ICM Weekly Strategic Plan : Jan 15 2012

Liquidity Cycle Indicator: The markets continued to be buffeted by the swirling news out of Europe this week and the Liquidity Cycle Indicator of conditions in the economy is still caught within the range of the past several months. The current readings are at the highs of that range, hinting of an upside breakout. Better performance by banks and financials since the first of the year is supporting the indicator at present. Chart low right. The SPY chart reveals a gap up the first week of the year followed by a brief breakout this week and the subsequent pull back into last weeks range on Friday. The Friday pullback was accompanied by a fall in the Euro to its recent lows and a week that saw a number of economic releases that were below expectations for the first time in several weeks.

Central Bank suppression of interest rates combined with risk off and flight to safety continues to keep treasury rates at otherwise absurd levels. The implication of these non-existent yields is very negative for economic recovery.

Bespoke noted : Chart courtesy of Bespoke investment

Given the strong performance of the sector, there seems to be a consensus building that the worst for the sector is behind it, butbe forewarned that we have deen this play out twice before. Who knows, maybe a third time will be the charm. We have made positive comments in the past regarding the sectors potential for 2012 and said low double digit returns were possible for the year, but with some stocks in the sector already up by that much this year, they may have gotten ahead of themselves.
Bespoke

Financials will bear watching including the etfs, BKX (banks including the TBTF banks) and KRE the (regional banks). Donald Coxe said in November We'll stick to our long-stated view that
the KRE will give the signal that the economy is really on its way back when it solidly outperforms both the S&P and the BKX at a time of rallying equity prices.

Two years of sector performance

This following chart shows some international indices wit recent 2 days performance and current PE, dividend rate, and 52 week % change. Note the United States tops the 52 week performance list. The category AVAT is the change in volume relative to the average of the past 10 days and some of the large jumps reflect very low volume over the holiday period. The US has been disappointing in that regard.

The currency performance ranking at weeks end has the Dollar, Aussie Dollar and the Yen as best trends. The clear loser is the Euro, and the Scandinavian currencies pulled down by Euro worries.

Ranking Global Indices shows the U.S. ranked 1 and with the only outright buy permission.

Market Environment readings show bullish fixed income but still a lot of quiet and neutral volatility.

Spreads and Curves First a look at the 5 year CDS swap curves for prominent European countries shows a modest ease in the last few days. Note this chart is only for a period of 2 months. Announcements in November and then at the important December 9/10 meetings and through Friday the 13th of Jan. The small amount of relief in these curves reflects the growing realization that the 3 yr LTRO plans combined with the very generous expansion of acceptable collateral for these loans does substantially ease the immediate liquidity problem that resulted from the breakdown of bank to bank short term lending. Overall financing and solvency are not improved in any way but panic is diffused by the mutual willingness of all parties to go along with the charade. Ponzi would be proud. The difference in the behavior of Italian 3 month yields and 10 year Italian bond yields clearly demonstrates the short term nature of these measures.

The USDA report on Thursday was very disappointing for the grain bulls as yield and crop production was not diminished as the market had come to expect.

Sharply reduced backwardation between crop years. Soybeans saw similar fall in backwardation between crop years as supply estimate increased.

Wheat had weaker prices but contango stayed in place in Chicago and Kansas City and the premiums in Minneapolis shrank a bit but still remain.

Copper prices jumped and backwardation increased modestly on increased hopes for a China easing

Energy both Brent and WTI prices moved lower over the week with modest softening in the curve in the very front end. This despite all the noise around Iran and the Straits of Hormuz.

The Natural Gas market continues to see weaker prices in a relentless downtrend and this is reflected once again by the widening of the contango. The outlook for NG is still bleak until export facilities for lng are completed and functioning. Then the prospects for firms like Cheniere (LNG) look very bright as the cheap prices in North America and increased demand for lng by countries that are shuttering nuclear facilities, like Japan and Germany, will mean significant demand for US exports. In the meantime, users of natural gas like fertilizer manufacturers, aluminum companies and cement plants all are benefitting from lower costs.

Commentary and news of interest this week LNG vulnerability to Straits of Hormuz
In the event of a blockage in the Strait, at least some crude flows could be diverted through alternative routes (Saudi Arabia's East-West Pipeline and Abqaiq-Yanbu NGL pipeline; the UAE's under construction Habshan-Fujairah pipeline). But there is virtually no flexibility for LNG, with the Strait of Hormuz the only route for global gas from Qatar and the UAE, which together account for 34% of global supply. In 2012 Qatar will produce 77 million tons of LNG and the UAE will produce 6.1 million tons. Over 60% of those volumes are expected to go to Asia, 33% to Europe, 4% to South America and 2% to the US. The UAE sends all its LNG to Japan accounting for 7% of the Japanese market while Qatar supplies 95% of Belgium's LNG market, 80% of the UK, Italian and Indian markets, 40% of the Chinese market, 28% of the South Korean market and 21% of the Japanese market. While Europe and China have some optionality to turn to pipeline supplies in case of a disruption to LNG volumes, South Korea and Japan do not. Japan is especially vulnerable to fuel supply disruptions this year with the closure of nearly its entire nuclear fleet. No matter how remote the occurrence of the closing of the Strait of Hormuz the significance of this route to the LNG market and particularly Asian buyers will serve to put upward pressure on spot LNG cargoes this year. From a Washington advisory group US Agriculture exports to be negatively impacted by stronger dollar according to comments by Andy Lees of UBS Japan, the worlds largest corn importer, doubled grain purchases from Europe in the past two

