Growth and market continues down....

Wow - this market is heading into serious "trouble" now:

Month-end death cross:
http://dshort.com/charts/SP500-market-timing.html?SP500-monthly-10MA-since-1995

Consumer Metrics - my favourite "predicition tool" - and DSHORT got
this piece for you:
http://dshort.com/articles/Consumer-Metrics-Growth-Index.html



Market getting increasingly bearish and we are getting close to "panic
sell out"...: (check Paulson's portfolio here:)

But it's "save the market Tuesday" ... so we may need to go to Fridays NON-farm before getting break of the recent trading range:  1035-1085.

Safe trading,

Winston

Big week for yields:

IEF - the overbought condition now neutralized: and KEY KEY point on
mid-point which has been gr8 support: http://twitpic.com/2jm8e6

also friend of mine:

http://www.ireallytrade.com/TVStation/LarryTV.html

Non-Farm payroll could be key this week - we are ALL very negative, to
an extreme and good reason, but surprise would be on the upside. Stay
alert. Not time to fall asleep at the wheel as we are entering
"Melt-down" time.

EURUSD break? Indication of increased odds for QE or merely positioning ?

 Today the focus should be on Gold & EURUSD - to my eyes the EURO has
broken up on daily chart - still needing to close above the trend on
close - but more importantly is this indicating change to sentiment?

US Dollar weaker would be based on higher odds on QE or lowering the
rates on Fed deposits as per Alan Blindes editorial this morning:
http://tinyurl.com/3xtuacz

Long day ahead...but watch EURUSD for lead today on RISK.

--
Steen Jakobsen
Limus Capital Partners
Ny Østergade 3, 3. floor
1101 Copenhagen K
Denmark
+4541817167 (cell)
+4536923442 (office)

Hmm... market UP on extremely bad data...

Changed net position around to NET LONG as of close...

Reports of the death of mean reversion are premature

James Montier has written great piece on Mean Reversion & the "new
normal" - sharp, very sharp talk from him. Enjoy.

http://behaviouralinvesting.blogspot.com/2010/08/reports-of-death-of-mean-reversion-are.html

http://www.puc-rio.br/marco.ind/rev-jump.html

Friday, 20 August 2010
Reports of the death of mean reversion are premature
This was originally written for the FT, but they seem to have gone the
same way as so much media and are dumbed down these days - they said
it was too technical (after sitting on it for more than a week). So
I'll post it here in:

In a recent article [1] Richard Clarida and Mohamed El-Erian of PIMCO
argued that the 'New Normal' offered at least five implications for
portfolio management.

I. Investing based on mean reversion will be less compelling

II. Risk on/risk off fluctuations in sentiment will continue

III. Tail hedging becomes more important

IV. Historical benchmarks and correlations will be challenged

V. Less credit will be available to sustain leverage and high valuations

Implications IV and V seem pretty reasonable to me. However, reports
of the death of mean reversion are premature. I fear that the authors
are confusing the distribution of economic outcomes with the
distribution of asset market returns. The distribution of economic
outcomes may well turn out to be flatter, with fatter tails than we
have previously experienced.

However, asset markets have long suffered such a distribution; it has
proved no impediment to mean reversion based strategies. In fact, the
fat tails of the asset market have provided the best opportunities for
mean reversion strategies. For instance, in equity markets the fat
tails associated with unpleasant outcomes (poor returns) have
generally occurred as high (sometimes ludicrously high) valuations
have returned towards their 'normal' level, and the fat tails which we
all love (good returns) have occurred as low valuations have moved
back towards more 'normal' levels.

As long as markets continue to follow the second implication (as they
have done since time immemorial) and flip flop between irrational
exuberance and the depths of despair, then mean reversion (at least in
valuations) is likely to remain the best strategy for long-term
investors. (This also highlights the apparently contradictory nature
of the first two implications that the authors point out). We don't
require long periods of time at equilibrium for mean reversion
strategies to work, rather (and considerably less onerously) we simply
require markets to pass through the equilibrium periodically.

As always, investors need to be mindful of the context of their
investment decisions. It is always possible that we are standing on
the brink of a shift in the level to which asset valuations mean
revert. But that has always been the case. Only careful thought and
research can work to try to mitigate the dangers posed by this threat.
After all, if investing were both simple and easy, everyone would be
doing it.

The third implication that tail risk hedging will become more
important is and always has been true (much like the second
implication). The prudent investor should always pay attention to tail
risk – the new normal doesn't alter that.

Ever eager to please, the 'engineers of innovation' (or should that be
the 'architects of destruction'?) are happily creating products to
serve the new bull market in tail risk. Deutsche Bank is launching a
long equity volatility index, while Citi has come up with a tradeable
crisis index (mixing equity and bond vols, swap spreads and structured
credit spreads). Strangely enough, Bloomberg reports that PIMCO is
planning a fund that will protect investors in the event of a decline
greater than 15%. Even the CBOE is planning a new index based on the
skew in the S&P 500.

