Weekly Strategic Plan 02132012

Liquidity Cycle
Greek version of Groundhog Day played out all week as an agreement was near, agreed to, or not so much, near, done, not so much, etc. The US market finally had an off day after a steep steady incline in January and early February. Frankly, a little setback was needed to let participants catch their breadth.
The individual charts of components of the indicator relative to the SPY etf reveal pretty clearly the surging relative strength of the lead growth components compared to a similar chart of the most defensive components which are now losing ground. The early cycle group has had several brief periods of false positive performance breakouts over the past year and is somewhat unproven at this point. But the late cycle group has outperformed for a significant period and has rather rigorously broken the previous trend, lending conviction to the belief in prospects for a more lasting period of positive action in early growth securities.
The ICM Liquidity Cycle Indicator experienced a very small pullback Friday, yet is still pointing higher.
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icmWEEKLY STRATEGIC PLAN
ECRI Weekly Leading Index (black) did turn higher last week as LCI hinted, this despite the continued recessionary stance at ECRI. (see video)
I am am going to utilize some information from Bespoke research here since their weekly review is chock full of good information this week. In the scope of the last few years, the period of calm that we have seen so far this year seems out of place and not the norm. From a longer term perspective, however, the 30 day stretch is anything but rare. The chart below shows streaks where the S&P 500 went without a decline of 1% or more. As shown, there have been numerous periods where the index went 30 days, or for that matter, much longer, without a 1% drop. Since 1980 alone we have seen three separate stretches where the index went more than 100 trading days without a 1% decline. Taking an even longer term view, since 1928 there have been 135 streaks where the S&P 500 went without a 1% drop for more than 30 trading days, and of those streaks, eleven lasted more than 100 trading days.
Even though AAPL was not chosen to replace GM, it is always fun to see what might have been. To that end, we have recalculated the performance of the DJIA to reflect how it would have done if AAPL was added to the DJIA instead of CSCO. The chart below shows the current DJIA (blue line) compared to the Apple DJIA (red line). Currently, the DJIA is trading at a level of roughly 12,865, which is about 12.1% off its all-time high of 14,198.10 from October 2007. If AAPL was in the DJIA, though, the index would not only be significantly higher (14%), but it would also be trading at an all-time high of 14,636. Granted, you cannot go back and change the past, but we wonder if investor sentiment would be more positive if the DJIA was trading at record highs?
SECTOR : The Bespoke Table reveals through the correlation column the sectors driving the market this year.
The next couple of pages have a table of a broad range of ETF arranged by type and the daily closes on Friday. The overwhelming color of red illustrates the breadth of downward price action. Green quotes are pretty much limited to inverse and short funds, as well as a few fixed income securities. ETF daily on Friday Feb 10
Sector charts covering 3 months:
Commodites: I have found some different tables on the Bloomberg that I am using this week. I hope these are readable because
they have a lot of information that is useful in a fairly concise grouping. These include the metals outright, and various spread indications as well as price, 5 day movement and seasonal compared to normal. The Ags and Energy tables follow.
Ags Most outrights ag markets finished the week lower with exceptions being Sugar, Lean Hogs, Palm oil, and lumber. Old crop corn and wheat both gained, though corn lost ground to wheat and beans on the week. Also many ags are trading above seasonal norms, though wheat and cocoa are not.
Energies: The WTI-Brent spread probably got the most attention as threats of embargo and possible strikes against Iran have Brent trading firm relative to both WTI and Dubai. WTI has its own issues as large supplies from Canada the Bakken fields stress the storage capacity in Cushing Oklahoma.
Foreign Exchange
Twenty-seven billion CHF in $1000 swiss bills? How many of these are circulating in the fast food joints and bars on the streets of Zurich or Geneva do you suppose? Ithink almost none. This is money hiding from other jurisdictions and foregoing any kind of return in order to remain hidden in bank drawers (swiss mattresses). This money constitutes a nice free loan to the Swiss treasury. Perhaps the US needs to become a tax haven instead of a vast tax grabbing squid.
Euro news dominated price action again but the heavy short position and consensus for a weaker Eurocurrency seems to have stymied the market. More and more suspicion that Greek default may be priced in has created cracks in the wall of selling the euro threatens to take a run at the shorts and perhaps as high as 135 to the dollar. Trends dont like to start with a full load of believers so a good head fake is needed to empty a few seats. Short term the go /no go package for Greece still is calling the tune. The Swiss indicate loudly and often that they remain ready to defend the eur/chf 1.20 level at any cost. Consensus is overwhelming that they will succeed if challenged. Frankly that makes me a bit uncomfortable. Why would the market even approach that level if everyone thought it would hold? I mailed this out this week but is still provocative to me so I repeat Article can be retrieved here.
Fixed Income
More money has been lost calling an end to the downtrend in bond yields than any other trade I can think of in recent years. The turn down from the top was made by two men I know of; Gary Shilling and Anthony Boeckh. I was a young trader and both were calling for massive and long lasting secular change in the direction of the markets. I thought they were both nuts. Dr. Shilling has never backed off the call for lower rates and ridden the trend for almost 30 years. If you should hear he has changed his mind I suggest you pay attention.
Trend and Volatility Environment
In the meantime the meantime representing mere mortals I feel the endgame is nearing for the falling 30 yr trend. One must expect an extraordinarily dismal economic picture globally to support a long extension of the current trend lower. Though one should remember Japan has achieved even lower rates. Of course the Japanese lack the zealous determination of our own currency debauchers. Japan just does not have deficient economists with degrees from the Ivy League. If one takes a look at the same long term period of rate declines on a Bollinger band chart one can make the case that a simple pull back to the mean of the trend would still produce a significant price change. (Roughly a 15-point drop in 30 treasury futures.) I submit that while the trend may continue lower it will be grudging as it approaches the zero bound and negative real yields. Therefore the chances of a large and rapid price move are now to the downside and trades should reflect that possibility. I will be looking to sell modest amounts of option premium above the market and /or being long of the same to the downside. (I am talking price here now yield) Tread lightly though; the street is littered with premature bond bears.
Supporting Information and Commentary

