icm weekly strategic plan 02212012

7/31/2019 Icm Weekly Strategic Plan 02212012

1/9

Liquidity Cycle

THIS COMMUNICATION IS INTENDED ONLY FOR THE USE OF INFINIUM CAPITAL MANAGEMENT, LCC AND ITS EMPLOYEES TO WHICH IT IS ADDRESSED AND CONTAINS OR MAY CONTAIN INFORMATION THAT IS PRIVILEGED, CONFIDENTIAL OR EXEMPT FROM DISCLOSURE UNDER APPLICABLE LAW. If the reader of this communicati on is not the intended recemployee or agent responsible for delivering to the intended recipient), you are hereby notied that any dissemination, distribution, or copying of this communication is strictly prohibited. If you have received this communication in error, please immediately inform Innium Capital Management, LLC and then disregard and delete this communication. Do not retain any copy of this communication.

The broad equity indices generally continue their robust performance in 2012 challenging signicant overhead resistance as shown in the

SPX chart below. Readings in the Liquidity Cycle Indicator (LCI) remain supportive of a positive outcome. The ECRI weekly leading index

has ticked up again also. As I write this on a holiday in the US markets elsewhere are reacting positively to current crop of rumors of an

agreement on a Greek bailout. Thoughts on the merits of any Greek deal will be discussed later but on price action alone the market seems

to want to get a deal and put on a rally.

The next chart reveals how our early cycle indicators have taken the wheel and are powering the rally since early January. Financials are one o

participants in this group and the ECB move to adopt far less strenuous standards for collateral and initiate the LTRO program triggered much b

in the banking sectors and those securities in the US especially have responded. The ECB move occurred in mid-December and once the mark

digested the fact that this was a huge Tarp like program the money ow into nancials accelerated and off they went.

Following are some more graphs and tables illustrating the positive sector performance and breadth of the recent advance.


2/9


Sector ETFs

The 1 week heat map below is another look available from www.Finviz.comfor free that allows you to drill down and see sectors and individua

change to daily or monthly periods. I show this to illustrate how green the picture was f or last weeks net direction.

Bullish sentiment has been high but the small decline in the market last week dropped sentiment rather sharply (see next page) which still indi

somewhat jittery group of investors has not become over-condent.
http://www.finviz.com/http://www.finviz.com/


3/9


4/9


Price Curves Wheat in Chicago and Kansas City both advanced in price but had little to no change in curve shape reecting adequate supplies.

Minneapolis wheat is in the chart below and the market is still not comfortable with the size of spring wheat inventories. This market is

backwardated and next crop year prices advanced faster last week indicating to me that thee is increasing worry that one crop year is not

going to relieve the supply concerns.

Soybeans historical comparison; Prices this year are below last year and the curve is atter suggesting a more balanced global supply

though the year to year contango is still a symptom of inadequate inventories should problems develop in current crops.

The corn curve one week change shows the price move higher but only the very slightest easing of 2012 contango and the continued

backwardation crop year to crop year.

The meats were strong this past week and April Live Cattle popped up above resistance conrming the existing uptrend. Chart below is

weekly and has a good strong candle breakout on the week. Feeder cattle for April also moved to new highs.


5/9THIS COMMUNICATION IS INTENDED ONLY FOR THE USE OF INFINIUM CAPITAL MANAGEMENT, LCC AND ITS EMPLOYEES TO WHICH IT IS ADDRESSED AND CONTAINS OR MAY CONTAIN INFORMATION THAT IS PRIVILEGED, CONFIDENTIAL OR EXEMPT FROM DISCLOSURE UNDER APPLICABLE LAW. If the reader of this communicati on is not the intended recemployee or agent responsible for delivering to the intended recipient), you are hereby notied that any dissemination, distribution, or copying of this communication is strictly prohibited. If you have received this communication in error, please immediately inform Innium Capital Management, LLC and then disregard and delete this communication. Do not retain any copy of this communication.

Energies

Scott Grannis wrote a very good post on the xed income market so I am going to let him speak for me: The problem with Treasury yieldsBoth WTI and Brent moved higher and the curves strengthened also. The very front few months in WTI still reect the supply build in cushingbut both markets are backwardated beyond the front. The war of words between the west and Iran appears to be close to combustion and

Israel in particular is running out of time to talk before its safety is completely compromised by nuclear weaponry in the hands of Ahmedinijad.

( ok, I am not even trying to spell that right.) Over the week crack spreads weakened but heating/gas oil rmed up.

