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 leadership dealing 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.

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.

The rather meager progress announced this past weeks summit. ( roughly the 450th this year) More comment on what was accomplished will follow later in articles 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

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

Jobless claims grabbed a few headlines by dropping 23k to 381k the lowest since Feb 11 and second lowest since Sept 08 after Lehman Brothers. This reading is also below the avg of 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 and observers 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 global growth and demand out of Europe. Chinese markets are near recent lows and PE levels are also near historic lows indicating investors have worries about profit margins ahead.

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

spreading the weakness elsewhere and leading to more beggar-thy-neighbor behavior. Hold the safest cash currencies, gold, and highest quality return producing assets. Positive case requires Europe to stabilize and become more optimistic, China to definitively ease policy, and the US recovery to keep illustrating improvement accompanied by some indication of effective governance in Washington. Invest in strong balance sheet countries and companies. Strong cash flow and dividend equities, and commodities needed by emerging populations with rapidly rising standards of living. ( China, Indonesia, Malaysia, India, Brazil, Chile, Mexico with technical confirmation) Not sovereign bonds anywhere. Muddle along is most likely as each region struggles with its own problems the uncertainty retards natural entrepreneurial optimism. US continues on a path of recovery but one that is torturously slow. Concentrate again on strong companies and currencies in countries with relatively solid balance sheets, equities with good dividends in very solid companies that compound earnings, and Gold. The chart from Bespoke illustrates the ETF Universe and the colors show pretty well what was strong and what wasnt.

Sharp improvement in any region is likely to await some more evidence of improvement in Sovereign
Debt . 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 market the past 6 months or so. Chart courtesy of Bespoke Investsments

Our table of Equity markets shows us the relative strength leaders and laggards ( in dollar terms) but there is still no green and a lot of red in the trend columns.

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

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 OK are slowly becoming less of a factor and WTI prices are behaving more normally now.

Grain Curves and Spreads

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

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

Cattle front end fell into a bit deeper contango as did Nat Gas.

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 and

keep 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 the disproportionate importance of policy and political overture, as opposed to fundamentals, in determining price action. This creates a highly indeterminate period in which volatility is elevated and investment decisions amongst our community can tend to become incredibly myopic, living from one political announcement to the next. Whole political and financial regimes 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 cycles have been reduced from what appeared as weeks or months to hours and days. We have to adapt 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 via Zerohedge
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 growth will slow modestly to 3.5% in 2012. The US economy will expand by 1.9% in 2012 but will weaken 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 versus Value and large versus small cap stocks; reduce Treasury allocations in the spring as our fixed income 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 in coming quarters, in the absence of much stronger jobs creation or wage growth.

[22] How to play it: Weaker US consumption growth means portfolios should be tilted toward defensives in the US in early 2012 (Chart 3). Within defensives, US Equity and Quantitative Strategist 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 current account 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% in 2012. How to play it: As inflation risks fade in 2012, look for Chinese policies to turn increasingly pro-growth. Maintain exposure to commodities and begin to look for opportunities in other EM assets 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 accommodative monetary policies around the world, aided by lower inflation. Importantly, our economists expect

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

[23] How to play it: Buy gold and gold stocks. Commodity Strategist Francisco Blanch has a 12month 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 Priya Misra expects 10-year Treasury yields will fall to 1.6% by early 2Q (before the Fed launches QE3), 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 will be limited. How to play it: Underweight Treasuries and overweight corporate and Emerging Market bonds, 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 assets that provide quality income. Credit Strategists Hans Mikkelson and Oleg Melentyev are bullish on corporate credit. They expect credit spreads to significantly tighten by the end of 2012 and forecast total returns of 4.8% and 13.9% from US IG and HY bonds, respectively.

[24] How to play it: Within corporate bonds, favor the US over Europe, and overweight IG Financials. Within equities, favor high quality and high dividend yielding companies, US Staples and 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 for the MSCI ACWI and 1350 for the S&P 500. Deleveraging and slower earnings growth will limit upside, but quantitative easing, valuation and positioning will limit downside. We remain convinced that the true equity bull market is in stocks and sectors that provide high growth, high quality 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 over Japan. Select US sectors (Consumer Staples, Tech) and themes that offer a combination of high quality 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 growth and valuations are better up the market cap spectrum. The heightened volatility and macro uncertainty 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 to outperform along with secular growth stocks. Small-cap Strategist Steven DeSanctis favored sectors are Energy, Health Care and Tech, and his least-favored are Financials and Materials. 9. EM rate cuts support EM assets and commodities Our 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 increased public spending. And as recent policy easing in Brazil, Russia, Turkey and Indonesia suggest, EM central banks will be pre-emptive in supporting growth.

How to play it: Aggressive EM easing is positive for EM bonds and equities, although the upside to EM currencies will be constrained. Asian easing should be positive for commodity prices. 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 high frequency program trading and widening use of ETFs has simultaneously increased correlations and inefficient pricing of individual stocks. Correlations are likely to drop once a macro solution is forced upon Europe.

[25] How to play it: This can be exploited with a buy-and-hold strategy for the best companies and aggressive stock pair trades, as well as favoring active fund management. The good news is investor sentiment is more defensive today than 12 months ago, and central banks are once again demonstrating they will do everything they can to prevent systemic 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 Failures Lowest Since 2008

The two charts above provide some evidence that the U.S. banking sector is recovering from the effects of the Great Recession and financial crisis of 2008-2009. Carpe Diem