The undermining of the US Dollar is under way....

Dear Investors,

Todays macro blog is on how the the Think Local- Buy Local strategy of Asia(China) and Russia could have material impact on natural unemployment rate - i.e: higher - in Europe and the US.

Also Fed is leaking their intent on not hiking rates ... read on:

www.steenjakobsen.blogspot.com

safe trading,

Steen Jakobsen

Negosiating difficult water....

Dear Investors,

Seems the "temptation" was too big at the critical 882-00 level, and the normal "sell-of" Monday cycle has been replaced by a buying Monday, if tomorrow do not follow the normal pattern of being an "upday" its either sign of some behavioural changes in investors, or sign this top is in place - There are several schools and logic to seeing a "melt up" in S&P as my good friend Drew Baptiste, MS, says in his notes today, but there is also a terrible "consensus" move change almost daily presently, a sign things are about to heat up.

Clearly a close below 880 - is one sign - and on the top side 930 becomes a key issue for further gains into the 950/1050 expected top for the year...

(click on chart for bigger size)

I am again pretty much sidelined as I can not make head-or-tail in this market - my inclination is for top being in place, but on the other hand the lack of follow through concerns me - hence the almost tiny interet in getting involved for real untill this range gets "unstuck".....

The dynamics of the market is thorne between "nervousness" of missing the train - again- on the upside and risk of being caught too long on the topside.......

I know im rambling, but bottom line... wait for market to evolve - I notice or rather my friend Jesper noticed the "usual" front page from Barrons in May.




Source: http://www.barrons.com/



I have always loved reading Barrons, but its timing and being front page has not always worked out - Clearly we "all" think there is one final bubble, i.e the low yields in the world, but as I have stated again and again it really depends on your starting premise: I.e: Which is greater the falling velocity of money or the inflationary "printing" of new money? You will know I am in the camp of "disinflation/deflation", but as Barrons clearly makes the case for ......the risk being this could be the biggest bubble left to play... I will look into how the ultimate "reflation"-basket has been doing recently: Long Gold, short T-bond, long crude, short US dollars.....

Anyhow, safe wind and safe trading.

Steen Jakobsen

PS: Spend some educational time listening to Prof. Thaler if u got the time:

http://www.ft.com/cms/bfba2c48-5588-11dc-b971-0000779fd2ac.html?_i_referralObject=1107357154&fromSearch=n

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

REVIEW ON MACRO EVENT FROM LAST WEEK

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

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


Source: Google Trend

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

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

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

TECH. PATTERNS

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

Click on chart for larger version:




The bullish sentiment has reached 90% …

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

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

DEFLATION/DISINFLATION vs. INFLATION

This weeks PPI & CPI will reignite focus on the waning inflation as PPI is expected to fall 3.7% % YoY top-line, while Core-CPI is down to minus 0.6% YoY - the market believes the "bottom line story in the Obama plan" is one of reflation and hence inside the next 12 month(as seen by FED funds 1 yr pricing in 50 bps hikes – in Swaps), but this seems way too early days for us.
Click on chart for larger version:


We have the position that the velocity of money is still falling faster than the “new” printing …”The hole is still big” and needs to be filled first before inflation takes off. We see at least 12-24 months of disinflation and then the REAL EXERCISE becomes for the Fed and the world’ central banks to take ALL of the monetary easing back.

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

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


FIXED INCOME

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

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

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

http://tinyurl.com/re447o
Click on chart for larger version:




ALLOCATIONS

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

CONCLUSION

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

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


Steen Jakobsen

My Karma ran over your dogma. Unknown

It's kind of dramatic that Obama did not even manage to get himself 100 days of honeymoon - his administration has been mirred in mistakes and major policy confusion, but what must really hurt is the stock market reaction to him and his merry men.....- Obama speaks --- market waits -- then sell off --- Geithner speaks market sells of before, while and after.....

Change? The only change is the change left in the tax payers pockets after Obama have spend their money.... and this week is Budget Forum week - how UN-Keynesian!

First they spend the money, then they make plans for cutting back - not even good old Keynes can they get right !

Either you put the invisible hand (animal spirit) to work or not - Not even you Obama can have it both ways! - I find it extremely frightning that Obama seems so driven by spin doctors and bad advice He is for EVERYTHING the voters wants...but "believes in ?"...- my advice to you O and let us not forget I am merely a simple Europea hedge fund manager but:

• Take the loss on Geithner - cut him, not even his own Fed supports him!!!!!!!
  
• Take your loss on Summers - anyone who thinks aloud that women are inferior to men needs their head examined - plus he is so outdated he is almost fashionable
  
• Finally "pay Volcker" - the only voice of reason in your cabinet and someone whom the market will listen to.....