Fixed Income
http://scottgrannis.blogspot.com/2012/02/problem-with-treasury-yields.htmlhttp://scottgrannis.blogspot.com/2012/02/problem-with-treasury-yields.html


6/9THIS COMMUNICATION IS INTENDED ONLY FOR THE USE OF INFINIUM CAPITAL MANAGEMENT, LCC AND ITS EMPLOYEES TO WHICH IT IS ADDRESSED AND CONTAINS OR MAY CONTAIN INFORMATION THAT IS PRIVILEGED, CONFIDENTIAL OR EXEMPT FROM DISCLOSURE UNDER APPLICABLE LAW. If the reader of this communicati on is not the intended recemployee or agent responsible for delivering to the intended recipient), you are hereby notied that any dissemination, distribution, or copying of this communication is strictly prohibited. If you have received this communication in error, please immediately inform Innium Capital Management, LLC and then disregard and delete this communication. Do not retain any copy of this communication.

MetalsIm always on the lookout for valuation discrepancies, and these two charts highlight the biggest potential discrepancy that Im awareof today: Treasury yields are very low given the strength of the economy and the level of ination. Stock prices are rising because the

economy is proving to be somewhat stronger than expected. Ination is not deadits been rising for the past yearand it now is close

to where its been for the past decade, around 2-3%. Yet bond yields are near all-time lows and are priced to the expectation that the

economy will be chronically weak and ination will move towards zero.

There are of course three valid explanations for why Treasury yields are so low despite the improvement in the economy and the

outlook for 2-3% ination (i.e., the market is not entirely crazy): 1) the Fed keeps insisting that it will keep short-term rates near zero

for the next three years, 2) the Fed, via its Operation Twist, is actively attempting to keep Treasury note and bond yields low, and 3)

the world is willing to pay very high prices for the safety of Treasuries given the threat of Eurozone sovereign defaults and the potential

demise of the Euro.

However, those rationales could evaporate very quickly, if a) the Fed becomes convinced that the economy is doing better than

expected and there is little risk of ination being too low, and b) the Eurozone survives a Greek default without any signicant collateral

damage. I think there is a reasonable chance we could see both of those developments within a reasonable time frame. Thus I viewTreasuries as very risky investments, while equities remain relatively attractive, underpinned by relatively low PEs and strong corporate

prots.

UPDATE: There appears to be some confusion regarding the markets expectation of future ination, and I should have made that clear

in my initial post. The best measure of expected ination that I know of is that which is derived from the pricing of TIPS and Treasuries.

And the Fed agrees, having annointed the 5-yr, 5-yr forward ination expectation implied in TIPS and Treasury prices as the best

measure of the markets ination expectations. I show that in the chart below, with the current reading being about 2.5%. On a longer-

term basis, the expectation for average CPI ination over the next 10 years is about 2.25%. Both of these expectations are very close to

what ination has averaged in the past 5 and 10 years, so there is nothing unusual in todays expectations for the future.

You can see the same pattern in this chart as in the charts above: 10-yr yields are trading substantially below the level that has

prevailed in the past, given current ination expectations. No matter how you look at it, Treasury yields appear to be articially

depressed. And from my perspective, the pressures for higher yields are building daily.

Yields on sovereign CDS in the PIIGS have been easing on balance as the rhetoric around the Greek bailout continues to point toward

an eventual agreement. The talk this weekend was of near agreement (again) and so some easing of those rates followed into the

Monday session. Bloomberg chart on next page:


7/9


Commentary and Supporting InformationEnvironmentRemains mostly bullish trend and quiet volatility.

Bob Janjuah: Markets Are So Rigged By Policy Makers That I Have No Meaningful Insights To Offer

The notorious bear says were in a bubble, but the markets are too manipulated to make sense. His only recommendations are gold, non-na

quality corporate credit and blue-chip big cap non-nancial global equities.

Bobs World: Monetary Anarchy

Since my last note from early January I have spent the last few weeks assessing data and price action, as well as spending a lot of time talkin

and trying to analyse the words and deeds of policymakers. In no particular order, my takeaways are as follows:

1 Greece (and the whole eurozone story) continues to lurch about, seemingly perpetually, from Farce to Tragedy. Policy seems to be focuse

protecting and preserving vested interests, with little consideration given to the dreadful conditions the people of Greece and other periphera

being forced to live with. However, it seems that eurozone leaders may be about to pour even more taxpayer money down into the black hole

Greece, primarily to help the banks in Europe, at the expense of perhaps a decade of suffering by the Greek populace. For my part, I am now

the Greece/Peripherals/Eurozone story to the box marked self-serving political debacle? and from here on in I will simplify Europe as follows

unless, Germany signs up to full scal union, a eurozone breakup is likely. And depending on how long we can continue to kick the can dow

in order to protect the eurozone banks, the eurozone will be consigned to an extended period of weak growth, which in turn means ever decre

sustainability. Ultimately this means that the end game will simply be more devastating for us all the longer we are forced to wait. I nvestors sh

fully aware that home? bias amongst real money investors is now off the charts?. This is not a good development for the eurozone, unless o

leaders are preparing for break up, or at least considering it as a viable option.

