“10 Outrageous Claims 2009

Saxo Bank Strategy and Research

True to Saxo Bank’s now annual tradition, we in Strategy and Research are delighted to present our “10 Outrageous Claims” for 2009.

The primary reason for doing this “Black Swan” exercise every year is to counter-balance human psychology, which is usually skewed towards optimism. We tend to be somewhat more pessimistic in our Yearly Outlook than the average analyst in the market, and believe that it is important for the investor to always factor in the less likely scenarios (as perceived by the market). Please keep in mind that this is more of a thought exercise than a set of outright predictions – we do not consider the chances are better than 50-50 for all of these claims.

Chief Investment Officer, Steen Jakobsen (sj@saxobank.com)
Chief Economist, David Karsboel (dka@saxobank.com)
Chief Equity Strategist, Christian Tegllund Blaabjerg (ctb@saxobank.com)
Chief FX Strategist, John Judson Hardy (jjh@saxobank.com)


Iranian Revolution

The Iranian economy is already under pressure. However, the single most important export good is oil, and since we expect oil to trade as low as $40 or even $35, the purchasing power of Iranian society in USD will diminish. The government will come under severe pressure as they will not be able to uphold the supply of basic necessities. There are limits as to how much the Iranian population will stand for. These limits are flexible in a well functioning economy, but with energy prices declining rapidly, social unrest and dissatisfaction are guaranteed.

Crude @ 25 USD

Crude will trade lower during 2009 as demand slows due to the worst, global economic contraction since the Great Depression. We will see production cuts by OPEC but, due to disagreement within OPEC, the cuts will not be as substantial as those required to stop crude falling from the current levels. Furthermore, oil producing and less mature countries that have grown dependent on oil revenues in order to please their populations, will desperately break any concerted efforts to keep oil prices high.

S&P500 in 500

S&P500 will hit 500 in 2009. The primary reason for this will be falling earnings, rather than falling P/E ratios (since the low interest rates justify relatively high P/Es). There are several reasons why earnings will continue to drop:

1. Consumers will no longer be able to extent their credit from banks, since the banks are writing off losses and need to lower their balances
2. Cost of funds have also increased in the corporate sector – and especially for debt-financed consumption
3. Total housing equity is vaporising and will no longer be able to serve as collateral for loans
4. Companies will curb their investing programs, which will hurt B2B business models.

Italy will make good on threats to leave the ERM

Italy has a long-running affection for devaluations, something which is not possible within the single-currency cooperation of the ERM. Government finances are under immense pressure and the ERM requirements will not only be violated, but they will be completely ignored in 2009.  EU is likely to crack down on excessive government budget deficits in several member states, but Italy could make good on previous threats to leave the ERM completely.

AUDJPY to 40

The Australian economy is heavily influenced by the commodity market and a large part of the country’s economic expansion in the past year has been driven by the commodity boom. We believe the whole commodity complex will be left dead in the water for the next ten years due to real demand destruction caused by the high prices over the past five years. At the same time, we are bullish JPY with the big, Japanese Current Account Deficit and overwhelming domestic savings.

EURUSD to 0.95 – and then to 1.30

The potential problems in the Eurozone are simply not getting the attention they deserve. European bank balances are under tremendous pressure due to the outsized exposure to Eastern Europe – a region that will increasingly falter during 2009. At the same time intra-European economic tensions are increasing as witnessed by the government bond spreads vs. Bunds. Additionally, the USD is the primary medium of exchange in money markets, which ensures that as long as they stay tight, USD demand will be high. That said, the USD isn’t a sound currency and the obvious problems in the Eurozone are all priced in very quickly. Thus, a move to 0.95 will be undershooting the fundamental case, meaning a return to 1.30.

Chinese GDP growth to 0%

This is as close to recession that China will get in 2009. The export-driven sectors in the Chinese economy will be hurt significantly by the free-fall economic activity in the US. Furthermore, many of the commodity-based investments that have been undertaken over the past five years will sour with the collapsing commodity prices. Since the Chinese economy has been stimulated by overly expansive monetary policy for years, more of the thereby induced speculative excesses will also be revealed in 2009.

Pre-Ins First Out

We believe that several of the Eastern European currencies currently pegged or semi-pegged to the EUR will be under increasing pressure due to capital outflows in 2009. Several of these countries already have extremely large Current Account Deficits and their required refinancing will make them vulnerable to additional credit market disruptions. This especially goes for the Baltic currencies.

