End of month Usd buying at the Lon 4pm fix?

Due to S&P being down 10% on the month, there is guesstimates that today will bring 12-15 Bn Usd of Usd buying mainly vs Euro, Gbp and Aud. Last month it was widely talked about and discounted. This time it seems less discounted, although the amount is also about half the one in October. Expect heavy Usd buying as we approach the fix. Watch out for Usd selling post it. Hence, should be quite choppy price action around 4pm Lon time.

Russia - slipping on that slippery slope

The Russian centralbank confirmed they are widening the RUB corridor at the same time as hiking interest rates from 12% to 13%.
This was motivated by; "stemming capital outflows and dampening inflationtrends". Smells like they are loosing the grip to me. Hmmm,,, perhaps the bull rally will not last that long? At least not in Europe. I honestly hope that the Latvian government knows what to do in this situation. First thing I come up with is for the currency to float. But then again, what do I know?

Where is the Swedish Riksbank contingency planning? They need to become more proactive on this issue and realise that this is a very serious crisis, coming soon to a Swedish bank and currency near you. Get involved. Stop pretending everything is hunkydory. The Swedish banks will lobby their hardest in order not to float. They should be ignored.

Anyway, keep a very close eye on the developments in Russia nearterm.
If the Russian bear should fall, it would drag many others with it, with strong repercussions for Europe.

For anyone interested, go to http://www.imf.org/external/index.htm and read the IMF;s latest working paper on "The tasks ahead". In essence, it highlights the very problematic funding issues for the IMF in order to be able to support the Emerging markets, as well as the necessity of it. Not very encouraging reading if one expected the Emerging market funding issue to have been all figured out. Any big Emerging country going down, such as Russia would cause major problems as such a country by itself, might empty the IMF;s funds.

GS downgrading Europe - big time

For the first time in 25 years, the GS European chief economist is making a dowgrade just 1 month after the previous revision. This underscores the severity of it, in my opinion. Doing such a thing is a hard prestige hit. Europe is going dooown, if anyone thought otherwise.
GS is revising Eurozone GDP growth for 2009 from -0,3% to -1,3%.
The biggest recession in postwar history.

This is equivalent to what Sweden went through in the early nineties, in what is regarded as the worst banking crisis in European history. (Although I guess it has faded somewhat compared to what we are witnessing in the global banking industry this time around.)Well, we havent seen the Baltic "subprime" collapse unfold yet. Scandinavian banks will surely get a chance to break their previous record. I reckon theyve got good chances of achieving this. Will be a strong sense of dejavu for the Swedish Riksbank, but with a new twist, bailing out the banks AND the Baltics!

Enjoy the ride of this bear rally while it lasts and make money on it, but dont buy into the story that we have bottomed. It might last one more hour, day, week or month, but, not months or a year. I want to see a solution to the Emerging market story first. A downgrading of Europe is NOT going to help.
I have bought calls on US banks, looking for US equities and banks to outperform other markets in the short term.
As always, good luck!

No Latvian pegchange demanded by IMF, it seems,,,,

LATVIAN IMF PLAN WILL NOT CHANGE CURRENCY PEG, GODMANIS SAYS.
"Stupid is as stupid does", as Forrest Gump used to say.
Guess Ill revise my timing on this one then, unless this is a political classic in these matters, saying one thing and doing another.
Lets see. In any case, I hope the population agrees with this, and I also hope the politicians have found a solution. Really, I do. Its just that I dont quite know myself what that solution would look like with the current currency regime set up and given the global macro environment.

Equitymarkets up for the 4th day, and counting.

Bearmarket rally, still rolling. Will it continue? Well, everybody trying their hardest, for sure.
US quantitative easing in full progress post Tuesdays Usd 800Bn Fed funded programme to buy GSE and other mortgage debt. Bond and mortgage yields falling on the back of it.

* US home (average) loan rates declined from 6% on Monday to 5.5% on Wednesday. Stressed mortgage rates for 30 year fixed loans fell from 6.33% Monday to 5.97% Wednesday.
Corporate bond spreads declining along with mortgage spreads, all supporting the equity market, which has responded very well.
* Citigroup jumping ca 85% since the closing last friday, with the rest of the banking sector tagging along, although with various speed. All courtesy of the US Treasury.
* One of the delevaring indicators, the USD, has weakened against the Euro from 1.24 last week to over 1.30 yesterday. Sub 1.29 today. Emerging market buying of equities and currencies, with the EU bringing cohesion funding spending forward.

