Weekly Macro Meeting

The three driving premises for our research remains:

1. Cost of funding drives market and valuations


2. Price of liquidity new unknown (tax on money)


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

Conclusion

This week: Reality hurts! Redemption, Dirigisme, tension in EMG+ EEC all points to further deleveraging in the economy ==> Bias on ACCELERATION on downside for risk assets

Last week: We have moved into grey-zone between recession and depression ==> Bias on downside is increasing.

Allocations:

This week: 85% cash maintained - short in commodity direct and indirect through stocks, short gold, long TIPS, Bunds,long USD,JPY,CHF vs EUR, LVL, HUF, GBP, long down-side in Stoxx50 and S&P500

Last week: We called the transition - although the Social democratic Nationalisation has created pressure in EEC and EMG countries as they stand outside the "circling of the wagons".
We maintain 85% cash - but up from intraweek 65% - as we need further information to make long-term call.

Targets:
S&P 500: Down to test our long-term minimum target of <765-00>

Fed funds: 0.50% by Q2 2009 /ECB: 1.50% by Q2 2009 /10y yield: 4.5-5.0% by Q2 2009 /2y yield: 1.00% by Q2 2009

Crude: 50-60 by Q1 2009 /Gold: 700 by Q1 2009 =========================================================

Economics

Bias: Negative growth, consumer demand & inflation

Incoming data continues to disappoint- below is the Surprise Index compiled by Citigroup, it rates better than expected data in ratio to worse than - not exactly time to smile is it?

(Click on chart for larger version)

We see increased tensions in the Non-in regions: EMG and EEC.

Hungary is being called the new Iceland, and Argentina is threathning to nationalise the pension funds......

EMG+EEC return is 100% correlated to their current account surplus' - in this global slow-down C/A balance deteriate and does the political will of these emerging countries to maintain "open trade" and non-intervention.....unfortunately.

On the premise of "cost of capital" key component, the saving surplus countries: Switzerland, Singapore, China and Japan will do "less bad" than overleveraged: EEC+EMG, UK, P.I.G.S, Canada, Australia and New Zealand.

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Fixed Income

Bias: Bullish

Change in bias from neutral last week - we have been long Bunds the past week and with some success we see further flight to quality.

High Yield(Ticker: HYG) has performed ok - we are still constructive on this.

Danish Mortgages: Still under pressure - as long as the Government dont guarantee mortgages there will be pressure on DKK & Mortgage Bonds. We see intervention timed with the "conversion" in December - The government does not know this yet, but they will intervene before going on Christmast Break.

Still favour Bunds over Treausury. In cash bonds we favor New Zealand, UK and Austalia - currency hedged.

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Equity

Bias: Very negative

Our long-term EPS share model indicates we need to undershoot by wide margin on "cheapness" in order to follow standard mean-reversion. Our Chief Economist is all excited about potential for S&P in 400.00 as an analogy to The Great Depression where S&P fell 80% from peak, but unfortunately we are not in position to use this type of counting due to our rule #3: No prior analogy historically will work (because this is different, very different)- However this does not mean David is not right about deteriation beyond our minimum target of 765.00

Sectors wise:

Negative: Energy, Consumer Discretion(..but Fiscal Stimulus plan could change this), Materials

Positive: Financials(The National Champions), Utilities, and Technology

Neutral: Consumer staples, health care, Industrials, Telecom

Top picks: Credit Suisse, HSBC, Microsoft

Top pans: Carlsberg, Nestle, British American Tobacco, Coke, Volkswagen

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Commodities

Bias: Negative

Gold: In time of writing we have passed our last week minimum target of 750.00 - new target: 700.00. The Central Banks sits on big Gold reserves which pays nothing, does not offer any value ==> They will sell - also correlation with US dollar will accelerate the move.

Crude: Passed the critical 70.00 US Dollar. OPEC this week will take 2 mio. barrels out of circulation - but pressure will continue.

Foreign Exchange

Bias: Stronger US Dollar and risk aversion currencies: CHF, JPY

US Dollar: The fiscal package mentioning this week took US Dollar through the critical 1.3250 level, we have been short from 1.3700 and we are now close to our target of 1.2700.

The key drivers in US dollar for now are:

Dirigisme, the relative more leveraged European banks, and differences in monetary policy expectations - all indicates that down the line 1.10-1.15 could be likely.

EMG, EEC: Very very negative. We are looking for strain in ALL pegged currencies and EEC+EMG. Hungary been hiking rates 300 bps - this smells like UK & Ireland in 1992 hiking to defend, but how is that going to do anything about their structural imbalances? You need to be long CHF, USD, JPY basket vs EMG+ EEC

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OVERALL CONCLUSION

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Our Puma Macro model made +123 bps versus Dax return of -1208 bps for the last week - and YTD we are +510 bps versus -43% for DAX .