Reuters/Jefferies CRB Index to drop 30% (to 150)

Commodities might have been an even bigger bubble over the past years than equities (but not credit derivatives). We believe the speculative excesses have been so large they have even skewed the demand and supply statistics. We even doubt the consensus belief that demand has been outstripping supply for years is true. Hidden stockpiles of, especially, industrial metals will be unloaded during 2009 and that will press prices even lower.

First Asian currency to be pegged to CNY

China’s economic, political and cultural influence is growing and a return from Phony Economics to Old School economics will lead everyone to focus on the important issues. In other words: Who has the productive potential? Who holds the debt? Who has growth and savings? Most of the answers will favour China, and the Asian economies will increasingly look towards China to find new trade partners and to scale down on the hitherto US-centric agenda.

DISCLAIMER: Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by Saxo Bank that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated. Read the full analysis disclaimer and Saxo Bank's general disclaimer. ”

Wikipedia’s website describes Saxo Bank as show below:

“Saxo Bank

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Saxo Bank is a Danish online investment bank. It was founded as an online broker in 1992, under the name Midas Fondsmæglerselskab by Lars Seier Christensen, Kim Fournais and Marc Hauschildt. The name was changed to Saxo Bank at the time the bank obtained its banking license in 2001. Saxo Bank offers capital markets trading through its online trading platform, SaxoTrader, in instruments such as Forex, Stocks, CFDs, Futures, Funds and Bonds. Private Wealth Management services are also offered. According to the bank, roughly two-thirds of the Bank's activities are derived from partnerships with banks, brokerage firms, FCMs and institutional trading partners. One will not find Saxo Bank branches in Denmark or elswhere, as no traditional banking products are offered. The bank is, so to speak, an online broker with a bank license, and customer funds are held by other banks.

Internationally, Saxo Bank is world renowned for its success in exploiting new business opportunities offered by the Internet. In Denmark's financial community Saxo Bank remains highly controversial, with its founders' documented history in so-called bucket shops^[1][2] and media stories on fictive market rates on the SaxoTrader.^[3] Saxo Bank currently employs almost 1100 employees. In September, 2008, Saxo Bank fired about 340 employees, for purely rational purposes. According to the Danish newspaper Boersen, at the same time the bank was accused of repeated manipulation with its Wikipedia article. The story attracted some media and blogger attention in Denmark.^[4]

History

 The Nineties: The Midas Era

In the early nineties Lars Seier Christensen worked as a trader with Gerald Metals in London, when he met Kim Fournais, working as a currency trader at the now defunct Lannung Bank. As part of their work, the two Danes spoked on the phone up to ten times a day. Later, the two entrepreneurs, now billionaires, described that they both felt like they had found their business soulmate.^[5] According to Economical Review, The two entrepreneurs founded Midas, initially operating as a broker without obtaining the required licenses, selling option products. When Midas obtained a limited broker license, the news was reportedly received with much astonishment and surprise in the financial sector. With high school as the highest level of completed education^[6], both of its CEOs seemed to lack formal qualification to run a financial institution, according to normal Fit & Proper requirements as set forth by Finanstilsynet. Around the time Midas received its license, the periodical Økonomisk Ugebrev, "Economic Weekly" began publishing an article series on sidegadevekslererne, the bucket shops of Denmark. A group to which the company belonged, according to the publication.^[7][8][9]

The Bucket Shop Report

During the fall of 1996, Midas and Kim Fournais became front page news when a series of investors suffered devastating losses using Midas' wealth management services. One of the investors was Karsten Ree. Like many of Midas' other investors Karsten Ree was a successful businessman, and one of Denmark's wealthiest men. Reportedly, he felt cheated by Midas into fictive investments. Ree suffered losses exceeding 800.000 DKK in one month.^[10]The article series further uncovered that Kim Fournais had a background in MSC Gruppen, an unlicensed entity that collapsed after defrauding its wealth management customers that was left behind with a 200 million DKK loss. According to the investigation, after the collapse Kim Fournais was subsequently employed by Lannung Bank, and remained with Lannung until it was sold in the collapse of its holding company, Accumulator Invest. Accumulator was owned by the white-collar criminal Klaus Riskjær Petersen, and Kim Fournais was subsequently fired by the bank's new owners. The periodical and later print media describes how employees without formal qualifications or after unsuccessful attemps to obtaining licenses or jobs at established institutions were attracted and employed by Midas, later Saxo Bank.^[11]