Question is, will we now see the pools of unleveraged liquidity, generated from the forced asset liquiditation over the last months come back into the market? Will attractive valuations be enough? If so, there will be a substantial bearmarket rally. Institutional realmoney will be the main indicator. The "Once (or twice/third) burned twice shy" rule is still applicable though. Capital preservation focus should still rule for now.
Watch this space.

Me myself am dipping my toes using mainly options. After being long US bank puts, I am now long ditto calls as well, having reduced the puts. Want to get hold of Brent Oil and Gold Calls, but easier said than done at the moment.
Monitoring the Emergings closely.
I am still long Swedish bank puts due to the Baltics, long Fx Sek puts vs Euro for ditto reasons. (There are other reasons as well, more on this later).
Still long the Usd in cash.

Happy thanksgiving! Count your blessings and best of luck.

Oh no,EU bailout, 6.5BN Usd to the autoindustry

So it has officially started, the bailoutrace. Wrong track. This will lead to protectionism and competitive weakening of currencies in efforts to jumpstart "their own" economy. Suboptimal global GDP growth is NOT what we need right now. Oh dear,,,

Full throttle against the raging river

Been away on a trip. Looking into a company with a very bright future.
Quite a few events taking place meanwhile;
* General and specific packages being launched in US, UK and "promised" in Europe.
* Tax cuts talked about in Europe, US, tax hikes for the wealthy in the UK.
* Global rate cuts continuing globally. As Ive mentioned before, we are now seeing Emerging markets joining in as well; Russia, Turkey, Poland, South Africa, and more will follow. Expect weaker currencies there, but first the short Try positions are being flushed out.
* Quantitative easing showing its effect in the long bond market with long bond yields falling heavily in the US.
* FED buying MBS and GSE debt, in essence directly supporting the consumers.
* However, Usd funding demand very heavy, especially from UK banks, pushing 3mth eur basis euribor from -120 to -165, 3mth cbl, gbp libor was -165 to -212. Cbl was at its highest to start with, so it has just kept pushing. Next week there will be an 84 day ECB auction.
So far these auctions havent attracted much demand due to their current rates being 40-50 bp above the market. This level is now attractive due to market developments, so expect heavy demand there. Cbl situation does not seem to get that relief. Anyway, where am I going with this? I am concerned that liquidity spreads are widening when state money continues to be injected on a scale never seen before. To sum it up; Extreme amounts of money, but wheres the velocity? Without money velocity, no "bang for the buck". More Tax cuts and infrastructure programs to get people into work, please.
All in all, the efforts made by centralbanks and governments globally is simply massive, extraordinarily, for a lack of a better word.
* I am now concerned by the velocity of money. It need to be sped up. This is where the fiscal measures come in. Instead of spending money on dinosaur businesses and corporations, please make sure people get money in their pockets by making labour cheaper via lower taxes for employers as well as lower income taxes and VAT.
* Governments should invest in infrastructure projects, there are plenty to choose from. Some are even urgently needed anyway. This will achieve higher efficiency, productivity and profitability, making each country more competitive. We are facing a worsening global macro outlook. Making the right decisions are key here. Unfortunately it all smells like protectionism in the end. As long as the bailout talks of various industries persist, anyway.
I suspect unemployment will have to rise towards 10-15% in western countries. Higher in Emerging ones. At least, infrastructure projects can sort some of that out, or at least cap it.
Net, net;
Hard efforts are being made, but not enough fiscal policy measures to make me bullish.
Im still bearish.
What comes after deflation? Inflation. Not really on the radar screen as of yet, but something to keep in the back of your mind. Now; Cash is king, then; Cash will be the worst place to be.

Something going on?

Eur/Sek reaching 10,58, Swedbank down 8% from up 5%, SEB down 6% from up 4%,,,,
Well, I guess there is a weekend coming up,,,, Time to make an IMF deal?
Hold on to those Swedish bank and Sek puts.
Dont miss out on the Austrian bank puts either.
Good luck

What now?

