icm weekly strategic trading plan week of 11-28-11

8/3/2019 ICM Weekly Strategic Trading Plan Week of 11-28-11

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ICM Weekly Strategic Plan 11252011

Current environment: Sideways/Normal Most markets continue to stay in sideways ranges. We saw

and softs show some plurality in downside BOs last week. We saw most other markets oscillate fromthe top of their ranges to the middle to bottom of their ranges keeping the environment sideways.

Summary: European yields spiked to new highs last week. There was a major shift in Europe last week.

The past month had seen the weak countries in the EU experience higher yields (Italy, Spain, France

starting to be punished for their issues) while strong countries (Germany, Netherlands, Finland) saw

declining yields. This had many spreads such as GET/BUND (France/Germany) going out to record yield

spreads. Last week saw a major change. All EU yields spiked higher including Germany. Weaker

countries saw yields spike to new highs. There was a shift of people pulling money out of EU countries

and bonds and rolling to bonds in strong countries such as Canada, Great Britian, Australia, Sweden,

Norway, NZ, Singapore and the US. In addition, we saw yields start to spike in 3 month paper for some

countries, another sign of stress. We need to continue to watch French 10 yr yields. If they violate the

3.781% level, I believe things will get bearish for Europe in a hurry. Over the weekend we had 2 bullish

news items. 1. That EU countries plan a workaround revising the EU Treaty by establishing bilateral

agreements with each other. 2. The rumor that the IMF is going to provide EU600Bn in loans to Italy to

allow Italy to roll its paper this year while establishing a new government. I believe that these

developments will turn out to be ineffective or plain false but the market will contiue to look for reasons

to have sharp countertrend rallies. This rally could last for 1 day to 1 week. I also want to continue to

keep an eye on UniCredit the Italian bank. UniCredit has EU74Bn in equity with EU1.2 Trillion in assets.

If their assets are written down by just over 4% they will be wiped out. They have to roll EU51Bn in debt

over the next year. I dont believe they will do it. Article 125 of the EU treaty prevents the ECB frombailing out banks. They are too big for Italy to bail them out. If they go under, a Lehman style collapse

could come out of Europe.

Having said all of that, it seems Europes path out is to print Euros. If this happens, it will be very bullish

for gold and potentially for all commodities. We will continue to keep a close eye on Gold including

getting long gold vol. I think stocks could have a strong rally in this environment because they hold real

assets, pay higher dividends than soverign bonds and make money. This rally might be a loser in

inflation terms but winner in price.

I believe that we will continue to maintain our sideways environment for the remainder of the year

unless we get a downside shock out of Europe that forces people to liquidate more positions. Forscenario planning I would prepare for sideways while have contingency plans for a downside shock.

Top Trading Markets for Week of 11/14-11/18:


2/20

Longs:

USShorts:

NG S SM BO W CC SB CD

Top Trading Ideas for Week of 11/7-11/11:

Longs:

Weekly/Daily Qtrly/Monthly

Shorts:

Weekly/Dailyo NG in Weekly B3 (3.606-3.628)o S in Weekly B2 (1120.5-1141)o SM in Weekly B2o W in Weekly B3 (605-623)o CC in Weekly B2 (2390-2428)

Qtrly/MonthlySpreads

+ARA/-BRN +BO/-SM +S/-SM +PL/-PA +KC/-CC

Open Positions:

- CC on Weekly (stop = 24.77)We were stopped out on our trailing stop for NG. We shorted CC and remain short in on the weekly.


3/20

ICM Strategic Plan Week of 11252011

The Liquidity Cycle Indicator continues to be kicked around by increasingly jittery climate in Europe and

the lack of competent leadership in Washington. The indicator turned lower this week as the rebound in

October faltered with the increasing uncertainty we have experienced in November and particularly in

this past week. The more defensive groups did poorly this past week but significantly outperformedsectors like technology, industrials and materials. The ECRI weekly leading index apparently did not

update yet and so tha chart is not included.

Rather than spend time on the liquidity cycle I am going to borrow from a couple of Bespoke charts to

illustrate how grim and correlated the action has been in the past week. First the number of stocks

above the 50 ma dropped from nearly 90% to 25% very quickly.

Next page is chart of the 10 day advance decline also demonstrating the sharp market decline.


4/20

Both these charts from Bespoke week in review to which I subscribe

The table on the next page provides the performance of a l ist of ETFs of sectors or indices and some

commodities and bonds. Performance is remarkably similar except in the case of Bonds which have been

inverse. The plurality revealed is indicative of the dominating influence of the crisis in Europe. Sovereign

debt issues of the PIIGS led to awareness of the vulnerability of the banking system even in core Euro

countries which has now infested what were previously considered strong countries. This past week has

even seen the German rates begin to move higher as the market begins to acknowledge the credit

worthiness of the entire continent has come to rest upon Germany, and that may be too much for

Germany to handle.


