Tuesday Investment meeting

Dear All,

My partner Jesper Christiansen chairs our Tuesday Macro Meeting and this week presentation was best yet and with his permission I have enclosed the pdf-file below to share with you.

A couple of notes:

The early part of presentation is macro incoming data vs expectations, then it's forward looking (Consumer Metrics et al), then it moves on to performance measures - Note how DIVERGENT the portfolio are!  European investors losing their shirt so far this year despite ok performance in Dow etc!!!!  (Port. value in DKK = EUR).....

Then theme based analysis ... State of Union (Hat tip to my friend Mr. E for his look at performance post FOMC)......and finally looking ahead.

Enjoy,

Limus Capital Macro Meeting Jan. 21st, 2011

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2011 Jan. 19: Macroblog: The option of buying time is running out of.....time?

The option of buying time is running out of.....time?

I had the pleasure of meeting some very smart shipping people last week and it got me thinking, yes major surprise I know, about the inflation vs debt quality issue on rates.

The 2011 call I am most confident about remains that 2010 was the CYCLICAL LOW for interest rates. Period.

This is a combination of technical studies, but more importantly also a fundamental reasoning:

The policy makers are constantly trying to 'buy more time' - Thinking they can restart a positive cycle of confidence through cheap funding, put guarantees on stocks, refinancing of debt(now indirectly through syndication as market does not want to play this game anymore) and a strong almost abusive talk to investors which reminds me of scolding a child(to no avail as we parents very well know).

The problem with buying time is that it's pretty similar to being long an option, the decay in time value, the Theta, is cheap in the early phase(you have almost full length of time value, i.e you have 1-month option 22 tradings days out of 22 ergo 21/22 ish.....) but towards the expiry(In terms of Europe it's March 24-25 EU Summit & the US the imploding Local- and State Debt) the time value is 2/22)......

With the decay in time the price of DEBT will rise unless there is STRUCTURAL SOLUTION to the ever rising debt, otherwise any solutions becomes substituting debt for more debt.

The new game in town is now the idea of moving debt obligations from a national/ECB level to a new vehicle EFSF. This is supposed to impress us despite all the logical shortcoming in its design, which is much better described by this article from Minyanville: European Debt Crisis Redux by Mr. Das

Looking at different gauges for "pressure/boiling points" in marginal cost of capital I find it's certainly the case. Take 30 Year CDS for California - it's now trading at yield levels only seen during the peak of the 2008 Financial Crisis, a market with no liquidity and no outlook to solutions. Desperate? Looks like it to me:


From technical point of view I found an interesting major indicator this morning: The so called Death-Cross:


As the chart shows the moving average cross over has been an excellent indicator of cyclical trends around a stable mean-reversion game - if this chart is correct we could have a test of 4.00% shortly.

The impact from higher yield/rates is path dependent: The Ivory Tower Banks will be positive as they see rising rates as a confirmation of HIGHER GROWTH in economy (although everything being equal: Cash flow re-based at higher rates should be negative)

OR - if this is due to my conclusion: The time decay is working - faster and faster, we have now had almost two years of time buying by policy makers. The general public is now SUPER CONFIDENT on economy, their earnings, the world, despite the fact there is LESS IN WORK today than before financial crisis, much less and despite their REAL EARNINGS seriously eroding as food- and energy prices are showing more and more upward pressure.

A concept of inflation / rising prices can be gained through using Google Trends, despite all its shortfalls a statistical indicator:

The conclusion is inconclusive although clearly there is more and more talks about 'rising prices' and 'inflation'.  EMG on the other hand is clearly experiencing increased both prices but more troublesome social tension as can be seen by this link: Indian Riots on Petrol Prices

Conclusion:

I'm bullish on the prospect of policy makers continuing to play: 'buy more time' and I'm getting increasingly bearish on their ability to fight the Theta(time decay) of their option, as the marginal cost of capital continues its slow but steady rise higher across the world.

Investment Outline

Clearly all models are GO!  Long RISK ON across the board.

FX:

Models are short US Dollar in size (almost every single market)
JPY - seeing signals for weaker JPY...... long EURJPY
AUD, CAD - Long

Metals:

Difficult, very. Gold and Silver is playing up-down-up consolidation game - the failure to break above 1400 in GC February contract is troublesome, and Silver inability to trend across 29.50 likewise. It does not change that this is MERELY CONSOLIDATION before the final phase of speculative fever takes the market to new highs...

Commodities:

Easy! Long everything and I mean everything: Grains, Energy et al.

Fixed Income:

Cautiously short US market and German Bunds

It's time to reload investment scenario from here - I'm fading this Monday-Tuesday move to go neutral on most markets awaiting confirmation for top in place.

