onsdag den 29. oktober 2008

We must believe in luck. For how else can we explain the success of those we don't like?

We must believe in luck. For how else can we explain the success of those we don't like?
Jean Cocteau

Day two in the biggest rebalancing since 1987 puts the stock market is positive mode and with good reason - personally I believe that the climax in fear & panic has been reached - what comes next week is the final deleveraging of portfolio which will still have to happen:

  1. Redemption still a real issue
  2. Banks will need to find even more capital - Markets are down 20% this month - and with 10x leverage the banks needs capital and fast.
  3. Still too many "hopers" around - we maintain our minimum target if 765.00

Inspired by the article this morning in the New York Times: http://tinyurl.com/56gudn - I had my equity stragist Christian Blaabjerg do this chart: (Click on chart to enlarge)

To make this work "faster" we have even done 2-year average - the picture remains the same - we have come a long way, but there is still some way even on average to call this cheap. This is not exact science at all - and as John Boogle says in the article: You have to look at the alternatives - which is sooooooo true. We firmly believe stocks will be +/- 5% for a long, long time maybe 10 years before breaking higher, but the alternatives could be even worse!

Why would interest rate stay this artificially low forever? The credit cake is not only smaller, it is more expensive, so lending the US Government money @ 4.00% is total joke, when I get 3% dividend yield in actual private corporations. This theme could be the saviors of stock markets, if, and this is a big if, the fund managers tries to embrace true diversification as teached by Swenson at Yale Endowment http://tinyurl.com/6gzwlw (if you havent read or bought this book yet, you may be doomed)

The month is soon to be over and it looks ugly again - check this overview: (Click on chart to enlarge)

but it is still much better than long-only funds! Further redemption will follow these kinds of results.


We were long some 1010 Calls on the rebalancing - which we took of late yesterday, still have stoxx50 2800 & 3100 in place for final stretch of the month - still long 95% cash, but having we look to make some +400 bps in our Macro Strategy & +200 in our CTA account - which means we will playing safe for balance of the week.

Stay safe,


tirsdag den 28. oktober 2008

Rebalancing - chances of three day rally

Dear Investors,

This is not even a "real blog" but I have to make you aware that potentially this month-end could be the biggest rebalancing going on since "crahs of 1987" - the following is an internal e-mail I did to explain - very simplistically what goes on! (Please, please do not send me email why its wrong, but accept the "drivers" of this totally mechanical process' which has ironically made most funds lose more money....but that's another story.

Rebalancing – the way most long only fund managers do their portfolio management is to hedge themselves versus a benchmark – for arguments sake let’s make this index:

60% stocks and 40% fixed income.

From end of September the performance has been:

Russel2000: - 34% month to date
EAFE International stocks: -30% month to date
Lehman +20 yrs bonds: +2%

A “standard portfolio” consists of:40% domestic bonds – here represented by TLT US Index, 60% stocks – where 75% is domestic (RTY index) & 25% foreign EAFE (MXEA) ---

now the math starts:

Assuming fund manager by start of October was balanced as per above his p&l looks like this:

Oct 1: AUM 100 USD.
TLT (Bonds) 40 USD
RTY (Domestic stocks) 45 USD
MXEA(Foreign stocks) 15 USD….

Oct 28th though:

TLT = 40.8 USD (+2%)
RTY= 29.5 USD (-34%)
MXEA= 10.5 USD (-30%)

In order to get back to Oct 1 “ratio” the fund manager needs to (look at 4th coloumn):

TLT 40.8 32.4 -8.4 -6.804
RTY 29.7 36.45 6.75 5.4675
MXEA 10.5 12.15 1.65 1.3365
TOTAL 81 81

He/she needs to:

Sell 8.4% of 81 USD worth of bonds or 6.8 USD worth
BUY 5.5 USD worth of domestic stocks
BUY 1.3 USD worth of foreign stock.

This is Totally mechanical and the closer we get to Friday the more this could play.

We have bought November call 1010 for 10.00 USD to play this – or 500 US Dollar per contract.

References: S&P @ 873.00, Stoxx50 @ 2355

Safe trading


mandag den 27. oktober 2008

Monday morning Quarter-backing......

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)


We had our Weekly Investment Meeting this morning and we moved our cash from 85% to 95% reflecting this market has now entered what can only be called the final capitulation phase

95% cash reflects that we do not see how we can trade this market with any conviction. Last week we had strong both economic and pricing bias negative – this we maintain; We see our 765.00 minimum target being met shortly – also we have seen almost all of our long-term price target met:

Gold: below 700.00
EURUSD: below 1.2700 – our new target 1.2300 also met – now 1.2000 next level. Note this month end there will LARGE DEMAND for US Dollars on the fixing for benchmark’.
Crude: 50.00 $ getting closer
Bunds 117.00 + met.

We are in process of calibrating our 2009 view as to make money from here you need some “fundamental” valuation/benchmark to work against – not using our rule #3 – we need to asses things from forward-looking perspective not in analogies to history.

Why rule number #3 is some important can be seen in almost every single link below. The Hedge Fund Industry is dying day-by-day due to not accepting rule number # 3! When you talk of a true “paradigm shift” it means nothing can be interpreted the same any longer – Like science before and after it was discovered the world was not round!

I guess for most people paradigm-shift is just a word- maybe it’s time for people/investor to understand the true meaning of Paradigm as defined by Thomas Kuhn in his book: The Structure of Scientific Revolutions. I recommend the book for the few of you who are interested in facts rather than “nanny-stories”.

In my humble European Elitist, high-horsed, arrogant way (Did I miss any of the superlatives?) opinion this market still has 90% amateurs who should not be “authorized” to advice, let alone manage other people money. Look at the odds: There are fewer good fund managers in the world than brain-surgeons. At least with brain-surgeons you know they have performed the task before, has proper medical/surgical training & the have experience, but in fund management you have people who talk more BS than most College do when they seriously intoxicated. Shame on the banking and fund management industry – it is time for: transparency, best-practices, and proper measurement of risk. The evolution right now is fortunately letting the Cowboys die hopefully, there will be some money to manage for the remaining serious players.


Wait-and-see. We are long small down-side in Stoxx50, Short Gold – nothing else on. This market is UNTRADEABLE. Watch for Fed on Wednesday, and mind Sarkozy he is getting more and more dangerous.