Asia not behaving as I would have expected, for sure. Seems like a classic weekend clearing with assetshorts getting squeezed. We have seen similar tendencies in Europe and could end the day on that note in US. However, beyond the noise, we still have a bear case.
Yesterdays news that Latvia was in talks with the IMF sounds like a clear and present danger that they will let their currency float before long.
Hence, buy puts on the Swedish banks , sell the Sek.
We will probably see further rate cuts globally on the back of Switzerlands 100bp cut yesterday. Plus IMF money being cascaded left, right and center. This will create violent short squeeze rallies. On top of that, Citigroup wants a short selling ban. Anyway, when the dust has settled, I believe there is a quite high risk that IMF and others will have come up short vs the economic realities.
Use options, dip your toes buying calls for short asset shortsqueezes. Reposition bearish again post it.
When it comes to Swedish banks, just position short via options. Do it now, despite the short squeeze risk. Since the Baltics is Swedens own mini subprime, Swedbank and SEB is likely to follow in the footprints of Citigroup. Ie they both have a good cashflow, like the vastmajority of banks, but the creditlosses will/can wipe them out. This will change the whole perspective on these stocks, from undervalued to vastly overvalued. Facing government ownership (Swedbank), to Investor having to transfer their cash to SEB, plus an IPO. Risk in such a scenario is for stocks to drop to the 5 to 15 Sek range. Drastic, I know, but worth considering.
Eur/Sek would approach the 11.00 handle or more, Usd/Sek towards the 9.00 handle or more.
Stay short Sek, both against the Eur and the Usd.

Trying my hardest with a bullish hat on

Getting tired of my own bearishness. Therefore, in the midst of the deepest bearishness, will try my hardest to find the bullish scenario instead.
So what would such a scenario look like?

One could be a massive injection of funds to the worlds Emerging markets via the IMF, the world Bank, EU etc, enough to bail out all the hard currency loans and guarantee each countries banking system. Not including Asia or Latinamerica, how much would it cost? 1Trn Usd? 2 Trn Usd? Just to cover the hard currency loans. Guaranteeing each countries banking sector would be a different cup of tea.
Anyway, the two main remaining surplus countries, Japan and China, would have to foot the majority of these funds. Such a scenario would nevertheless make me bullish from here.
Add to that a global, coordinated fiscal stimulus program including tax cuts and infrastructure works and I would be bullish as an equityhouse.
While Im at it, add government funded restructuring programs to phase out and speed up the necessary transformation of old, overestablished industries, making them leaner and meaner, ie more efficient and costeffective. Preferrably enviromental friendly as well.
The autoindustry would be a good start. No bailouts, no subsidies, rather tax cut incentives, driving the development in the right direction. Bailouts and subsidies risk driving the development towards protectionism instead. This should be avoided at all costs. Just say NO to the D-word.

Other bullish thoughts with the bull hat on;
*Harder and harder to find a bull these days. It is very mainstream to be bearish. Not that everybody and their mother is bearish yet, but were getting closer. No bus or taxidrivers telling me were going down in a bucket,,,,yet.
*Stocks at extremely low valuations, and tons of cash on the sidelines. Companies with good cashflow and dividendyields are also amongst the victims. Stocks hit by forced selling likewise.
*Balticdry index down 93% on the year, getting close to that zero.
*Commodities severely hit.
*Very steep yield curves in the western world, coming soon to a country near you, globally.
*New all time high for the CBOE VIX index, hitting 81% vol. Extremely high volatilities in all assetclasses. These high implied volatilities are basically preventing hedgers from getting efficient insurance via options, forcing them to sell the underlying asset instead. These sell offs are often "capitulation like". How much more to go? Good question, thank you. Getting implied volatilities higher from here will take something extra though. Once we get lower asset volatilites, this will lure "investors" in again.

There, I did it. Some bullish scenario and thoughts to chew on.
Hoping for the best but preparing for the worst.

While this scenario is a distinct possibility I will stay bearish til it starts showing. Right now the global coordination capacity seems too weak to me. At the same time the protectionism tendency has reared its ugly head. I fear that this tendency will get stronger as the economic developments worsen and the focus increasingly is directed to the domestic arena.
More bearishness to come in my next piece.