Avoiding EM economies is the biggest gamble of all The world this year will continue to be divided into deleveraging developed economies and emerging market economies without excessive debt. The US and Europe will continue to experience sub-trend growth, with the main risk still a return to recession or depression. Many emerging economies will grow close to trend, the main risks being country specific, not least inflation. Developed and emerging economies will continue to experience broadly synchronised intra-year inventory cycles due to the increasingly globalised nature of the manufacturing supply chain, but the underlying growth stories and the demand side conditions will continue to differ markedly. Emerging countries are highly heterogeneous and no longer share the common feature of potential default should they be cut off from foreign capital for the simple reason that they are now often the net creditors. All their main risk scenarios are either country specific, or emanate from the mess in the developed world. The former can be avoided by a portfolio investor, the latter scenarios all pose greater risks for those invested in the developed than in the emerging world.
Money, Money, Everywhere

My desk is littered with analysts charts showing the explosion of central bank assets over the past four years. As interest rates have dropped to just above the infamous zero bound while the global banking system and the developed economies have threatened to collapse, the central banks have responded with new forms of monetary stimulus to keep the financial system alive and to push their economies toward growth. The acronyms might be different for the methods used by the US Fed, ECB, Bank of England, Bank of Japan, and Swiss National Bank, but these various techniques have all served to expand the high-powered money available to their banking systems by at least a factor of three. These five countries all have ratios of central bank assets to GDP over 18%, and in Switzerland it is over 40%, a far cry from the old days. Add to this the extension of swap lines between the Fed and other central banks, and liquidity is everywhere. Those of us in the financial world are surrounded by a sea of money, but just like the ditty of my youth when sailing on the ocean, water, water, everywhere, but not a drop to drink, there seems to be nothing economically constructive to do with this money. If the idea was to keep the banking system alive, it is obvious that this strategy will work. Clearly, giving money to banks at no cost or, at the worst, extremely low cost means that they dont have to pay anything for their liabilities a perfect match for all of their bad-loan assets, which give them no revenue either. This allows the banks to avoid: calling their bad loans, causing companies to go bankrupt or real estate to go on the auction block, and admitting economic reality. To us, this seems to be exactly the strategy followed by the Bank of Japan for years, the one that was so harshly criticized by Bernanke ten years ago. Europe and the US now have their own zombie banks dead but they keep on walking, not lending money or clearing out the bad debts. If this massive infusion of liquidity was meant to help main street, the operating economy, or the average worker, it has been a complete failure in each country, except Switzerland where this was not its goal. This gigantic flood of extremely inexpensive high-powered money does have a major impact, not in the real economy, but in the liquid investment markets. Free money sets a very low hurdle for a short-term investment and as long as the transaction has decent liquidity, why not do the trade. As a result, almost every equity, commodity, and credit market is moving higher. High beta currencies are moving higher as well, as risk is clearly on the front foot. This positive mood began at the start of October, a bit more than a week after Bernanke announced the start of Operation Twist, a subtle way to improve the profits of the banks and increase the risk of the Fed without expanding its balance sheet. Global equity markets began to climb. Bernanke then announced an expansion and cheapening of the US swap lines with Europe, which currently have $103 billion outstanding, adding massively to Europe and Japans liquidity. Mario Draghis move into the ECB Presidency on November 1 was the next harbinger of a new wave of liquidity, as he dropped the refinancing rate a few days later and then announced the LTRO on December 8, expanding the ECB balance sheet by over 4% of the GDP in one day later in the month. By the end of December things were clearly moving up in all the traded markets, and Bernanke put the cherry on the top of the sundae not once, but several times in the last few weeks. First, he announced that US rates would be extremely low into late 2014, then, a bit later, he emphasized the likelihood of QE3 if there were any economic pause, and then Tuesday he told the US Senate that he was not happy with the way the economy was growing more hopes for QE3. As the markets always respond to monetary stimulus when the trend is already positive, prices will be forced even higher. Although we cant be positive about the real economy, this expanding liquidity will keep us happy until a political accident intervenes. Europe offers some candidates: Greece in March, followed by France in April.
