Weekly Strategic Plan 02132012

7/28/2019 Weekly Strategic Plan 02132012

1/9

Liquidity Cycle

Greek version of Groundhog Day played out all week as an agreement was near, agreed to, or not so much, near, done, not so much, etc.

The US market nally had an off day after a steep steady incline in January and early February. Frankly, a little setback was needed to let

participants catch their breadth.

The individual charts of components of the indicator relative to the SPY etf reveal pretty clearly the surging relative strength of the lead growth

compared to a similar chart of the most defensive components which are now losing ground. The early cycle group has had several brief per

positive performance breakouts over the past year and is somewhat unproven at this point. But the late cycle group has outperformed for a si

period and has rather rigorously broken the previous trend, lending conviction to the belief in prospects for a more lasting period of positive ac

growth securities.

The ICM Liquidity Cycle Indicator experienced a very small pullback Friday, yet is still pointing higher.

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 nretain any copy of this communication.


2/9


ECRI Weekly Leading Index (black) did turn higher last week as LCI hinted, this despite the continued recessionary stance at ECRI.

(see video) I am am going to utilize some information from Bespoke research here since their weekly review is chock full of good information this week.

In the scope of the last few years, t he period of calm that we have seen so far this year seems out of place and not the norm. From a longer

term perspective, however, the 30 day stretch is anything but rare. The chart below shows streaks where the S&P 500 went without a decline

of 1% or more. As shown, there have been numerous periods where the index went 30 days, or for that matter, much longer, without a 1% drop.

Since 1980 alone we have seen three separate stretches where the index went more than 100 trading days without a 1% decline.

Taking an even longer term view, since 1928 there have been 135 streaks where the S&P 500 went without a 1% drop for more than 30 trading

days, and of those streaks, eleven lasted more than 100 trading days.

Even though AAPL was not chosen to replace GM, it is always fun to see what might have been. To that end, we have recalculated the

performance of the DJIA to reect how it would have done if AAPL was added to the DJIA instead of CSCO. The chart below shows the current

DJIA (blue line) compared to the Apple DJIA (red line). Currently, the DJIA is trading at a level of roughly 12,865, which is about 12.1% off

its all-time high of 14,198.10 from October 2007. If AAPL was in the DJIA, though, the index would not only be signicantly higher (14%), but

it would also be trading at an all-time high of 14,636. Granted, you cannot go back and change the past, but we wonder if investor sentiment

would be more positive if the DJIA was trading at record highs?
http://www.businesscycle.com/http://www.bespokepremium.com/http://www.bespokepremium.com/http://www.businesscycle.com/


3/9


The next couple of pages have a table of a broad range of ETF arranged by type and the daily closes on Friday. The overwhelming color

red illustrates the breadth of downward price action. Green quotes are pretty much limited to inverse and short funds, as well as a few x

income securities.

SECTOR : The Bespoke Table reveals through the correlation column the sectors driving the market this year.

ETF daily on Friday Feb 10

Sector charts covering 3 months:


4/9


Commodites: I have found some different tables on the Bloomberg that I am using this week. I hope these are readable because

they have a lot of information that is useful in a fairly concise grouping. These include the metals outright, and various spread

indications as well as price, 5 day movement and seasonal compared to normal. The Ags and Energy tables follow.


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 nretain any copy of this communication.

Ags Most outrights ag markets nished the week lower with exceptions being Sugar, Lean Hogs, Palm oil, and lumber. Old crop corn and wheat

both gained, though corn lost ground to wheat and beans on the week. Also many ags are trading above seasonal norms, though wheat and

cocoa are not.

Energies: The WTI-Brent spread probably got the most attention as threats of embargo and possible strikes against Iran have Brent

trading rm relative to both WTI and Dubai. WTI has its own issues as large supplies from Canada the Bakken elds stress the storage

capacity in Cushing Oklahoma.


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7/9


In the meantime the meantime representing mere mortals I feel the endgame is nearing for the falling 30 yr trend. One must expect an

extraordinarily dismal economic picture globally to support a long extension of the current trend lower. Though one should remember

Japan has achieved even lower rates. Of course the Japanese lack the zealous determination of our own currency debauchers. Japan

just does not have decient economists with degrees from the Ivy League.

