Icm Weekly Strategic Plan 05282012

7/31/2019 Icm Weekly Strategic Plan 05282012

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Liquidity Cycle

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The market continues to struggle with this epic European macro version of a horror movie. Just as relief appears the villain comes back to life

with murderous intent. Or perhaps because of its importance the analogy should be more Shakespearian: To be (EUROpean) or not to be,

that is the question? The global economy is being held hostage by this issue and has for the past month fallen into a more pessimistic view

of the outcome.

The next chart is an overlay of the MSCI World Index, the Emerging Market ETF, the Asia ex Japan, and the Latin America etf. All have turned

and the World index is the strongest because it includes the United States. The decline coincides with an increasingly negative outlook for glo

Europe plunges into deeper recession. The brown bordered chart with our mid-cycle indicator, shanghai Comp, and Copper which are all sen

rates have continued weak also.

The US equity markets have corrected from the highs steadily since the beginning of May and that dismal performance is better than any

other major equity market over the same time period. The Liquidity Cycle Indicator had shown minor negative divergence during April and is

solidly conrming the weakness. The ECRI Weekly Index even more persistently diverged from the previous rally and looks to be conrming

the ECRIs forecast of the US slipping into recession by mid-year 2012.

The plurality of weakness and weak sentiment offer a distinct possibility of a bounce on any hint of a new program from European leaders tha

the nancing impasse and hold out hope for growth rather than just more and sustained austerity (read public hardship).


2/11


This next chart from Bespoke overlays the SPX with the ratio of stocks below the 50 day moving average ( red) and the ration of stocks below

the 200 day avg (green). These numbers have reached levels that have produced rallies often in the past. But this kind of measure is a heads

up not a buy signal.

Another inuence that will come into play this year is the Presidential election and efforts to by this (and every) administration to paint a better

picture of the economy by October.

The Fixed income markets too reect the heightened fear of Eurocalypse reected in US and German yields continuing to slide lower on ight

to safety money ows. This is a Will Rogers bond market with investors concentrating on the return of rather than return on their money.

Elsewhere sovereign CDS are sending a message of worry.


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The market faces several signicant uncertainties, the US election, the scal cliff, Chinese soft or hard landing, but the mother of uncertainties

for now is the EMU, is it to be or not to be.

SECTORS


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COMMODITIES

Crude oil market curves moved modestly bearishly over the week as global growth forecasts weaken and the talks with Iran have lowered the

likelihood of imminent conict.


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Agricultural Commodities


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Some select Volatility ChartsMETALS


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Foreign Exchange

Weekly candle charts


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Comments and Supporting Information

European Calendar Of Events: May July from ZeroHedge

May

28 May: Italy auction. Bonds.

29 May: Italy auction. Bills.

31 May: Irish referendum on Euro zone Fiscal Compact. A recent poll published in the Sunday Business Post showed a 6 point increase in

support for Yes after the rst week of formal campaigning by the government. The yes vote was up 6pp to 53% versus a month ago, the no vote

down 4pp to 31% and dont know down 2pp to 16%. Excluding the dont knows, Yes leads No 63% to 37%. An alternative poll published in the

Irish Independent on 17 May similarly showed a 60% Yes vote when the dont know contingent is excluded. However, in that poll the dont knows

represented 35% of the total. The average dont know proportion in the opinions polls on the Fiscal Compact since the start of the year is 24%. The

question is whether the dont knows swing in favour of the No camp. In the last 5 opinion polls in the month ahead of the Lisbon Treaty rejection

in 2008, the dont knows averaged 31%. Excluding the dont knows, Yes had a lead over No of 56% to 42%. In the event, the Lisbon Treaty was

rejected 47% to 53%. (see Eurostress in this issue of Focus Europe).

June

6 June: ECB Governing Council meeting, followed

by interest rate announcement and news conference.

6-June: European Commission proposed Directive on crisis management/bank resolution. The EC is due to present proposals for a bank crisis

resolution scheme, potentially including plans for creditor write- downs, before the G20 leaders? summit on 18-19 June. The proposals beingworked on have been reported not to directly involve the euro zones EFSF and ESM funds.

