Service in New York ? You kidding me?

Yes, it would have been a joke less than three month ago - but seems the crisis bites here - yesterday arriving in New York I had my taxi driver volentarily waiting for me while I checked in at the hotel before going to first meeting !!!!

I lived in New York for more than three years in late 1990s and never got anything but abuse day-in-day out!

Everything is 40/50% off on December 1st! Talk about crisis - and on top of that plenty of buy three pay for two deals ..... I am not the big shopper but this is close to bargain values.....

On the other hand something never change:I was "listening" to three New Yorkers discuss the world affairs and its striking how simple and full of themselves they are - Obama is "accepted" but only due to PC - political correctness - there is terrible jokes and one liners which not even I will commit to papers flying around - I must say all of the sudden I remember why I both hate and love New York.

It is great place to visit and the Americans are at large the nicest people but in a very strange way New Yorkers are the most "narrowminded" people I meet during my travels around the world. They make George from Seinfeld sound and look like a true globetrotter.....:

http://www.youtube.com/watch?v=1gjxnxKmaVQ

There is pain here, lots of pain, no one paying school fees, the Wall Street Trophy Wifes are unhappy - there is even rumors they are marrying for looks now! ----imaging sinking so low!

Paulson & Bernanke, aka The Muppet Show, goes on TV yesterday and the market sinks, and I mean sinks as they open their mouths - dealing rooms are "begging" and I mean "begging" them to shut up .........another new low for politicians and policy makers ? Absolutely! Please watch this old video:

http://www.youtube.com/watch?v=heBxMzSAuKY&feature=related

Meanwhile in Fixed Income Land - there is massive fight in on- and off the run 10 year notes, the market makers sitting tight(long the papers) while the hedge funds and bond funds sits shorts the deliverable - there is sooooo much cheap, risk free arbritrage available - but NO ONE and I mean no one to do the deals due to lack of balance sheet - there is so big deals to be had that it screams to me that this market is far worse shape than anyone even willing to earn up to...... Fixed income could catapult itself this week - yes even after 6 figures move yesterday.....watch as we move into futures roll.....

Also redemptions continues:

//www.efinancialnews.com/usedition/specialfeatures/content/3352639983/

Sitting next to senior executive in Pharma on the plane over - he was "desperate" in a positive way - saying there is NO WAY in Hell he could raise new money, but at the same time he was shown better deals than ever in his history as executive, so much so that he had hired senior banker to do his M & A - and that's fortunately the bright light here:

The well managed companies are starting to be shown the good deals - at least outside banking - meanwhile back in banking-land I keep getting pummeled for stating the obvious - banks should and will fail with or without protections from Governments - this is merely 6th inning (there are 9 innings in Baseball) - as my fellow traveler from pharma stated : I am a doctor I believe in evolution, the stronger must survive!

http://online.wsj.com/article/SB122818833059071519.html?mod=googlenews_wsj

Strategy:

Still @ 75% cash/short-term fixed income, and applying the remaining 25% into NEGATIVE market views: short eurchf, short Stoxx50, long Stoxx50 puts, short EURUSD(still), short NZD in options, still down-side in Gold.......

We remain with our S&P500 in 500 and all Westerns world interest rates in ZERO....this is the 5th wave starting - the worst one......I have been on the road extensively last one month and there is only one uniform message: This stinks ........

Safe trading,

Steen

If stock market experts were so expert, they would be buying stock, not selling advice.

If stock market experts were so expert, they would be buying stock, not selling advice.
Norman Augustine (1935 - )

Dear Investors,

I find it scary that our target (long-term) is now in sight: 765-00 - We have been calling for sub-800 but the speed of this collapse surprised even me to be honest - I did expect the politicians to react to get ahead of the curve but in true politician/policy maker fashion they trailed - giving me 50 bps, when 100 bps was needed, leaking all info to press - etc etc.

Now we are awaiting two major events:

One, the Lehman CDS settlement - this has been major driver of the hoarding of capital by banks and funds as the gross amount needed to be settled is said to be > 300 bln. US Dollars.

http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN0841811720081008
9:45 a.m.-10 a.m. Auction participants will submit bids and offers for the debt backing the credit default swaps, which will be used to determine the initial recovery rate of the swaps.
10:30 a.m. Auction administrators Creditex and Markit will publish the initial recovery price and the open interest for the contracts will be published. The open interest reflects the amount of bids and offers that have been made, and will show if there are more buyers than sellers, or vice versa.
12:45 p.m. -1 p.m. Participating dealers will submit limit orders for the debt on behalf of themselves and their clients to fill the open interest
2 p.m. The final price of the auction will be published.