Links for reading:


ONE of Britain’s best-known hedge funds, RAB Capital, has stopped investors cashing out of a second of its flagship funds. Investors in RAB’s Energy fund - which has lost more than 50% of its value this year - have been told they will not be able to liquidate their holdings.
Those who want to quit will be handed “redemption shares” instead of cash - a promise on behalf of the fund to pay back investors as and when it can sell out of enough stocks.
The fund, run by Gavin Wilson and Mark Redway, is entitled to do this under existing agreements with investors


Highbridge Capital Management, which is majority owned by JP Morgan Chase and has $25bn under management, is axing 10 per cent of its New York-based staff and plans cuts in Europe and Asia.
The volatility in global stock markets has savaged the performance of some of the world’s best-known hedge funds, raising fears of a collapse in the sector, which could cause a fresh crisis in the financial system.
Big names including Deephaven, Marshall Wace, Citadel Investment Corp, Lansdowne Partners, Third Point and Harbinger, have in recent weeks sustained losses of as much as 20 per cent in some funds.
Investors pulled at least $43bn (£25bn) from US hedge funds in September, according to TrimTabs Investment Research. This is nearly five per cent of the global sector’s estimated $2 trillion in total assets.


CHICAGO (Reuters) - Examiners with the Federal Reserve have questioned Wall Street counterparties about their exposure to debt and other holdings of Citadel Investment Group, The Wall Street Journal said on Saturday.
Citing people familiar with the matter, the Journal said the Fed questioned the counterparties in at least two instances in recent days.
Katie Spring, a spokeswoman for Citadel, said Citadel continues to have more than 30 percent of its investment capital in cash.
The Journal's report came a day after Citadel, one of the world's largest hedge funds, said it had more than $10 billion in available credit. The Chicago-based fund company, which manages $18 billion, held a conference call to quell rumors it was facing liquidity issues.
The fund firm, founded by Kenneth Griffin 18 years ago, denied on Friday market talk that it had approached the U.S. Treasury for a cash injection and that the Federal Reserve was coming to inspect its

Safe trading,

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
Phone: +44 (0)207 151 2010 Fax: +44 (0)207 151 2001
Please visit our website at: http://www.saxobank.com/

Trades in accordance with recommendations, especially in leveraged investments such as foreign exchange trading and investments in derivatives, can be very speculative and may result in losses as well as profits. Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information contained in this email.

Please read our full disclaimer.

fredag den 24. oktober 2008

It feels like 1992, it smells like 1992, but its 2008

This is very similar to what I felt before Bank of England gave up in 1992 - Every single central bank in the world are protecting their currencies by hiking rates - No, they do not learn from history!

Having said that this note will be short:

My targets in: Gold @ 700 been reached - in process of taking profit.....EURUSD @ 1.2700 been reached and exceeed - took profit. Bunds @ 117.00 took profit.

I will go home SQUARE - and I mean 100% cash tonight - We had great run last two month and it is time to honor the trading Gods by not believing in ..... "easy money"...

I feel the pain of my colleagues - they are hurt, but too many of them still "hope" - The hopers needs to learn that hope belongs in Churches on Sundays (In Denmark) no where else.

This week-end Central banks and governments will be busy putting together packages. Close to home in Denmark, we will get State Guarantee for Mortgages..... closing down the arbitrage between Deposits and Mortgage bonds.

Dirigisme - the most dangerous thing in the world is being used to talk about market potentially being closed for one or two weeks (Roubinin & Berlousconi both should have said so - I did not have time to verify either so please check yourselves)

I just had conversation with journalist from Norway and when being asked what the policians and policy makers could do to make this better I impulsively said: "Ask them to shut up!" Sounds harsh - why do not you listen to this link: http://www.youtube.com/watch?v=zPHUtFxaJ8M or even better consult studies on political economies:

As I always ask: Why was President Bill Clinton so successful (vis-a-vis economic growth)? Because he never EVER got anything done - it was eight years of total political vacuum on major issues - In vacuums the economy adjust on the micro-level.

What we need now is for the Americans to feel and understand why they need to save money - not because Government tells them to, but because its the only way.

Before I get attacked for being elitist, european and high-horsed, the same goes for European banks, consumers, real estate people - if you think money will be free forever then reality is here now.



To have a week-end with no positions. (well entirely true - bought way of the money STOXX50 calls - only because I know I have no predictive powers)

Safe tradings all of you.

torsdag den 23. oktober 2008

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)


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.


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.

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 =========================================================


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.


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.



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



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




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

tirsdag den 21. oktober 2008

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".....:
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 .


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.


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....


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


mandag den 20. oktober 2008

Prediction is very difficult, especially about the future. Niels Bohr

Prediction is very difficult, especially about the future.
Niels Bohr (1885 - 1962)

There is clearly now some established ranges in place in the S&P500 between 860 and 1060 on the downside, bias for me is still "south".

Right now I am watching my friend Drew Baptiste 987.00 level as key trigger for whether long or short, and remains with our negative bias meaning potential for minimum 767.00 based on the trading theme process moving from recession into depression.

I have said continuesly that the stock market performance for Q4-2008 and Q1-2009 will be based on the "perception" of either recession or depression. Despite my own bias towards recession, a severe one, it is more and more clear in the public domain and incoming economic data confirms that the worsening data is accelerating not stabilising.

The best point is our own internal model designed by our Chief Economist David Karsbøl, which measure key indicators. This model has been excellent in catching the trend of incoming data.

Saxo Bank Fundamental Index (Click to enlarge)

The conclusion:

For now we are moving into a "perceptional depression" from a fully priced recession - market impact is retest of low(potential for new lows) & much lower short-term interest rates.

In Europe, and in EURUSD I have become very negative short-term based on the increased pressure for much lower rates in ECB (& BOE).

I can not say I am fan of Kaletsky of The Times in London as he continues to act and speak like a person who uses history to explain the future, which is simply not do-able in my investment world: (http://business.timesonline.co.uk/tol/business/columnists/article4974535.ece)

To remind you our three premises are:

  • Cost of funding - drives market and valuations

  • Price of liquidity new unknown (tax on money)

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

Despite this he has an interesting argument: If we assume UK has one of the most leverage economies in the world, then why does it not have the lowest interest rate?

His argument can be read and seen in the above link, but there is some truth in this and the investment outlook conclusion must be:.......Much lower front-end rates.

I hear you already, but it is already priced in! No! Not to the full "depression" extend: UK in 1.00%, USin 0.5 %, Australia in 1.00% etc, not possible? Sure it is, in a depression its all new rules, when you fight to survive as a country, a company and on a personal level. As President Reagan said: "A recession is when your neightbour lose his job, a depression is when you lose yours".