6 June: Portugal auction. Bills.

7 June: Spain auction. Bonds.

10 June: French legislative election (rst round). Elections to entirely renew the deputies in the National Assembly (lower house of parliament). A

risk is that the socialist party alone fails to secure an absolute majority and has to depend on the support of the radical left, which could push to try to

transform what we hold for pure campaign rhetoric in actual legislation. However, it would be wrong to simply replicate Melanchons score in the rst

round of the presidential election into the number of deputies the radical left would secure, as the personal factor was important in Melanchons

strong performance and as the two rounds majority system of the parliamentary election should favour the socialists.

12 June: Greece auction. Bills.

13 June: New timeline for ratifying ESM and Fiscal Compact in Germany. German government and opposition will decide on the nal timeline

ratication of ESM and Fiscal Compact. In return for their support to approve the Fiscal Treaty (two-third majority in the Bundestag required),

opposition (SPD and Greens) want to see a broad growth initiative for the euro area. Meanwhile, the opposition has indicated that the elemen

a growth strategy discussed at the informal EU dinner on Wednesday will satisfy their demands in this regard (in their statement the SPD joine

Chancellor Merkel in rejecting Eurobonds at this point in time). The crucial issue remains the oppositions call for concrete steps to introduce a

nancial transaction tax which is supported by the ruling coalition in principle but cannot be realised at short notice. Moreover, the second cha

- representing the German states - has to approve the legislative pieces with two-third majority also. There, the states face budgetary problem

implementing the budget rules of the Fiscal Compact until 2014 (stricter than the German debt brake so far) and demand nancial support fro

federal level to comply with them - which is likely to be granted in some form. Government and opposition will convene again on June 13 to de

on the nal timing for the legislative process. The ESM should be ratied in time for the July 1st deadline to allow its entering into force but the

ratication of the Fiscal Treaty might well slip into July.

13 June: SPD and CDU meeting. According to Bloomberg on 13 June the CDU and SPD will discuss the idea of t he so-called European

Redemption Fund put forward by the German Council of Economic Experts

13 June: Italy auction. Bills.

14 June: Italy auction. Bonds 17 June: French legislative election (second round) See 10 June entry.

17 June: Greek elections. A repeat of the national elections in Greece was called by the President after the three largest parties from the initi

election on 6 May (New Democracy, SYRIZA and PASOK) were each in turn unsuccessful in forming a coalition and talks between all party le

failed to produce a unity government. An emergency government led by the senior judge Panagotis Pikrammenos has been tasked with taking

Greece through to the new election. Some polls showed a sharp rise in support for the anti-bailout SYRIZA, while others showed a stronger b

for New Democracy (see A Containment Strategy? in this issue of Focus Europe for further details).

18-19 June: G20 Leaders Summit, in Los Cabos, Mexico. Gathering of the leaders of the worlds t wenty biggest economies. European

Commissions plan to resolve failed European banks among the issued to be discussed (see the entry above).

19 June: German Constitutional Court ruling The German Constitutional Court will deliver its ruling on the information obligations of the Germ

government to the parliament in the context of ESM and Euro-Plus Pact. The opposition Green Party claims that the government has failed to

parliament comprehensively and at t he earliest possible time and to consult parliament on the negotiations and EU-level decisions concernin

ESM and the Euro-Plus Pact. The dispute is partly procedural in nature as there is a legal basis for information obligation by the government i

matters concerning European Union affairs. ESM and Euro- Plus Pact, however, have been treated as intergovernmental decisions not covere

this legal act. The claimants want to see the formal information obligations also extended to decisions with an intergovernmental character. Si

Constitutional Court has followed the line of strengthening parliaments role in euro crisis management it might well rule in favour of the Green

material impact on the German decision-making process should be marginal.

19 June: Spain auction. Bills.

19 June: Greece auction. Bills.21 June: Spain auction. Bonds.

21 June: Eurogroup nance ministers meetings.

26 June: Spain auction. Bills.

26 June: Italy auction. Bonds

27 June: Italy auction. Bills.

28 June: Italy auction. Bonds.

28-29 June: European Council meeting. This is the quarterly summit meeting of the EU heads of state and government. This may be when a

growth compact to complement the Fiscal Compact crystallises.

