torsdag den 26. april 2007

Ground hog day ? Personal thoughts from very tired fund manager......

This market reminds me of the movie: Groundhog day!

Every morning I wake up and wish for today to be different from the day before!

No such thing! It also turns out that the only destruction of capital going on right now is in my P&L - everyone else seem to be on board the 'carry trading' trade.

Someone trying to tell me this morning that 70 pct of mortgages in Hungary is financed in CHF! Supposedly it's a 'safe bet'.

Reminds me of a young man, me, who in the late 1980s figured out I could finance my car for free by funding myself in CHF and then buy some AUD on a forward trade to pick up... .yes carry. The car a Daihatsu, it's final price? The equivalent of a Porsche!

Then again don't listen to old hand like me - there is a new game in town: the blind leading the blinds and with all things being sooooooooo damn good.. there must be more of this for next week which includes Golden Week in Asia. (

It can't be a huge surprise that I had a horrible week of trading - all our model' and analysis' pointed to extreme valuation in pretty much all markets....but instead we had more of the same. Had I been an equity analyst' I would argue that the trades have just become EVEN better....but unfortunately I live from trading not giving advice (Which I probably everything being equal is the best for me....)

Tomorrow sees the release of the Japanese CPI expected to drop 0.2% this mornings market indicates there is firm believe in weaker CPI leading to non-action from BOJ. The data is mixed but facts will tell the real story.

I can't help thinking myself back to 2000, sitting in UBS' huge trading room in Stamford, Connecticut and having FX sales people walk up to me ALL the time telling me how much they made buying IT-stocks on Mondays selling them on Fridays.

I had several colleagues leave the business because working took their time away from their true call: trading stocks.

I am also reminded of how, probably one of the best stock traders ever, Julian Robinson of Tiger Management in March 2000 threw in the towel only to see his core view: internet stock valuation having no connection with reality being vindicated inside two months!

My point here: Sometimes you have to take a stand as a fund manager, most of the time the markets demands our TOTAL flexibility and at other times we have to stuck in.... which is which right now?

As per usual I have no idea, listening to my "body" or in more structural form: behavioural science, its clear to me we are right in front of major infliction point.

The catalyst? No idea! Researchers are still looking for why the internet bubble of 2000 got defused, and as far as I know they are looking!

So... for now the only right thing to do is to sit back for a while and figure out what I missed on this move....

Strategic views:

FX: Maintaining some JPY strenth calls through short-dated options. Bought some GBP/USD downside earlier in the week based on market looking for 50 bps hike. Short EUR/CHF still despite the pain of funding the Hungarians!

FI: Bought some Bunds upside. Looking at 1 year forward forward making new highs, the contrarian in me MUST react .......Slightly long 10y notes, our model is long with stop out below 108.00

Commodities: Still long Wheat, had some Crude overnight, but considering medium-term view is one of risk aversion coming into play the position makes no sense plus our models are agnostic at best at these levels.

Equities: Stopped once again. Our models shows stock extremely expensive on our mean-reversion models. Reversal is close.


Carry on carriying says the market, but..... watch the close in GBP/USD today. .below 1.9930/40 could become major indicator of high yielders top in place. I also note, trying to be confident, that despite hike in NZD, the 3 years swaps came of, seems inflation in control and that the Central bank wishes for lower NZD. + 700 bps of carry hard for the Japanese to ignore but as they said in Hill Street Blues after morning roll call: ...and be careful out there.

Nice weekend


tirsdag den 24. april 2007

Destruction of Capital !

Well, nothing much changed since my last blog, expect for me being down 100 bps for the month! There are a number of reasons to be on the alert the next few days:
  • Bank of England goes in front of the Parliament to explain why inflation exceeded 3 pct. What a fr....... joke!

  • Spanish property stocks are not only falling but in almost free-fall this morning and unlike market commentaries that's nothing new.....