Unemployment rates across the world, will unfortunate rise to at least 1992 levels, and I remember being a young man coming out of a tube at Hammersmith Station in London in 1992, and hearing the newspaper salesman shout: Evening Standard: 3 million unemployed in the UK, Read all about it..........and if you do not trust me on the pain of the UK consumer check this cool site by the BBC http://news.bbc.co.uk/1/hi/business/7457886.stm


Foreign Exchange:

Short EURUSD @ 1.3500 - fancy new lows beyond 1.3260. My chartist John Hardy is very bearish....

Still small long USDJPY through options, mostly as "insurance".

Fixed Income:

We continue to flex between deflation and inflation, right now this a.m, we bought back our short Treasuries around 112 25/32 - looking for some erosion into the Washington Mutual CDS auction tomorrow, plus acceleration of down-side for economics.

We are also looking for post Investment Meeting tomorrow to put on some 1.00 pct UK rates by Q1-2009.

I remain sceptical of lending the US money @ 4.00%, so net long is not happening here......


We took profit on ALL our long positions including value trades like banks, pharma, and shipping making a 7%-17% return on them - why?

Well, the "needle" has clearly moved to 60% odds depression from 40% in the last few weeks.. which we now take consequences from.


Short Gold, very bearish.... target sub-700.

ALL in all we are in for exciting week, the financial panic has been avoided, but will we be able to avoid economic disaster? We think so, but right now price action and incoming data dictates us to at least believe it could be DEPRESSION´which is incoming.

Finally, spend 10 minutes reading this unique commentary by Ms Scwartz, 92 years old: Bernanke is fighting the last war. http://online.wsj.com/article/SB122428279231046053.html?mod=special_page_campaign2008_mostpop##

Safe trading,


torsdag den 16. oktober 2008

Weekly Macro Meeting

The three PREMISES:
  • Cost of funding for drives market and valuations
  • Price of liquidity new unknown (tax on money)
  • No prior analogy historically will work (because this is different, very different)


Last week: We are seeing the financial effect now impacting the economic situation - making this the "worst part of the curve".

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

Last week: Watch the transitions period - we are clearly policy dependent. We maintain 85% cash = EXTREMELY DEFENSIVE

This 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.

Keeping cash @ 85% is not only impossible in order to make excess return, it is also extremely punitive in general allocation theory, but this is not time for being brave, rather it is time to look for opportunities, so as negative as we are - we are looking to reduce our cash portion relative quickly should we get more transparency.


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: 750 by Q1 2009 =========================================================


Bias: Negative growth & inflation

David Karsbøls economic forecasting model continue to fall indicating waning growth & inflation
Key leading indicators all point to lower growth

Fed 1 years forward expected rate is +26 bps - which we deem to be too high - We expect further cuts in Fed funds

EDCB 1 year forward expected is -121 bps - which we also deem to high - We expect minimum 250 bps cuts from ECB

Australia and any commodity country will decelerate the most - we are entering bust-cycle for commodities, which will hurt these countries

On the premise of "cost of capital", I.e savings we favour economic relative performance from: Switzerland, Singapore, China, & China - and underperformance from: UK, Scandinavia, Spain, Portugal, USA, Canada, Australia, New Zealand


Bias: Neutral

Banks can not releverage their balance sheet meaning less demand for Government issuances
Central banks will need to buy their own government bonds as no one else will!!!!

High Yield is still struggling - Corporate leverage spreads widening - Financial tightening - 8 year Ford pay 27% yield

Danish Mortgages: Still under pressure - Lack of guarantee in mortgages makes for widening spreads plus weaker DKK currency

Still favour BUNDS over Treasuries

We will go long TIPS (ETF: TIP US ) - as breakeven has gone negative - indicating NO INFLATION expectations



Bias: Negative

Our team does not believe earning actual results to be major theme - although there are low expectations

The key driver in equity will be: Hedge Fund Redemption. There is talk of > 200 bln. US Dollar and most of it in November & December

Using our three premises sectors to be overweight are: Utilities & Telecom. Underweight's are: Energy sector and consumer cyclical

There is some silver lining in equities - looking at P/E based on trend earnings (I.e smoothed earnings) we are trading all BEAR MARKET LOWS: Presently 12,2x versus previous lows of 15.7x(2002), 14.2x(1990), and 13.7x(1987).

The issue being where the E in P/E should be priced...but in terms of medium- and long-term allocation we need to move into equities soon or we lose upside allocation potential



Bias: Negative

Gold: The governments will need to sell out of their stocks plus if we should be buying Gold as inflation hedge, then with break-even turning negative, we should be selling Gold. We are net short GOLD through medium term Put bought.

Crude: Getting closer to "critical levels" for both producing countries and producing companies - 70 $ seems to have some budget rate implications - hence fall below could trigger two thins: 1.
Foreign Exchange

Bias: Neutral

US dollar: The US needs to fund themselves- there are two ways: 1. Much cheaper currency 2. Much higher yields - Second choice will not help the economy, hence must number one play - we are at turning point in this US Dollar strength, but we need further easing in US funding rates, and some better economic data to pull the trigger

JPY, CHF; Two best places to park your currency for now

EMG, EEC: Very very negative. The currencies is 100 pct correlated to their current account balances - with world slowing into recession/depression there will be more pain - unfortunately
Carry trading: Forget it!



We fully realise keeping 85% in cash does not make you a lot of money, but with a performance of +400 bps YTD, and our benchmark down everything between 25% and 75% we simply do not feel this is the time to be brave.

We are more focused on finding long ideas in equity, corporate bonds and commodities than in continuing selling them down. We see and understand that in "normal times" this is cheap, but having premise number three: This is different, we have been able to navigate these troubled waters.

The Investment meeting was down right depressive for yours truly, who find himself the most "bullish" of all - but in respecting the framework and the lack of clarity we reassigned the extremely cautious weights to our portfolio.

For arguments sake let me tell you in "normal times" if we have no exposure we would to Beta exposure:

Equity: 35%
Fixed Income: 15%
Alternative Strategies: 20%
Private Equity: 20%
Real Estate: 10%
Cash: 0%

But clearly this is not a time like that.....