2 I am staggered at how easily the concepts of Democracy and the Rule of Law two of the pillars of the modern world have bee

brushed aside in the interests of political expediency.This is not just a eurozone phenomenon but of course the removal of elected gover

and the instalment of insider? technocrats who simply serve the interests of the elite has become a specialisation in Europe. Many will think t

development is not a big deal and is instead may be what is needed. Personally I am absolutely certain that the kind of totalitarianism being p

us by our leaders will if allowed to persist and fester end with consequences which are way beyond anything the printing presses of our ce

could ever hope to contain. Communism failed badly. Why then are we arguably trying to resurrect a version of it, particularly in Europe? Are t

powerful that we are all beholden to them and the biggest nonsense of all that defaults should never happen (unless said defaults are trivial

meaningless)?

3 More broadly, with Mr Draghi now in situ, it is clear that I misread and misunderstood two things. First, I am simply stunned that our po

seem so one-dimensional, so short-termist, and so utterly bereft of courage or ideas. It now seems obvious that in response to the nathat has been with us for ve years and counting, we are being toldto double up on these same policy decisions. The crisis was caused by c

bankers mispricing the cost of capital, which forced a misallocation of capital, driven by debt/leverage, which was ultimately exposed as a hid

bubble which then collapsed, destroying the lives and livelihoods of tens of millions of relatively innocent people. Well now, if you listen to t he

Bernanke and Draghi, it seems that the only solution they can offer up is to yet again misprice the cost of capital, in the hope that, yet again, t

increased leverage/debt, we are yet again greedy? enough to misallocate capital, which in turn will lead to yet another round of asset bubble

asset bubbles are meant to delude us into believing that we are now richer. When as they do by denition these bubbles burst, those wh

suckered in will realise that their wealth? is instead an illusion, which in turn will be replaced by default risk.

Secondly, I have clearly underestimated the markets willingness, nay desperation, to go along with this ultimately ruinous policy p

Personally, I think this is extremely worrying the number of clients who tell me that they know they are being forced into playing a game that

disaster, but who feel they have to play along and who hope they will get out before it turns, is a depressingly familiar old tale. Some such folk

the idea that Draghi/LTRO changed the asymmetry of risk from deeply negative to positive. Yet even these folks know that printing more mon

liquidity/more debt/more leverage is not a viable solution to our ills, and in fact will mean true supply side reform and the search for true comp

and sustainable growth will be further cast aside, as the focus will be on the easy gains to be made in markets.

4 - Assuming that we are in yet another liquidity fuelled rally courtesy of Bernanke and Draghi, then there are some key things to re

First, such rallies can last days, weeks, months, perhaps we could even extend into 2013.And to give a proxy guide the S&P could

the high 1500s again if this current binge lasts into 2013. The problem with such liquidity fuelled set-ups is that they can last longer and get bi

any reasonable logic would dictate. The issue here is not what central bankers say it now seems clear that Bernanke and Draghi will say whtakes to keep the market supplied with ample liquidity but what they can do. In this respect one either believes that central bankers can do w

they like whenever they like, or one believes there are limits. I think t here are limits to what Bernanke and Draghi can do, and once we hit t ho

these bubbles will burst, with increasingly greater consequences the longer we are forced to wait. Do I know when we may hit these limits? I h

sooner rather than later, but I have no real conviction.
http://www.zerohedge.com/news/bob-janjuah-markets-are-so-rigged-policy-makers-i-have-no-meaningful-insights-offerhttp://www.zerohedge.com/news/bob-janjuah-markets-are-so-rigged-policy-makers-i-have-no-meaningful-insights-offer


8/9


Drought Map of the USSecondly, when looking for where the bubbles may be, realise this: in this current cycle, where central bank balance sheets are at the core,

the bubble is everywhere in stocks, in bonds, in growth expectation, in credit spreads, in currencies, in commodity prices, in most real asset prices

you name it! This is why I think that this current bubble, if it is allowed to fester and develop into 2013, will have such widespread consequences when it

bursts that it will make 2008 feel, relatively speaking, like a bull market.