Starsigns aligning

Bit by bit pieces are falling into place to get new events triggered.
1) Im thinking about the link between the western world yield curves, forced to a downhill speedskiing slope by imploding domestic demand and recapitalisation need for the financial sector. In turn linked to similar needs found in most Emerging market countries. I am mainly thinking about Russia, CEE, Turkey and South Africa here. So far, these countries have not altered their monetary plocy in the wests direction. However, in this environment with correlations increasing, the deflation variable should push them closer to the western yield curve world, (IMF may not necessarily agree). This evening, Turkey cut their rates by 50 Bp to 16.25%. MPC will have a very fine line to walk from here between avoiding a currency collapse and a domestic demand one. If they had to choose, I would have to think that they would sacrifice the currency, after all, deflation is the main concern now, right?
If Turkey sets any precedent for other emerging markets ( which I think they do), others will follow, moving towards flatter yield curves and potentially, positive ones.
2) This will lead to weaker ditto Emerging currencies, increasing credit losses both locally and with western corporations. Any country with a deficit stuck in a currency regime is bound to devalue. One area that comes to mind and that you will be all too bored to hear about for the fiftyeleventh time, are the Baltics. Timeschedule for a devaluation should, if the politicians there come to their senses of which one of two very high cost alternatives (deflation nuclear meltdown or devaluation debt blowup) is the lowest.
3) This has repercussions for Scandinavian banks as they might stand to loose perhaps 25% of what theyve lend in the Baltics. (Total is about 400 Bn SEK for the Baltics). Add to that Poland and the Ukraine. Admittedly these numbers are not that big on an international scene, but will be enough to take down one, perhaps two Swedish banks. In the end, the Swedish banks are guaranteed by the Swedish government, but so far the Swedish Riksbank and other authorities have continously underestimated how much the Baltics will cost and what the consequences will be for the Swedish banking system and currency. Austrian banks are the number one though and heavily exposed to the CEE area and will be in the frontlines when the creditloss barrage is fired at them. Another issue is that the Austrian banking sector corresponds to 85-100% of Austria GDP. A few Austrian banks will go bankrupt=state ownership with equity going to zero. This could mean that not only the PIGS (Portugal,Italy, Greece and Spain) countries would be the ones with unsustainable deficits, Austria could potentially join the club? Not good for the Euro if so. And yes, I am concerned about the sustainability of the Euro. More about that at another time though.
4) Hence, I suggest staying short Swedish banks via put options, mainly SEB and Swedbank. Staying short the SEK via options. Staying short Try, Zar, Pln and Huf, even Czk, preferrably via options, but pricing and liquidity is such that it could be difficult for anyone not running a book on it. Spot is the alternative. Light feet needed, but they are a trending and in this market, the trend is definitely your friend. Traders, enjoy.

Bailouts and protectionism

Bailouts, bailouts, bailouts. A scary proposition if you ask me. Ok, fine, the banks that are critical for a countries banking system and with very far reaching global exposures might have to be bailed out. Fine, but bailing out other industries? Ehhh nope. This is my reasoning; The world wants free trade since this optimizes the worlds potential GDP growth. Hence, the globe is striving for global free trade agreements. By subsidising=bailing out various industries, there is, per definition no free competition anymore. How will these companies not getting subsidised get compensated then? The answer is; by getting compensation subsidies by their homecountry. You see where I am going with this. We are on the road towards protectionism. This will drag the global GDP down further, threatening the world to get sucked into a global depression. Any surplus country will benefit, the others will sink. Before running to the keyboard also remember that todays surplus countries might not necessarily stay that way, leverage exposure is the key here as well as how it is financed. Russia is a good example on a very swift shift. Six to nine months ago, this was a nobrainer buy of the currency and shares. Today it is a nobrainer sell of ditto, mainly for the above reasons and the very high dependence of the value of one single commodity. What makes it even worse is that politicians are increasingly getting a bigger say in how markets will be run going forward. Meddling by politicians has historically never been a hit and will definitely not be one this time around either. My suggestion; The record high global leverage has to be reduced. This will be painful. Politicians can try to soothen this pain without meddling in the markets. There are always opportunity and in this case the opportunity for restructuring is the one that stands out. This is a good time to restructure dinosaur industries and making the other ones leaner and meaner. This will benefit globalgrowth and rebound. Increasing infrastructure projects is another one that will have the same positive effects, apart from also creating more jobs.