However, any consideration of the purchase of insurance should not be
divorced from a discussion of the price of the insurance. Cheap
insurance is wonderful, and clearly benefits portfolios in terms of
robustness. However, the key word is that the insurance must be cheap
(or at very worst fair value). Buying expensive insurance is a waste
of time. I used to live in Tokyo and was constantly amazed that the
day after an earth tremor the cost of earthquake insurance would soar,
as would the demand!

You should really only want insurance when it is cheap, as this is the
time when no one else wants it, and (perversely) the events are most
likely. Buying expensive insurance is just like buying any other
overpriced asset ... a path to the permanent impairment of capital.
Rather than wasting money on expensive insurance, holding a larger
cash balance makes sense. It preserves your dry powder for times when
you want to deploy capital, and limits the downside.

So buy insurance when it's cheap. When it isn't and you are worried
about the downside, hold cash. As Buffett said, holding cash is
painful, but not as painful as doing something stupid!

In summary, the new normal may pose some issues for investors who have
never bothered to study history (which is, of course, littered with
many, many 'new normals'). However, for those with perspective,
prudence, patience and process, many of the same 'eternal' rules are
likely to govern the game as they always have, come rain or shine. In
essence, many of the implications are less the new normal, and more
the old always!

[1] Uncertainty changing investment landscape, Market Insight, 2 August 2010

Posted by James at 00:54

All change again....Closing long with loss of 8 S&P points...

Two announcements this morning:

1. I closed my long position based on "hope" & some QE-talk, but this morning WSJ leak, which has been known by insider since FOMC meeting makes for the catalyst: Fed split on decision--(click for full story)

2. 40 years after my football career started it ended in tears - yes, it is an important thing for the markets :-) Too many injuries: broken wrist, angle & now shoulder displaced is too much to ask this old body of mine, so this is the end of football for me (soccer)......

Here is a few charts supporting the view - it has too be said that the market is VERY OVERSOLD - but momentum seems to continue on the downside, the Monday action was particular poor considering Monday-Tuesday traditionally is up-days.

My main model: Looks like towards lower end of range: 1040-ish..

The safe benchmark model (designed to keep us in market long & short)

The long-term model. Sell below avg. long above

Otherwise the only REAL ITEM on the agenda this week is meeting in Jackson Hole, where Kansas FED invites all the central bankers & policy makers to a seminar. There is high expectations that Bernanke will give new insight into his & FOMC policy on QE et al.:  FED agenda and text of Bernanke speech

With todays leak it has become apperent that there is major discussion in the FOMC on how to proceed and I note several media carrying the story that instead FOMC should HIKE rates - to secure we do not go into deflation - C'MON that makes no sense, but it all boils down to: Market is UNCERTAIN - and volatility is defined as..... UNCERTAINTY of PATH - hence we will see very nervous market with several doom-and-gloom predictions thrown in....

Good luck,

Is the QE2 the new Titanic? Macro note

Macro
---------------------
Strongest view:

US growth heading to zero or below

Reaction

QE in both UK and US in Q4

UK will most likely lead due to severe fiscal tightning...

US trigger will be shift to my view in growth OR stock market
falling....(Sub 1050/30 s and p)

ECB will not follow - Weber won the QE debate and more importantly I
see the new euro SPV being used to capitalize banks AND taking "bad"
sovereign debt of ECB balancesheet -- creating bigger monetary and
policy flexibility for ECB

Medium term forecasts;
------------------------------------------
The mutual fund, pension, and SWF asset management model is under
threath from several angles:

1 demographics now headwind on growth +0,5-1,0 pct-points (reducing
expected return by same)

2 the equity premium has disappeared(studies estimate it to be 4-6
pct) and this means the YALE model is underperforming(getting overpaid
to hold illiquid assets) - the 2008 crisis showed us that in time of
crisis are all illiquid instruments trading as leverage equity w
discontinued price function- fat tail distribution)

3 the 60/40 model dies under #2 as it is really 80 long equity and 20
fixed income weighted - problem being bonds has been outperforming(due
to low inflation and policy response cycle) ---so now the 'new black'
in allocation should be --- 80 fixed income and 20 equity like
investments whichs risk weighted wud be 60/40 !!!!

4 who wants to pay 2/20 for zero return ??? Same goes for private
equity leverage plays ( vs unleveraged)

Implications?

Big reallocation away from equity into fixed income, and more
commodity, and true diversification...(ironic that best and cheapest
put on stocks market has been......fixed income( and high yield good
credit)

Secondary medium term:

Velocity at historic lows - considering that growth equals monetary
base x velocity - there is need is need to either further increase
monetary base(political trouble) or work to increase volatiity(loan
demand and loan supply)

The risk being Weimar like explosion in velocity (during two weeks the
german lost all faith in reichmark and velocity(and inflation)
exploded as major disbelieve in purchasing power(US dollar long term?)
-------------
Positioning

Long equity since last week - looking for month-end rally based on
Jackson Hole hope for better outlook to economy(combination of hope
for QE and stimulus going into midterm election)...and slight
short-term oversoldness... Looking for retest of August high - but see
market having put in major high for the year)

Net selling by September 1st and we will begin long slide down(target
sub 666) over next 18 month.