Third, when this bubble bursts, I dont think there is an easy way out. Who will be the bail-out provider? We already have extraordinarily

weak and fragile government balance sheets, ditto banking balance sheets and consumer balance sheets. The big cap corporate balance sheet

is sound, but it already worries about how bad the real economy hit will be when the next bubble bursts. As such, the corporate sector which has a

huge degree of control over the political classes will keeps its powder dry until asset prices fall to clearing levels. When this happens they will be the

biggest buyer of truly cheap assets in town, but not before then. The really dangerous thing about this next bubble is that it will likely ruin current central

bank credibility, as their balance sheet expansion, accumulating ever more toxic assets, is at the centre of the current cycle. As a result, the central

bank decision-making function is now (increasingly) deeply compromised, if not utterly at odds with its own raison dtre. This of course means that if/

when the current cycle implodes, central banks which have seen explosive balance sheet growth will add to the problems, rather than being able to act

as credible lenders of last resort. A resulting consequence is that we will, at that point, usher in a new era of central banking and policy settings, where

the key will be to regain a semblance of credibility and independence. This will be good news. But we will likely have to go t hrough the bust rst.

5 I am not well equipped to navigate bubbles where tactical views and secular views are all thrown into the melting pot together, where

there is no visibility, where as one client put it to me recently we have Monetary Anarchy running riot, where the elastic band between

the real economy and the current liquidity-fuelled markets is stretched further and further beyond credulity, and where history tells us

that policymakers will happily stand by whilst bubbles are being pumped up, and hope that they are onto their next job before it all comes

tumbling down. It seems that the 07/08/09 part of this crisis has resulted in zero lessons learned. In fact it is much worse than that as we are instead

being asked to double up on a strategy which I fear will end in failure. As such, clearly my outlook in my last note needs to be re-assessed in terms of

the latest developments. Whilst equity market levels are still within the tolerance limits set out in this previous note, my timing is clearly being stretched.

Unfortunately for me, and as warned in the prior note, if my outlook set out therein is proven to be wrong, it is because I am overly cautious. I say

unfortunately because the longer we have to wait for the nal resolution to the global nancial crisis, the bigger and more devastating the nal leg

lower will be. I have an extremely high level of conviction on this point.

6 So, in t erms of markets, be warned. My personal recommendation is to sit in Gold and non-nancial high quality corporate credit and blue-

chip big cap non-nancial global equities. Bond and Currency markets are now so rigged by policy makers that I have no meaningful insights

to offer, other than my bubble fears. Real assets are relatively attractive. But I am going to wait for this current central bank bubble to burst before

going all in. I may be waiting 5 days, 5 weeks, 5 months, perhaps 5 quarters. It all depends on when and how our central bank leaders are exposed as

lacking credibility and/or lacking the mandates to keep pumping liquidity into t he system. The end of the bubble will be sign posted by either monetary

anarchy creating major real economy ination or by a deationary credit collapse (if they run out of pumping mandates).The end game is incrediblybinary in my view, but in between it is pretty much a random walk. Either way, bonds are toast in any secular timeframe (due either to huge

inationary pressures, or due to a deationary credit collapse), which in turn means that asset bubbles in risky assets will get crushed on a

secular basis.

My colleague Kevin Gaynor has a more nuanced view and he feels that we may well avoid the bubble outcome, as political hurdles, political changes,

growth and earnings data will all very quickly undermine central bankers and their bubble vision. For all our (long term) sakes, I hope I am wrong when it

comes to fearing another round of liquidity-fuelled bubbles, and that he is right that good sense will prevail soon.

I will continue to use the Dow/Gold charts to continue to guide me going forward. The USD price of an ounce of gold and the Dow will, I believe,

converge at/around 1, at some point over the next 2 years or so. I have extremely high conviction on this. What I am not sure on is whether we

converge at 7000+/-, or at 14000+/-. Because I do believe that even Bernanke and Draghi cannot do as they wish and that there are some limits to the

recklessness of policymakers, I still lean towards a deationary resolution at/about 7000 in the next year or two. Pretty vague, I know, buts its the best I

can do right now, and what is clear is that, in the world I fear ahead, gold is a winner either way remember, gold is a great (monetary) ination hedge,

and in a deationary credit collapse gold works as a store of value/wealth as it carries zero credit risk.

As a credit guy at heart I see more likelihood in a deationary credit (i.e., a real) collapse rather than a real economy inationary (nominal) collapse.