Positioning

Looking at blogs posted recently, one might get the impression I am all doom and gloom. Well, it is undoubtedly a very serious situation, but it is also a very volatile environment, creating more drastic opportunities and risks than usual.
On the positive side (for a change), I suggest the ones who loves the options product (I do), to use it selectively in this environment to be able to take advantage of these swift, and often unexpected moves. For anyone having read Talebs "Black Swan", the last three months has been a very vivid illustration. Now, my point, as assets gets very depressed in the equity market and elsewhere is the following; As we have seen, big rallies develop in this environment as cash rich market participants are lured in and shortpositions are squeezed. I am now looking for low delta calls at the front end of the curve, (expiring in December and January) in equities, commodities and currencies to be able to take advantage of these low delta, low premium options in order to capitalise on these kind of events. We are reaching the very thin liqudity part of the season and this year it will be worse than usual. My fundamental outlook is bearish though, there is still some way to go before this is over. Therefore, use rallies to get bearish positions on. And, I cant reiterate this enough, use options whenever possible unless volatilities/premiums are prohibitive. This environment spells capital preservation, high cost of capital and making sure you have the freedom to maneuvre and act in an illiquid and highly volatile environment. Cash is king=use options.

Caught in a trap,,,,,,

"Caught in a trap, I cant look back, cause I love you too much baby,,,,," As the old Elvis song goes. The same can be said about the Scandinavian banks and the Baltics. The Swedish banks deeply involved are stuck there (and in Eastern Europe, Ukraine). The Baltics is the Scandinavian Banks own subprime, albeit on a much smaller scale. (Banks have lend a total of 400 BN Sek.) With Russia moving closer to the edge and the CBR realising that holding and controlling the RUB will most likely not be feasible going forward, the question is; how far and how fast will the RUB fall? Well, I cant answer that question. But I believe it will be further than what the CBR is planning to allow the RUB to weaken to. And I believe it will be in a shorter timescale than what they are planning as well. Without mentioning any numbers, the point here is that it will lead to an Eastern European crisis that was on its way anyway, but that will surely not be helped by this. Of course, surplus countries could still finance the IMF with money to be lend out to certain Emerging market countries, but judging from the G20 meeting, coordination does not seem to be the strong trait of that group. At least not yet. Even so, even if they do get this money, the basic problem is revolving around how these countries have structured their financing, leaving them very vulnerable in a global recession. It might be a temporary respite , but not a solution. By the way, this goes for this whole global deleveraging saga. Anybody ever heard about a forced deleveraging not involving pain? I havent. This will be no exception. The turn has come to the Emerging markets and they will drag the rest along with them. In the western world it seems anything will be done trying to temporarily soothe the pain, no matter what the consequences ahead are. More of that later.

Japanese G20 suggestion

- Double the IMF reserves to 640BN USD
- Japan will provide the IMF with a 100 BN USD loan
- Pressing US and Europe to make their financial institutions dump bad assets out of their companies asap

Sounds like a good suggestion to me. Remains to be seen whether the G20 can agree on it, since US and Europe would most likely set precedent for the rest of the world.
Question is, how much will Emerging markets need from the IMF? Nobody knows, but perhaps up to and in excess of 1 TRN USD? I dont know. However, if they succeed in putting this together, it should help equities and emergingmarkets short term. This, however, should provide a selling opportunity for both equity and emerging currencies, CEE, TRY, ZAR.

Emerging markets and the yield curves

Ok, so well be having a global recession soonish. As Ive mentioned before, Emergingmarkets are key in this. So what do I think will happen with the FX and the yield curves. Well, if we start with CEE markets, Turkey and South Africa. Domestic demand is falling rapidly in these countries, but yield curves are inverted, following classic Emerging market and IMF methodology. Industrialised countries are doing all they can to avoid a depression, this theme will also be coming to an Emerging country near you. The "only" thing preventing these countries to copy paste the very steep yield curve of the g20 countries is the absence of blanket guarantee to their banks. This will most likély be provided by the IMF. Once this is in place, there should be little in the way fo the these emerging countries flattening and eventually steepening the yield curve slope. Swap lines should ensure the respective countries borrowing in hard currency gets funded. Politicians have to choose whether they will risk imploding domestic demand and no exports or a weaker currency, stimulating demand but creating hard currency losses for households and corporates in the process. Putting a gun to their head, I believe they will choose the latter.