  • The market have changed again! Gone is the US data focus, no one believes in the US data anyway but more importantly everyone with non-American passport is watching China and Japan for next move. The US centric financial markets is about to be gone! The King is dead, long live the new King

  • Watch for 'positive' surprise in GDP from the US on Friday

Bank of England is coming to Parliament with the tail between their legs as they have exceeded the 2.0 plus 1.0 pct error margin on inflation. What a sad day for my beloved UK. Let me ask you: When in history has involving politicians in monetary matters ever been successful? The clear lesson of history, the less you involve politicians the better it goes for the economy.

That used to be the tenant for the US until 9-11 since... the US has become a better version of the old Soviet. Central planning, no room for foreigners, no room for freedom. It's sad as the US is still my favourite place and where I count my most friends (which honestly does not say much with my social skills! :-)

Point with the UK. Bank of England will now be forced to hike rates 25 bps even 50 bps on their next meeting at a time where they should be standing aside, the growth cycle is almost certainly pass it peak, but being 'behind the curve' will force Bank of England to move counter on monetary policy to cyclical peak in growth! Nice set-up. Years of hard work lost on the grounds of being too defensive.

The lesson here: Central bank underestimates the inflation by tweaking it 100 different ways to fit their political games. Fact: The strong GBP has kept the inflation more in check than expected and hence soon when GBP starts to fall then inflation will go even higher. Please say hallo to our new 'friend' the vicious circle of ever higher inflation based on monetary mistakes of BOE, Fed, BOJ and others.

Spanish property prices in free fall? I will never ever claim to be expert of anything, let alone Spanish property prices, but to think today's sell-off is random would be to complacent.

Madrid Real Estate Index (Click on chart to get full picture)

Spanish real-estate starting selling of with the late February sell-off. It never recovered and shows that even markets where all the good reasons for continued growth are in place: demographics (Europeans wants sun and water when old), cheap funding (ready available funding at almost historic low rates), infrastructure etc..... the story does end at the extremes.....

Could this have ramification into other markets? The optimist will state this is isolated to Spain, but one thing a long life, too long, in trading taught me; at extremes EVERYTHING is correlated, if you do not believe me read about LTCM (which by the way also got saved on central bank mistake!)

The hegemonic power of the US is gone? On my recent visit to New York I came back confused. Let me for the record state that: 1. I lived in New York 2. I am biggest fan of the US, but......gone is the drive, gone is the aggressive intellectual searching for better ways. Its placements? Compliance, anti-business legislation, and lack of understanding of the new financial orders. Yes, the US companies making record earnings, but are they investing in new business? Are they building new capacities? No, they do buy-backs, some M&A business, all financial transactions.

Inflow to US mutual funds who invest in US stocks had NET-outflow last year, funds investing overseas had NET-inflow! The fund managers of the world now more concerned about China's reaction to over-heating Chinese economy than to US data (which is anyway manipulated). The rising sun of Japan could become real surprise later this week if BOJ's monthly report indicates stronger consumer demand.....

In other words, the timezone to watch for direction is now early European morning when Shanghai and Asia closes - that's our lead indicators. Learn it or lose money like me!

Strategic views

I have been adding risk for reversal of carry trading to my portfolio over the last 3-4 trading days:

FX: Long JPY vs USD and EUR, long GBP put USD call x. 1.9700 (done today), Long NOK vs EUR (stop close by)..

FI: Took of 2-10 spread with small profit. Tried short 10y with small loss, now neutral, but bought some Bund Calls for surprise....ticket..

EQ: Short DAX from yday - tight stop.

Commodities: short Crude and long Wheat.

Good luck,


tirsdag den 17. april 2007

JPY is the turn upon us?

Consumer confidence coming back, Government upgraded consumption 1st time in 20 month, only...aber dabei being the exepcted lowering of CPI forecast from 0.5 to 0.1%... Seems agreement consumer key for future path...

5 yr Japanese Rates...

This is growing risk for JPY bears - add to this we have big shift in bias from SHORT JPY to neutral... I am beginning to believe in the JPY from here.. but I am merely farmers son from Denmark...

There is already major change in rate differentials. Below I plotted JPY 1yr fwd vs USD 1yr fwd....It also indicates top could be in place.. last few hours there has even been, wrongly, rumors that BOJ may hike earlier based on better outlook.