5/20

Bespoke weekly, monthly and quarterly % performance across specialty ETFs

I find it striking that with a really poor performance last week and for the past month most markets are

still up on a quarterly basis.


6/20

Futures markets were broadly down in risk off mode except for some of the really weak markets for

which risk off means a rally. Or the fixed income markets which benefit from risk off.

Check out the grains on the next page. Anyone detect any plurality?


7/20


8/20

Looking at spread relationships we find that wti brent is still narrowing :

The industrial metal spreads were flat in some cases but several were climbing indicating bullish actionand higher demand under normal circumstances. But I suspect some of the price action may be less

inventory accumulation than switching out of currency. Aluminum, Zinc, and Nickel all saw the front

end rally though Copper remained steady as did Lead (not pictured).


9/20

The next chart is the S&P Europe 350 Index overlaid with the Europe 350 dividend aristocrats Index (in

Blue ) which is comprised of the steady dividend payers from the first index. The dividend aristocrat

index has held up considerably better than the full index suggesting to me that money is utilizing the big

steady dividend paying private companies as a substitute for shaky sovereign bonds. There is merit in

this behavior as the corporate assets will continue to be productive and will reprice to whatever

currency is being used in the future. The strategy is another form of risk off.

The continuing de rating of the Eurostoxx bank index is another sign of risk off.


10/20

A couple of weeks back I posted charts of the Aussie dollar versus copper and of the shanghai Index

noting the high correlations of the price movements presuming this was all related to Chinese demand

for materials and Australias large mining activities. This next chart is of the Aussie currency with Brent

Crude perhaps broadening the link to total global growth prospects and alternative places to hold onesmoney than the Euro.

Chart courtesy of Bloomberg via CLSA Greed and Fear Letter

Comment

Early trade Sunday night is optimistic about some rumors from Europe and eminis are up the dollar is a

bit weaker and Asian markets have rallied. But oversold markets can rally on a mirage and have just as

little substance. Where and how is the IMF going to raise 600 B euros to lend to Italy? That is a huge sum

from an organization that essentially gets all its funding from the US and Europe? Did the German

auction failure create enough fear to cause Germany to just cave in and quietly agree to print money or

break the national laws against maintaining sovereignty in fiscal affairs? I hope to be wrong but I see a

great deal more talk than action. Sharp rallies in risk on based upon hopes for Europe are to be sold atthe first sign of weakness.

The expiry of the payroll tax on Jan 1, 2012 will now be the hot debate in the US. The democrats plan to

hammer the class warfare angle on the issue. If I were the Republicans I would not give them the

chance. I would just extend the current law one more year immediately a squash the argument. The

economy still needs the support , especially if Europe continues to unravel.


11/20

One more comment for tonight. Reading articles and talking with people from many locales during

Thanksgiving week I have never encountered such uniform disgust with the elected officials in our

government. The entire super committee charade has left an extraordinary sense of mistrust in peoples

mouths. No one seems to be trusted on either side. No one appears to even pretend to be a public

servant. The elected officials in Washington better get back to their districts and take note of the local

sentiment if they are going to have much chance of retaining office. People are pissed off and I dont

think they are going to take it much more. The 2012 election is going to be historic.

Week ahead from JPMorgan

Weekend Update it was a relatively busy weekend as far as headlines from Europe go and overall

the incremental news was mildly positive. Eurozone countries plan on announcing an accelerated

timeline for fiscal integration, bypassing the more cumbersome treaty changes that could take a while

to implement and instead striking bilateral deals w/one another. In theory, this means by early 12 the

EU will have more oversight on state fiscal matters and also would be granted new powers to

intervene in those governments deemed exceptionally profligate. A report in a German paper (quoted

on Reuters) says this accelerated fiscal consolidation path demonstrates the seriousness with which

politicians are tackling the present panic may be enough to spur the ECB into providing greater

support to sovereign bond markets (this remains to be seen however). There has been more talk of

the IMF stepping up its involvement in the present crisis, extending its new credit lines to certain

states and potentially acting as a conduit for funneling non-European money into struggling

governments. On Fri the finance ministers from Germany, Finland, and the Netherlands discussed

how the role of the IMF needs to be strengthened w/regards to its presence in Europe. While Spain is

denying a Fri report claiming the new Rajoy government would seek an IMF line, a report over the

weekend discusses how the IMF is crafting a EU600B financing package for Italy that would buy the

Monti government time to implement reforms. The coming two weeks will be decisive for the

situation in Europe: either things will continue to spiral or stabilize (bunch of big catalysts

