ICM Weekly Strategic Plan 12122011

8/3/2019 ICM Weekly Strategic Plan 12122011

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ICM Weekly Strategic Plan 12122011

The Liquidity Cycle Indicator gave relatively clear pictures in real time of what

leading indexes would likely show when released until this summer. The

embarrassing way that Congress has performed dealing with the debt ceiling and

fiscal budget combined with the rather similar ineptitude of the European leadershipdealing with fiscal matters in Europe has decimated confidence in government

management and trapped the markets in a risk on/off chop that is driving equity

money away from the markets. Return of rather than return on is the flavor of the

day.

The 10 yr yields fell on the fear and confusion following the mishandling of the debt

ceiling hike and resulting flight of safety in treasuries. Lack of improved since then

has risk off money still parked.


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The problem is even worse in Europe which has struggled to find a solution

and leadership. Merkel and the Germans are trying to lead but the more profligate

states are reluctant to cede any sovereignty to German controlled entities. It must

feel rather like letting the preacher plan the party.

The chart below compares the US liquidity indicator to the Global version of

same and while they track closely the US has performed modestly better over the

last 4 months on prospects for softening global growth.


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The rather meager progress announced this past weeks summit. ( roughly

the 450th

this year) More comment on what was accomplished will follow later inarticles written by those more informed than I. My take however, is that all that was

really done was to recognize that the immediate need is to stop the looming

collapse and failure of the banking system. The failure of big French, German, and

Italian banks could not be allowed to occur. Too big to fail triumphs once again.

What we will see from here ( if we are lucky ) is the creation of a mirage of

transactions disguising the printing of money through electronic bank credit backed

by sovereign IOUs backed by monetary union IOU.s backed by crossed fingers.

European QE2 though I prefer to call it PU TOO.

THERE IS NO MEANS OF AVOIDING THE FINAL COLLAPSE OF A BOOM

BROUGHT ABOUT BY CREDIT EXPANSION. THE ALTERNATIVE IS ONLY

WHETHER THE CRISIS SHOULD COME SOONER AS A RESULT OF A

VOLUNTARY ABANDONMENT OF FURTHER CREDIT EXPANSION, OR

LATER AS A FINAL OR TOTAL CATASTROPHE OF THE CURRENCY

SYSTEM INVOLVED

Ludwig von Mises
http://www.zerohedge.com/news/egon-von-greyerz-there-no-deus-ex-machina-lefthttp://www.zerohedge.com/news/egon-von-greyerz-there-no-deus-ex-machina-left


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Elsewhere markets teeter between European contagion risk and policy change based on animproved food inflation outlook and slowing economies. The US has seen some distinctimprovement in recent economic releases. Nothing indicating a robust economy by anymeans , but positive nevertheless.

Jobless claims grabbed a few headlines by dropping 23k to 381k the lowest since Feb 11and second lowest since Sept 08 after Lehman Brothers. This reading is also below the avgof 390k since year 2000. Source of data and charts Bespoke Investment Group

China has seen the first real indication of potential policy ease with a 50 bp reduction in the RRR andobservers expect more on slower inflation numbers and widespread stress in the shadow credit markets.Expectations have also turned down considerably for export growth in light of the dropping forecast for globalgrowth and demand out of Europe. Chinese markets are near recent lows and PE levels are also near historiclows indicating investors have worries about profit margins ahead.
http://www.bespokeinvestment.com/http://www.bespokeinvestment.com/


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Simplistic Scenarios:

Negative case will occur if European debt markets continue to fall apart indicating another failedeffort to stabilize the situation and greater probability of default and bank failures. The risk off tradewould continue to pull money to the sidelines damaging global equity markets, shrinking world trade


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spreading the weakness elsewhere and leading to more beggar-thy-neighbor behavior. Hold thesafest cash currencies, gold, and highest quality return producing assets.

Positive case requires Europe to stabilize and become more optimistic, China to definitively easepolicy, and the US recovery to keep illustrating improvement accompanied by some indication ofeffective governance in Washington. Invest in strong balance sheet countries and companies. Strongcash flow and dividend equities, and commodities needed by emerging populations with rapidly

rising standards of living. ( China, Indonesia, Malaysia, India, Brazil, Chile, Mexico with technicalconfirmation) Not sovereign bonds anywhere.

Muddle along is most likely as each region struggles with its own problems the uncertainty retardsnatural entrepreneurial optimism. US continues on a path of recovery but one that is torturouslyslow. Concentrate again on strong companies and currencies in countries with relatively solidbalance sheets, equities with good dividends in very solid companies that compound earnings, andGold.