Note the big drop in the white line, which, non-tested, seems to lead the USDJPY relationship.

Finally, there is must read for people concerned about Stagflation:

Caroline Baum, Bloomberg:

Good luck,

Steen Jakobsen

It's so easy, it's almost not easy...

The market has become easy, almost to easy. Just sell low yielders and buy high yielder in foreign exchange. Stocks got positive drift "always".

Let's run the numbers: In Saxo Asset Management we believe in generic models and in them explaining where the money "flows": (Click on gif to get bigger view)

The different strategies pretty much explain themselves; Think about it; Rolling the lowest yield in G-10 vs the highest yield (and the difference is not 200 bps!!) has given 417 bps this year! Doing the same in Emerging currencies earned you 591 bps, and what makes it even worse for simple macro guy like me; the risk numbers are excellent. Sharp is high, volatility is decent, in other words; a non-thinking strategy is not only making more money than me it is also less volatile (almost)

On the other hand our "momentum" part of the model (think John Henry) is losing money faster than a Formula One car! Macro - Turle model with all instruments in it down 903 bps and Foreign Exchange turles is down 578. Clearly sitting and earning interest works and trading(trending) does not!

What to learn from this? Well having observed this way of trading for a long, long time there are some simple rules;

1. Excess return on pro anno basis in carry trading unleveraged is about 400 bps - Yes, 400 bps. Similar to equity there seems to be 'positive drift' in favour of taking on risk.

2. The return profile tends to mean revert, trending did really well end of Q4-2006 and was up more than 500 bps.... the long run.... (we are all dead .... JM Keynes)

This leads me to think about catalyst's for unwinding of carry trades. I know even considering a reversal of carry is the equivalent of being a witch in the Middle Age, never the less I have made my few pennies on being contrarian at the top or bottom AGAINST the prevailing direction.

I noted, late as per usual, this story from International Herald Tribune:

TOKYO: Sumitomo Life Insurance, Japan's fourth-largest life insurer, said it will move funds from maturing bonds in Europe into yen-denominated debt on concern the euro is too strong.

The insurer will increase its holdings of Japanese bonds by "several hundred billion yen" in the year started April 1, after an increase of ¥650 billion, or $5.46 billion, the previous 12 months, said Hirofumi Miyahara, deputy general manager of investment planning in Tokyo. Sumitomo Life will keep reducing overseas debt holdings after cutting them by about ¥500 billion last year, he said.

"The euro is quite strong so it's difficult to buy the euro-denominated bonds at these levels," Miyahara said in an interview last week. The company will invest mainly in Japanese 10-year and 20-year bonds as well as residential mortgage-backed securities, shifting money from maturing euro bonds, he said.

Sumitomo Life is the second life insurer in Japan this month to say it will buy more domestic debt to reduce currency risk. Meiji Yasuda Life Insurance, the third-largest, on April 5 said it planned to raise Japanese bond holdings by ¥300 billion to ¥9.38 trillion this fiscal year.
Japanese investors sold more bonds abroad than they bought in nine of 13 weeks this year after the cost of protection against a drop in the euro climbed to the highest in three years. Life insurers were net sellers of overseas debt in 2006 for a second year, according to Ministry of Finance figures.

That's interesting, it is however countered by the massive demand by Japanese retail clients doing everything they can to secure yield, but the key phrase in the text above is; 'The euro is quite strong so it's difficult to buy the euro-denominated bonds at these levels'.... It's the fx relationship which prevent them from buying not the tactical allocation!

To me that's an early warning signal. Add to this that EURJPY and USDJPY seems to be topping out - if it doesnt make new highs today.......

April is the start of the new financial year in Japan (March 31st end of fiscal year)

The inflation numbers this week will be major movers, UK just out above expected, later today we got US CPI, which I expect to be closer to 0.3 than 0.1 in core-inflation.

Market tends to ignore that Asia is now EXPORTING inflation net net. This will show up as increase in import prices across the globe shortly, also in Japan. In other words I am betting on combination of;

Too cheap JPY for Japanese investors to invest in overseas markets (Non private), a rising inflation trend generated by higher export prices from Asia, positioning and finally some inidications of toppish behaviour in JPY crosses.


