tirsdag den 15. september 2009

A hero is no braver than an ordinary man, but he is braver five minutes longer. Ralph Waldo Emerson (1803 - 1882)

Our family office had its first real macro meeting in a long time... with following conclusions......(or lack of it....)

Economics:

The incoming data continues to be good although we have noticed some deteriation recently relative to expectations.

We are simple people and use the rough guestimate delivered on Bloomberg by Citibank as benchmark. (CESIEUR and CESIG10). The better-than-expected data topped around end of August and into early September.

This week have seen very disappoing ZEW but very good US numbers continuing the a trend of
"cyclical" difference between the US and Europe, where the US is perceived to be further ahead on the curve and hence should perform better. (S&P over STOXX50)

This week is full of data and it will be interesting to monitor the development post this week and going into the G-20 meeting in Pittsburgh 24-25. September (http://www.pittsburghsummit.gov/)

We should note from 10.000 feet, the paradox of better economic data still does not rhym with the high Jobless Claims and the rising unemployment.

The lead-lag factor does not explain why this "recovery" which many ivory tower economist in investment banks are busy calling much better than in 1930s (due to Industrial Production presently doing better -maybe slightly overlooking the fact there is NO MANFACTURING left in the US)......

Conclusion:

The data still improving - but the velocity is dropping and a few "dark clouds" have been seen.

We need another fiscal stimulus, a new cash-for-clonkers, further expansion of Fed's balancesheet to keep the boat afloat....... but bottom line: No reason to fade the economics .....yet

Foreign Exchange

We had quiet a lengthy discussion on the US Dollar and it's direction. Jesper playing devils-advocate saying the pro-cyclical aspects of the US Dollar should be supportive (Improved balance of trade, Current Account and the US being ahead in the pro-cyclical loose monetary policy.

I, on the other hand, argued for the POLITICAL ASPECT being key driver- and here I have to add that one of the "macro mistakes" I have made over the summer has been to let my "hate" - and yes it is hate for politicians and central bankers cloud the decision making - the fact
they are implementing wrong policies, delaying the inevitable has NOTHING TO DO with our trading approach.(At least theoretically)

Politicians are simple people (Just look at Porno Berlousconi) - they try to do what they tell you! The London G-20 Summit roadmap has been followed to the point - the next main agenda being regulation .... and a hard one.

Back to the US Dollar here is my argument for weaker, a much weaker US Dollar:

The recycling of capital from the CONSUMING America to the EXPORTING Asia meant:

Lower yield, stronger US Dollar and a temporary equlibrium condusive for stock markets (bubbles). Now the US consumer is DEAD and gone.

The logic (I hear you laugh at me for using logic in this market :-) should be for rates now to go up, for the exporting Asia to increase their home bias and for the US to increase its domestic saving (which is happening)...... This is first part of the argument.

Then you add the geopolitcal aspect of China, Taiwan and now Japan increasingly trying to go it alone without the US on the foreign policy. Asia corridor policy I call it.

This week-end the new Premier indicated Japan no longer is happy to just bow and say: Ai,Ai.. Mr President.

They want their own footprint - own standing forces, which is new dimension.

Extend this to their allocation framework, their sovereign wealth funds, and a pattern of "less export of surplus" capital in the US markets and an increased investment in Asia region (Through stock and natural resources) and the US Dollar financing begin to look.... nervous....

We continue to believe China will "buy" Taiwan rather than fight it. It's cheaper and easier!

Well, we ended nowhere really on the discussion.

Being the FX guy I think both 1.5000 and 1.6000 maybe even re-testing last year highs is possible...but not in a straight line. The US dollar index could test new lows with the highs in the stock market coming end of September / Mid October.

We also monitor EURNOK and EURSEK. Selling EURSEK below 10.20 and EURNOK below 8.6000.

Conclusion:

Accepting sliding US Dollar - but also acknowledging the MASSIVE negative sentiment in place.

Equity

We define this as the 9th ining. Our projected cyclical top will be end of September / Mid October. The Euphoria is bigger than the volume in the market presently, but never the less, it is paramount to sit tight on long positions in this market while the market overextends itself.

Looking for catalyst for top in place- I, personally, think it will be political or event based, but on the calendar there is several other options: Non-farm payroll, G-20 meeting, Chinese Communist Party Anniversary...... (add to the list yourself).

We also take due notice of the DIVERGENCE in almost all stock markets. Prices higher, but momentum indicators are not following, and the relatively low volume, but bottom line: We respect the upside.

The price target is roughly 1080/1120 on a overshoot. The present envelop top is around 1062.00 (as of Friday) rising 10 figures per week, ie. 1072.00 by Friday or two points a day...... Adding three weeks obviously takes us to 1090-00 region..... and the you add some VAT and you got 1080-00 / 1120.00 expected top.

It is important for us to stress that the top coming up most likely will be a correction inside this mini-bull market as we do no expect the polticians/central banks to back away before we move into 2010. In other words we are looking at 10-15% correction in October/early November, with a rebound having probalities.

Fixed Income

Jesper made key comment: Relatively to where equity is trading its to expensive (price) - Relatively to how we see the world in Q4 and 2010 it looks fair......

The point being - the US Administations wants/needs rates to be low to mitigate the the recast in ARM loans and the replacing of bank loans by issuance of bonds. The key dominator/measure for succes of US Administation is the 10y yield!

There are good Taylor-rules reasons why we could see 3% break....low inflation expectations, slow job recovery......(although we feel the 3% threshold will only be broken in tandam with a correction in the stock market)

The EXIT strategy was cancelled at Jackson Hole, and confirmed CLOSED at the finance minsters G-20 meeting recently - the upcoming meeting will be more of the same and some public a..-covering with tough talks about bonus' et al.

Commodities

Considering the amount of "liquidity" floating in the system it is disappointing that commodities can not get a bid. The reason for this is relatively simple - China has stopped buying and storing - hence the small demand. Shipping rates confirmes this.

Gold - the team likes gold, but are slightly disappointed in lack of follow through above 1.000 US Dollar - I remain extremely sceptical, but need to reasses this view is US Dollar becomes crisis currency.

We note the extreme condition in Natural Gas - and the continued bid in Sugar.....

OVERALL CONCLUSION:


Allocation:

Beta allocation: @ 75%

The Alpha part needs to look at downside protection.

The strategy being to slowly take Beta down to 25% over the coming
three/four weeks...
Currency allocation: Short US Dollar, long SEK, long small JPY

This is no time for heroes..... be long, be happy....

Safe trading,

Steen (Jesper & Carsten)

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