weekly strategic plan jan 9 2012

8/2/2019 Weekly Strategic Plan Jan 9 2012

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ICM Weekly Strategic Plan Jan 9 2012

The Liquidity Cycle index remains locked in generally sideways action driven by the high degree of

market correlation resulting from the continued focus on news out of the Eurozone and the crisis

surrounding sovereign debt, bank solvency, and the structure of the monetary union.

The same sideways behavior is reflected in the US fixed income markets. The 3 month and 10 yr charts

below illustrate the lateral movement as the markets attention is focused primarily on the euro circus.

The liquidity cycle indicators do tend to confirm the big up day or down day movements but the macro

conditions continue to predominate which reduces some of the sector variation that really drives the


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current variation of the model. The US market is experiencing improved sentiment as we have seen

improving data from many economic releases for the past several weeks. The Economic Surprise Index

Has moved very positively but the ECRI Leading Economic Indicator is not confirming. Our Liquidity Cycle

Index tracks the ECRI index very closely and is also diverging from the surprise indices. The last

divergence of this size back in 2008 resolved sharply to the downside.

The AAII bullish sentiment chart courtesy ofhttp://www.bespokepremium.com/ also reveals the rising

optimism recently. The chart of the VIX, also from Bespoke, again confirms rising optimism about

equities in the US.

I am including a table below of the 1 week, month and year performance of the ETFs in the Bespoke

universe because it is a concise way to compare performance across domestic, international, equity,
http://www.bespokepremium.com/http://www.bespokepremium.com/http://www.bespokepremium.com/http://www.bespokepremium.com/


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sector , fixed income and commodity markets. The strongest performance was TLT the 20 year tresury

ETF up 28.28% last year. The weakest performers wer natural gas and India.

Rather striking outperformance by US equities relative to International markets. Following are some 1

year performance charts providing a quick visual of 2011 relative outcomes. Equity Sectors first:


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Global Indices and Commodities charts courtesy of www.finviz.com
http://www.finviz.com/http://www.finviz.com/http://www.finviz.com/


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Scanning hundreds of charts covering equities , bonds, commocities, currencies and international

markets this weekend preparing this document enabled me to note that the few days in late July early

August when the US Congress was fully revealed as fully dysfunctional by the process surrounding the

debt ceiling hikes was in fact a cathartic moment. Chart after chart showed a change for the worse or an

acceleration of negative direction right at that point of the year. The preening hypocrisy of our elected

officials and their self important ornamentality was broadcast world wide and the world lost its nerve.

Argentina just happens to be the first in this list but go to this FinVizlinkand see the 20 other examples

to see what I mean. Or the bond chart next showing the global loss of global confidence sent money

running for safety to the US anyway.

The televised demonstration of the incompetence of the current elected leadership of the most

powerful nation on earth not only caused a loss of confidence in the United States but led the managers

of global capital to also mark down the value of leadership elsewhere. The global liquidity one might

have expected to flee the US looked around and could not find desirable alternative locations. So that

money stayed in the US and went risk off and was joined by global money doing the same thing. US
http://www.finviz.com/groups.ashx?g=country&v=410&o=namehttp://www.finviz.com/groups.ashx?g=country&v=410&o=namehttp://www.finviz.com/groups.ashx?g=country&v=410&o=namehttp://www.finviz.com/groups.ashx?g=country&v=410&o=name


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currency, equity, and fixed income have largely outperformed since that time. Swiss Franc, Japanese

Yen, and Gold also benefitted from haven seekers.

Volatiltiy Environment: The end of the year position squaring and shrinking volumes left most markets

officially quiet or neutral. But the first of the year can be expected to activity pick up.


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Spread activity in energies and in grains this past week were very correlated to open to close price

direction, confirming those moves but not offering much additional. I sent out a brief note on those

charts mid week and so I am going to pass on that coverage until next week when markets will be back

in full operation giving us more reliable readings.

This week once again was dominated by European news. Equities and currencies moving to the mood ofthe euro. The Dec 9 ECB moves and the subsequent statements form European leaders following that

date were initially received with some disappointment but markets quickly realized the LTRO programs

offered a kind of TARP imitation that would provide enough liquidity to reduce the looming bank

contagion. Cheap loans for 3 years combined with expanded and eased ECB collateral rules would

provide great relief to european bank balance sheet pressure. Relief set in and rates eased, especially

short rates and a degree of holiday quiet started but as the CDS rate chart shows worries have

reemerged and by the end of the first week of 2012 cds rates wer back near their worst levels in early

December.