Good luck,

Steen Jakobsen

The week of reckoning......

The week of reckoning......

Tomorrow will be critical event of the week with Portugal rolling over a relative small amount but with yield on 10 year exceeding 7% now it's more an issue of "confidence" in Portugal

The expected issuance tomorrow from Ministry of Finance, Portugal's web-site:


Watch this link for live updates on Portugal's 10 year yield during the next 24 hours:
Bloomberg: Portugal 10 Year Bond Yield

Meanwhile the confusion on where we are in the economic cycle continues: The Ivory Tower Investment Banks looking forward to their bonus' being paid out in February and March are bid through the roof for growth, some even thinks this is going be inflationary year! Quelle Scandale!

But.... I remain extremely sceptical this time of year - true the incoming data for December will probably be good, but it will also be tail-end of positive manipulation by both companies and government, so I expect data to be good but to be lower than expectations. Confused? You should be!

I am very bullish on Fixed Income from here as per earlier blog comments - this is first time in long, long time, while I still keep my extremely bullish year-end target of doubling of short-term US rates we need to revisit low-end of Q4 range in rates first on the combination of lower growth expectations but also "flight-to-quality" and finally the oversoldness of Fixed Income relative to equities.

The bullishness in stocks may be over soon - yes over! There is 50/50 chance though, that we need to move into early March before it really happens but I have had a few early warning signals lately:

SPX w. MFI channel


Note how the MFI - Money-Flow-Index has broken down, always the first warning signal!

Meanwhile in Freight-land - where we transport all this great global growth we are now at levels not seen since............drum roll ….... Low in stocks in mid-2008!

Meanwhile ----- The growth Asia currency of prefence: AUD is coming down hard.....


And in CONSUMER-land, THE consumer stock Wal-Mart brok down technically yesterday?



What is all means? I do not really know to be honest except there is more friction in the market than perception dictates - personally, I think this market is high on "guaranteed puts" on the market - Capital rules, BIS II+III, solvency et al all dictates the CREDIT CAKE will be smaller in 2011 and going into 2012,, meanwhile NO ONE is doing anything to attack the structural issues, can this continue through 2011 ? Maybe, but keep watching the marginal-cost of financing..........

I'm off to Germany for two days, back post the Portugal auction.

Non-farm payroll was like most New Years Parties - lots of hype and expectations

105K!!! 105K!!! New jobs - after the useless ADP report earlier this week, the Investment Banks and their useless linear-projection team went to work all pretty much ending with 'whisper' estimates above 500K! 

Now, the Unemployment rate came down to 9.4% on nothing but statistical flukes while the CREATION of jobs continues below the magic 250K  (needed to just keeping the economy growing) 

Unfortunately this number became a Ben Bernanke number - Manipulation and more of the same in terms of transperency looking forward. This is NOT a number which makes companies go out and hire.

It's NOT a number which confirm all the bullishness embedded in everyones forecast for 2011 - we are heading, and let me add, with ligthning speed, towards a big correction of outlooks less than 5 days into the new trading year. Not since early 2008 have I seen a bigger gap between the economic reality and the true economy - let me games begin!

I will add long FIXED INCOME to my portfolio for the first time in more than six month due to the model. Link here.  The model is so simple it makes you weep! Never the less look at prior signals and the crying should start. Markets - not data - indicates to me we are heading into considerable slow-down in growth and hence new jobs.

 

I wish you an excellent weekend with a music link - the title mimicks my view of the US: American Beauty - too bad the Beuaty is fading under Obama fascination with Chinese Planned Economy thinking.

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False starts and the Paul Breitner rule of thumb

Dear All,

Wow, wow and more wow! Market seems deliberately setting up signals and wrong ones this past two days alone I have had a buy signal in EURUSD invalidated by failure to close above, and yesterday three stocks signals:  Short DAX and STOXX50 both failed, while long S&P (72.50 being the entry also managed barely to fail). Lesson? Market is in testing mode and there are yet to be a significant trend and bias.

Commodities seems making early signs of exhaustion but I would be very careful to allow myself to get carried away with anything.

Now the ADP report was clearly "good news" - but maybe good news is the last thing this market needs! Note how when the market was falling 'bad news' was good news, and hence now I feel good news is bad news why?

Good news - and we need to see Friday Non-farm payroll numbers first, but if jobs are being created, if growth momentum is as strong as market think it is, and if GDP growth will be increased then with Crude @ almost 100 US again there is rising wage- and commodity inflation which combined with EXTREMELY LOW ARTIFICIAL LENDING RATES will create a potential inflation monster. Watch the inflation expectations post FOMC tomorrow. 

