søndag den 27. april 2008

Position update, Monday

Will write normal blog later but as I have changed "core-view" mainly on Equity....


Long S&P (since 1380s)... 1450 target if we can take out 1400/05
Long EMG
Long Dax


Long US dollar vs Euro - Start of the cyclical change I have talked about all year?


Long Grains
Short Crude (through options + still not working)


Short bunds
Long Corp. Debt. inv. grade


tirsdag den 22. april 2008

If confusion is the first step to knowledge, I must be a genius. Larry Leissner

If Mr. Leissner is right I sure am a genius!

The confusion on my part does not actually go on the long-term picture but more on the short- and medium term pattern.

The fact is that the market consensus has moved to expect Fed to be hiking by 10 bps in one years time from now, while still betting 25 bps in next weeks meeting just to safe guard the economy.

No, my confusion, goes to the pure fact of me being a Libertarian through-and-through although after listening to Soros, Kaufman and others I am beginning to see "clouds on the laissez faire horizon".

Looking back at the last 20 years and really since 1987 Soros is absolutely right this has been the biggest credit binge ever - the whole system was built on the fact that credit was readily available and if there was a crisis Greenspan and his merry men came to the rescue; 1987, 1991, 1997, 2000-2001 .....and now in 2008.

The banks created business models which took advantage of the free-flowing credit and doing the so called financial engineering (talk about contradiction in terms!) they told the investors and public at large that they had invented a money machine. Obviously now we all know, that yet again, this was not the case. The mark-t0-market effect was not duely calculated and compounded. (Read UBS story in FT this week)

Let me give you an example;

I bought a house in 2001 for let's say 5 mio. DKK, took out mortgage based on the valuation on 90% - then I kept the house for 3 years, now the "market" told me it was worth 15 mio. DKK - right.....but surely the mortgage value would be something like initial cost (5 mio) plus inflation x 2, plus replacement value plus average disposable income/ Houseprice maximum ? But no the mortgage value is and was based on the "market value" of it - fair ?

No, a tangible asset can not continue to go up merely because the market "clears" the price higher, there must be fundamental fair value around which the loan valuation is based otherwise we end with a market which is self feeding both on the upside and on the downside.

I would even argue that logically my "quick-and-dirty price" is more logical than a house rising from 5 mio to 15 mio. in 3 years? Nothing fundamentally argues for this being correct ? Am I wrong? This example is one of 1000s but a true one!

If you follow me so far - then, however, if the "market" is not the correct pricing mechanism then what is ? A bunch of useless central bankers? or some other STATE CAPITALISTIC enterprise?

Neither, the "market" needs to smarten up and make sure it does not compound positive and negative movements outside the scope of fundamental value.

Warren Buffet, Jim Roger, George Soros will all tell you the best deals they ever did was based on good fundamental value, not market timing, if that is the case then surely we got some way to for this NEW CAPITALISM to go back to normal again?

I probably argued myself into a hole, my point here is;

Every time the "market" has had trouble the central banks or governments have bailed out the system, this time it may be different. Fed has little ammunition in the bag except for doing Carry-On movies with business as usual, but the banks is in a position where IF they get their balance sheet in order they will move towards my valuation model based on FUNDAMENTALS, which mean they will lend out less and more expensive.

That's the real paradigm shift here - the credit bubble is in process of being de-leveraged - the new world is one where there has been power shift to the savers; i.e the Middle East and Asia, who will have less of a strategic angle on the US and Europe as future export growth for them is being hammered by two unavoidable factors;

1. Lower global growth - if credit is less then growth is less.
2. Rising de facto cost of producing as there "workers" demand bigger and bigger share of production cost.

If you don't believe me then check the two worst performing market this year? China and Vietnam both down more than 40% - sign of the times?

I am very open to discussion here, but the above issue is one which bother me big time, as I believe the old regime and "rules" of trading is being thrown away... and it is time to look at the world from 10.000 feet and with more than day to day glasses.