Have a nice week,
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
Phone: +44 (0)207 151 2010 Fax: +44 (0)207 151 2001
Please visit our website at: http://www.saxobank.com/
Trades in accordance with recommendations, especially in leveraged investments such as foreign exchange trading and investments in derivatives, can be very speculative and may result in losses as well as profits. Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information contained in this email.
Please read our full disclaimer.

onsdag den 15. oktober 2008

What Castro taught me; Dont trust stock indexes

My good friend Yoshi is back with an excellent piece on the markets called:

What Castro taught me; Dont trust stock indexes

"Those who profit are the ones at the top. They keep the doughnut for themselves and give the hole to the people." by Alexander Lebed (1950-2002), former Russian general & presidential candidate

On 10th of October 2008, George Bush said, "We are in this together and we will pull out of this together." My English translation is "My pals and I put you in this mess and you pull us out." In November 1999, Fidel Castro simplified the next president by the comment of this decade, "He is not smart."

His insight came back alive when I saw the Cuban TV showing some politicians dozing away and others chatting away with someone in the back row while Castro was speaking. I felt this guy might not be so bad, so I braved out to the streets of Havana. The poor socialists in the shops and on the streets looked ok in contrast to the discontent capitalists in the US. Castro was not their god and my long suffering salsa teacher candidly said, "Let’s talk politics." Looking back now, we have been too naïve to prepare for the emerging shift in the world: redistribution of the wealth and resources outside the developed economies.

Then Paulson said today "The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.'' He left the most important objective on the goodwill of the 9 nominated banks knowing full well what happened in Japan: the Japanese banks didn’t lend, they used the injected capital, the zero interest rate and the deposit money to push the 10y JGB yield down to 0.75%. The banks recovered eventually, but the rest of the country lost a decade. So we may see another zero sum game again. The government gives $750 billion and 1% Fed fund; the banks buy Tresuries (so bigger the issuance, more profits for the banks). It’s much better than selling the toxic assets to the government since that could give the banks a chance to recover some of the loss later). Therefore, I don’t want to be too excited about the stocks and too bearish on the long-end of government bonds beyond November until the FX mkt gives me a signal: the redistribution of the wealth and resources outside the US in the form of USD devaluation and inflation.

I am now shifting my mid-term view to neutral on the government bonds: the government everywhere is wasting the scarce resources on the inefficient part of the economy at the cost of the efficient parts and tax payers. I am not confident if the real economy will follow the bounce on the financial stocks beyond few weeks. Looking at the coordinated global response to date, the world seems to have decided to keep the existing financial structure a while longer by continuing to lend to the US.

Below are the current index weightings of the financial groups in the US, UK and Europe:
SPX: 9.2%
Euro Stoxx50: 23%
FTSE 100: 21%

Despite the fact that $750 billion and other guarantees in the US and $1.8 trillion in Europe are being committed, the financials are the only sectors showing positive numbers hinting the mkt hesitation. The global demand and the main streets are weakening while the financials are boosted by the governments. Don’t be fooled by the indexes, they will no longer represent the overall economy accurately. I think the financials’ weightings will increase to high 30s in Europe and mid 20s in the US to obscure the negative effects on the real economy.


tirsdag den 14. oktober 2008

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,


mandag den 13. oktober 2008

Genuine beginnings begin within us, even when they are brought to our attention by external opportunities.

Genuine beginnings begin within us, even when they are brought to our attention by external opportunities.
William Bridges

This is one interesting morning for the financials markets - the main street and the politicians - I find it ironic that on the low-point of capitalisme we may have "deal" which will get us back to basic or at least back to non-crisis mode!

In my wording I believe and that's believe like going to Church this will bring policy-makers ahead of the curve rather than behind it - If they are smart enough to throw in more rate cuts we could have real nice Q4 on our hands.

Yes, you did read correctly! I am semi-bullish- the highest state in Steen Jakobsen's Nirvana training! I will however have to disappoint the ALL BULLISH crowd - the price for this Socialdemocratic Project is higher taxes, misallocation of capital, more regulation and a global recession, but twe saved the system.

The steps taken this week-end matches what I talked about all through last week: The all-in, no prisoners approach which says: LISTEN! We will do anything at any cost to get this going!

I was, as always, way too early in this call and even believing in it, but in the meantime the "best thing" to happen was that we moved the S&P500 into a cheap territory - or close to it - I like the fact that Jeremy Grantof GMO, a person who has been even more vocal than me was addressing the same issue in this week-end Barrons: Still Holding back http://tinyurl.com/3h548x

I found this nice link on Big Picture: 10 Bullish Chart, Indicators http://tinyurl.com/4yqstd

I will comtemplate the true costs to this all-in plan from the week-end - but it is a time of great opportunities and risk, but for now our main views are:

  • Fixed Income: Curve steepning - Still more rate cuts are coming in Europe and the US. I personally think the last bubble to burst will be long-end US yields - lending US government at sub-7 is not a good long term deal. We are short 10y notes - and looking to put on steepners. We see Europe cutting 50-75 bps - USA 25-50 bps -considering High Yield funds - long -
  • Foreign Exchange: Long EURJPY - and we have strong fundamental case for reversal of EUR higher again - despite rate cuts - the US dollar bid came from liquidity raising in short-term market & US Investors dumping their EMG exposure - we are close to turning point for US dollar strength.
  • Commodities: Not involved- believe in 50% boom-bust cycle - close to initiating long positions
  • Cash: 80% down from cyclical high 85% - will deploy some more if US open holds what the futures promises. Target to get 25% exposure within this week playing strong Q4

Keep safe,


torsdag den 9. oktober 2008

If stock market experts were so expert, they would be buying stock, not selling advice.

Dear Investors,

I find it scary that our target (long-term) is now in sight: 765-00 - We have been calling for sub-800 but the speed of this collapse surprised even me to be honest - I did expect the politicians to react to get ahead of the curve but in true politician/policy maker fashion they trailed - giving me 50 bps, when 100 bps was needed, leaking all info to press - etc etc.

Now we are awaiting two major events:

One, the Lehman CDS settlement - this has been major driver of the hoarding of capital by banks and funds as the gross amount needed to be settled is said to be > 300 bln. US Dollars.

9:45 a.m.-10 a.m. Auction participants will submit bids and offers for the debt backing the credit default swaps, which will be used to determine the initial recovery rate of the swaps.
10:30 a.m. Auction administrators Creditex and Markit will publish the initial recovery price and the open interest for the contracts will be published. The open interest reflects the amount of bids and offers that have been made, and will show if there are more buyers than sellers, or vice versa.
12:45 p.m. -1 p.m. Participating dealers will submit limit orders for the debt on behalf of themselves and their clients to fill the open interest
2 p.m. The final price of the auction will be published.