The chart from Bespoke illustrates the ETF Universe and the colors show pretty well what wasstrong and what wasnt.


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Sharp improvement in any region is likely to await some more evidence of improvement in SovereignDebt .

The chart below offers little convincing evidence so far from Europe.

The S&P 500 is giving few clues yet but watch the 200 day avg as that has been a touch stone for the marketthe past 6 months or so. Chart courtesy ofBespoke Investsments

Our table of Equity markets shows us the relative strength leaders and laggards ( in dollar terms) butthere is still no green and a lot of red in the trend columns.
http://www.bespokeinvestment.com/http://www.bespokeinvestment.com/


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Relative trades still preferred over bottom picking longs. Global trend is definitively down. Be shortor be patient.


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The major currency performance is little changed for several weeks now.

Spreads Both the major Crude contracts year spreads are moving bullishly.

The WTI to Brent front month has continued to narrow as storage conditions at Cushing OKare slowly becoming less of a factor and WTI prices are behaving more normally now.


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Grain Curves and Spreads

Soybean prices above fell and the front went into deeper contango. Corn prices weresteadier and spread movement was modest. Below the wheat price generally moved lowerbut the contango clearly increased confirming the weak price. Cocoa prices fell sharply andthe curve actually flattened very slightly as the back months caught up to the pace of thefall.

The next page has cotton, coffee, sugar, live cattle and Nat gas.


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Supporting Information and Comment

Fortress Commodity Funds: source http://www.zerohedge.com/print/441478

. In these volatile times, we think it is essential to stick to our core top conviction beliefs andkeep the portfolio simple and liquid. Thus, we are long gold, short base metals, a patient

seller of strength in crude oil, and a buyer of corn on any real flush in prices. One of the most significant challenges of the current market environment has been thedisproportionate importance of policy and political overture, as opposed to fundamentals,in determining price action. This creates a highly indeterminate period in which volatility iselevated and investment decisions amongst our community can tend to become incrediblymyopic, living from one political announcement to the next. Whole political and financialregimes are at stake. This process of deleveraging is nowhere near complete, so we expect this ?inhuman volatility? to persist for the foreseeable future.

We also are now more actively trying to book realized profits when they exist as cycleshave been reduced from what appeared as weeks or months to hours and days. We have toadapt to these new realities and endeavor to extract profits accordingly.

This article is 5 or 6 pages long and is a good read. Available at the link above.- BBL

Top Ten Macro Themes For 2012 from Bank America Merrill Lynch viaZerohedge

10 key macro themes for 2012

Heading into 2012 the RIC believes investors should position for the following 10 macro themes:

1. Slower global economic growth

Co-heads of Global Economics Ethan Harris and Alberto Ades forecast that global GDP growthwill slow modestly to 3.5% in 2012. The US economy will expand by 1.9% in 2012 but willweaken in the second half. In Europe, our base case is for a mild recession, and we expect EM

growth to slow to 5-6%.

How to play it: Neutral equities until lead indicators trough; overweight Growth versusValue and large versus small cap stocks; reduce Treasury allocations in the spring as our fixedincome strategists expect a trough in Treasury yields by early 2Q12.

2. The US consumer will weaken again

Our economics group expects the recent momentum from US consumer spending to subside incoming quarters, in the absence of much stronger jobs creation or wage growth.
http://www.zerohedge.com/print/441478http://www.zerohedge.com/news/bank-countrywide-lynch-top-ten-macro-themes-2012http://www.zerohedge.com/print/441478http://www.zerohedge.com/news/bank-countrywide-lynch-top-ten-macro-themes-2012


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How to play it: Weaker US consumption growth means portfolios should be tilted towarddefensives in the US in early 2012 (Chart 3). Within defensives, US Equity and QuantitativeStrategist Savita Subramanians favored sector is Consumer Staples.

3. A soft landing in China

China is vulnerable to a US and European recession, but a healthy balance sheet, a huge currentaccount surplus and massive foreign reserves mean China can ease aggressively if necessary.Economist Ting Lu expects China to avert a hard-landing, and forecasts GDP growth of 8-9% in2012.

How to play it: As inflation risks fade in 2012, look for Chinese policies to turn increasinglypro-growth. Maintain exposure to commodities and begin to look for opportunities in other EMassets as more EMs join the easing cycle.

4. Quantitative easing in the US and Europe

Tighter fiscal policies in the US, Europe and Japan are likely to be offset by accommodativemonetary policies around the world, aided by lower inflation. Importantly, our economists expect
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2011/12/20111209_BAML2.png


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fresh rounds of quantitative easing by mid 2012 in both the US and Europe. This will prove to bean important inflection point for risk assets (Chart 4).