Two, the G-7 meeting in Washington. I got feeling this meeting could start early if not already underway right now. There should be press conference 7-ish PM CET time, but I expect announcement before US open.

The schedule:

All times are (WashingtonTime/ GMT)...
0830/1230 - French Economy Minister Christine Lagarde speaks on the credit crisis at the Council on Foreign Relations.
0830/1230 - Eurogroup President Jean-Claude Juncker delivers welcoming remarks at a conference on the euro sponsored by the Peterson Institute for International Economics and BRUEGEL
0845/1245 - EU Economic and Monetary Affairs Commissioner Joaquin Almunia speaks at euro conference 0900/1300 - Group of 24 ministers meeting.
0930/1330 - ECB Executive Board member Lorenzo Bini Smaghi speaks at euro conference.
1000/1400 - Inter-American Development Bank holds seminar, 'Impact of Financial Crisis on Latin America'.
1015/1415 - IMF Managing Director Dominique Strauss-Kahn speaks at euro conference.
1240/1640 - ECB Governing Council member Christian Noyer speaks at euro conference 1400/1800 - Finance minister and central bankers from Group of Seven nations meet.
1515/1915 - Media briefing by G-24 Chair.
1515/1915 - ECB Executive Board member Lorenzo Bini Smaghi participates in IMF seminar on oil prices.
1700/2100 - South African Finance Minister Trevor Manuel participates in IMF seminar on impact on developing countries of economic slowdown among Group of Seven nations.
1845/2245 - U.S. Treasury Secretary Henry Paulson holds post-G7 news conference.
1945/2345 - ECB President Jean-Claude Trichet, Eurogroup Chairman Jean-Claude Juncker and EU Economic and Monetary Affairs Commissioner Joaquin Almunia hold news conference.
TBA: Other G7 delegations hold news conferences.
TBA: G7 holds 'outreach dinner' with Russia.

We are now in phase where innocent people lose their jobs, pension and net-worth due to bad investment advice and the ever go-happy-crowd of stock manipulators calling for buy-on-dips, through my optics this is the "fundamentals" right now:

• S&P in 900-1000 is oversold; getting cheap...


• S&P sub 800 is cheap... and should give excellent return on 2-5 years horizon.


• Our target remains 765-00....... we are 85% in cash - and we will await this weekend moves and NOT ENTER any new positions before Monday.....

My thoughts go out to all those who fights the markets today, to the poor Icelandic population, to everyone forced to "do something or else"....... this will be day to tell your grandchildren about, for once I am relieved I am a boring, defensive, and sceptic..... I am scared and so should you be.

Be safe - with the best wishes,

http://www.youtube.com/watch?v=jHPOzQzk9Qo

Steen

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

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.

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

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

If confusion is the first step to knowledge, I must be a genius. Larry Leissner

If Mr. Leissner is right I sure am a genius!

The confusion on my part does not actually go on the long-term picture but more on the short- and medium term pattern.

The fact is that the market consensus has moved to expect Fed to be hiking by 10 bps in one years time from now, while still betting 25 bps in next weeks meeting just to safe guard the economy.

No, my confusion, goes to the pure fact of me being a Libertarian through-and-through although after listening to Soros, Kaufman and others I am beginning to see "clouds on the laissez faire horizon".

Looking back at the last 20 years and really since 1987 Soros is absolutely right this has been the biggest credit binge ever - the whole system was built on the fact that credit was readily available and if there was a crisis Greenspan and his merry men came to the rescue; 1987, 1991, 1997, 2000-2001 .....and now in 2008.

The banks created business models which took advantage of the free-flowing credit and doing the so called financial engineering (talk about contradiction in terms!) they told the investors and public at large that they had invented a money machine. Obviously now we all know, that yet again, this was not the case. The mark-t0-market effect was not duely calculated and compounded. (Read UBS story in FT this week)

Let me give you an example;

I bought a house in 2001 for let's say 5 mio. DKK, took out mortgage based on the valuation on 90% - then I kept the house for 3 years, now the "market" told me it was worth 15 mio. DKK - right.....but surely the mortgage value would be something like initial cost (5 mio) plus inflation x 2, plus replacement value plus average disposable income/ Houseprice maximum ? But no the mortgage value is and was based on the "market value" of it - fair ?

No, a tangible asset can not continue to go up merely because the market "clears" the price higher, there must be fundamental fair value around which the loan valuation is based otherwise we end with a market which is self feeding both on the upside and on the downside.

I would even argue that logically my "quick-and-dirty price" is more logical than a house rising from 5 mio to 15 mio. in 3 years? Nothing fundamentally argues for this being correct ? Am I wrong? This example is one of 1000s but a true one!