The Euro finished under big pressure: Breaks down into 5 year lows


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The 5 year chart is a bit misleading about those low levels so here is a longer look. Much lower levels are

still possible and credible if nothing is done beyond the current daisy chain of questionable credit

extension and turning a blind eye to collateral value.

Perhaps the resumption of pressure on the Euro was caused by pre New Years reading and someone

got a look at the table below produced by Grant Williams of TTMYGH fame.

The table above highlights the issuance for the PIIGS plus Belgium, France and Germany for the first

quarter of this year and, makes quite clear, that something, somewhere has to give. March alone will

see the need for 159.6bln to be raised amongst these 8 nations out ofa whopping 400bln for the

first quarter of 2012. Grant Williams

Another problem for the Euro leaders is even as they bend the rules to lend mmoney to the banks thereis no certainty the banks will lend it out. You know the old saying you can lead a bank to money, but

you cant make him loan.

Some 453bn (378bn) was lodged in the ECBs deposit facility on Tuesday night in a move that

some analysts feared showed banks were so concerned about lending it out to rivals that they

would rather earn just 0.25% in interest from the central bank. UK Gaurdian via TTMYGH


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Late in 2011 and so far this year Gold has been another big story and focus of attention. I havebeen asked for my opinion on gold quite a bit in the last month and I have responded prettyconsistently so I will keep it brief here this week.

For a short term trader gold might do anything . It has had a big up move , a solid and rapidcorrection, scandal brought on by MF Global, and has cleaned out a lot of positions, open interest

and resting orders. I expect volatility and would use the charts as a guide.

For investors or longer time frame traders or central bankers I say the following: hold your longsbuy more if you can. Pretty unequivocal. Here is why I feel strongly about this:

For anyone who still hasn't grasped the magnitude of the central planning intervention over the past fouryears, the following two charts should explain it all rather effectively. As the bottom chart shows,currently the central banks of the top three developed world entities: the Eurozone, the US and Japan havebalance sheets that amount to roughly $8 trillion. This is more than double the combined total notional in2007. More importantly, these banks assets (and by implication liabilities, as virtually none of them haveany notable capital or equity) combined represent a whopping 25% of their host GDP, which just so

happen are virtually all the countries that form the Developed world (with the exception of the UK).Which allows us to conclude several things. First, the rapid expansion in balance sheets was conductedprimarily to monetize various assets, in the process lifting stock markets, but just as importantly, to find anatural buyer of sovereign paper (in the case of the Fed) and/or guarantee and backstop the existence ofbanks which could then in turn purchase sovereign debt on their own balance sheet (monetization onceremoved coupled with outright sterilized asset purchases as is the case of the ECB). And in this day andage of failed economic experiments when a dollar of debt buys just less than a dollar of GDP (there is a
http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/http://socgen%27s%20situation%20summary/


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reason why the 100% debt/GDP barrier is so informative), it also means that central banks nowimplicitly account for up to 25% of developed world GDP!

What does this mean? It means that nearly $8 trillion in world economic growth is artificial and existsonly courtesy of central bank intervention - if one is looking for the reason why there is no meanreversion to a more stable period of time, there's your answer. It also means that central banks will never

unwind their "assets", either actively, or passively, by letting them mature, as doing so would effectivelymean an accelerated return to a nonpro forma status quo, one in which global GDP suddenly finds itself$8 trillion less. It also means that in this age of ongoing consumer and corporate deleveraging, centralbanks will have no choice but to continue monetizing not to generate incremental growth, but to offsetdebt destruction elsewhere. And of course, in order to sustain global GDP growth of ~3%, they willhave to print even more viaZerohedgeandTTMYGH

One Chart for the traders:

This letter threatens to get too long so I will close up. But I will add reading and thinking about the worldand economies in an environment like we have now can be discouraging. News tone follows popular

sentiment which is worried in worrying times. But I am very optimistic about the longer term and aboutwhat humanity can achieve. Grant Williams concluded his letter this week thisvideo linkand thefollowing comment with which I concur: We really are, as a good friend of mine is wont to say, cleverlittle apes...

Enjoy. Bruce Lawrence
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weekly strategic plan jan 9 2012

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