Yes, I am, like most people, hit by bearish fatigue. It is tough continuously having to look for the negative things in life and in trading, but this is such times. The mood reminds me so much of 1992 ERM crisis, lots of waiting, lots of denial, and loads of people buying the "official" explanation.
In 1992 the fundamentals got the better of the political game, and the UK should replace the recent Mandela sculpture with one of George Soros, as his run on the Bank of England did more to the UK economy than anything else since WW II!
Staying on that note, the analogy for the stock market is the same. IF... you really want this stock market to continue its long-term magical rise, then what we need is to replace "the ignorant trading style" with good old traditional value. In other words we need SERIOUS DEVALUATION of the stock market.
I am, despite, being casted as the opposite, extremely optimistic for technology, evolution, stock market and mankind in general. There are at least 50 different stocks I would love to own in the next down-cycle, but the fact remains that right now, as of this moment, the market is defending GBPDEM on the bid in the brokers, or....or in todays terms.. the stock market is slowly edging towards the final 5Th wave correction which should take equities to FAIR VALUE, from there we need to move to CHEAP VALUATION, and then the future is bright.
Do not EVER forget that there are several factors which makes the stock market "drift positively":
- Innovations - Economy of scale - Demographics - Human nature (stock market is game, where we only win whens it goes up...) - Yield - Relative risk - Utility - Sovereign Wealth Funds
All of the above will make for power full cocktail, but right now.....the market tells me 2008 Earnings growth will be 11.75% after 7.7% in Q2-2007. Let me understand this;
1. Margin cycle has clearly topped. Input costs through the roof, growth velocity has peaked globally. 2. Funding costs of doing the business has risen considerably, as seen in credit spreads and even LIBOR lending rates. 3. Consumer sentiment - collapsing 4. Housing market, everything being equal will need to fall another 2-3 quarters
Does 1 through 4 add up to rise in earnings growth? Apparently!, according to the people in Positive-land.
I have ZERO predictability power but looking at pure chart based trading I note two recent developments:
1. My momentum based models are VERY CLOSE to selling the market. DAX Futures should be sold below 7.375-00 for a 5th final wave according to my medium term model. 2. There is TRIANGLE formation in about all major indices.
1+2 should be resolved shortly, either we get false or no break, and the people of Positive-land will be enjoying their cocktail again on unsinkable Titanic or.....if I am right, they will be running for life-boats.......
A resolution in technical terms will have to happen in the Sep. 13th-28 Sep. window, so this fatigue can soon be followed by some fast paced action.....
Fixed Income: Waiting for Santa Bennie, but long Euribor calls Foreign Exchange: Building LONG US dollar position, yes long... vs GBP, and EUR.. Equity: Short Dax, adding as per above if broken, and long gamma. Took profit in mining. Next 7 trading days decides the year in my opinion.
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:
- 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.
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.
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.
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.
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.
It is very clear to me that the central banks of the world are in the process of doing a paradigm shift. In all of my trading life we have had the Greenspan put in place. Basically, since 1982 every single market down turn should have been bought, as IF there was ANY type of crisis on the horizon the central bank response was to float the market with more capital in order to stem the tide.
This "safed" the Asian crises, but made the IT-bubble in 2000, post the IT-bubble capital floated into housing, and private equity/hedge funds. The REAL paradigm changed has been the fact that 1989 was the most significant ECONOMIC EVENT in my life. Why? Because it created more wealth by creating 2 billion new capitalist', it created more saving allowing the Western world too deeply dis-safe.
What I see in front of us, it that the CREDIT CARD bill now has to be paid. No longer is it enought to pay the minimum amount on the bill. The card is MAXED OUT!
The paradigm shift happens because the new central bank managements, understand that bailing out the industry right now will not only create a moral hazard but also make the bubble even bigger. They need a resolution to this crisis which comes from somewhere else.
Yes, they will cut rates WHEN, not if, the economies show down turn. All cyclical indicators for the world economy is collapsing anyway, but......the CREIDT issue as seen by the graph here neither can or should they touch.
LIBOR, the London interbank rate is now trading through the FED discount window allowing at least US based banks to arbritrage... this will not happen yet as there is collateral needed for borrowing in the discount window....
This situation illustrates many fold, how this is about the world banks taking ALL their off-balance-sheet investment onto their balance sheets.
Without naming names, clearly, a lot of European banks are not telling the full truth about their loses. (How come some banks continue to have Glitches in their payment system day after day??)
This is to continue, having read Schumpeter at University finally pays off!!!! Destruction of capital is the name of game. Destruction because a lot of those off-balance-sheet products was funded by NON money. This was always smoke and mirror, the only place it really showed up was in the ever rising earnings of the investment banks.
Pension funds and risk averse investors, are now caught with AAA "vehicles" which is downgraded to junk. The mom and pops Money Market Fund is losing 10-15 pct... in a month! New world? Yes for sure.
In all my life as a trader I have never seen anything like this. The stock market is in a total denial, the fixed income in near panic. JPY risk reversals in 3 mos still safely above 5% for JPY calls or 2-3 times the norm!
The only thing which can safe this seems to be the 50 bps the stock market thinks Bennie will give them, but .......even that could be short cutted by another discount rate cut.
I have very few positions as I get stopped out almost inside 5 min off initiating the positins but..
I am VERY long gamma downside in stock market for September. I'm small long JPY, short AUD......
I am still keeping the powder dry, but the longer this goes on, the more I get nervous...
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..
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