Warren Buffett: Why stocks beat gold and bonds Follow this link for the entire article which is worthwhile. I am including one small portion of the article which makes and important point: Today the worlds gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- golds price as I write this -- its value would be about $9.6 trillion. Call this cube pile A. Lets now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the worlds most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B? Mr, Buffett wrote on this topic long ago very near the $800 peak of gold in the early 1980s. He was criticized for his view then but he was dead right. I believe he is right now and yet I remain bullish of gold and believe it should be a portion of long term portfolios. Mr. Buffett has great faith in the eventual future of the United States and sanity of the countrys leadership. I am less sanguine. The current administration and legislative leadership is a kleptocracy made of greedy and self-serving blowhards lacking (as a group) the moral fiber to address issues that threaten their re-election. I prefer a bit of protection against the mendacity of this group.
growth of government made clear China tells banks to roll over loans This 3 minute 40 second video clip may be the most important Clip you have ever watched ... This is probably the most intelligent presentation of the truth You have seen in a long time .... Please take the time to view this clip and then share it with others China has instructed its banks to embark on a mammoth roll-over of loans to local governments, delaying the countrys reckoning with debts that have clouded its economic prospects. Chinas stimulus response to the global financial crisis saddled its provinces and cities with Rmb10.7tn ($1.7tn) in debts about a quarter of the countrys output and more than half those loans are scheduled to come due over the next three years.
From The Absolute Return Letter Now a Positive: Study of the Day: Gene Therapy Can Restore Vision One Eye at a Time Ten states join effort to buy natural gas vehicles The latest report from Instituto Nacional de Estadistica suggests that the overall level of unemployment in Spain now stands at 22.85% (see here) and youth unemployment has risen to more than 50%. Although a flourishing black economy in Spain ensures that not all these people are without work, the relentless rise in unemployment is crippling the domestic economy. This is a combustible and impatient demographic BBL
The chart below resembles similar charts in the US when the Fed first began various rounds of liquidity injection into the US banking system. The result is likely to be similar. Very of little of the liquidity gets into the economy but is absorbed into the banking system which is too busy trying to bail out old investments to bother making new ones. Classic pushing on a string, so far, though this does not cover the period after the LTRO was initiated. This M3 series needs to turn up.
I remain generally positive on US and Emerging market equity markets as the staggering sums of central bank credit expansion will leak into equity prices as the markets re state the relative value of real assets to the declining value of newly printed fiat paper. Lean heavily to strong franchise, safe balance sheets, and a history of reliable management. Diversify across countries since none of them can be trusted. Bruce Lawrence

Weekly Strategic Plan 02132012

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Weekly Strategic Plan 02132012

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Liquidity Cycle

icmWEEKLY STRATEGIC PLAN

icmWEEKLY STRATEGIC PLAN

Sector charts covering 3 months:

icmWEEKLY STRATEGIC PLAN

icmWEEKLY STRATEGIC PLAN

icmWEEKLY STRATEGIC PLAN

icmWEEKLY STRATEGIC PLAN

Trend and Volatility Environment

icmWEEKLY STRATEGIC PLAN

Supporting Information and Commentary

Money, Money, Everywhere

icmWEEKLY STRATEGIC PLAN

icmWEEKLY STRATEGIC PLAN

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