Two, the G-7 meeting in Washington. I got feeling this meeting could start early if not already underway right now. There should be press conference 7-ish PM CET time, but I expect announcement before US open.

The schedule:

All times are (WashingtonTime/ GMT)...
0830/1230 - French Economy Minister Christine Lagarde speaks on the credit crisis at the Council on Foreign Relations.
0830/1230 - Eurogroup President Jean-Claude Juncker delivers welcoming remarks at a conference on the euro sponsored by the Peterson Institute for International Economics and BRUEGEL
0845/1245 - EU Economic and Monetary Affairs Commissioner Joaquin Almunia speaks at euro conference 0900/1300 - Group of 24 ministers meeting.
0930/1330 - ECB Executive Board member Lorenzo Bini Smaghi speaks at euro conference.
1000/1400 - Inter-American Development Bank holds seminar, 'Impact of Financial Crisis on Latin America'.
1015/1415 - IMF Managing Director Dominique Strauss-Kahn speaks at euro conference.
1240/1640 - ECB Governing Council member Christian Noyer speaks at euro conference 1400/1800 - Finance minister and central bankers from Group of Seven nations meet.
1515/1915 - Media briefing by G-24 Chair.
1515/1915 - ECB Executive Board member Lorenzo Bini Smaghi participates in IMF seminar on oil prices.
1700/2100 - South African Finance Minister Trevor Manuel participates in IMF seminar on impact on developing countries of economic slowdown among Group of Seven nations.
1845/2245 - U.S. Treasury Secretary Henry Paulson holds post-G7 news conference.
1945/2345 - ECB President Jean-Claude Trichet, Eurogroup Chairman Jean-Claude Juncker and EU Economic and Monetary Affairs Commissioner Joaquin Almunia hold news conference.
TBA: Other G7 delegations hold news conferences.
TBA: G7 holds 'outreach dinner' with Russia.

We are now in phase where innocent people lose their jobs, pension and net-worth due to bad investment advice and the ever go-happy-crowd of stock manipulators calling for buy-on-dips, through my optics this is the "fundamentals" right now:

  • S&P in 900-1000 is oversold; getting cheap...

  • S&P sub 800 is cheap... and should give excellent return on 2-5 years horizon.

  • Our target remains 765-00....... we are 85% in cash - and we will await this weekend moves and NOT ENTER any new positions before Monday.....

My thoughts go out to all those who fights the markets today, to the poor Icelandic population, to everyone forced to "do something or else"....... this will be day to tell your grandchildren about, for once I am relieved I am a boring, defensive, and sceptic..... I am scared and so should you be.

Be safe - with the best wishes,

onsdag den 8. oktober 2008

Too many people are thinking of security instead of opportunity. They seem more afraid of life than death.

Too many people are thinking of security instead of opportunity. They seem more afraid of life than death.
James F. Byrnes (1879 - 1972)

Dear Investors,

S&P from here 800 or 1200? (click chart to get larger version)

We are in period which mildy could be said to be "volatile", but we are getting towards the total panic needed in every crisis. I will not try to be brave or give any advice but I will give you my scenario for this tumultous time.

  1. To stop this crisis the Government & Central Banks needs to get ahead of the curve not behind. This entails giving LARGER THAN exepected rate cuts, bigger than expected capital injections into banks - and redoing their communication policy - broadbased comments are not appreciate in a market market looking for laser-precise answers to the enigmas of the financial markets

  2. Adding stocks to my personal account going from 99.5% cash to 50% cash-I have been - remains 85% in cash in my funds- and in the PA account I have been 99.5% long cash - I have this morning added a number of stocks onto the PA account -( pardon this being danish stocks but my private bank does not seem to have noticed there is equity markets outside Denmark) - but I added: Danske @ 88.00, Novo @ 263, Maersk B @ 34.500. I have NO PREDICTIVE POWERS - but really - if you like me, have been 100% cash for the last year you need to start allocating somewhere... I am starting now (For disclaiming purposes I also added Danske & Barclays to my hedge fund accounts...)

  3. The outlook from here is a bifurcation: Either bounce to 1200-1300 or direct to sub-800......(check the chart)

  4. Carnage is fully pricing collapse now - remember a while back I wrote about this mechanical fund who in their September newsletter proclaimed: "It is dangerous to be in the market, it is even more dangerous to not be in the market!" - I kid you not that fund is now down 70% for the year - so my point is: The last of the "remain invested jerks" are disappearing - the financials market equivalent of a clown sorry joke: Jim Cramer wants to sell all my stocks and go to cash! (He is ALWAYS wrong - only beaten by Greenspan, who is the best inverse indicator ever)

  5. The policy reaction function is different in the US and Europe. One must acknowledge that Europe have greater power to do "UK like" baning bail-outs than the US - All options are open to Europe but due to the idiotic EMU construction it does lack European Treasury to co-ordinate anything - meaning it look and feels like piece-meal solutions, but at least they are not bounded by Congress. In the US Bernanke & Paulson are limited by needing broadbased political support - and we know how that works in the US --- or rather how that DOES NOT work - the US election cycle could... and I mean could mean we need to BUY EUROPE vs US - the trigger would be full fletched banking support in Europe which US can't copy ==> outflow from investors -- I am getting closer and closer to triggering UPSIDE EURUSD based on this.


Despite being almost the parma bear on this- I simply can not be NET SHORT stocks any longer , so... I remain 85% long cash, but I am now using the 15% to buy UPSIDE STRATEGIES... on S&P, USDJPY and banking shares........

In our Weekly Investment meeting we came up with three "premises" which one needs to learn, respect and understand:

  1. Cost of funding drives market & valuations (old fixed income theorem now moved into fx, equity and commodity)

  2. Price of liquidity essential and REAL PRICE (tax on money)

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

I will let Mark Twain end this blog: "I am more concerned with the return of my money than the return on my money".

Good luck,


Where is the Market Going ?

(click on chart to enlarge!)

tirsdag den 7. oktober 2008

The Road Less Traveled. We Don’t Want to Get There.