There is evidence jobs are for real coming back - I guess - this link talks about different metric, the Help Wanted index and the author concludes(maybe high on confirmation from ADP statistical flukes) that 2011 will be year of job creation. A Bizarre Labor Market

IF - the impressive jobs growth survives the Friday data, then it raises odds of:

• Much stronger US Dollar - combined with continued underperformance of European bonds and equities indicates 1.10-1.00 EUR could happen......(Ultimately we will end 2011 with much weaker US Dollar)
• We could be proved right on the 2011 call for MUCH HIGHER interest rates
• Early rotation from fixed income to equities will continue, but the ever higher rates will remove the marginal return on capital for companies and we will quickly see how the EPS numbers did peak last year and not this year. (Inverse cost structure - higher employmen less productivity?)..but ultimately gravity will prevail maybe we need to go to March before the first real set-back for the market.

Meanwhile I stay with my rule from Paul Breitners time:  (Picture enclosed)

Safe trading,

Initial Macro Comment, Jan. 5, 2011

Dear All,

Running late this morning, but...... a couple of key things playing out:

1. US Dollar did trade through 1.3424 yday but failed to close above which gives us excellent 'mean-reversion' short with known stop loss (@ 1.3450). Euro auction started this a.m with Germany selling less than 4 bln. EUR with bid-to-coverage of 1.6 (up from 1.2 and 1.4) France tomorrow probably worse. Jesper tells me PMI Southern Europe was DISASTER territory underlining need for something "else" to solve this EUR crisis ==> For now short EUR from 1.33708 with stop @ 1.3450.
2. DAX initiated short today @ 6.920 (as per yesterdays signal) - IMPORTANT note being: It needs to close below tonight to validate! Note also STOXX50 @ 2.784 in reach, but yet not reached (spot @ 2805.00)
3. IEF - my long-term leading indicator of Fixed Income overall has done turn-around indicating some upside potential in bonds from here (More on this in later post today)
4. Commodities - as noted in "model run" yday, the charts indicated massive "Inverse Hammer" in most market, which turned out to be major signal for short. Crude continues down this morning, while Gold/Silver holds the levels of late last night ...for now...
5. Also please read Yves Merch editorial in WSJ today:  Cut the deficit now - Yves Mersch

More later

Finally! New year.

Dear All,

Old rule of thumb from back when Macro trading used to be macro trading and Paul Breitner hair was still in style used to be to stay away from the market in the first two weeks of January. The lesson being too much new risk capital is at play and is eager to commit to the extension of last years trend.

In this light the major boost to stocks yesterdays made a lot of sense - add to this that Goldman Sachs seems eager to let their internal clients pay 50 bln. US dollar for a small stake in Facebook (while GS ripes the huge IPO fee for themselves - nothing wrong in that, just smart......) and we had perfect day as the 1st day of trading also constitutes the best day to be long of all days according to the increasing numbers of 'counters' in the market.

I will not be the one to suggest that going into 2011 most investors and commentators are too bullish the extension of 2011, but I note from the model work I did this morning a few surprising signals:

• I will have to sell US Dollars if either or both EURUSD (March contract) trades above 1,3424 or DX (March) trades below 79,025. Considering the vast majority of all FX watchers expects EURO to go to parity this year this goes against some conventional wisedom.
• Stock market divergences.  All my US index' are long on the model, while the equivalent European ones are neutral, but...... with sell signals. DAX (March) have sell signal @ 6920,00 & STOXX50(March) have sell signal @ 2784,00
• Short-term Fixed Income seems to have turned around to bullish - I need to buy 2y notes @ 109'160 (March) in the model...........
• Finally, and most significant to me at least: Most commodities shows signs of trend reversal. I have "Inverted Hammers" in just about every single market and in particular in the grains segment (but also Crude og Gold). Is it the 'tangible safe haven' premium going out as market optimism reaches new highs? I do not know

Next two weeks have major macro events, with issuance dominating most of the European traders - Germany and France comes to the market Wednesday and Thursday this week, while the PIIGS Circus restarts next week with Portugal and Spain (Wed+Thurs) most likely. 

The US Congress will be back in session Wednesday and the new Speaker of the House John Boehner will be sworn in - Congress will be at war for sure. Keep a close eye on Illinois Budget (one of the states I got going into volentary bankruptcy in 2001) as indicator of action and reaction from Washington and investors this week. Headline from Bloomberg goes: Illinois has days to play $13 Billion deficit that took years to produce.

Attached is my partner Jesper Christiansen's excellent timeline overview from our Investment Meeting this morning.

Good luck in 2011