). First up will be the fin min meeting this Tues/Wed according to weekend reports, documents

formalizing the EFSF leveraging mechanisms are complete and ready to be approved by ministers this

week. On the domestic front, Black Friday sales look like they came in


12/20

pretty strong. There is more talk about sparing the Pentagon from the $1.2T

worth of cuts due to kick-in starting 2013 as a result of the Supercommittee failing (although recall

the only reason the agencies didnt downgrade US debt after the failed talks was b/c of that $1.2T

trigger if it gets scaled back, Moodys, S&P, and Fitch could change their minds). JPMorgan macro

research discusses how it appears increasingly likely 2012 will see a large US

fiscal contraction (as a result of unemployment benefits and the payroll tax cut not getting extended)

and also how central bank policy globally wont be eased all that much going forward.

__________________________________________________________________________________

Death of a currency as eurogeddonapproaches

It's time to think what hitherto markets have regarded as

unthinkable that the euro really is on its last legs.

The defining moment was the fiasco over Wednesday's bund auction, reinforced on Thursday bythe spectacle of German sovereign bond yields rising above those of the UK.

If you are tempted to think this another vote of confidence by international investors in the UK,don't. It's actually got virtually nothing to do with us. Nor in truth does it have much to do withthe idea that Germany will eventually get saddled with liability for periphery nation debts,

thereby undermining its own creditworthiness.

No, what this is about is the markets starting to bet on what was previously a minority view - a

complete collapse, or break-up, of the euro. Up until the past few days, it has remained just aboutpossible to go along with the idea that ultimately Germany would bow to pressure and do

whatever might be required to save the single currency.

The prevailing view was that the German Chancellor didn't really mean what she was saying, or

was only saying it to placate German voters. When finally she came to peer over the precipice,she would retreat from her hard line position and compromise. Self interest alone would forceGermany to act.

But there comes a point in every crisis where the consensus suddenly shatters. That's what has

just occurred, and with good reason. In recent days, it has become plain as a pike staff that thelady's not for turning.


13/20

This has caused remaining international confidence in the euro to evaporate, and even Germanbunds to lose their "risk free" status. The crisis is no longer confined to the sinners of the south.

Suddenly, no-one wants to hold euro denominated assets of any variety, and that includes whathad previously been thought the eurozone safe haven of German bunds.

Investors have gone on strike. The Americans are getting their money out as fast as they decentlycan. British banks have stopped lending to all but their safest eurozone counterparts, and eventhose have been denied access to dollar funding. The UK hardly has anything to boast of; it's got

its own legion of problems, many of them not so dissimilar to those of the eurozone periphery.

But almost anything is going to look preferable to a currency which might soon be assigned tothe dustbin of history. All of a sudden, the pound is the European default asset of choice.

Telegraph by Jeremy Warner

_____________________________________________________________________

A collection of weekend articles on Europe. Warning: no optimism here.

Worlds biggest banks starting to draw up contingency plans for an eventual break-up of the

EMU

NYT http://nyti.ms/rWM9YS

British embassies in the eurozone have been told to draw up plans to help British expats

through

the collapse of the single currency, amid new fears for Italy and Spain London Telegraph.

http://tgr.ph/vlM4ht

ECB for the ECB, no may really mean no despite a chorus of commentators calling on the

ECB

to ramp up its SMP and purchase government debt in sizeable quantities, this seems a long

way from

actually occurring. For Germany, it seems like the country would rather see the EMU fall

apart rather

than have the ECB compromise its inflation-fighting principles. There is only one scenario that

could

see the ECB buy more debt and that is if deflation became a credible concern. However,

w/inflation


14/20

still running north of the ECBs target, falling prices seems a long way off. NYT

http://bit.ly/tNFOqx

UK the UK Treasury Sec (Osborne) will outline his credit easing plan during the annual

autumn

address scheduled for Tues. Osborne will discuss how the government plans on making

available as

much as GBP10B in loans for businesses London Times. http://thetim.es/vcf0AM

Belgium finally gets a government and a budget - Belgian political parties reached a deal on

the

2012 budget on Saturday, clearing the last major obstacle to the formation of a new

government;

This budget meets the multi-year commitments ofBelgium towards the European Union,

the

negotiators said in a joint statement on the deal. It will reduce the deficit in our country to

2.8

percent of GDP in 2012 to break even in 2015. Bloomberg/FT http://on.ft.com/v04keR

