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 BO s last week. We saw most other markets oscillate from the 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 don t believe they will do it. Article 125 of the EU treaty prevents the ECB from bailing 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 Europe s 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. For scenario planning I would prepare for sideways while have contingency plans for a downside shock.

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

Longs:  US Shorts:         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/Daily o NG in Weekly B3 (3.606-3.628) o S in Weekly B2 (1120.5-1141) o SM in Weekly B2 o W in Weekly B3 (605-623) o CC in Weekly B2 (2390-2428)  Qtrly/Monthly Spreads      +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.

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 outperformed sectors 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.

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

The table on the next page provides the performance of a list of ETF s 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.

Bespoke weekly, monthly and quarterly % performance across specialty ETF s

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.

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?

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 action and 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).

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.

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 Australia s 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 ones money 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 emini s 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 at the 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.

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 don t 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

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 didn t downgrade US debt after the failed talks was b/c of that $1.2T trigger if it gets scaled back, Moody s, 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 won t be eased all that much going forward. __________________________________________________________________________________

Death of a currency as eurogeddon approaches

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 by the 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 with the 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 about possible 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 force Germany 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 the lady's not for turning.

This has caused remaining international confidence in the euro to evaporate, and even German bunds 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 what had 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 decently can. British banks have stopped lending to all but their safest eurozone counterparts, and even those 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 to the 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. World s 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

still running north of the ECB s 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 of Belgium 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 don t voluntarily sign up for the swap Reuters http://reut.rs/t5nXEY SNB stands ready to act - Switzerland s central bank remains ready to act if the franc s strength

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 of slowing demand WSJ http://on.wsj.com/uHwMov Is this really the end? Unless Germany and the ECB move quickly, the single currency s 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 hit the 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 should continue 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

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 (late cash 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 to afford 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 domestic needs, with Mexico, Brazil and China all big losers. With China now saying they may run a full year trade deficit 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.

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, about twice 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.

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. BBL This last chart is what pushing on a string looks like. _________________________________________________________________________________

Let me tell you what I find most terrifying: we re having this discussion about a risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners 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