It is my pleasure to welcome my first guest on my blog, my good friend, Mr. Yoshi Fujioka, Fujioka Investment has written an extremely well formulated piece about the long term issues and where we are in the cycle of investment. Yoshi been trading in all major centres, he is an independent trader in Singapore, and a true Gentleman, please enjoy:

The Road Less Traveled. We Don’t Want to Get There by Yoshi Fujioka

"The sound of a bell echoes the impermanence of all things. The color of a flower reveals the truth that the prosperous must decline. The proud do not endure like a dream on a spring night; the mighty fall at last, they are as dust before the wind." The opening of The Tale of the Heike

I came across a press freedom index by Reporters without Borders, which prompted me to look at America’s economic standing relative to its social/political evolution as I believe an economy cannot continue to prosper when its society and political representation are languishing and a constructive capitalism can only be developed through freely available access to accurate information (government data, corporate earnings reports and a proper universal accounting system) and minimum corruption.

I have compiled my civilization index, which consists of Press Freedom of Index (PFI: Reporters without Borders), Corruption Perception Index (CPI: Transparency International) and a percentage ranking of the global GDP (nominal):
(Click on chart to get bigger format)

CPI: Corruption Perception Index (Transparency International)
PFI: Press Freedom Index (Reporters without Borders)
GDP (nominal): International Monetary Fund

The economic and social deterioration in the US and Europe, where I spent 22 years of my life, dampened my weekend spirit and my natural reaction was cursing in silence, “Is this the products of Bush’s neo-conservatism?” Their Laissez Faire turned out to be opposition to its people’s interventions/participation and weakening the national credibility. I was taught taxation was designed to redistribute resources from the wealthy and businesses to people, but it is now from the people to the selected businesses.

I have no doubts that capitalism had defeated socialism, but I’m not sure if democracy has prevailed over autocratic governments. The autocratic countries are funding the democratic countries and the financial power is shifting from the large democracies to China, Russia and Arab nations. The market should always be aware of the deteriorating credibility of USD as the only reserve currency, which is monetizing the commodities belonging to other nations. USD is the currency of a debtor nation prone to a shock if the creditor nations decide to monetize their own natural resources via a monetary union like Gulf Monetary Union (which will no longer require the USD peg).

The last depression took 23 years and WW II to recover and it is unreasonable to expect a quick resolution to the current crisis. We’ve just dealt with the banking balance sheet clean-up. There are still European banking crisis, a new earning report season, $62 trillion credit derivatives market and the deleveraging of the US consumption (72% of the US GDP growth).

The US is running $800 billion current account deficit (over 7% of its GDP), which in turn comes back to finance further debts. When the deficit declines, the credit will become less available at a higher cost and hit assets negatively. The easy monetary policies have created asset bubbles leading to current pains and the Fed may be about to ease its policies further when the government is injecting $700 billion and yet needs to deleverage the economy to minimize the further shock (the US GDP/credit expansion is 1:5 for the last 7 years). But the major central banks have been increasing their money supply at a rate of more than 10%. Deleveraging the economy was exactly what the US didn’t do before 1929 and as Michael Milken himself said, "30:1 leverage is not a business, it has never been a business and it will never be a business."

Deflation vs. Inflation

Japanese deflation: The market is looking at the Japanese model to answer the future course of the general price level: asset deflation and lower consumption, which caused a deflation. I am feeling uneasy about this answer since I cannot overlook the differences in the external debt ratio, saving rate and trade surplus vs. trade deficit. The Japanese budget deficit was financed internally (95% plus) and the largest portion of the JGB went to the public financial institutions like the postal saving & insurance systems, public pension funds and the BOJ. Therefore, the increased issuance did not cause supply-demand inbalance in the market and the overall trade current account was at a huge surplus.

Chinese Purchase of Treasuries: China’s industrial production has 49% share in its GDP while the US GDP consists of 20% manufacturing and 70% consumption, 18% in UK and 27% in Japan. This is my answer to the decoupling believers. The US, Japanese and European recessions will have a material impacts. The Chinese economy is also highly leveraged at alarming inefficiency and overcapacity while they rely heavily on bank loans. The 08 Chinese GDP is expected to slow to 10% from 12% in 07 and Steven Roach is forecasting that the GDP could contract to 8% if their exports decline further.

The primary driver of the Chinese policies is the continuation of the communist party rule and everything else comes second and third. So they will do everything to keep its 1.3 billion people employed as many as possible. Otherwise, what’s the point of having a communist party if they can’t give its people jobs? This was the reason the government allowed the banks to lend recklessly to build more factories leading to the overcapacity, continuing debt servicing costs with employees who cannot be easily laid off in the global recession. China will use its reserve to stimulate its economy. So after the less trade surplus and more fiscal spending, China would be less willing financier for the US and will demand higher returns on their capital.
Will Emerging Nations Continue to Invest in the West? It has been said these countries have no other investment choice. What the market should ask is when this assumption will change. The autocratic nations will have to open their markets to each other as they have to seek natural resources and commodities. Also, a recent study by the Pew Hispanic Center on the12 million illegal immigrants in the US made me wonder if the world want the US as much as before: the illegal entry from Mexico is down -25% and down -50% from the Central America.

The End Results of these Crises:

1. Further fiscal packages to deal with the $62 trillion credit derivatives market and home ownership.
2. Much more regulations.
3. The majority of the hedge funds disappearing as the banks deleverage themselves since the hedge fund industry’s return will be a fraction of what it was. The recent USD strength is a short term result of their position closing and redemption.
4. Downgrading of the US Treasuries and eventual rise in yields, minimum to 5% 10y UST in 09 (I expect the majority of the government bonds to remain where they are until January 09).
5. Resumption of USD depreciation and some kind of FX control.
6. Loss of confidence in the Swiss banking system. As seen in the Icelandic banks ballooned their balance sheet to 900% of the GDP (the krona has slumped 14% vs. euro and the inflation at 14%) The Swiss banking system is outside the EMU & EU and too big for the country alone to deal with. If the real damage surfaces, the Swiss Franc will depreciate against every major currencies.
7. JPY appreciates to 85/USD
8. S&P will resume its downtrend to 800
9. Stagflation

Well, I end my note here by quoting Andrew Jackson’s words when he closed a bank:"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves." - Andrew Jackson, 7th US President


mandag den 6. oktober 2008

Monday, Monday, .......Midday update

Classic fund manager dilemma - although this is not like anything I have seen before in my career, I feel tempted to go square from short everything more on a gut feeling than anything else - and trust me gut feelings are overrated so I will stick to our key targets (see below)

Massive rate cuts are coming - maybe even before the open today or tomorrow open - The authorities thinks in steps:

1. Bail-out

2. Rate cuts

3. Direct intervention (in bonds and stocks)....

We did step 1.) now and step 2.) is coming if not working either - we will move to step 3.) which will be unprecedented in Europe & North America but not in Asia....