The rumours of Jamie Dimon in the wings is a joke - who with a job would want to join US Politics - and become colleagues with people like Barney Franks?

Meanwhile in "Fantasy Policy- Land" - i.e Fed,the US Treasury, US Government, UK Government and ECB there are plenty of plans, but as someone more clever than me wrote this morning:

"There is no way you can rebuild the financial system from top down....there are plenty of architects but we really need plumbers"....so true, so true...

1. Trichet, my "favourite" central banker in-denial: want to regulate some more: Well done Mr. President that will work: http://online.wsj.com/article/SB123538521116847221.html
   
2. Citibank is closed to being "nationalised" - what happens to sub-debt? Default clauses? Ouch, this could get worse than Lehman http://online.wsj.com/article/SB123535148618845005.html?mod=article-outset-box


3. In WSJ article headlined: Red Light flasing again we are told: a) LIBOR- Swap spread which reached high of 366 last year - saw 90 in January is now rising above 100 again b) Markit LCDX (100 leveraged loans) at close to record lows again (@ 72,5% of face) and swap pay-out now based on 40% recovery vs 20 y avg of 81% pay-back c) CMBX (25 Commercial mortgage backed securities) at new record highs - with Moodys looking to downgrade 320 bln. of securities.....nice....in other words: It aint over yet....
   
4. Government bail-outs doesn't work! Don't trust me but do read Ela Glowicka on IDEAS on http://ideas.repec.org/p/trf/wpaper/176.html - less than 40% of companies receiving aid exists 10 years later --- C'mon lets spend some more money......!
   
5. Gold - being told, mainly by my friend Antonio Savoca of UBS, that I should think of GOLD as an currency - and that it will go to 1500 and then 2000 US Dollar - You know me, not one to shy away from an outragous prediction but this is a little rich.....but I could be wrong not having exposure...but the true contrarian is flat.....
   
6. EU/EEC - let them try to sort of the mess in Eastern Europe....but with NO TREASURY the task is several fold harder than in the US - who will print the money?
   

Enough from me, only getting back into the research game... I am still looking for:

EURUSD in 1.0000 - the game will commence soon.....be ready to watch the "Trichet Horror Show".......The trailer talks of: All the mistakes which can be done will be done, no one has ever been more dogmatic when faced with REAL FACTS, see how central banking was 20 years ago, and with performers like Barroso wanting to export the European "Social economic model" we are in for a real treat not seen since Hitchcock....

S&P getting close to my minimum target of 690 - my friend Drew wants 620 minimum to be happy, and I know Drew is not one to change his mind (fortunately!)......

10 years yield in the US will flirt with 2.00% - by the way ? How are the "Bubble in fixed income" Ivory Tower people doing ?

STRATEGY:

75% cash/fixed income

25% applied aggessively negatively..

Long 1800 Stoxx50 March, short EURUSD; short S&P, long EUR/EEC - looking to increase JPY exposure...

Safe trading

Steen

PS: Did I tell you this smells like it did before LEHMAN tanked? Check this link: http://carolan.org/ Something is rotten.....

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

when in doubt......go on holiday?

My colleague David Karsbøl have developped a model based on the supposed short-term model of The US Treasury mentioned in Paul O'Neills book, where he states based on only weekly data alone The Treasury's growth model exceeded Wall Streets economist forecast accuracy (Mind you that's an easy goal to set yourself!), but the point being this:

David models continues its free fall indicating we are now moving into solid negative growth and consumer demand.

The later is best seen through the spectrum of credit cards - The US consumer has always been willing to flaunt the plastic even when they have negative equity, but in the land of designer credit cards things are turning to the worse:

Moody's Investor service reports that the charge off rate, which measures defaults as percentage of loans outstanding - rose 6.05% in in March, from 4.64% a year earlier.

The charge off rate peaked above 7% in the 1991 and 2001 recession.

The underlying trend indication is for worst to come as:

1. The repayment amount are decreasing. The US consumer is simply paying less into the bills, obviously indicating either consumption preference or lack of hard dollars...

2. The amount of people skipping 3rd and 4th payment also on the rise.....again not exactly the best sign..

The thing to understand, and this is important.... The financial "melt-down" in banking has been avoided (for now) by Bernanke and his Merry Men's circling of the wagons, but the next phase is one of considerable weakning global demand, the tail risk being we will revert back into credit crisis, as personable income collapse, margin erodes, corporate defaults starts to rise, and banks continues to hoard capital.

Trichet, a man who at long last is gaining some respect from me, hit it spot on yesterday: "The worst could be to come, and an ongoing, very significant market correction is in process"...

My respect for Trichet is rising(note: rising - not gained!) as maintaining unchanged ECB rates does the job for now - it gives him some credibility vis-a-vis inflation, and he realise, correctly, cutting rates not doing anything to real economy as the banks are in trouble.