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How to play it: Buy gold and gold stocks. Commodity Strategist Francisco Blanch has a 12-month gold price target of $2000/oz.

5. Negative returns for holders of US Treasuries

Treasury returns were one of the biggest surprises in 2011. Next year, US Rates Strategist PriyaMisra expects 10-year Treasury yields will fall to 1.6% by early 2Q (before the Fed launchesQE3), before rising to 2.4% by year-end. This would imply a total return of -0.7% for the year.While Treasuries are likely to remain a safe-haven asset, the downside and upside on yields willbe limited.

How to play it: Underweight Treasuries and overweight corporate and Emerging Marketbonds, which offer a more attractive risk-reward profile.

6. Yield and income will remain paramount

This will be another year of low rates and scarce yield, and investors will continue to seek assetsthat provide quality income. Credit Strategists Hans Mikkelson and Oleg Melentyev are bullishon corporate credit. They expect credit spreads to significantly tighten by the end of 2012 andforecast total returns of 4.8% and 13.9% from US IG and HY bonds, respectively.


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How to play it: Within corporate bonds, favor the US over Europe, and overweight IGFinancials. Within equities, favor high quality and high dividend yielding companies, US Staplesand Tobacco stocks, REITs and MLPs.

7. Modest upside for equities

Equities should offer roughly 10% upside in 2012. Our year-end targets for equities are 330 forthe MSCI ACWI and 1350 for the S&P 500. Deleveraging and slower earnings growth will limitupside, but quantitative easing, valuation and positioning will limit downside. We remainconvinced that the true equity bull market is in stocks and sectors that provide high growth, highquality and high yields.

How to play it: 2012 portfolios should continue to be tilted toward Creditors over Debtors,Growth over Value, large over small, quality over junk, US over Europe and EM overJapan. Select US sectors (Consumer Staples, Tech) and themes that offer a combination of highquality and strong secular growth.

8. Large-caps should outperform small-caps

The RIC expects large-caps to continue to outperform small-caps in 2012, as earnings growthand valuations are better up the market cap spectrum. The heightened volatility and macrouncertainty offsets the clean balance sheets and potential for more M&A within small-caps.

How to play it: Avoid small-cap ETFs. Within small-caps, look for size and quality tooutperform along with secular growth stocks. Small-cap Strategist Steven DeSanctis favoredsectors are Energy, Health Care and Tech, and his least-favored are Financials and Materials.

9. EM rate cuts support EM assets and commoditiesOur economists expect Emerging Markets to continue to be the engine of global growth in 2012.EM government debt-to-GDP ratios are well below those in DMs, leaving room for increasedpublic spending. And as recent policy easing in Brazil, Russia, Turkey and Indonesia suggest,EM central banks will be pre-emptive in supporting growth.


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How to play it: Aggressive EM easing is positive for EM bonds and equities, although theupside to EM currencies will be constrained. Asian easing should be positive for commodityprices.

10. Stock picking opportunities likely to emerge

A decline in correlation and volatility is very likely from the current unprecedented levels and

should engender higher returns from active fund management in 2012. The growth of highfrequency program trading and widening use of ETFs has simultaneously increased correlationsand inefficient pricing of individual stocks. Correlations are likely to drop once a macro solutionis forced upon Europe.

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How to play it: This can be exploited with a buy-and-hold strategy for the best companies andaggressive stock pair trades, as well as favoring active fund management.

The good news is investor sentiment is more defensive today than 12 months ago , andcentral banks are once again demonstrating they will do everything they can to preventsystemic financial market turmoil.

Donald Coxe Conference call Dec 09, 2011

http://www.bellwebcasting.ca/audience/lobby/index.asp?eventid=70081727&lang=english&stage=&rndkey=&referral=9576836&sLoginVisible=

Bank Business Loan Charge-Off Rates Returning to 2007 Levels, Bank FailuresLowest Since 2008
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The two charts above provide some evidence that the U.S. banking sector is recoveringfrom the effects of the Great Recession and financial crisis of 2008-2009. Carpe Diem
http://mjperry.blogspot.com/2011/12/bank-business-loan-charge-off-rates.htmlhttp://2.bp.blogspot.com/-dCnyQx-yaNQ/TuJjcx9xf1I/AAAAAAAAQak/tvyxEmFchGA/s1600/fail.jpghttp://3.bp.blogspot.com/-KL5eqDrOFhQ/TuJjbApeWiI/AAAAAAAAQac/ucSwtWlTwmQ/s1600/banks.jpghttp://mjperry.blogspot.com/2011/12/bank-business-loan-charge-off-rates.html


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ICM Weekly Strategic Plan 12122011

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