Equity: Well got stopped out on DAX for sure, options worth ZERO... but another day another play. Still short NASDAQ futures (stop v.v.v.v close)

Fixed Income: Doubled the 2-10 y. spread yesterday. Firmly believing in back-end will have to adjust and soon.

Foreign Exchange: Long EURUSD, bought JPY call USD put, one month today 15 dlt, short EURGBP, short EURCHF

Commodities: Long Wheat. Winter condition tough on the shorts in agricultures.

Looking at: Gold(long), short Credit, Cotton and Crude...longs...

Remember as always; at best my predictions are random, this is written to provoke thinking out of the box nothing else.

Steen Jakobsen, April 17th, 2007

torsdag den 12. april 2007

Finally someone(s) more confused than me.....

Fed Minutes - its elementary Dr. Watson.......

Well the usual breed of Wall Streeters having tough time this morning spinning last nights FOMC minutes in a positive light.

What was most significant in the statement was the lack of discussion about changing the bias to neutral. A subject which was strongly discussed in the prior meeting. Bottom line is clear: Fed has no intention of leaving neutral mode anytime soon.

What's more interesting is how the FOMC now is in clear INFLATION ALERT risk mode. This is no surprise to us, but it's not something the stock market was even willing to discuss less than two weeks ago.

Embedded in the FOMC Minutes there was some interesting forward looking forecasts from FED staffers:
  • Fed staff reduced Q1 growth forecast........

  • Fed increased inflation projections.....'inflation is projected to be higher in the first half than the prior forecast'.... though 'would still edge down in rest of 2007 and 2008'
Sure and I will be playing for Man. U in the Champions League Final. Wishing and hoping is for prayers in Churches not for markets.

Fed governors on the speaking circuit reiterated the inflation scare.......they all put confidence in the fact that inflation expectations remains subdued. This is only matter of time with food and energy again on the rise.

Break-even rates 5years US... (or inflation expectations - CLICK ON CHART for better view)

As seen by the above chart the expected inflation is on the rise, so is the ultimate inflation benchmark maybe FOMC should either pray some more or start to do something about the problem, but here comes the issue.

If... the US economy was growing at trend or even above it would be the easiest thing in the world to continue hiking, but alas the growth is risking to collapse.

The lack of consumer spending should according to people far more smart than me be substituted by CAPEX spending (Capital Exenditure) as the corporate balance sheets are stronger than ever....but... whats this then? (full reference/ CLICK ON CHART FOR BETTER VIEW)

Yes, Houston we got problems! The US been fortunate in the last two decades that every time one sector cyclically ran into trouble another took over. Some of it was technology driven, some of it monetary, but whats different this time (and yes I have been around for more than 20 years trading!) is that the substitute bench is empty, there are no more players to put on the pitch:
  • Yield still low historically
  • Monetary policy has only just started globally to be normalised (Agg. Mone. growht in January was ALL TIME high still!)
  • The consumer is tired. Six in ten Americans looking for recession, and they seem better at predicting markets than Greenspan and his cohorts!
  • Corporate US will rather buy back stocks and do M&A to reflect globalisation
  • Energy & commodities are in long-term upcycle due to distorted supply and demand

So... I am NOT impressed! Mr. Bernanke bet his integrity on the pause move last year and as any rookie playing in the real world, he looked good for a he looks was he is an academic pursuing a political career in Washington........

Conclusion: FOMC is caught out, they can only wait and pray, as friend said to me on another subject; "...When you are in hole, stop digging".. (Sorry I can't reveal the conversation this arised from .....:-).

Best think FOMC and FED can do now is to stop commenting on the markets, they are in other word even more confused than I am....


Foreign Exchange: We are long EURUSD, GBPUSD and short EURCHF & EURGBP

Fixed Income: Short 5 y notes, long 2-10 spread

Equity: Short NASDAQ and Dax Futures, Long Dax puts...

Commodities: Long Wheat

Overall looking to add: NOK, Gold, Crude......