We fully acknowledge being so extremely defensive dictates being open for any change of trend, but having said that in a world of almost total uncertainty the old rules of Money Management needs to be applied:

1. Preservation of capital

2. Respect and understand compounding

3. Knowing when you are wrong.....

I wish that more socalled advisors would have learned these lessons:

I now daily see "Conservative Portfolios" down 70% and where the standard reply from the "managers" continues to be: Keep calm, this will come back...... but as John Maynard Keynes (keeping with the theme of dirigisme) said: 'The market can stay irrational longer than you can stay solvent'

We are now in phase where people/investors face the most difficult task of all: Remaining solvent - the advice they get is to "stay with your positions - it will come back", but scroll back up to the top of this blog and read our # 3 rule again: It is different this time - negatively.

Safe trading,

Steen Jakobsen

The spread of evil is the sympton of a vacuum - Ayn Rand

The spread of evil is the symptom of a vacuum. whenever evil wins, it is only by default: by the moral failure of those who evade the fact that there can be no compromise on basic principles.
Ayn Rand (1905 - 1982), Capitalism: The Unknown Ideal, 1966


(Click on chart to get bigger version)




I really should not be showing you this chart from my Chief Economist David Karsbøl - it shows how some trades have become so out of whack that there is great oppertunities in the market.

BAA - or Moody's BAA-rated bonds pays more than 500 bps over US Treasuries(I.e: Yield > 900 bps p.a) with defaults never higher than 4% ! The only issue being our negative equity bias, but this is one of the trades you need to put on.

We are working on making synthetic ETF ratio which can cover this one for more direct access - otherwise check out:

HYG: http://stockcharts.com/h-sc/ui?s=HYG&p=D&b=5&g=0&id=p42658334577 or
LQD: http://stockcharts.com/h-sc/ui?s=LQD&p=D&b=5&g=0&id=p42658334577


Another thing you need to watch is this word:
Dirigisme (http://en.wikipedia.org/wiki/Dirigisme)

Sarkozy has turned out to be more Socialist than any prior President - my friend Henri Foch send me this email today and unlike me, Henri is not person to get "carried away".....:
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Europe is getting protectionist as the French President suggests creating a fund to nationalise key industries. He mentioned two reasons why to create this fund:

- To gains increasing influence on the economy in order to guide it.
- To avoid foreign investors buying European industries for the cheap

Sarkozy suggested that Europe could run a 'different monetary policy' without violating the independence of the ECB. In order to achieve this he plans introducing an economic council / government which ‘should discuss with the ECB’

After the comment, European shares declined, CEE and other EMK currencies have come under pressure. The quality of the comment is poor and super EUR bearish.
=============================================================

I am sure Sarkozy like Putin soon will be proclaiming: "There is NO CRISIS in France" its a conspiracy of the hedge funds, the Liberitarians and the Economists.... sure is ....

Why are "facts" are so oversold in todays market? Fear, greed, stupidity ? Mankind is supposed to learn from their experiences, that's why we "rule the earth" is it not -

I must say I am getting more and more depressed about the intellectual part of finance (How about that for a contradiction in terms!) - there is too much BETA around........ Beta must die --- Destruction of Capital as per Schumpeter must play out .

Strategy:

FX: We remain short our EURUSD based on:

• Technical 1.3260 was next line the sand. John Hardy, my chartist looks for 1.2700 - and he has been hot recently, so we move our 1.3000 target to 1.2700 minimum
• Fiscal stimulus in the US - Bernanke seems to want job with new administration as he "sanctioned" fiscal plan to the tune of 300 bln. USD in Congress yesterday (mind you getting Bernanke's blessing is the kiss of dead!)
• Europe deleveraging needs to run longer and deeper than the US.

We are looking to add short HUF & LVL vs. basket of CHF and USD

Fixed Income

As printed above - we like Corporate bonds from the "distance" - getting closer - looking to trigger.........

We like TIPS http://stockcharts.com/h-sc/ui?s=TIP&p=D&b=5&g=0&id=p42658334577

Bunds - we are long 116.00 calls for Friday - sold our cash today.

Commodities

We are short GOLD, mostly because I am enforcing the view on the team but in my metrics - fiscal deficits needs to be financed, why not sell something which does not work as inflation hedge, carries no value except illussion of storage - i.e gold reserves to finance the purchase on government bonds .. ?

Target: 700.00 still....

Equities

This is your Captain - we are flying in a straight line towards 765.00 - we do expect some turbulence along the way, so please remain seated at all times during the flight - Thank you for flying with us.

Cash: 85% still - Full Investment Meeting report tomorrow from me...

Finally, my friend, teammate and sparrings partner Jesper Christiansen have launched his own blog - although more "dark visioned" than me, he offers this from different angle than me - try his blog: http://mrtitrading.blogspot.com/

Safe Trading

Steen