The good thing here begin, if the market moves towards normalisation on credit creation and lending standards we are in for less volatility and better growth long term as the world again allocates capital to the HIGHER MARGINAL UTILITY - and not as now to dead financial instruments in some alphabet soup no ones understand. Hopefully this will also mean that the talented young people of today will stop applying for jobs in funds like mine and move on to change the world to a better place dealing with real issues like;

Demograhics, the quickly rising population
Food, lowest production to demand in history
Energy, alternatives more needed than ever


FX: Still some EURUSD long, but starting to built reversal trade - if the market is right about FED being done on downside there is risk of dramatic out of the blue correction in EURUSD. My friend Drew Baptiste, Morgan Stanley, warns me it could biggest in the last 1-3 years, but new low in US dollar is ideally needed.

Still long MXN - best performing stock market, long term growth - like it....

JPY - long - still think its matter of time before new lows is coming - the anti-risk trade I know and its costly, but......

FI: Given up on upside for now - think mean reversion still the game. My model turned bullish FI last two days on mean reversion - let's see how it plays out.

EQ: Short versus the 1400-05 major trend line - may work may not - but in it.....

COM; Long grains - what a ride - that vol for you.

MTD: down like 70 bps.

More later in the week more direct market relevant.

Go Liverpool 2night.....!


mandag den 14. april 2008

A fanatic is one who can't change his mind and won't change the subject. Churchill

A long life in trading have taught me not to believe in any one model or one approach for making money over time,but I have also learned not to ignore when several micro themes confluence.
Right now there is several smaller themes which in my scope starts to look like something which could lead to massive change in outlook primarily for fixed income and fx - A cyclical turn could be in place inside the next few months and lead interest rates much higher in response to:

a. Reflation from the Fed

b. Inflation becoming front page news

AND it will make and mark the significant low in the US dollar weakness, as the US starts reflating, the yield on long term US debt will increase making the marginal attrativeness of the US dollar rise.

It should be noted that for the foreign exchange market I see one major correction followed by a long protracted narrow range - as this is the way lows and highs in the market is created (think how S&P been in broad band since making all time highs last year)

Overall there are several themes which makes for some nervousness in Camp Jakobsen:

1. The move towards socialisation of risk from banking system to tax payers in the US and later Europe. http://tinyurl.com/6s2ldq Will Hutton - The Observer

This link tells a good story from Soc. Dem former Editor of The Observer, but there is some powerful arguments which should not be ignored. I know for a fact that the "Scandinavian banking model of the 1990s" is buzz words among policy makers around the world.

I firmly believe the end game now is a big fund taking the risk of the books of the banks. It is absolutely clear that Bernanke will do anything to "save" the US economy, the fact he makes things worse by "propping" up the banksin the process will lead to ultimate need for STATE CAPITAL FUND bailing out the mess.

2. US dollar is getting close to the "cyclical turn" I have talked about for month's and there is some concern at Central Banks levels about the level or at least the acceleration of the weakness indicating we are closer to "maximum accepted" weakness than before. (Though listening to the frogs talking about Plaza II is a little overdone even by French normal standards!) Link: Best piece on US dollar in long, long time: http://tinyurl.com/4gt6nz

3. Reflation is imminent in the US - taking yields higher. John Makin made this interesting point in the WSJ editorial. Argument being, Fed not really expanded money base since late last year, now is the time to start doing it, inflation is secondary. http://tinyurl.com/4op9t5

4. Economic and Earnings news will disappoint and take economic data in free-fall from here.

I have no doubt Europe is just lacking the US by 6-9 month, and from my latest trip to Singapore I have no doubt that Asia is slowing, even ahead of Olympics, growth is only kept artificially high through Government infrastructure investments across the region.

5. Cycle analysis --- Enclosed some interesting charts based on long term cycles. I know they are at best probably random, but it is interesting that it looks for low in US dollar in April and low in yields in the US in June!


Foreign Exchange --

There is one final leg down in the US Dollar left - market will see 1.60+. Still long MXN, and long JPY.