Greece may miss its target for privatization revenues next year because of the worsening

economic climate in Europe (Reuters) http://reut.rs/v5zAaD

Greece - neg. Reuters article on bank bond swap (this hit Fri during trading); says IIF may

not get

enough support to move forward w/swap; Athens now talking to banks directly; Greece now

demanding NPV of new bonds to be 25% (far harsher than high 40%s banks want); CDS could

trigger as Athens may squeeze out those bondholders who dont voluntarily sign up for the

swap

Reuters http://reut.rs/t5nXEY

SNB stands ready to act - Switzerlands central bank remains ready to act if the francs

strength


15/20

worsens the outlook for the economy, governing board member Thomas Jordan said

Bloomberg

http://bloom.bg/tu28lF

Shipping companies have started to cut back on their Asia-to-Europe routes amid signs ofslowing

demand WSJ http://on.wsj.com/uHwMov

Is this really the end? Unless Germany and the ECB move quickly, the single currencys

collapse

is looming The Economist cover story. The chances of the euro zone being smashed apart

have risen alarmingly, thanks to financial panic, a rapidly weakening economic outlook and

pigheaded brinkmanship. The odds of a safe landing are dwindling fast.

http://econ.st/u6Y7iU

The new IMF credit lines, which could be worth as much as 10x a country's quota, may be

drawn down by some governments in Europe (see press release from the IMF last week

talking about these lines http://bit.ly/s1jgPg) . You can see everyone's quota here

(http://bit.ly/uKXqdR ). There are some indications the IMF could step up its actions: Reuters

reported on Fri (11/25) that Spain's incoming PM may draw down on an IMF line (although

Spain has denied this) and there were reports this weekend of a EU600B package being put

together by the IMF for Italy. On Friday, the Finnish fin min talked about how there were

discussions ongoing to create a larger roll for the IMF in the present Europe panic.

Credit Suisse:

US Weekly Data Cycle

The economy is no turkey. Job growth should pick up in November, vehicle sales should hitthe highest non-cash-for-clunkers rate in three years in November, and new home sales should

edge up in October.

Surveys say. The ISM Manufacturing index should reach a five-month high in November.

Consumer confidence should post a solid jump in November. The Fed's Beige Book shouldcontinue to have a sense of uncertainty, like the September and October versions.

Jobless claims enter volatile period. We expect a rise back above 400K in the Thanksgiving

holiday week. This week starts the volatile year-end season, so more noise could be on the


16/20

platter in coming weeks. So pass the salt.

Andrew Lees of UBS; Chia cash flow

Subject:Chinese cash flow

We saw today that 80% of Chinese construction firms say developers are now behind on payments (latecash flow), and that consequently land purchases are already 42% down y/y (slowing local authority cash

flow). We also heard that pricing controls means that utility companies no longer have the cash flow toafford vital imports. Q3 corporate cash flow was down 27%.

China's trade surplus is annualizing this year at USD152bn, FDI @ USD114bn yet its FX reserve

increase is USD472bn. The attached chart shows Chinese external borrowings which continue to soar.

I am being told that European banks are now starting to shrink their foreign loan books to meet domesticneeds, with Mexico, Brazil and China all big losers. With China now saying they may run a full year tradedeficit next year, and with them unable to afford to import vital coal and other resources without either

suffering domestic inflation or without selling its FX reserves, it may now well be time to consider some

sort of puts on the yuan. In fact the only reason perhaps not to is that India may collapse first reducing the

competition for coal and giving China a little more breathing room.


17/20

Andrew Lees of UBS:

The first chart shows the combined central bank assets of the Fed, the

BoJ, the ECB and the BoE - (lets call them the G4) - based on the last

available data some of which is more up-to-date than others. As you can

see central bankassets are soaring at an increasingly fast pace, abouttwice the pace of 2009 through 2010.

The second chart shows the same G4 M3 money supply growth where it is

available or M2 if M3 is not available. As you can see this has stalled

and actually looks like it may be about to break down as balance sheets

contract.


18/20

The third chart simply divides the G4M3 by the central bank assets to

give a multiplier. As you can see central banks are having increasingly

less impact from their marginal dollar, suggesting the private sector is

in increasing difficulty. The multiplier is now even lower than at the

height of the 2008 crisis and it has been trending lower and lower. This

should be expected and shows to a large extent the futility of printing

money with each successive dollar or euro printed increasing the

misallocation of capital.

Whilst I would expect a continued acceleration of printing money to try

and keep the economy going, it appears that with oil production having

peaked in 2005 this is simply not going to gain any traction and stop

the real economy from falling over; stagflation looks ever more likely.

BBLThis last chart is what pushing on a string looks like.

_________________________________________________________________________________

Let me tell you what I find most terrifying: were having this discussion about a risk of

recession at a time when unemployment is already too high, at a time when a quarter ofhomeowners are underwater on their mortgages, at a time when the fiscal deficit is 9%, a

time when interest rates are at zero. These are all conditions coming out of a recession, not

going into a recession. Mohamed El-Erian


19/20


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icm weekly strategic trading plan week of 11-28-11

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