On October 10, 1996, Danish national television, DR, aired the investigative journalism programme Rapporten on bucket shops. The documentary showed a sales trader from a bucket shop called Bernstein applying a high sales pressure technique on a handicapped man in a wheelchair, pushing what was presented as alledgedly ficitive investment products. Additionally, Kim Fournais was asked point blank if he had stolen customer funds, which he denied.^[12] The result was a massive public outcry and Midas underwent a criminal investigation by the Danish special police unit for serious economic crime, Bagmandspolitiet. Midas hired the high profile star lawyer John Korsø Jensen of law firm Mazanti-Andersen, who convinced the police that nothing illegal had taken place. John Korsø Jensen was later offered a seat on the board of the company. Midas turned abroad to Sweden, in an effort to sell options-based products to a Swedish clientele, and the company now hired Swedish sales people to work in its Copenhagen office.^[13]

The Breakthrough: 2000s

The company now turned to the Internet, and in 1997 Midas launched its first online trading platform for currencies, ultimately paving the way for Saxo Bank's current success. The first trading platform was called MITS. It was later replaced with what is today the SaxoTrader platform. Midas decided to change its name, and obtained a Danish banking license in 2001, using the name Saxo Bank. Saxo Bank began expanding its online presense focusing primarily on retail forex, and at the same time it moved to new headquarters in the Copenhagen suburb of Gentofte. In the beginning of 2003, Saxo Bank decided to focus its online investment services offering on the relatively new customer segment, retail forex. Since the time-to-market of new banking software products is considered a challenge in the competitive financial services market, Saxo Bank decided to outsource its software development. It chose Reksoft in St. Petersburg, Russia, which worked on the software from August 2003 to December 2006.^[14]

Success and global expansion

In March 2004, Saxo Bank was in the process of global expansion, when it had to halt its business in Australia^[15]. The Australian Securities and Investment Commission, ASIC, passed regulation requiring an Australian bank license to offer foreign exchange to private customers ^[16]. Saxo Bank had to terminate all its australian retail clients and passed the accounts to two Australian brokers^[17]. Saxo had particular problems with the Australian authorities, as Danish legislation does not allow the country's regulator to sign a bilateral agreement with them^[18]. On september 17, the issue was resolved, and ASIC granted Saxo a license to trade in Australia.^[19] In the beginning of September 2004, Saxo launched its first US white label partership, according to director Daniel Darst, after seeing increasing interest from retrail traders there.
In 2005, Saxo Bank reported a 39% increase in pre-tax profits, net profits rose DKK 161 million (EUR 21.6 million) to DKK 223 million. In FXweek, the CEO commented, "Once again, we have experienced growth in earnings in our foreign exchange trading and have more than doubled our earnings in other business areas, contracts for difference and futures," Lars Seier Christensen said. "We can only be pleased with our progress, which also reflects the general growth in number of clients during the year." Saxo said the growth was due to direct client business as well as its many white-label partnerships, and at the time, Saxo Bank was still looking to headcount, having already expanded its number of employees by approximately 150 in 2005.^[20] Saxo Bank started buying advertisement space in the FX industry periodical, FXweek. In 2005 it won FXweek's e-FX Award, in the category Best Retail Platform.
In 2006, Saxo Bank started expanding its physical presence worldwide, primarily through buying its own white label partners. Today, Saxo Bank has offices in London, Geneva, Zurich, Paris, Tokyo, Singapore and Marbella. Same year, Saxo Bank made significant changes to its structure, as it seeked to boost its retail forex business with hires from the Danish business world. Internal restructuring took place, with its former head of marketing becoming head of white label partnerships. Lars Seier Christensen said the changes were made to reflect growth at the bank, "The hires are part of the ongoing process of growing from a small specialised operation to a global business with more than 500 staff."^[21]

In September 2007, Saxo Bank announced acquisition of its swiss white label partner, Synthesis Bank. In late May, Saxo joined forces with the French a brokerage Cambiste, which is set to be renamed Saxo Banque, France. In 2008, Saxo Bank hired Eric Rylberg, former head of the Danish facility service and cleaning company, ISS A/S, as bank CEO. The founders retaining their executive titles as well, and shortly after asuming office, Rylberg implemented a rationalization plan and reduced the staff with around 1/3.^[22]