Disclaimer: As always above is meant to provoke you to think outside the box, the likelyhood of me being right is smaller than me playing for Man. U in Champions League Final....

Good Luck into ECB meeting today

Steen Jakobsen

onsdag den 11. april 2007

Fed does it... creates... Stag-flation light theme

Text goes: 'The combination of generally weaker-than-expected economic indicators and uncomfortably high readings on inflation suggested downside risks to economic growth and greater uncertainty that the expected gradual decline in core inflation would materialize...'

WOW, WOOW and more WOW... This is Fed getting nervous about both growth and inflation at the same time.....Stag-flation light will be theme...

Note also 6 in 10 American expects recession in Bloomberg/La Times poll.... last time the ratio was this high was 2000... just before..... 2001... recession light...

This is no good... Market will try to read it positively... but it will be very hard....

The Minutes ALSO indicates how the "tossers" of Wall Street got the text all wrong post the meeting. Fed did not indicate much for well paid inve. bankers in their Ivory towers...

More tomorrow... this is my early thoughts...

Med Venlig Hilsen Yours Sincerely Steen Jakobsen, Chief Investment Officer, Saxo Asset Management Saxo Bank A/S -London
40 Bank Street, 26th Floor Canary WharfLondon E14 5DA
Phone: +44 (0)207 151 2010 Fax: +44 (0)207 151 2001
Please visit our website at:

Still confused but some trend are emerging...

Foreign Exchange

Patience is the required virtue, US weakness will accelerate....
Overnight the FT front page: "Treasury looks at repatriating tax free".... got some headlines. The first move took out 1.9800 but soon market starting focusing on the text: Treasury said it should be tax natural. Well, being someone who pay excessively much in accountant fees, there is huge difference in flow, stock and tax regime.

The fact the potential change is tax neutral does not mean its not flow positive. I will let it to accountants to explain it to you, but trust me, even income and tax is two very different things in tax terms.

The net impact could be similar to that of the Homeland Investment Act in the US. However this is early days.

Independently of the weakness in GBP, the US dollar looks very, and I mean very fragile.

There is huge bias of people fading this move, we have over 3 std. dev. indication on our flow model, indicating risk of big move... up....

We are long EURUSD through options, long GBPUSD.....


Market again concerned about Sub-prime and Alt-A risk. Someone much smarter than me commented that we could be in front of the third leg down in housing:

The first leg, was the "cooling off" period which started two years ago. The second leg was the implosion of sub-prime..and now getting close to the third leg, we have the right (or wrong conditions) of... rising inventories and tightened lending standard which could increase the inventory of unsold homes. We are not yet there, but D.R Horton Q1 numbers create a scare; Volume was down 37% and in value terms (I.e with discount) sales were 41%. California on its own is down 59 %.

Bank Credit Analyst, an independent research firm, is out with report on banking impact on sub-prime loans. The report states that Real Estate Loans and holding of mortgage securities equals 44%, yes 44%, of bank assets. Creating risk of early 1990s repeat of the banking crisis, but BCA concludes: No its different this time, bank are in much stronger financial position this time. Then the devil in my asks: Well, how do banks make money these days? Well from packaging primarily mortgage products in baskets of risk, so.....maybe banks are not poor, but they seem to be running out of products to make future gains on.

Trust me, I worked for Chase Manhattan Bank, in early 1990s (I was VERY YOUNG THEN...!!!).... it was no fun, let's hope the optimists from BCA are rights and I am wrong.

Overall the continued pattern of strong Asian and European stocks markets continue with US behind the curve. I am troubled a strong Non-farm payroll did not have bigger impact on the positive side. I was long, and wrong, and bored....

Option prices on a lot of stocks acting strangely, despite underlying being well bid, the PUT options trade at premiums? Why? Need to hedge or sign of weakness ahead?

We are short NASDAQ-100 Futures and DAX Futures....

Fixed Income:

Its a feast for Fed watchers. The whole board of governors seems to be speaking ....and tonight's FOMC Minutes should be in focus;

How will the replacement of: 'additional policy firming' with 'future policy adjustment' be explained? More flexibility? I think so, but I am probably the only person worse than Greenspan in calling FOMC policy. (Very few know Greenspan was Fed watcher before joining Fed.... his company continuously rated at the BOTTOM in the ranking!)........