I expect sell of in sep/oct then big reaction on forcefull QE.2 then
slow grinding down on growth headwind, higher unemployement,..

Long s and p
Long stoxx50
Short eursek
Long gold futures and etf
Short REIT etf
Long usd index
Long jpy index
Long crude futures and etf
Long freight companies....
Long non-listed private equity investments unleveraged and
turnaround/credit stories ( headhunting, fund management, newsletter
publicist, and freight)

But major bet will be when August runs out--

Will be long 30yr year US vs 10yr US (Fed will need to lower rates at
that tenor)

Long Gold ( real-rates falling)
Short USD dollar, Long EUR basket
Long Fixed income
Long high yield corp debt
Long utilities

...And the answer to the headline quesion: No, but it's not a lifeboat either..

Adopting long positions in S&P and risk on overall....(click on chart for larger version)

As mentioned early I turned my overall position around to NET LONG
from NET SHORT based on the below chart work.....
Positions initiated:
long S&P @ 1071.80
Short EURSEK @ 9.4953
Long EURJPY @ 109.58

This is NOT new bull run, rather is the final test on the upside and
we should not exceed early August high - and then we will prepare
ourselves for new lows coming in September/November period.
The market will keep hoping for QE2 - or more stimulus......for now we
will buy some more hope....

Taking profit on all positions - positioning myself for end-of-month rally ...

More later but my technical work indicate market is oversold going
into FNM/FRD tomorrow - and several sources of retail benchmarking.

Market too bearish and we have reached critical conditions for going long ......

Covered last short in S&P @ 1073.75
Long EURSEK @ 9.5075
Long bond call sold @ 1+ figures profit.

Waiting to go long as I need to do some work - but I do NOT expect
August high to be taken out in this shake-out of the weak shorts.

Deflation link (must listen) & Early thoughts on 2010 2nd half

Long note this week-end but here is a must see interview w. John Makin:

http://www.businessinsider.com/aei-john-makin-2010-8

http://www.aei.org/scholar/40

Still got the same views:

* Collapsing US growth - my old theme...

* Gold long

* Stocks short

* Short SEK since early August on Debt office planned selling of SEK
plus cyclical growth top in place....

* Looking at shorting deflation industries: Autos, housing and banks.......

* Looking at how "equity premium in stocks - the fact yoy get paid for
owning something less liquid than cash/bonds is going to collapse" -
ECB put it as 500 bps when investing in banks in 2008/2009 - is it
likely we will get less than 100/200 bps going forward as holding
cash/bonds even at these low rates - earning pretty much zero after
inflation is better than owning stocks w. negative 5-7 pct ? The
whole "spiel" in last built up phase was Yale model - getting paid to
own illiquid instruments - 2008 proved it did not work - now we are
all realising owning 60/40 stock/bonds allocation is really weighted
80/20 stocks.. (volatility higher than bonds meaning you need to own
80 pc bonds and 20 pc to be truely 60/40) ... this has massive impact
on pension schemes ...

* Looking at demographics - getting convinced that both Current
Account & growth highly correlated to ratio of "prime age" population
to total population - meaning we have seen peak in growth potential -
forever! ...

Nice week-end

Non-farm as bad as expected now on to FED meeting next week...

These numbers are bad news for Obama AND we are getting to the RIOT
point in my cycle analysis - this next week could make or break this
year performance for investors:
FED to meet Aug. 10th :
http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm#6274
- They will most likely restart buying treasuries (1 trillion worth)
==> Buy Gold.
My favourite tech-model have 1140 top - but its falling and the April
high WAS the high for this year........most likely....
My SPY w. MFI model also indicating lack of REAL buying.. note how MFI
below does not reach same level as other peak... actually falls!
http://stockcharts.com/h-sc/ui?s=SPY&p=D&st=2009-01-01&en=%28today%29&id=p00268769628
To top this of - this is massive season for non-conventional market timers..
More this week-end, but this being early warning that next week will
be potentially "explosive"...
--

1140/1150 summer high test?

It is the most dominating projection of the market all summer and pre-summer for that matter - the key becomes Friday's non-farm pay-roll which is bound to be poor.

I note, with some distress, how small business survey by Well Fargo last night managed new lows for the series, and my favorite forward indicator is looking at minus 3 pc growth in consumer segment! In other words we are getting desperately close to the boiling point of the market and we will see the long expected negative moves in Q3 and Q4 - for now the market is skirting on low yields ( for longer), more stiumulus coming (they think), and good company news, but alas.... I tihnk the April high still constitutes major high and that we are now in classic re-test of high and the gravitity ultimately will take the market down.

I will be off line for a few days checking out the facilities in Mallorca, but ......will be back to time the sell-off.

Good luck