If one takes a look at the same long term period of rate declines on a Bollinger band chart one can make the case that a simple pull

back to the mean of the trend would still produce a signicant price change. (Roughly a 15-point drop in 30 treasury futures.) I submit

that while the trend may continue lower it will be grudging as it approaches the zero bound and negative real yields. Therefore the

chances of a large and rapid price move are now to the downside and trades should reect that possibility. I will be looking to sell

modest amounts of option premium above the market and /or being long of the same to the downside. (I am talking price here now

yield) Tread lightly though; the street is littered with premature bond bears.

Trend and Volatility Environment


8/9


Supporting Information and Commentary Money, Money, Everywhere

My desk is littered with analysts charts showing the explosion of central bank assets over the past four years. As interest rates have

dropped to just above the infamous zero bound while the global banking system and t he developed economies have threatened to

collapse, the central banks have responded with new forms of monetary stimulus to keep the nancial system alive and to push their

economies toward growth. The acronyms might be different for the methods used by the US Fed, ECB, Bank of England, Bank of

Japan, and Swiss National Bank, but these various techniques have all served to expand the high-powered money available to their

banking systems by at least a factor of three. These ve countries all have ratios of central bank assets to GDP over 18%, and in

Switzerland it is over 40%, a far cry from the old days. Add to this the extension of swap lines between the Fed and other central banks,

and liquidity is everywhere. Those of us in the nancial world are surrounded by a sea of money, but just like the ditty of my youth when

sailing on the ocean, water, water, everywhere, but not a drop to drink, there seems to be nothing economically constructive to

do with this money. If the idea was to keep the banking system alive, it is obvious that this strategy will work. Clearly, giving money

to banks at no cost or, at the worst, extremely low cost means that they dont have to pay anything for their liabilities a perfect match

for all of their bad-loan assets, which give them no revenue either. This allows the banks to avoid: calling their bad loans, causing

companies to go bankrupt or real estate to go on the auction block, and admitting economic reality. To us, this seems to be exactly the

strategy followed by the Bank of Japan for years, the one that was so harshly criticized by Bernanke ten years ago.

Europe and the US now have their own zombie banks dead but they keep on walking, not lending money or clearing out the bad

debts. If this massive infusion of liquidity was meant to help main street, the operating economy, or the average worker, it has been a

complete failure in each country, except Switzerland where this was not its goal.

This gigantic ood of extremely inexpensive high-powered money does have a major impact, not in the real economy, but in t he liquid

investment markets. Free money sets a very low hurdle for a short-term investment and as long as the transaction has decent liquidity,

why not do the trade. As a result, almost every equity, commodity, and credit market is moving higher. High beta currencies are

moving higher as well, as risk is clearly on the front foot. This positive mood began at the start of October, a bit more than a week after

Bernanke announced the start of Operation Twist, a subtle way to improve the prots of the banks and increase the risk of the Fed

without expanding its balance sheet. Global equity markets began to climb. Bernanke then announced an expansion and cheapening of

the US swap lines with Europe, which currently have $103 billion outstanding, adding massively to Europe and Japans liquidity. Mario

Draghis move into the ECB Presidency on November 1 was the next harbinger of a new wave of liquidity, as he dropped the renancing

rate a few days later and then announced the LTRO on December 8, expanding the ECB balance sheet by over 4% of t he GDP in one

day later in the month. By the end of December things were clearly moving up in all the traded markets, and Bernanke put the cherry

on the top of the sundae not once, but several times in the last few weeks. First, he announced that US rates would be extremely low

into late 2014, then, a bit later, he emphasized the likelihood of QE3 if there were any economic pause, and then Tuesday he told theUS Senate that he was not happy with the way the economy was growing more hopes for QE3. As the markets always respond to

monetary stimulus when the trend is already positive, prices will be forced even higher. Although we cant be positive about the

real economy, this expanding liquidity will keep us happy until a political accident intervenes. Europe offers some candidates:

Greece in March, followed by France in April.

Avoiding EM economies is the biggest gamble of all

The world this year will continue to be divided into deleveraging developed economies and emerging market economies without

excessive debt. The US and Europe will continue to experience sub-trend growth, with the main risk still a return to recession or

depression. Many emerging economies will grow close to trend, the main risks being country specic, not least ination. Developed and

emerging economies will continue to experience broadly synchronised intra-year inventory cycles due to the increasingly globalised

nature of the manufacturing supply chain, but the underlying growth stories and the demand side conditions will continue to differ

markedly.

