Prediction is very difficult, especially about the future. Niels Bohr

Prediction is very difficult, especially about the future.
Niels Bohr (1885 - 1962)

There is clearly now some established ranges in place in the S&P500 between 860 and 1060 on the downside, bias for me is still "south".

Right now I am watching my friend Drew Baptiste 987.00 level as key trigger for whether long or short, and remains with our negative bias meaning potential for minimum 767.00 based on the trading theme process moving from recession into depression.

I have said continuesly that the stock market performance for Q4-2008 and Q1-2009 will be based on the "perception" of either recession or depression. Despite my own bias towards recession, a severe one, it is more and more clear in the public domain and incoming economic data confirms that the worsening data is accelerating not stabilising.

The best point is our own internal model designed by our Chief Economist David Karsbøl, which measure key indicators. This model has been excellent in catching the trend of incoming data.

Saxo Bank Fundamental Index (Click to enlarge)


The conclusion:

For now we are moving into a "perceptional depression" from a fully priced recession - market impact is retest of low(potential for new lows) & much lower short-term interest rates.

In Europe, and in EURUSD I have become very negative short-term based on the increased pressure for much lower rates in ECB (& BOE).

I can not say I am fan of Kaletsky of The Times in London as he continues to act and speak like a person who uses history to explain the future, which is simply not do-able in my investment world: (http://business.timesonline.co.uk/tol/business/columnists/article4974535.ece)

To remind you our three premises are:

• Cost of funding - drives market and valuations


• Price of liquidity new unknown (tax on money)


• No prior analogy historically will work (because this is different, very different)

Despite this he has an interesting argument: If we assume UK has one of the most leverage economies in the world, then why does it not have the lowest interest rate?

His argument can be read and seen in the above link, but there is some truth in this and the investment outlook conclusion must be:.......Much lower front-end rates.

I hear you already, but it is already priced in! No! Not to the full "depression" extend: UK in 1.00%, USin 0.5 %, Australia in 1.00% etc, not possible? Sure it is, in a depression its all new rules, when you fight to survive as a country, a company and on a personal level. As President Reagan said: "A recession is when your neightbour lose his job, a depression is when you lose yours".

Unemployment rates across the world, will unfortunate rise to at least 1992 levels, and I remember being a young man coming out of a tube at Hammersmith Station in London in 1992, and hearing the newspaper salesman shout: Evening Standard: 3 million unemployed in the UK, Read all about it..........and if you do not trust me on the pain of the UK consumer check this cool site by the BBC http://news.bbc.co.uk/1/hi/business/7457886.stm

Strategy:

Foreign Exchange:

Short EURUSD @ 1.3500 - fancy new lows beyond 1.3260. My chartist John Hardy is very bearish....

Still small long USDJPY through options, mostly as "insurance".

Fixed Income:

We continue to flex between deflation and inflation, right now this a.m, we bought back our short Treasuries around 112 25/32 - looking for some erosion into the Washington Mutual CDS auction tomorrow, plus acceleration of down-side for economics.

We are also looking for post Investment Meeting tomorrow to put on some 1.00 pct UK rates by Q1-2009.

I remain sceptical of lending the US money @ 4.00%, so net long is not happening here......

Equity:

We took profit on ALL our long positions including value trades like banks, pharma, and shipping making a 7%-17% return on them - why?

Well, the "needle" has clearly moved to 60% odds depression from 40% in the last few weeks.. which we now take consequences from.

Commodities:

Short Gold, very bearish.... target sub-700.

ALL in all we are in for exciting week, the financial panic has been avoided, but will we be able to avoid economic disaster? We think so, but right now price action and incoming data dictates us to at least believe it could be DEPRESSION´which is incoming.

Finally, spend 10 minutes reading this unique commentary by Ms Scwartz, 92 years old: Bernanke is fighting the last war. http://online.wsj.com/article/SB122428279231046053.html?mod=special_page_campaign2008_mostpop##

Safe trading,

Steen

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

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

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

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

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

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

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


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


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


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


• Private Equity deals is extremely cheap


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


• Pakistan Sovereign debt trading @ 85 pct chance of default

Some things are lacking as well:

• Housing market still has 4.5 mio. unsold homes,


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


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


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


• US election. Whoever wins is a loser as they will have to wind down spending, increase taxes..... and implement stupid regulatory frameworks

So what I am trying to say remains:

This is going to be like in the 1970s:

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

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

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


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

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

In closing I will note two more things:

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


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

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

Be safe,

Steen

A day in positive-land...

