates in 8-10% as we have turn money (September into October) - showing not enough collateral in the system for some of the banks.....
• This will be one of the worst month on record for hedge funds - we expect redemptions to exceed 10% of AUM at least , i.e more than 200 bln. US Dollars....

Strategy

We are trying to defend an excellent month by taking very small risk into the month-end - our primary focus has been stocks this month, next chapter in this story could very well the major move in the US dollar. Which way? Still unclear, the path of least resistance should be weaker US dollar based on their extreme need for funding from overseas, but for now it seems there is considerable repatriation going on from US based investors away from EMG back into the US, but to me this is merely matter of time, but tide is turning.

The issue as my good friend Lars keeps pointing out; the EUR is major disaster in every aspect, economically, cyclically, and policy-wise. Trichet will once again be forced to move away from his dogmatic views and into the REAL WORLD, as the Eruopean banks are collapsing one-by-one.

Left? CHF and JPY, I guess, if anyone can tell me what the Japanese investors will do the next three month, having savings exceeeding ALL THE SWF-funds in the world, I will tell you where the JPY (and US dollar goes)... keep me posted.

Moving into Q4 we could have potential for big positive return if the policy makers can stay away......Mind you the starting is low - the real deal though will be whether or not the REAL NEEDY, the US consumer with mortgages gets help or not - with the failure of the deal yesterday we are one step closer to proper solution - maybe?

Positions

Small long S&P from this morning, short T-bonds, long front-end US rates, long CHF vs GBP & EUR...

Good luck, and be safe