Chinas October Industrial production

Chinas Industrial production came in at 8,2% yoy, way below the consensus of 11.1%. Equities in Asia falling drastically. However, Japan also announced willingness to support the IMF with 100Bn Usd equivalent in cash. This money will be put in use to support Emerging markets, which is a positive. I believe markets are now hoping for some new globally coordinated fiscal programmes to come out of the G20 meeting this weekend. Unfortunately, I think they will be dissapointed. Going from here, I doubt the Japanese addon will solv the emerging dilemma, more money is needed, perhaps another 400Bn Usd? Anyway, European markets are handling this in a supportive manner as the equity markets open. Got to respect that. Remember; Emerging markets are still key.

Heads up; Chinas Industrial production

Chinas Industrial production will be released over night. Expectations are for 11.1% increase, but government sources has mentioned about 8% yoy growth rate. If this is the case, we will see another wave of deleveraging taking place. Asia should already be in bearish mode and this would definitely push it quite abit further.

Russia,the Usd and deleveraging

Russia has spent 111 Bn Usd on supporting the RUB since August. CBR now has 91 BN Usd left.

Yesterday they spent another 7 BN Usd. This is clearly not a viable situation. CBR has decided to let the RUB weaken slowly but surely, in a controlled fashion. The risk is that this gets out of control. In any case, commodity prices are low, current account surpluses are changing signs, FDI (Foreign direct investment) is falling, Russian corporates having funded themselves in hardcurrency to the tune of 400BN Usd, a steady outflow of "hot money" as well as "real money" and youve got a receipe for trouble. This in turn will trigger hard currency buying which should boost the USD. On top of that, unless IMF and CEE (Central Eastern European Countries) and other countries with twin deficits get financial support soonish, we will most likely have another round of global forced asset selling (due to deleveraging) on our hands. Nobody wants that. Expect hard efforts to raise further funds for the IMF by G20 government heads. Emerging markets, and especially twin deficit countries hold the key here.

Ceteris paribus, expect further pressure on CEE, TRY, ZAR, CAD and Euro currencies from here towards the October lows, and a stronger USD, CHF and JPY. This also implies that the speed of the Baltic countries crisis is also increased. More on this at another time.

CEE to continue under pressure despite "lifelines"

Re the swap agreement between Poland and SNB; this does not involve PLN, rather Euro vs Chf, so transferring the risk to Eur instead. Expect the ECB to announce a swap agreement with Poland as well, soonish, or else,,, The upcoming G20 meeting is likely to generate hopes of more stimulus, but the level of global leverage is such that there is no guarantee whatsoever that this will be enough. Emerging market inflows is expected to slow from 1.9Trn Usd in 2007 to 650 BN Usd over the next few years. Asset correlations to start breaking up before long?

BRIC/China power stimulus

Throwing all they got at it. China launching a massive 586 BN USD stimulus package! This is almost a fifth of Chinas annual GDP. Guess that will get the market something to chew on.

Time to dip those bearish toes (again)?

Next week should bring some clarity as to what effect, if any, the latest interestrate cuts will have on the CEE countries. Swaplines from SNB to Poland was extended last week, but already cries for more help are being heard from the Emerging world. The risk for a setback is clear to me. IMF is having trouble refinancing their depleted stocks. If the middleeast does not provide this,,,, Anyway The Baltics are sinking and my focus now is not if, but squarely on when they devalue.
This is a tricky situation since it is purely political, but another downturn in Emerging markets would make me bet on a 3mth-6mth schedule rather than a 6mth-12mth schedule. Latvia published their latest GDP figure last Friday (-4.2%). The countrys GDP has now dropped roughly 15% during the last 12 months. This downward spiral will continue til Latvia devalue their currency, LVL. The ECB shut the door towards Euro membership last year, and it will stay shut til they devalue and start from scratch. The solution will be very painful, but the longer devaluation is delayed, the higher the total cost for the country.
Which brings on the issue of the Swedish banks and the SEK. Both will follow the Baltics down. Stay posted.