Investment meeting and initial thoughts post Easter vaca - April 6th 2010

(Click on charts for larger versions)

The best performing portfolio to my slight surprise has been the "inflation model" or the - why do not we just sell Treasuries, buy commodities, gold and oil trade!

It is up 319 bps since initiation compared to overall Benchmark portfolio up 203 bps.  This is quit a big difference in performance in such a short span, but the odd thing being the inflation expectations are almost unchanged in all measures - forward/forward and break-even rates!

This got us discussing how the higher yield should play out - and the semi-conclusion being for now, at least, pre the anti-sovereign debt issue, the REAL RATES needs to normalise to 200/250 bps which will take 10 year yields to minimum  4.25/4.50 vs 2.00-ish inflation - not at all unlikely as this should and could be part of normalised process - the favourite theme of the market presently.

From the model is also abundantly clear that there are NO REASON to fade the present bull market in stocks, the only risk being three factors:

1. Extreme bullishness as measured by put/call volumes

2. Failure of overseas investors to show up at the auction this week. (The conspiracy types reckons China and the US has done deal and as part of this Asia will be aggressivey buying auctions this week- My note: hmmmmmmm)

3. Some slight change in FOMC minutes (out today) and or some leaking to the press of imminent hikes coming (unlikely)

This makes for week where the odds favours test of 1200+ and a week where yield could take out 4.00 in 10 years.

We judge the economy and market to being in the "sweet spot" path, with risk of entering V-shaped recovery. (Which will have less upside potential due to higher potential rates)

The outlook for the week should include:

1. Greece - the never ending story. They failed to sell their "goods" in Asia - now they are in the US. Meanwhile spreads vs Germany going out reaching January levels again(368 bps this morning)
2. Iran - nuclear talks (with China attending) leading to widespread speculation revaluation coming.
3. Treasury auctions this week
4. Early month effect on equities
5. Limited economic data from the US
6. European PMI's out this week. (Norway this morning failed to regain 50.0)
7. Gold move- is it merely the usual early month move or more profound?
8. Oil - the big mover (with China) last week - what's behind the move?
9. VIX - risk of shoulder-head-shoulder now that everyone is bearish volatility and long the market?
10. HYG - high yield fails to stay bid - early sign of ?

Macro Funds, and admittedly us, have not had best of opening to the year. It seems to gain on average 1 pct a month one needs to risk 3-5% intra-day - not exactly the best scenarios favoured by old people like us, but having said that there has been several strong
trends:

• SEK and NOK stronger
• US Dollar stronger
• Yields - the last two weeks
• Equities higher

So merely bad risk management must clearly be behind it :-)

From here the risk reward remains skewed the wrong way - and has been so for too long - if the projected semi-top is 1200/1220 I can gain 3-4% risking 10-15%? This is not valid for me - but on the other hand this type of arguments is clearly behind why S&P moves up day-by-day as the
intraday traders open every morning with a Latte and a outcry of: Buy me some S&P's now!

Trades:

• Long US dollar vs EUR, GBP and JPY
• Bought Bunds vs BTP spread today (if Greece trades at high - this could be excellent risk reward trade)
• Long down-side in 10 y notes
• Short S&P (despite knowing better - but with tight stop @ 1186.00 GTC)
• Short AUD vs CAD - relative performance play.

Stopped in short Gold over easter - took profit in short cash 10 y notes.

Ciao,

Winston