Either way however, what is clear is that if Bernanke and Draghi are allowed to continue on their current policy path for much longer, then whatever the

nal outcome will be, it will likely leave a deep scar on us for decades. Which on a ten-year timeframe may not be such a bad thing as it should kill off

monetarism and usher in a new era of monetary and scal prudence? In the near term, LTRO2 at month-end is the next clear focus for markets, more

so than Greece.If LTRO2 is USD1trn or more, the market will take that as a signal to load on more leverage, more risk and more carry. IfLTRO2 is in the order of USD250bn to USD500bn, Risk Off will be the order of the day as markets will start to fear t hat central bankers are having

to reign back-in their current policies, and that as a result we f ace another period where central bankers and policymakers fall back behind the curve.

LTRO1 clearly took policymakers from behind to ahead of the curve, but this is an extremely uid situation, where doing nothing is, in reality, the same as

going backwards. As the skew of expectations is to a large LTRO2, a LTRO2 take-up in between these ranges is likely to be viewed with neutrality/mild

disappointment.

Similar historical comparisons to current climate conditions are likely to lead to continued dryness in the west and the plains including up

into Canada while the eastern portion of the continent is wet at least through spring. This according to Evelyn Browning Gariss climate

newsletter. I do have a copy of the Browning Newsletter that was freely distributed if anyone would like a copy.

CHART OF THE DAY: Boaz Weinsteins Mammas Boy Index

Hedge fund manager Boaz Weinstein, the founder of Saba Capital and former co-head of credit trading at Deutsche Bank, caught our attent

a presentation he gave recently with this awesome chart explaining the eurozone crisis.

The chart below depicts the correlation between 5-year CDS (a form of insurance to protect against a credit event) of eurozone countries anpercentage of men ages of 25 to 34 still living at home with their mom and dad.

Its pretty obvious what the pattern is...

I dont even know what to say about that chart. BBL
http://www.browningnewsletter.com/http://www.businessinsider.com/chart-of-the-day-boaz-weinsteins-mammas-boy-index-2012-2#ixzz1mybYy5ovhttp://www.businessinsider.com/chart-of-the-day-boaz-weinsteins-mammas-boy-index-2012-2#ixzz1mybYy5ovhttp://www.browningnewsletter.com/


9/9


Two interesting white papers produced at GMO recently. The pieces are a bit long for this document but are availablehere by registering at the site. I

recommend registering as GMO makes available high quality white papers regularly as well as Jeremy Granthams Quarterly Letter.

Grant Williams latest newsletter is out and in it he links to a youtube copy of his charts and speech at a conference last week. This is a really good

presentation. It comes in two parts. Watch it.

Part one Part two

Also this little tidbit from Grants letter:

Greek budget revenues are already a cool 1billion behind targets after ONE MONTH of 2012, and, in that time, contracted by

7% versus an expected expansion of just 8.9% .

Read that again.

Does anybody else nd it as staggering as I do that, knowing what they know, the people making these targets could be THAT far off?

This demonstrates one of three things:

They are either completely in denial about how bad the situation is in Greece, the gures being touted as likely are designed to reect

that absolute BEST case scenario so as not to frighten people or the Greek economy is collapsing at a rate beyond their wildest

projections. Either way, throwing another 100+ billion at them is a ridiculous waste considering the nancial health of the majority of

contributors to it.

From Grant Williams TTMYGH

__________________________________________________________

China cut the RRR for its banks by 50 basis points this weekend as they slowly take steps to let the institutional foot off the brakes.

Japan just announced another bazillion yen will be created as they target 1% ination. So we have the biggest 4 economies in the

world easing liquidity at the same time. If the policies work to regenerate economic growth it could be an inationary disaster in the

making, and if it does not succeed it will be a deationary disaster in the making. Aint this fun. Own real things that produce real

income. Put that income in real things. Those are the things that will still be needed under this or the next monetary system.

Dont look so sad, I know its over. But life goes on, and this old world will keep on turning.

Kris Kristofferson Feb 21,2012

---Bruce Lawrence
http://www.gmo.com/America/http://www.gmo.com/America/http://www.youtube.com/watch?v=Ri6rIF40iSA&context=C3b23ec7ADOEgsToPDskIXumWgFANR5YCyUhIicmWShttp://www.youtube.com/watch?v=xoMAYAKHQqU&feature=context&context=C3b23ec7ADOEgsToPDskIXumWgFANR5YCyUhIicmWShttp://ethreemail.com/subscribe?g=bdc736behttp://ethreemail.com/subscribe?g=bdc736behttp://www.youtube.com/watch?v=xoMAYAKHQqU&feature=context&context=C3b23ec7ADOEgsToPDskIXumWgFANR5YCyUhIicmWShttp://www.youtube.com/watch?v=Ri6rIF40iSA&context=C3b23ec7ADOEgsToPDskIXumWgFANR5YCyUhIicmWShttp://www.gmo.com/America/

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