Fixed Income --

Long 30y US Bond calls - looking to buy Euro Dollar December, Fed is going to cut more than market perceive.

Looking at trades for when ECB cuts

Commodities --

Long grains, short crude (options)

Equity --

Short S&P and DAX

Good luck,

Steen Jakobsen, Chief Investment Officer, Saxo Asset Management.

fredag den 11. april 2008

Quick-and-dirty note... Friday..

<<<==== US Investment banker reporting quarter earnings...

Sorry been busy this week - seems my last post: We need crisis now hit something with a lot of people - more interestingly few people seems to disagree.....this week has been boring...except for GE failing to meet their normally 101% coordinated results! Dont forget this company is so big it can "find" earnings and write ups etc everywhere, but it seems time is running out - the credit card is maxed out!

GE is clear sign to me that the next and for me final step in this financial destruction has started -- oh yes market still believes bottom in place - that banks are doing fine etc - but here is my take:

1. Unemployment is rising and fast 5.1% going to 5.5$

2. Destruction of 2 trl. US dollar worth of credit has happened - which by the way is the exact same amount hedge fund got under total management - Less credit less money to spend.

3. 60% of all corporate funding comes from capital markets ! Ouch!

4. GS and Lehman the most leveraged plays in town... ouch.... tier 2 and tier 3 is getting ...so big that GSs CEO comes out and call the credit crisis over ! Nice try, tell me something, as Fintag asked this morning; Who would you rather trust a independent apolitical organisation like IMF calling for doom-and-gloom or a CEO from major inv. bank who just upped his tier 3 capital by 40% - I know what my choice wud be...

5. GE, one of the few true mega global companies.. Is hurting and hard...

6. G-7 - what a joke - even the central bank knows its waste of time - regulation, regulation, transparency....transparency.. all nice words but like VaR, it a word used which few people understand for real and God forbid to ask for clarification of the word.

7. Less than 12 month Freddie Mac and Fannie Mae was being punished for accouting issues, know US Congress gives them lower capital requirement and 200 bln. extra US dollar to play with - again if this fails - i.e the 200 bln is wasted who will then step in ? The Fed?

8. Socialisation of risk - Inv. bank getting away with murder ... they should trade at tangible asset value, hence Citibank shud be @ 10 US dollar. Why should I pay for "goodwill" from lying banking institutions, please I beg you tell me_

9. Volcker is cool ! Soros is cool and finally read this .... Bob was just voted best manager in this LIFETIME, sounds an awful lot but his piece is first class..



Usual lot: Added short banking this week, more fixed income and long grains..

Long JPY, EUR, MXN, vol and still short Crude (yes, what an idiot)....

Gotta rush to airport .. Nice week-end


torsdag den 3. april 2008

We seriously need a crisis now!

Back - still slightly jet-lagged but I got so much on my mind, and I will try to distil it as best possible:

1. Unemployment is rising and fast

2. US consumers has been max'ed out
3. Asia dream is over for this time....high inflation and negative real rates killing world saving reservoir.
4. US Dollar is on the brink of real crisis
5. 95% of all managers do not understand the risk involved here. A system without a healthy working interbank market is no market.

I know, I know, most people see me as this total pessimistic guy on the economy - and the world, and to some extent that has been right since last spring where I started rambling about the incoming risk of slow down, crisis, and how private equity was dead.

I am not praising myself here, I for one, admits to not having ANY predictive powers, but at all times I do try to put odds on upcoming market moves.

Where in the past being too pessimistic has been wrong 99% of the time, I now think we have seen true paradigm shift, where being too optimistic will reward no one.

Why?Think about it for two minutes:

In a "normal" business cycle the rich nations will invest in the poor in order to get excess return on their capital. The flow will go from rich to poor nations.

Now? We have the "poor" nations, i.e EMG countries pouring money into the US at returns which is sub-par.

This will not work I am sorry. Capital should go where the marginal return is positive and rising not the opposite!