He also, between the lines with his insight into the European banking system, indicates the European banks needs to earn up to the credit issue and the incoming freight train called potential stagflation.

The European banks are heavily subsidised through the liquidity provision in place, with Spanish banks issuing mortgage backed paper at 101 with ECB and seeing the actual price in the market trading @ 90 bid at best - talk about indirect support.

In terms of the temperature of the market, the bullish consensus hitting new highs, and CNBC commentators, their guests, can not stop talking the market higher - I have been neutral but I am slightly concerned about the market from here;

1405-10 in the S&P was supposed to get us flying, now in the 4th week we trade 1395-1435 and

VIX volatility is coming off - we are due for volatility spike and a range break-out.

I feel downside is the more likely as Q1 earnings was massive disappoint overall.

Stripped for oil companies, the 441 companies who reported so far saw profit tank 30.2% this quarter and 26% in the last.

Energy companies now make up 50% of all profit in the S&P!

Not exactly reason for joy - the fact is the market became oversold in January and March, and now its overbought, the next bigger directional play will be based on how the real economy tracks from here - my take as described above being a path of grinding slower growth, something a very smart friend of mine calls: growth recession indicating negative quarter by quarter growth but probably not outright recession numbers.

It should also be noted Q1 from growth perspective saw one-off factors which will be hard to copy in Q2 - Germany and Europe saw unusually high investments rates- probably covering the fact that most European companies faced bottle-necks in production, input materials and labor.

While in the US the massive inventory build was hardly a choice situation for US companies...but as always I am merely putting odds on this not making predictions.

Strategy

Moving away from Beta long, to net short exposure on market as of today; short banks-, big europeans industrials, and net indices - all on valuation and lack of technical upside break.

Still like credit overall in high grade names.....

EMG- extremely overpriced - looking to sell.......

FX - still firmly believing in new cyclical final low for US dollar- pricing in 100 bps hikes in the US a joke right in front of prolonged slow-down..........Long CAD, AUD, EUR vs. US dollar.

FI - mean reversion play long Bunds @ 113.38 ish... mainly options...

Commodities- stopped in agri- and still long long-term puts in crude....but looking for normalisation of commotidies to gradually reflect growth slow-down.

Best of luck,

Steen

Back from Paris.. sorry for lack of updates...

Maybe I shud add that these updates are as live as when I m in my office in London or Copenhagen, unfortunately the next quarter takes me around the world once, but....

Leading into G-7 I got some feeling in Paris, or rather a confidence that the french feels they can get some sort of 'action' which could stop the weakning US dollar. The french do talk extensively, but this time there seem to be odd confidence I have not seen in a while. I know the media is busy saying this is non-event, but since then has the media been AHEAD of time?

I got strong feeling, which could be proven wrongly shortly, that we are inside 1-3 EURO from top of the EURUSD cross. I remember moving back to Europe in 2000 from the US and how EVERYONE was betting their house the EURO would go to zero even dissolving.......people forget quickly.

I will follow up with more detailed analysis this pm....

Otherwise straight to the positions..

FI: We are and haven been long 10y notes since the last blog...and this time size through Dec 110 calls...

FX: We are VERY long US call vs EURO and NOK - and obviously losing some money.....
We are also long JPY calls.....in less size but with nice 116.00 strike...

Equity: Initiated one unit short (of maximum 3).. yesterday in STOX50 (4.464)...
We are also short AMZN and will add some more single stocks 2day - basically I am going to short the idiot Cramers index of high risers.... !!!

Commodities: No present positions


Bank of America reporting was interesting in several ways;

1. The steep decline in investment banking..
2. The amount of loss provisions...
...but ...
3. Most interestingly, BoA is the cleanest RETAIL bet in the US. BoA is by far the biggest bank and with the biggest exposure to the US at large. I find that as KEY INDICATOR in that consumers are more hurt than present numbers indicate......

Add to this that SIV's and off-balance sheet vehicles seems to be coming back to the surface of the trouble water indicating ROUND 2 is about to start.

After having been EXTREMELY confident in August that this evolve into crisis, I am far more prudent this time. I think the odds are 60 vs 40 for a full blown crisis, but we need to break 1520-1525 in S&P ....

On the FX market, make no mistakes; the fact we brokes 115.80 yesterday made excellent medium term forecaster like Andrew Baptiste calls for bare mimumum of 111.61 low tested with real chance of 105.00.

My comment: Why not ? Despite some renewed disappointed in Japanese economic numbers, they JPY should based on their growth and future yield path have been much lower. I think 100.00 is fair value. JPY is quasi Yuan so follow G-7 for related follow through. In terms of positioning JPY carry is back in force although not in same size as in late July.

Performance MTD etc... up later - report running late today......

Steen