Emerging countries are highly heterogeneous and no longer share the common feature of potential default should they be cut off from

foreign capital for the simple reason that they are now often the net creditors. All their main risk scenarios are either country specic, or

emanate from the mess in the developed world. The former can be avoided by a portfolio investor, the latter scenarios all pose greater

risks for those invested in the developed than in the emerging world.

Warren Buffett: Why stocks beat gold and bonds

Follow this link for the entire article which is worthwhile. I am including one small portion of the article which makes and important point:

Today the worlds gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet

per side. (Picture it tting comfortably within a baseball ineld.) At $1,750 per ounce -- golds price as I write this -- its value would be

about $9.6 trillion. Call this cube pile A.

Lets now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200

billion annually), plus 16 Exxon Mobils (the worlds most protable company, one earning more than $40 billion annually). After these

purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can

you imagine an investor with $9.6 trillion selecting pile A over pile B?

Mr, Buffett wrote on this topic long ago very near the $800 peak of gold in the early 1980s. He was criticized for his view then but he

was dead right. I believe he is right now and yet I remain bullish of gold and believe it should be a portion of long term portfolios. Mr.

Buffett has great faith in the eventual future of the United States and sanity of the countrys leadership. I am less sanguine. The currentadministration and legislative leadership is a kleptocracy made of greedy and self-serving blowhards lacking (as a group) the moral ber

to address issues that threaten their re-election. I prefer a bit of protection against the mendacity of this group.

growth of government made clear

This 3 minute 40 second video clip may be the most important

Clip you have ever watched ...

This is probably the most intelligent presentation of the truth

You have seen in a long time ....

Please take the time to view this clip and then share it with others

Now a Positive: Study of the Day: Gene Therapy Can Restore Vision One Eye at a Time

Ten states join effort to buy natural gas vehicles

China tells banks to roll over loans

China has instructed its banks to embark on a mammoth roll-over of loans to local governments, delaying the countrys reckoning with

debts that have clouded its economic prospects.

Chinas stimulus response to the global nancial crisis saddled its provinces and cities with Rmb10.7tn ($1.7tn) in debts about a

quarter of the countrys output and more than half those loans are scheduled to come due over the next three years.

From The Absolute Return Letter

The latest report from Instituto Nacional de Estadistica suggests that the overall level of unemployment in Spain now stands at 22.85%

(see here) and youth unemployment has risen to more than 50%. Although a ourishing black economy in Spain ensures that not all

these people are without work, the relentless rise in unemployment is crippling the domestic economy.

This is a combustible and impatient demographic BBL
http://www.zerohedge.com/news/money-money-everywherehttp://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/?section=money_topstories&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fmoney_topstories+(Top+Stories)http://www.youtube.com/watch_popup?v=xOAgT8L_BqQ&feature=player_embeddedhttp://www.theatlantic.com/health/archive/2012/02/study-of-the-day-gene-therapy-can-restore-vision-1-eye-at-a-time/252655/http://www.stateline.org/live/details/story?contentId=630771http://www.stateline.org/live/details/story?contentId=630771http://www.theatlantic.com/health/archive/2012/02/study-of-the-day-gene-therapy-can-restore-vision-1-eye-at-a-time/252655/http://www.youtube.com/watch_popup?v=xOAgT8L_BqQ&feature=player_embeddedhttp://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/?section=money_topstories&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fmoney_topstories+(Top+Stories)http://www.zerohedge.com/news/money-money-everywhere


9/9


The chart below resembles similar charts in the US when the Fed rst began various rounds of liquidity injection into the US banking

system. The result is likely to be similar. Very of little of the liquidity gets into the economy but is absorbed into the banking system

which is too busy trying to bail out old investments to bother making new ones. Classic pushing on a string, so far, though this does not

cover the period after the LTRO was initiated. This M3 series needs to turn up.

I remain generally positive on US and Emerging market equity markets as the staggering sums of central bank credit

expansion will leak into equity prices as the markets re state the relative value of real assets to the declining value of newly

printed at paper. Lean heavily to strong franchise, safe balance sheets, and a history of reliable management. Diversify

across countries since none of them can be trusted.

Bruce Lawrence

Documents

Weekly Strategic Plan 02132012