July

5 July: ECB Governing Council meeting, followed by interest rate announcement and news conference.

5 July: Spain auction. Bonds.

12 July: Italy auction. Bills.

13 July: Italy auction. Bonds.

17 July: Spain auction. Bills.

19 July: Spain auction. Bonds.

24 July: Spain auction. Bills.

25 July: ECB lending survey. The ECB are due to publish their third lending survey of the year on Wednesday 25 July. The survey could provECB with a key piece of evidence to justify additional 3Y LTROs if lending standards tighten again, another liquidity push may be necessar

avert a harsher credit crunch. The ECB will publish one more lending survey this year on 31 October.


27 July: Italy auction. Bills.



9/11


Interesting chart cement consumption per capita to GDP per capita.

Comments I read suggested countries well in excess of the curve are articially stimulating infrastructure development as a support to

employment but are likely engaging in malinvestment and bubble blowing.

HOORAY: FT Proclaims The Death of Equities

The FT has declared that nobody wants stock anymore, and that were seeing the Death Of Equities.

Peter Thal Larsen tweets out this pic:

As everybody with knowledge of nancial media history, the Death Of Equities was a famous BusinessWeek cover back in 1979.

Of course, this is what t he market looks like starting in 1979.

Now I remember the Businessweek article rather clearly. (relative to anything I remember) So I pulled some charts to take a look

because I remember more volatility than the chart above seems to show. Here is a chart of the SPX from 1950 to 2012.

Rather resembles the rst chart so I recongured. The chart following is just 1959 to1979.
http://www.businessinsider.com/ft-death-of-equities-2012-5http://www.businessinsider.com/ft-death-of-equities-2012-5


10/11


Now we are getting somewhere. This volatility is a much better match to my memory and to the current period. So I put the two together

again in a 1950 to 2012 chart but on a log scale to show percentage changes.

In the private-sector version of austerity, governments impose new taxes and mandates on the private sector while maintaining their

own personnel, salaries and pensions. Thats the antigrowth version of austerity prevalent in Europes austerity programs. Many

economic models, including the U.S. Congresss budget scoring system and Keynesian stimulus, ignore national debt levels and

disregard whether spending decisions are made by the private sector or the government. This creates t he absurd result that an

economy in which the government spends and invests increasing amountseven 100% of GDPhas the same projected growth rate

as an economy where the government spends and taxes less.

As the U.S. struggles with tax reform, decit reduction and the year-end scal cliff, it will be critical to distinguish between reforms that

downsize the government and reforms that downsize the private sector and put the dollar at risk. One approach points to growth, the

other to Greece.

UPDATE: The Centre for Policy Studies yesterday published a study of 28 OECD countries that nds that the size of government as a

proportion of GDP is a major inuence, controlling for other factors, on a countrys rate of economic growth. If you want growth, scaling

back the state should be an aim whether you have a decit or not. Furthermore, the study nds that other things equal, countries

with small governments and with small t ax burdens grow faster, and pupils in small-government countries achieve signicantly better

results in reading, math and science than those in big-government countries.

The good news is spreading: cutting back on bloated government spending is not austerity, it is one of the best ways to stimulate an

economy

History does not repeat itself, but it does rhyme. Mark Twain

Good and bad austerity

By Scott Grannis

Ive been a friend and admirer of David Malpass for a long time, even though we have not always agreed on the outlook for the

economy. Today, David has a very nice op-ed in the WSJ, Greeces False Austerity, that makes a critical distinction: austerity thatshrinks the public sector is good, while austerity that imposes increased burdens on the private sector is bad. This is excellent advice for

Greece, just as it is for the U.S. Some excerpts:

The conict between growth and austerity is articial and framed to f avor bigger government. Growth comes from economic freedom

within a framework of sound money, property rights, and a rule of law that restrains government overreach. Businesses wont invest or

hire as much in an environment where governments dominate the economy. Thus, government austerity is absolutely necessary for

economic growth in both the short and long run.

Economics has often ignored the critical distinction between austerity for the government and government-imposed austerity on the

private sector. In the f ormer, governments which are over-budget sell assets, restrain their hiring, and limit their mission to essentials.