The reaction off rate cuts could be: 2 min.'s rally or a longer bounce based on cheaper funding - there may still be pockets of desperation but it will be cheaper.....

I maintain as per my blog Friday - merely refinancing/bailing-out mortgage portion of risk will only help temporarily - We know the banks are "misrepresenting" the trust, this morning papers full of how Lehman told the less than honest truth about their true need of capital.

Direction key determinator will be bond market, and probably Bunds... if we are going to see action 2.) and 3.) we need furhter flight to quality.

Statewide banking guarantees - well ,well, it will not work - when everybody does the "arbitrage" goes away, its against EU regulation, it increases financial long-term burden(more debt), Widens funding rates for governments(through higher bonds premium) and it floats capital market with bonds..... Ergo: back to square one... but it does mean banks can keep their depositors, it also ironically means there is LESS CHANCE of bail-out for next bank in trouble - as the customers are already safed, why safe the bank frame-work?

Short-selling ban will by "law" disappear three days after President sign bail-out into law - Will be interesting - my estimate it will increase liquidity and get volatility back down, plus obvisously take CDS spreads down, as they have been the short financial proxy of choice.


Cash 90% - now, +5%
Small long US dollars versus EUR
Was small short european stocks - but awaiting resolution on rates...
Long Dec - EDZ
Long CHF vs GBP options
Small, small upside option on stocks...

We are entering the acceleration part of this market, one which creates more losers than winners...........I am keeping my powder dry - awaiting better risk/reward.

Our KEY targets remains:

S&P 867-00 (Was 1100 untill early August)
EUR 1.3500 - almost reached, we move it down to 1.30000
Yield 10 yr - when the US dollar hoarding done we expect the final bubble of this cycle: low interest rates to start playing for real. We see LT rates in the US in 8-10% in 2009....
GOLD --- 1000 US Dollars
Crude- 80-100 for balance of this crisis, then 200 US Dollars next year.

Trade smaller size, be active, be prudent, listen not to what they say, but observe what they do....


søndag den 5. oktober 2008

Dear Reader, not much time, but Ambrose Pritchard, the highest "ranked" economic journalists in our universe writes it better than me... READ IT or you are lost...


From internal note:

Read this or you could be lost......

This is an excellent summary of the risk we face - note the very dire words chosen by experienced in-the-know journalists -

I believe the next few days is similar to the extreme volatility we saw before GBP devalued in 1992.... It could also, unfortunately, be similar to 1987

We in dying moment of a 10 trl. US dollar balance exercise which is costing many banks there livelihood, and we will see MAJOR RATE CUTS this week in our opinion......Germany, as per usual, is so behind the ball, with the loser Trichet, that it could cost Europe SEVERE RECESSION.......

We will keep u posted all day - remember morning meeting 845...on trading floor..

Germany takes hot seat as Europe falls into the abyss
We face extreme danger. Unless there is immediate intervention on every front by all the major powers acting in concert, we risk a disintegration of global finance within days. Nobody will be spared, unless they own gold bars.
By Ambrose Evans-Pritchard
Last Updated: 11:26PM BST 05 Oct 2009
Investors will learn today whether the Paulson bail-out - fattened to $850bn (£480bn) by Congress - can begin to halt the death spiral in the credit system. So far, the response looks terrible.
Germany is now in the hot seat. The collapse of a rescue deal for Hypo Real Estate on Saturday threatens a €400bn (£311bn) bankruptcy that nearly matches the Lehman Brothers debacle for sheer scale.
Chancellor Angela Merkel has been forced to pull her head out of the sand, guaranteeing all German savings, a day after she rebuked Ireland for doing much the same thing. Reality intrudes.
During the past week, we have tipped over the edge, into the middle of the abyss. Systemic collapse is in full train. The Netherlands has just rushed through a second, more sweeping nationalisation of Fortis.
Ireland and Greece have had to rescue all their banks. Iceland is facing an Argentine denouement.
The US commercial paper market is closed. It shrank $95bn last week, and has lost $208bn in three weeks. The interbank lending market has seized up. There are almost no bids. It is a ghost market. Healthy companies cannot roll over debt. Some will have to sack staff today to stave off default.
As the unflappable Warren Buffett puts it, the credit freeze is "sucking blood" out of the economy. "In my adult lifetime, I don't think I've ever seen people as fearful," he said.
We are fast approaching the point of no return. The only way out of this calamitous descent is "shock and awe" on a global scale, and even that may not be enough.
Drastic rate cuts would be a good start. Central bankers still paralysed by a misplaced fear of inflation – whether in Europe, Britain, or the US – have become a public menace and should be held to severe account by our democracies. The imminent and massive danger is now self-feeding debt deflation.
The lesson of the 1930s is that any country trying to reflate in isolation will be punished. The crisis will ricochet from one economy to another until every one is crippled. We are seeing it play again in this drama as our leaders fail to rise above their narrow, parochial agendas.
The European Central Bank – which raised rates into the teeth of the crisis in July – has played a shockingly destructive role in this enveloping slump. Its growth predictions this year have been, and still are, delusional. Neglecting its global role, it has vastly complicated the fire-fighting efforts of Washington.
It could have offered "cover" to the US Federal Reserve this spring when Ben Bernanke was forced by events to slash rates to 2pc. It could at least have signalled an end to monetary tightening. That is how an ally ought to behave.
Instead, it stuck maniacally to its Gothic script, with equally unhappy consequences for both sides of the Atlantic, as well as for China, Japan, and India. The euro rocketed yet further, which it turn set off an oil shock as crude metamorphosed into an anti-dollar with leverage.
The ECB policy was self-defeating, even on its own terms. It merely drove headline inflation even higher, while deeper forces of underlying debt deflation pulled the real economies of Germany, Italy, France, and Spain into a recessionary vortex.
Far from offering reassurance, the weekend mini-summit of EU leaders served only to highlight that nobody is in charge of this runaway train. There is still no lender of last resort in euroland. The £12bn stimulus package is risible.
Angela Merkel has revealed her deep limitations. It was she who vetoed French efforts to launch a pan-EU rescue package, suspecting that any lifeboat fund would prove to be Trojan Horse – a way of co-opting German taxpayers into colossal transfers of wealth to Latin Europe.
In that she is right, but it is too late now for dysfunctional EU political games. By demanding that those who caused the damage should pay for it, she crossed the line into caricature, or worse.
Her comments echo word for word the "we're alright Jack" attitudes of Euro-pols during the first US banking crises in 1930-1931, until the storm hit Europe and the entire cast was swept away by furious electorates, or simply shot. Thankfully, this EU stupidity is at last drawing serious criticism.
"We have to make sure Europe takes its responsibilities, like the US:
action must be taken quickly and in a concerted manner," said IMF chief Dominique Strauss-Kahn.
As for the US itself, it has not yet exhausted its policy arsenal. It can escalate further up the nuclear ladder. The Fed can cut interest rates from 2pc to zero. If that fails, it can let rip with the mass purchase of US debt.
"The US government has a technology, called a printing press," said Fed chief Ben Bernanke in November 2002. (His helicopter speech).
In extremis, the Treasury/Fed can swoop into any market to shore up asset prices. They can buy Florida property. They can even buy SUV guzzlers from the car lots in Detroit, and mangle them in scrap yards.
As Bernanke put it, the Fed can "expand the menu of assets that it buys."
There is a devilish catch to this ploy, of course. It assumes that foreign creditors will tolerate such action.
Japan entered its Lost Decade as the world's top creditor, with a vast pool of household savings to cushion the slump. America starts its purge with net external liabilities of $3 trillion, and a savings rate near zero. Foreigners own over half the US Treasury debt, and two thirds of all Fannie, Freddie, and other US agency bonds.
But the risk of a dollar collapse is one for the distant future. Right now the world faces the opposite problem. There is a wild scramble for dollars as a $10 trillion pyramid of global lending based on dollar balance sheets "delevers" with a vengeance.
This is a "short squeeze" on those who have used the dollar for a vast global carry trade. International banks are facing margin calls on their dollar leverage. It is why the Fed is having to provide $1.25 trillion in dollar liquidity for the entire global system, according to estimates by Brad Setser from the Center for Geoeconomic Studies.
The crisis engulfing Europe, Asia and emerging markets, makes life easier for Washington. The United States is becoming a safe-haven again.
The Fed can now hope to pursue monetary stimulus "a l'outrance"
without being slapped down by the currency, debt, and commodity markets. Take comfort where you can.

