Riskaversion continues lower - opportunity or trendchange?

*Overview

What has happened over the last few weeks?
Massive US stimulus launches and G20 like meetings has generated hope for a change and solution to improvements in housing, growth, toxic assets and the liquidity plug.

Markets have had very bearish expectations both on economic numbers and corporate news. Any number or news in line with already bearish expectations has been a positive, any positive number or news has been megabullish. The China growth story has been brushed off and relaunched further enhancing the positive market sentiment. In short; the market consensus has been negative. It was time for a position squeeze and a bearmarketrally, which is what we have seen. The market still seem quite hesitant to this latest bullrally which could indicate it still has legs.

In addition, there has been quite alot of liquidity related depression of assets, which are now bouncing. Equity valuations are up on the radarscreen again.
Even carry aspects are coming alive with yielders gaining together with commodity and riskaversion hit currencies. CEE currencies has after an initial rally been consolidating for the last week.

*Where from here?
With higher stocks and lower implied volatilites comes carry plays and increased asset correlations. This creates opportunities for bullish asset plays. Commodities could very well continue higher from here.

I am still quite wary of the Baltics and the impact it will have on the rest of the CEE countries, the Scandinavian and western European banks. In a pressconference today the Latvian PM made clear that the IMF supports a devaluation while the Latvian government, Centralbank and the European Commission does not. The pressconference was given in conjunction with the Latvian - IMF renegotiation of the budget deficit in relationship to the GDP. Latvia wants to change the agreed maximum from 5%, to a 7% budget deficit of GDP. It will probably be quite difficult to get the IMF to agree to those new terms.

I believe the IMF would rather, as mentioned above, see a float if there are to be any concessions. Question is; Will the the EU step in to add the necessary cash to Latvia if the IMF refuses? Anyway, the Swedish, Norwegian and Danish governments/taxpayers should make sure they dont waste any more cash than they have already done. It is simply not worth it.

It will become difficult to solve the US banksituation with the Geithner plan. Partly due to flaws in the plan itself (see earlier posts), but also because of the increasing risk that the US Congress will not be forthcoming. Latest suggestion in the US congress is that any company buying 1BN Usd or more worth of "toxic assets" will automatically be subject to US state bonus regulations.

Besides, the Baltics and the CEE and western European banking insolvency issues have yet to play out in Europe.
When it comes to China, I would be very careful in reading too much into it. True, there are massive infrastucture projects being launched in China which I am all for and think is great. That is definitely a positive. However, I dont think we have seen even a fraction of Chinas misallocation and banking problems come to the surface yet. The key for China will be whether the surplus will be able to finance the coming credit losses and domestic spending without selling assets abroad; read the US).


*The inflation scare
I do agree there is a high risk of inflation becoming a massive issue at some point in time - but not now. One thing at a time. To me it seems way premature to play the inflation theme at this point in time. The timing is simply off. Admittedly, I have been long oil myself, but NOT due to any inflation scare. The main issue is still deflation, despite the recent US and European numbers. Over the last few weeks there has been plenty of position squaring and triggering of stops. I believe this too, could continue until trends are resumed again. I will stay nimble til then.


*Positioning
-I was caught long puts on European banks with exposure vs the Baltics and the CEE as the market went sharply higher. Luckily I went long a basket of US bank stocks against it, since I wanted to keep the digital exposure while benefitting from the US bank plan.
-I am still long the puts but have closed my long basket of US bank stocks.

-I closed my short positions on the CEE currencies and am closely monitoring them from here, looking for a reentry. I am still long Eur/Lvl.

-I am still short Gold via options and am currently reevaluating the position as momentum is waning. I still believe the market consensus is way too bullish and with 43% of long Gold positions stemming from the GLD ETF contract, it seems like it would be ripe for a clearout.

-I am still long the IVN Goldminer stock. The stock has moved favourably since my position inception but I am in it for way more than that. The mining approval they are awaiting from the Mongolian parliament would, if approved, clear the way for the worlds biggest Gold and Coppermine field. The parliament is set to reconvene on this issue in early April. With the Mongolian government currently strapped for cash relying on the IMF for funding, the IMF has alledgedly advised them to sort out the mining approval. Further on, Rio Tinto bought a stake in IVN last fall and if the there is a mining approval, there will most likely be speculation on whether Rio Tinto will make a bid for the whole company.

-I took profit on half of my long position in Nok/Sek in the high 1.27;s. Post the Nok rate announcement there has been quite a squeeze in Nok/Sek and I am monitoring the remaining position closely.

-I have taken profit on my long Oil position.

- I am short US long bonds via options

Volatility has calmed down substantially and many assets are currently ranging or correcting. I will await further opportunities from here. One thing is for sure - there will be more of them. In all kinds of shape and forms.



As always, good luck




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