If you follow me so far - then, however, if the "market" is not the correct pricing mechanism then what is ? A bunch of useless central bankers? or some other STATE CAPITALISTIC enterprise?

Neither, the "market" needs to smarten up and make sure it does not compound positive and negative movements outside the scope of fundamental value.

Warren Buffet, Jim Roger, George Soros will all tell you the best deals they ever did was based on good fundamental value, not market timing, if that is the case then surely we got some way to for this NEW CAPITALISM to go back to normal again?

I probably argued myself into a hole, my point here is;

Every time the "market" has had trouble the central banks or governments have bailed out the system, this time it may be different. Fed has little ammunition in the bag except for doing Carry-On movies with business as usual, but the banks is in a position where IF they get their balance sheet in order they will move towards my valuation model based on FUNDAMENTALS, which mean they will lend out less and more expensive.

That's the real paradigm shift here - the credit bubble is in process of being de-leveraged - the new world is one where there has been power shift to the savers; i.e the Middle East and Asia, who will have less of a strategic angle on the US and Europe as future export growth for them is being hammered by two unavoidable factors;

1. Lower global growth - if credit is less then growth is less.
2. Rising de facto cost of producing as there "workers" demand bigger and bigger share of production cost.

If you don't believe me then check the two worst performing market this year? China and Vietnam both down more than 40% - sign of the times?

I am very open to discussion here, but the above issue is one which bother me big time, as I believe the old regime and "rules" of trading is being thrown away... and it is time to look at the world from 10.000 feet and with more than day to day glasses.

The good thing here begin, if the market moves towards normalisation on credit creation and lending standards we are in for less volatility and better growth long term as the world again allocates capital to the HIGHER MARGINAL UTILITY - and not as now to dead financial instruments in some alphabet soup no ones understand. Hopefully this will also mean that the talented young people of today will stop applying for jobs in funds like mine and move on to change the world to a better place dealing with real issues like;

Demograhics, the quickly rising population
Food, lowest production to demand in history
Energy, alternatives more needed than ever

Strategy;

FX: Still some EURUSD long, but starting to built reversal trade - if the market is right about FED being done on downside there is risk of dramatic out of the blue correction in EURUSD. My friend Drew Baptiste, Morgan Stanley, warns me it could biggest in the last 1-3 years, but new low in US dollar is ideally needed.

Still long MXN - best performing stock market, long term growth - like it....

JPY - long - still think its matter of time before new lows is coming - the anti-risk trade I know and its costly, but......

FI: Given up on upside for now - think mean reversion still the game. My model turned bullish FI last two days on mean reversion - let's see how it plays out.

EQ: Short versus the 1400-05 major trend line - may work may not - but in it.....

COM; Long grains - what a ride - that vol for you.

MTD: down like 70 bps.

More later in the week more direct market relevant.

Go Liverpool 2night.....!

Steen

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

Another big day in the market...ECB & BoE

The Beige book was far more upbeat than market expected - the evidence, though, would have been available at Jackson Hole meeting, but what remains is that the US at large in August were more 'fearing than feeling' the new paradigm of NO liquidity for banks.

I did however, stumle upon a very interesting note from a former colleague; Jessie Tay, UBS, Singapore, she noted that: "In a highly unusual move, FHLB, another GSE, revealed that they have lent 110 bln. $ in August, which I understand to be 6 month to 2 yr funding. They normally disclose quarterly. "The 12 Federal Home Loan Banks lend money to 8,100 thrifts, credit unions, insurance companies and commercial banks at below market rates in order to finance their holding of mortgages. The banks in the system, which was formed 75 years ago, also buy and hold mortgage related assets themselves"...

The irony as she also conclude; so this credit crunch happened DESPITE most financial institutions having access to funding in August. Maybe that's why the pain was not felt YET ?

Staying on credit I noted in FT's Gillian Tett piece yesterday that she qouted international monetary sources as saying : "What is happening right now suggest that the moves by the FED and the ECB just havent worked as we hoped" Interesting someone with sense of the situation?

BOE is unchanged today so is ECB anything else would be surprise. ECB is dogmatic so bigger risk for something ODD to happen there.

Another company goes under in New Zealand the RBA's Costello admits: "...sub-prime hurt confidence". RBA also widen the repos amid credit squeeze.

Basically, nothing have changed, the off-balance sheet to on-balance sheet continues, and in this light we should also see Citigroups closing down Tribecca, and internal hedge fund, which when launched was supposed to get 20 bln. USD under management!

Readers of my "analysis" know I think EVERYTHING in the world is connected to JPY volaitlity, to prove the point here is chart showing ABC/Wash. Post week confidence indicator and JPY vol 12 mos (inversed).... Hereuka! Its another match. (double click on chart and it enlarges)

So... according to correlation, if JPY volatility does not come down then there will be no improvement in US confidence.