fredag den 3. oktober 2008

A little learning is a dangerous thing but a lot of ignorance is just as bad.

A little learning is a dangerous thing but a lot of ignorance is just as bad.
Bob Edwards

I have decided to explain the crisis and why the plan is useless once and for all to myself - it is really an economy of scale issue as it is the question I get the most (Yes, I know you are wondering why people even bother to ask me anything being an European Elitist Arrogant High-horse something as a "friendly anonymous visitor to my site called me!)....these days....but let me try:

The background is this:

Imagine you have a bank - for arguments sake let us call it : Banque Paulson & Bernanke - their corporate motto's is: "We create moral hazards better than anyone else -faster".....

This bank BP&P got an asset side which really mimics a traditonal portfolio:

A little stock, a little government bonds(10%), a little (sorry a lot) of mortgages(30%), a little lending(40%), a little Real Estate(20%) and other on-and-off balancesheet vehicles...

- It is - obviously- all funded day by day in the money market.

The portfolio is leveraged 10 times - which happens to be the average leverage in commercial banks.

Now - the market (portfolio) is down 15% - meaning you are insolvent by 50% -- i.e 10 x 15% = 150% minus your capital = -50% - but your "bank" --- allows you to keep the portfolio because tomorrow they "hope" the market will be better.....(The Church going traders I call them..)

Then one day the Congress and its two parties called We-got-zero-clue and We-got-even-less-clue gets call from The White House - some geezer who doesn't know what an CDO is shouts: "Fire, Fire - pants on fire ......." Please send in the Mortgage Firebrigade..... fast!

Congress goes into panic and decides they will buy ALL MORTGAGES and ALL MORTGAGE INSTITUTIONS in the country.

Fine.....but hang on... lets go through this...

If the GOVERNMENT buys only the mortgage loss from my portfolio what happens next?

Well if we deal a market-prices the mortgage portfolio is off my book @ 20 cents in the dollar... so my cash goes up but the loss remains in place plus taking 30% of loss off still leaves me short a few bucks...but even if they bail-out out without loss' on my mortgages I am still short: (100 USD - 30% in mortgages equals 30 USD x 10 leverage = 300 USD x 15% loss = equals 45 USD loss....so I am getting 45 USD back - but I am down 50 USD net - leaving me 5 US dollars short (Yes, this is constructed portfolio but.. point is still the same....)

- and IF... the others parts of the portfolio continues to fall --- BP&B is still even more insolvent.


Because you are NOT dealing with the real issues:

1. Funding is done day by day - with massive mismatch in time - Bad business model is environment of scarce credit creation.
2. Leverage - in a perfect storm EVERYTHING becomes correlated. .meaning falling...
3. Mortgages - there are 4.5 mio. unsold homes, so whether government or private sector owns them does not matter - its all math.....
4. Solvency - portfolio of BP&B still insolvent - why should anyone deal with them?
5. Transperency - how do I know BP&B is honest?

The right solution would be to let everyone go bankrupt - but if you want to spend the tax payers money the government needs to think like a Private Equity Fund - buy on the bid, restructure balance sheet,give new management upside in equity, sack the old management, and buy equity upside leverage.

There was God forbid an excellent Swedish model for this before - Imagine that recommending anything Swedish is a first for me......but DO realise this is PURE SOCIALDEMOCRATIC policy and hence I can not support it, but it did work before....

So......if the deal adresss real issues it will work, but I doubt BP&B will survive longer than a few quarters more, and neither should they....


Calling it a strategy is an insult to the word itself, but.....

85% cash
Long USD vs EUR as we broke uptrend since 2000 - meaning lower EURUSD
Small short T-bonds
Small long upside stocks...

Nice week-end

Steen Jakobsen

onsdag den 1. oktober 2008

The opposite of talking isn't listening. The opposite of talking is waiting.

The opposite of talking isn't listening. The opposite of talking is waiting.
Fran Lebowitz (1950 .)

So... what did I do? I talked ;-) to my friends at Bloomberg - I put this link in as todays text as it pretty much states what I think right now (I am really sorry you have to both listen and see me)...