 Ownership and business model

Saxo Bank is privately held with co-founders Kim Fournais and Lars Seier Christensen holding majority stakes. Private Equity firm General Atlantic bought a minority stake in June 2005. The CEOs pocketed more than $30 million each following the sale of 25% of the business to the equity firm. Florian Wendelstadt and Jonathan Korngold, principal of General Atlantic, became members alongside six others appointed by Fournais and Christensen. General Atlantic holds 25% of the bank, while Fournais and Christensen own 71%. The other 4% is owned by staff.^[23] In September 2007 Saxo Bank announced acquisition of Synthesis Bank, a white label partner of Saxo Bank through four years. Synthesis Bank CEO Charles Henri-Sabet assumed the role of Global Head of Trading in Saxo Bank. ^[24] CEO Lars Seier Christensen argued the acquisition was perfect fit, matching the Saxo Bank 2010-strategy where presence in the major financial districts of the world is a key factor. A little less than a year after, Saxo Bank suspended Charles Henri-Sabet as Global Head of Trading, pending a cross-country legal investigation for criminal insider trading.^[25] In November 2007 Saxo Bank announced a white label partnership with Citibank, its biggest deal so far. In January 2008, Espirito Santo, took a five percent stake in Saxo Bank, making Saxo Bank’s market value worth at Euros 1.26 billion.

According to the bank, the White Label Partnership business accounts for more than half of the bank's revenue providing re-distribution of the bank's core competencies to a broader public through partnerships. Private Wealth Management is a relatively new area of business.

 Points of criticism

• At least the swiss branch of Saxo Bank has a minimum amount of money needed within the account to make it accessible. This minimum amount is nowhere mentioned, be it in the written contract, the GTCT or the homepage.
• Prices and fees are only listed on the homepage, in multiple documents. There is no single file to download and print.
• Saxo Bank does not send any written document upon opening of the account, neither a confirmation, nor regarding prices and fees. Saxo Bank in Marbella also does not give the customers a copy of the account opening agreement or any other paperwork. This is an illegal practice in Spain.
• Saxo Bank does not have its own bank accounts. Funds from customers are collected in a few accounts at ajor local banks. This is UBS for Switzerland and Deutsche Bank for Germany.
• Saxo Bank sends out private information like account transactions in plain text email.

Public relations

Saxo Bank monitors press and information sources to control the banks public image. Several times employees have edited e.g. this article to remove objective but critical information concerning the company.^[26]. An IP number from Midas Fondsmæglerselskab, the mother company of Saxo Bank, has recently deleted this paragraph with critical statements from the article and the talk page (IP lookup on 193.178.175.46, revision difference).

In Denmark, Saxo Bank has attracted media attention as a main sponsor of the Danish liberal-conservative think tank CEPOS and the fact that the company has distributed 10,000 copies of Ayn Rand's novel Atlas Shrugged, the book being given to every new employee. Saxo Bank is also a main supporter of the small Danish political party Liberal Alliance (Denmark).”

I disagree with the premise that there is a need to “counter-balance human psychology, which is usually skewed towards optimism. “ …and have the impression that some elitist Europeans (and others) have a 100 year history of being intellectually duped and eager to justify their market elitism by swallowing in whole objectionable and anti-social philosophies such as those contained in An Rand’s “Objectivism.”

So, what implications might this have on investments in the former Soviet States, Eastern Europe, and the People’s Republic of China?

“What Your Mind Can Conceive And Believe It Can Achieve!” If you MUST have a philosophy, would not this be a better one. It’s not new. Our tiny newly emerging startup, Global Trade Route.Com, Inc. has adopted this slogan as its own. Let’s be optimistic. Think! The entire world’s collective mind at this moment in time is focused on economic recovery, world justice, and collective prosperity – or at least the opportunity for human progress. We are not individuals alone. We are by choice intertwined in the fabric of society and suffer the same global fates of our neighbors – only removed by time and space. Learn from the lessons of the fallen elites… the collapse of Wall Street giants such as Lehman Brothers, the overnight loss of wealth within the elite circle of Bernard Lawrence Madoff,  businessman and former chairman of the NASDAQ stock market, etc. etc. etc. We are all in this together, although we currently (and perhaps temporarily) are standing on different levels of the ladder up. Lend a hand. You may soon need one... Expand your world and investments with your common sense and connectivity. It works long-term.