Tatical approach

Fixed Income: Clearly the tug of war continues. Central banks can not solve this, there needs to be serious downsizing of balance sheets in the banks.

10y notes made new high and if 5.44% goes in yield, we have new BULL fixed income market. This is justified as duration analysis shows the heavy weights funds (real money) been building potentially forcing others to join them.

I am neutral as I want to see ECB and BOE lingo, plus get feel for unemployment number tomorrow, but I am on the side of the big boys here.

Foreign Exchange:

Between rock and a hard plate. US dollar if Fed is going to give the market its cut, then it become question of... 25?, 50?, 75? If less than 50 bps next few month, US dollar will have strong recovery. The talk of China abolishing US Fixed income does not really makes sense, but I am more prone to buy US dollar than selling them, as the improvement in trade deficit "normally" coincides with stronger US dollar.

High yielder NZD and AUD have seen their highs - reality is hitting them with tight money markets, and sub-prime issues.

Long CHF again from this morning on technical input, also got feeling ECB numbers going to be weaker than Swiss from here.

Long JPY, despite both weak Nikkei and economy. In times of crisis, the Japanse starts to repatriate we saw that in the Asia crisis, and from the price action recently I feel its likely again. Volatility remains elevated.

Equity;

Still mega long gamma downside.


Good luck with ECB and BOE.

Steen

Do I owe Bernanke an apology?

The jury is still out, but Bennie even telling the market that the moral hazards was the markets issue to deal with not his, was pretty surprising! Bennie definitely gained some delta on my rating radar, but he is still public servant and the Bush/Bennie show was coordinated to almost perfection for most impact.

However, the real dilemma remains the sceptisme with which the fixed income market treats this event. They are telling us, bail-out, go to life boats, while the stocks market guys are enjoying their Martinis on the sun deck, seeing no icebergs or anything in the horizon which should get them take of the party cloth!

Is this is a matter of eventually, the stock market understand that when there are NO funding, there are no party, or is it the "doom sayers" of credit who needs to get a life?

For me its neither or, as both things are facts. Fact is EMG and Carry trading is back in full swing. Fact is there will be both earnings issues and down-turns in the economy, but....the real impact is on the consumers and here I am very pessimistic.

Two in three Americans thinks the US in a recession, according to WSJ poll!
The leverage consumer is stuck; the food bill is exploding, the gas bill..exploding, the rent bill... exploding, and the real income is flat, so this credit crisis is in REAL TERMS a surcharge tax on the consumers (the very reason Bush is trying to "help out")....

From an allocation point of view September have by far the worst seasonal returns:

ADVFN’s analysis found that the FTSE 100 drops an average of 1.37% during September, making it the month that sees the worst market performance of the year. (http://www.growingbusiness.co.uk/September_worst_month_for_stock_market.YeISIT1op7A9-A.html)

This makes me maintain my extreme long cash position: 60% - the bulk of my allocated assets are in Asia, mining and Asia real estate:

Aberdeen Global - An Asia Pacific fund YTD: +13.14%
Merrill Lynch World Mining fund - YTD: 32.86%
Morgan Stanley Asian Prop. - YTD: 10.19%

Even though these trades are part of leverage trades is for the long term. Mining have excellent supply-demand function, demand exceeding supply, Asia as whole will do more "internal investment" amoung each other, something the SWF(Sovereign Wealth Fund) will escalate, and property, well Asia is cheap vis-a-vis more developped economies and as the population grows, and gets richer so does their housing demand.

I am also long technology relative to banking. I was net negative banking but have shifted in to more balanced approach, as I really dont have any gauge on who "wins" the above conflict; the fixed income guys or the stock guys...

Either way the next directional move will be BIG in velocity and in re-valuation as;

1. IF.. stock gets fixed income guys convinved ... there will have to be bought a lot of stock to get portfolios back to neutral weights....
2. However..if fixed income prevails, there is serious revaluation needed. The present forward earnings have hardly budged. In other words the E in the P/E have remained untouched by the credit, add ot this that margin at cyclical peak, and you have dynamic cocktail.

In closing; Im long gamma downside in stocks, I cant afford not to be, looking to way of increasing long US dollar exposure.......neutral fixed income, neutral energy, and looking to sell both grains and energy.

A very confused .....Steen.... safe trading... and as always... toss a dice and you will most likely do better than me..

Steen

Credit crunch or not..? This remind me of 1998

I did internal Saxo Bank interview and instead of printing it I will leave it for you in link:

http://www.saxobank.com/?id=993

Steen