We are still long 2-10 y. spread and looking to increase. We are looking for curve to steepen, to reflect increased inflation risk in medium- to long term.

Also want to sell Asian fixed income, based on the rise in export prices we touched on yesterday. Japan should see imported inflation soon.......

Long 2-10 y. spread......


Corn, corn ,corn... we will venture into long position today. The more I read about Corn the more we need to be involved. Also looking to buy Gold as inflation hedge.


Growth forecast still coming down, look like sub 2.0% for Q1 - watch inflation numbers. Its creeping up. play defensively.......

Med Venlig Hilsen Yours Sincerely Steen Jakobsen, Chief Investment Officer, Saxo Asset Management Saxo Bank A/S -London
40 Bank Street, 26th Floor Canary WharfLondon E14 5DA
Phone: +44 (0)207 151 2010 Fax: +44 (0)207 151 2001
Please visit our website at:

tirsdag den 10. april 2007

Back and confused..

Goldman Commodity Index... higher and higher..
Couple of things from top of my head;

1. WTO could be something which we should focus on. Its major change of policy for the US who for six years been dancing around with China.

The US Trade rep. is very competent, she knows what she is doing. China already on the wire saying: this is no good. Watch for further news. Hard to see who benefits from trade 'war' escalation - but we have to note the change of US policy.

2. Food inflation. I came in this morning - looked at the economics numbers over the past few days and it struck me have ALL non-US numbers are rising (inflation). This morning Norway, Czech, and Hong Kong re-export prices back up to plus 2.8 pct.
More to the point, food prices are rising fast. In China yoy food inflation now 6 pct and in India prices should be up 50% in the food part.
Hmm... Are we on the brink of new inflation pressure from emerging nations? I think so, but I have no idea about the impact on the markets for now........need some more thinking on that.

My gut feeling right now says:
Buy EUR.USD (@1.3435)
Buy Crude (@ 62.00)
Buy Corn (@ 367.50)
Sell DAX and NASDAQ-100 futures (@ 7216 & 1826.75)
Buy 2 vs. 10y spread. Steeping.

Stay away from carry.....

Upcoming G-7: Non-event. China not even present due to 'time constraints'. I wonder why......... Tomorrow: Fed minutes. What made Fed change their wording.....? Steen

onsdag den 4. april 2007

Waiting, waiting and waiting...


Now it's Easter which needs to run of. Always new things to wait for - being a fund manager there are really a desperate need for "sitting around" doing nothing. No wonder carry-trading is so popular! At least you get paid for waiting.

The market had spur of activity in early February which made us oldtimers relish in the trading conditions. Now we are back to measuring pico-changes in relative yield differentials and watching latest Private Equity deal being announced.

The 100 bln. USD PE-deal is not far away!

Having said all that our generic models are kicking some good old a.. even in February. Raking up gains more than 300 bps for the year to date is pretty good considering the end of carry-trading being announced in early February.

Personally, I am neither here or there in terms of market direction. I am trying to figure out if inflation or lack of growth the most likely scenario. I promise you I have no illusions to ever figuring it out, but the never the less I need to pretend doing something.....

My positioning is boring; I am long some 2-10 y steepning, which is really 2-8 in technical terms due to cheapest-to-deliver is a 8 year paper. I am long GBP vs EUR, based on continued tightning bias of Bank of England.

Got some fat-tails lottery tickets in EUR.USD, mainly on the upside. Remembering how Thanks Giving Holiday got market excited. The issue though, Easter is more of a European than US holiday although Pass Over co-indicedes........

Would love to play odd of lower corn. Corn been down in 16 of 18 month according to the Commodity Almanac - as planting season comes into play.

Crude - I can't trade in geopolitical markets, but got nasty feeling that crude soon will take out 70 USD. Not based on Iran but on pure poor supply side of the production. I spend some quality time with Lehman last week ,their analyst being very bid based on purely sound fundamental reasons........

Well, enough is enough I am drained - doing nothing is too hard for me.