Thats growth-oriented austerity.

Russell Napier on Financial Times Interview Video

Uber-bear sees value in Europe

You may have to endure a 10 second ad.

Martin Spring in his latest On Target Letter.

A New East-West Alliance Starts to Emerge

China seems to be accumulating most of its additional foreign trade surpluses in euros, rather than dollars. But there could be more

behind this policy than asset diversication, or support for Europes struggling economy which takes 18 per cent of Chinas exports,

more than does the US.

Imagine for a moment that you are sitting in Beijing, thinking through long-term strategy for your nations climb-back to the global

dominance its economy held, then lost, just two centuries ago.

Which is your most dangerous competitor? And which would be your most promising partner?

The US is obviously the most formidable rival because it is the only military superpower (11 naval battle groups based on aircraft

carriers to your none at all), with the largest national economy and global leadership in technological development.

It already has a close alliance with your disliked and feared neighbour Japan, with its own huge economy and impressive technological

resources.

To your west lies India, a rising power in its own right, with a population whose growth will soon take it greater than yours, and a nation

clearly targeted by the Americans as a future major ally in Asia.

To your north lies Russia, a nuclear power in its own right and a traditional enemy that seized much of Siberia, with its great mineralresources, that were once part of China.

So you are surrounded by rivals, potential enemies, combining immense military, economic and technological power.

Beyond that ring of power one natural ally Europe.

Its economy, aggregated through the 27-nation membership of the European Union, is the worlds largest even bigger than the US.

Its core economy, Germany, is second only to Chinas as a dynamic exporting power. It has a pool of high-level scientic, technological,

engineering and nancial skills comparable to Americas.

It has no strategic interests that conict with yours. Indeed, its strategic weaknesses of dependence on the US for defence and on

Russia for energy resources will slowly increase the pressure on Europes ruling elite to seek a way out.
http://scottgrannis.blogspot.com/2012/05/good-and-bad-austerity.htmlhttp://video.ft.com/v/1655932538001/Uber-bear-sees-value-in-Europehttp://video.ft.com/v/1655932538001/Uber-bear-sees-value-in-Europehttp://video.ft.com/v/1655932538001/Uber-bear-sees-value-in-Europehttp://video.ft.com/v/1655932538001/Uber-bear-sees-value-in-Europehttp://video.ft.com/v/1655932538001/Uber-bear-sees-value-in-Europehttp://scottgrannis.blogspot.com/2012/05/good-and-bad-austerity.html


11/11


Global political power, under-exploited assets

For both China and Europe, there are only strategic opportunities. A much closer partnership is clearly the route to take.

For historical reasons, the European nations retain immense power in global politics, which could be very important in defending China

against global trade protectionism and dismantling US-driven international controls on transfer of sophisticated technologies.

The great old companies of Europe such as Siemens, Rolls Royce and Royal Dutch Shell, and the high-tech midsized ones, are natural

partners for Chinas fast-expanding, capital-rich ones.

If the euro continues to be f uelled by Chinese support, instead of losing out to the dollar it can become a stronger and more credible

rival for dominance in currency markets.

Europe has an enormous pool of under-exploited assets; China a huge and fast-growing pool of capital to invest. Europe is loaded with

debt; China is burdened with excess savings.

China and Europe are strategic partners, says Li Keqiang, the Chinese vice-premier tipped to take the t op job from Wen Jiabao in a

few months time.

Chinas imports from Europe are growing at 25 per cent a year, and its increasingly buying sovereign bonds to underpin the Eurozone.

Its direct investment in Europe doubled last year. Its rst car f actory inside the European Union has started production (in Bulgaria), it

has bought a road machinery manufacturing plant in Poland and taken control of a chemicals plant in Hungary.

When designed in Europe is combined with made in China, and when European technologies are applied to the Chinese market,

there will be amazing results, Li says.

Its clear that a new major strategic alliance is now developing that will have important economic, political and investment consequences

for everyone over the long term.

I wish you all a happy and fun Memorial Day and offer my sincerest gratitude to the men and women of t he Armed Forces both today

and in the past making it possible to live in freedom.

Bruce Lawrence May 27 2012

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Icm Weekly Strategic Plan 05282012