The fact is 10% of the world, I.e, the US, uses 80% of the world savings!In fact the whole recycling story is tied up on two things:

1. Strategic Deals. Energy deals for Middle East and for Asia import of cheap labour
2. Political agendas where Asia got the US "by its balls" by owning trillions of IOU notes.

Nowhere! Nowhere is allocation of capital based on best return profile!!!!!!!!

If you had the choice in investing a sum of money where would you invest?

1. Europe - poor demographics, with tail wind maximum growth of 2.5%....
2. US - poor demographics, saving deficit, real rates of minus 200 bps and weakening US dollar policy, maximum growth of 3.5/4.0%
3. Asia - excellent demographics, high saving rates, EXTREME need for infrastructure investments, minimum growth rates of 4.0/5.0% ?

I think it is very simple, and most intelligent investors seems to agree as the P/E for EMG for a while exceeded the P/E for G-15!

My point here is..... as the viscous cycle continues to compound the more the REAL RATES of growth, inflation , employment, currency rates gets out of whack with fundamentals.

Take Asia - now they got no monetary policy options (its own by Bernanke through the US dollar peg), high inflation (most above 5%) and negative real rates.

The biggest savers in the world is losing money saving !

Short-term that's not an issue, but when the net wealth decreases so does the incentive lend the money overseas.

The US consuming 80% of world savings offers you: more negative real rates than at home PLUS a guarantee for loss of currency value - is that a proposition you will take? No!

The result if this continues is one of stronger and stronger Asian currencies, with consumption falling as REAL WEALTH decreases and consumption comes down.

The saving grace being the STATE CAPITALISM in Asia which will keep pumping money into infrastructures making sure it crowds out private capital.

So this process which has been going on for way too long due to incompetent central bankers like Greenspan and Bernanke is reaching cross road where the worlds needs to face two major ghost:

Inflation and recession.

For balance to be established several things needs to happen:

1. The confidence in the US dollar needs to be restored preferably by increased saving rates and yields and a firm commitment to improve and maintain US competitiveness. This will work as confidence in the US will lower long-term yields, reduce inflation expectations and make investors commit to the "cheap" US dollar by allocating capital into the US.

2 Money needs to flow to highest marginal utility, which means where investment returns are highest. This means re-establishing the banking system to be able create CREDIT which in turn will be used for investments. The world is full of money, but there is ZERO credit. The market needs to flush out bad investment so the sounds investment can attract the proper rate....

3. The central banker should step away from speaking, engaging in the market place, and let market forces play it role. They should monitor inflation and commit to reduce inflation expectations to long-term averages.

Long time ago in the 1980s when I went to University I learned in Polical Science that the economies that survives long-term are the ones with the least amount of public engagement.

The US being the prime example, the very set-up of the US constitution making sure that Congresss and the President can't agree on anything meaning everything is left for the micro level of the economy to work things out. This worked so well during the Clinton years, which was ALL talk and no action (which reminds me of a lot of people I have met both internally and externally recently :-))

The bottom line here:

Never in my long life as a trader has perception and reality been further apart.

No one seems to understand that a capitalistic system with the above rules and no working banking system is the biggest systemic risk ever, and the policy response is one of more STATE CAPITALISME than before.

It is beginning to look a lot like the 1970s:

Big government, central ignoring inflation risk and rising energy and commodity prices.

This time we have a helicopter pilot who thinks its right to collect rent on Federal money - where is Volker when we need him ?

Finally, here is link to lengthy interview I did yesterday on the markets if you are not already bored - the link to the interview is on the right hand side.


We had excellent March - took profit - restarting engines now...

FX: Long MXN vs USD, long EURUSD from today.... (@ 1.5545 and @ 1.5665), short EURNOK @ 8.0170

FI: Long 122 US T-bonds calls

COM: Long AUG puts.. Long DBA

Looking to built negative Asian growth portfolio....more on strategy tomorrow.

Med Venlig Hilsen Yours Sincerely Steen Jakobsen, Chief Investment Officer, Saxo Fund Management Saxo Bank A/S -London
40 Bank Street, 26th Floor Canary WharfLondon E14 5DA
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