Well, once in a while it's good to join the other side, to get a different perspective.

I did that today, first I spent some time reading up on some of the better independent research firms out there BCA & Bridgewater, then I joined Soc. Gen for their lunch presentation with their Chief US Economist Stephen Gallagher, who writes some excellent research pieces week in and week out.

The arguments of the "positive" camp summed up by me are:

- Looking back at prior crisis' there is something missing this time....
- The consumer not going to back down.....
- Fed will do what's needed......

It is hard to argue with them if you only use data since 1982, which 99,9% of them do in their analysis. Yes, then something is missing, but.....

What lacking is not signs, but the reaction.... the automatic pilot which "bails" them, the economist, and the market out each time.

The central banks DOES realise there is moral hazard in rushing to the rescue, I think the best analogy of the present situation was given by McCulley, of Pimco....

He talks about, having been at Jackson Hole, how the Fed wants to reset the strike price of the Fed put.

I.e: slower and less predicable. That's a huge difference from the present mindset of the idiots like Cramer & Kudlow. Who thinks: Cut= Good No cut= Bad.

He goes on... "Fed does realise that risk aversion has not historically been broken except by cuts if Fed Funds policy rate". Freakin exactly!

So.. what we got is; a New reaction function, which is NOT automatic AND we got CB's, not only Fed, who wants to let the market play out its games, because it is ALL games!

I find it so ironic that the very people who wants and calls for Fed to cut, are arguing stock are cheap based on fundamentals! Why then do Fed have to cut?

Enough on this, I was inspired yesterday by John Makin latest op-ed in WSJ, which calls for Q4-2007 to have negative growth of 0.8%. I could not do his piece justice by trying to para-phrase him but here is the link:

http://www.aei.org/publications/filter.all,pubID.26775/pub_detail.asp


A few headlines from him:

- Reduced flow of credit to all borrowers, while increasing the cost of borrowing for credit worhty borrowers"
- Every time in the last 50 years that residential investment been this negative - it has meant a RECESSION
- American recessions unusual because it implies "negative consumption growth"
- The Excess of 2000-2001 bubble was in the capital stock, hence no material impact on consumer, and it took eight quarter to run this unwind
- the -0.8% comes from: Flat consumer growth, a negative 1 pct-point from fixed business investment, and plus 0.2 from the rest (which is average since 2001).

Well, I am really not in position to feel confident about neither the Positive-land story or the negative as represented by Mr Makin, but.... I am defensive still.

There is absolutely NO reason to be brave right now. There is still bubble in carry-trading, market believe in Santa Claus (Santa Bennie), and credit market is on a strike not seen since Reagan flighted the flight controllers!

End of this game is how the American consumer reacts, or in worst case, the foreign investors in the US dollar.

The second part have got some headline recently as US dollar index broken the 80,00 pretty much predicting free fall on the cards now.



I remain EXTREMELY sceptical on the US consumer, his headwinds are considerable:

Higher living costs, higher energy cost, no growth in disposable income, higher funding costs.

We have seen major ticket item stocks like Harley Davidson collapse recently, to me that's sign things are NOT that good. A seen by this chart (click on it to enlarge) the HOG stock been drifting down since MAY!.. Leading or lagging? I will let you be the judge.

Tactical

Fixed Income: Neutral. Long some Euribor calls as ECB too hawkish, but valuation is stretched even though duration data supports long position.

Commodities: Looking to short Soya and Corn. Crude = neutral

Foreign Exchange: Long JPY vs EUR and USD, short US index

Equity: Long Asian real estate, mining, and Asia in general, vs. long gamma position in Dax and S&P500.

Cash: Still 60% ish...

This is trying times for all of us; central banks, hedge fund managers, investors, the real questions to me remains: Is the paradigm shift?

Yes, I believe it is, the consequences will start to materialise over the next six month via increased leadership from Asia, increased SWF impact and repositioning of central banks reserves, but as always I am merely small farmer son from Denmark with less predictive powers than a monkey throwing darts.

Steen