Baltic dry at low for the year & S&P on the high...

Baltic Dry Index: http://goo.gl/qkTOp

Seekingalpha:  Baltic Dry Index and indicator for economy / S&P

This link is excellent analysis of dry vs S&P (I think he is slightly missing the point as the index to measure against should be Shanghai as China is the biggest driver of the index, but never the less, the divergence is significant in size and time, this does not mean too much but in 2008 this was early warning, but do read this extensive link as the author seems to have good control of the statistical and research aspect.

Happy New Year,

--

The Circular world continues towards the endgame.

Dear Friends,

This Friday' posting is a mixture of an article of Economist and related thoughts from me. Three-way split - The Economist Link

This is the best Outlook for 2011 I have seen and it's not even trying to be an outlook!

The Economist draws up the conclusion that the three global drivers: US, Europe and EMG will work against each other and that it's all circular, which indicates market/investors over hyping output and "more of the same" relative to the needed "circuit breaker".

Domestic agendas has changed in Europe and in the US, but to opposite positions... as they state elegantly: ' The US (with tax bill) is gettimng another dose of stimulus steroids just when Europe is checking into rehab and enduring a Cold Turkey'.

Meanwhile in trading-land the ever higher US yield stopped yday, but high enough to invalidate any hope of false breaks. Market now betting on Treasuries being oversold, but my friends in the real-money world keep telling me, more selling is incoming post December 31st, 2010. 

Short Treasuries has been my main position for last two month but I have to admit I'm down to less than 10% of the original position, enjoying the profit on what my old uncle (FX trader extraordinaire) called "Amateur Friday" .... Chinese numbers and action this week-end will tell us more than anything where to from here, but the picture is bleak....

1. Our leading Growth model turned cold and down
2. Congress in the US in stalemate, and looking extremely silly.....
3. End of year manipulation running into opposite risk being taken of by investment banks and prop. traders overall.
4. Stock market is slowly wakening up the conclusion in the Economist article above: "Worries about bubbles has been replaced with a broader fear of overheating in EMG. 
5. An add on to point 4 - the new law of markets reads:  (US loose monetary policy)  + (Sovereign default risk Europe) = (Speculative inflow into EMG), which again creates burdensome need for EMG countries to embark on restrictive tightening in 2011.... and then lower growth from Asia feeds negatively into the same law.........

S&P can still see 1240/1255 on year-end manipulation, but reality will bite in Q1-2011. where I see a move down to 1000.00.

On this positive note....I wish you a great week-end. Enjoy.

EMG getting hurt by expected price controls...

Chinese authorities is stepping up the fight against inflation: China pricecontrol and more balanced reporting: China downplays price control

Meanwhile in EMG-land things are bleak:  EMG Bonds: EMG Chart & EMG Stock: EMG Stock

Pretty much all markets are now at "infliction point" - the sound advice is to scale down short or neutralize, but for now models dictates one destinct theme:  SHORT FIXED INCOME!  As long as this plays I remain with some downside risk on all markets.

Meanwhile our back-stop Beta- model still long (Beta Model), so..... market needs to decide and soon..... watch Ireland's resolution and it's impact or lack of impact as catalyst for next leg.

Volatility is bid (VIX) and should be so: Volatility is the uncertainty of path - and never in mytrading life has the path been more difficult to predict.

Risk of - major moves in China - our new Global Leader...

Playing the QE2 card Bernanke et al confirmed that we now need to look at China for ALL future directions. The US has no further tools to use but are at the mercy of the international lenders and capital markets.

The reaction post QE2 must be major disappointment for FOMC and Obama, but the importance now is the "reaction" function of firstly China, then Europe(Euro crisis) and then back to the US.....We know the reaction function of policy makers:  1. It's not what they say but what the do which is important 2. They will always delay any decision to last minute 3. The response is ALWAYS creating more debt and mini-max solutions.

In this lights the REACTION FUNCTION should theoretically be:

1. QE2 ==> China and EMG will hike rates aggressively - it has already started note these comments from Goldman Sach this morning on RISK OFF: Chart on QE2 reaction

KRW: Renewed speculation that concrete capital controls will be announced on Monday (1mnth high 1129.5)
PBOC asking more local banks to hike RRR.
Chatter of Chinese state-entity selling commodity futures in Shanghai (Bloomberg reporting that China sold almost all zinc on offer from state reserves at below-market prices in the latest auctions, although this was out a few days ago)
Onshore Chinese traders and brokers speculating about another interest rate hike tonight.
Lack of concrete resolutions from G20 meeting in Korea

                                                                             
2. Euro-debt story gets back into the headlines

Germany will use their VETO leverage to negosiate even tougher hair-cut rules effectively setting up the division of EUROPE into to a two-tier system by 2013/14. The ones who wants to live by the stability rules, and the 2. division for those who needs time to get their finances in order.....

Expect Ireland to tap EFSF very shortly - the risk being there is contagion spread to other PIIGS - so maybe a longer than expected delay in using EFST but more countries than Ireland tapping EFSF from the start.

3. G-20  Communique or the Ministry of Propaganda - what is farce!

In other new the G-20 communique is a total joke! The old Polit-bureau in Russia would have been proud to issue this statement: It's all BS - big time BS... using words like: comprehensive, commitment, unprecedented coooperation, concrete steps - but... there is not a single modus operandi except for including the ever useless IMF in all things possible. There are now more working groups under G-20 than there are sand in Sahara! G-20 communique - by the Ministry of Propaganda for the Politbureau of G20


Strategy:

Seems yesterday chart-book has played out for now, but remember there is now POMO for a full month - the risk will be if POMO does not help the market then we have a real issue on the downside - watch the US action tonigt if 1190-00 breaks on close, then we have top in place - and more importantly the QE2 was REAL MACRO TREND event....

Nice week-end

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