months, heading for record levels this year, as local feed mills seek cheaper alternatives to US supply. The imports are coming from the Black Sea region so Ukraine, Romania and Hungry. Japan had sourced 90% of its needs from the US in 2010 but European shippers offered corn to Japanese buyers at more than USD20 a ton cheaper than the US. They are taking advantage of cheaper currencies against the US dollar according to the Japanese commodity broker Fujitomi. Japan imported 10.8m tons of corn last fiscal year of which 88% came from the US, with Argentina and Brazil counting for 10.4%, but with imports from Europe now looking like exceed 1.5m tons, there is clearly going to be some loss of market share. Weather affecting South American and other non US crops becomes just that much more important because of currency related demand shifts.

Also from Japan some good US news related to Yen strength this time. This too pointed out by Andy Lees of UBS. Toyota said it wants its North American operations to become a big exporting base. We are looking for the opportunity for any North American product to be exported. We have 12 models now being produced in North America, and each one of them has its own potential. We are

thoroughly reviewing the potential. Last year it started to export its Camry model from the US to South Korea., but it said This is just the beginning of a new era of North America being a source of supply to many other parts of the world. Equally as importantly it said it wants to reduce its exports from Japan from 1.7m vehicles to 1.5m to escape currency losses, but will look to increase domestic sales by 200,000 to keep its pledge of producing 3m vehicles a year in Japan.

In-Depth Research: Falling Net Issuance to Provide Tailwind for Treasury Supply

Falling Net Issuance to Provide Tailwind for Treasury Supply * Falling net issuance in 2012 should provide yet another tailwind to 2012 coupon issuance. * The sharp rise in net issuance is mostly due to the first 3yr notes issued at the turn of 2009 starting to mature and sharply higher 2yr auction sizes seen in early 2010 coming due. * The Fed's Operation Twist program is also kicking short-end coupon supply back onto the market, increasing redemptions and suppressing net issuance. We expect this tailwind to continue as 2012 supply kicks off, with net issuance set to drop off sharply on a monthly basis due to a number of technical factors. The first 3yr notes issued at the turn of 2009 have begun coming due, leading to a spike in redemptions. Accelerating the increase in redemptions (especially in early 2012) is the maturing of record-high 2yr note issuance in early 2010. If this is not enough, the Fed's Operation Twist program has also kicked short-end coupon supply back onto the market, increasing ex-Fed redemption sizes and therefore depressing net issuance. We believe that given the extremely uncertain global outlook amid a plethora of European risks and positive tailwinds from decreasing net issuance, demand for Treasuries should remain close to extreme historical highs in the coming year.

From 4CAST

3 More Charts That Support The Bull Case For Housing Read more:
http://www.businessinsider.com/deutsche-bank-bull-case-for-housing-2012-1#ixzz1jZelkPid There's no question that optimism for a housing recovery has hit a level that we haven't seen since the crash. Late in December, WSJ's Gregory Zuckerman reported that several big funds were betting on a recovery. Meanwhile, the homebuilder stocks have been among the best performers over the past couple of months. However the fact of the matter is that the data hasn't been that good. New home constructions are still anemic, prices are still falling, mortgage applications are going nowhere, and so on. So then... In a note, Deutsche Bank's Joe LaVorgna and Carl Riccadonna argue that the conditions are being set for a recovery. These three charts from the report are all key. First, more people are showing up to look at houses.

And the fact of the matter is that housing affordability (a function of prices, interest rates, and incomes) is impressive.

And finally, the industries that support housing (construction, architecture, etc.) are showing signs of life.

These aren't the numbers that will really get anyone too excited, but they do hint at something happening. And when you consider just the basic population/household creation needs, there are reasons to be happy.

The article below is a guest contribution by Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors. What a decade! A rapidly urbanizing global population driven by tremendous growth in emerging markets has sent commodities on quite a run over the past 10 years. If you annualize the returns since 2002, you find that all 14 commodities are in positive territory. A precious metal was the best performer but its probably not the one you were thinking of. With an impressive 20 percent annualized return, silver is king of the commodity space over the past decade with gold (19 percent annualized) and copper (18 percent annualized) following closely behind. Notably, all commodities except natural gas outperformed the S&P 500 Index (SPX 1289.09 0.49%) 10-year annualized return of 2.92 percent. Last year did not seem reflective of the decade-long clamor for commodities. In 2011, only four commodities we track increased: gold (10 percent), oil (8 percent), coal (nearly 6 percent), and corn (nearly 3 percent). The remaining listed on our popular Periodic Table of Commodity Returns fell, with losses ranging from nearly 10 percent for silver to 32 percent for natural gas.
Read more: http://www.investmentpostcards.com/2012/01/14/what-the-next-decade-holds-for-commodities/#ixzz1jZhzhzUu

Link to chart pdf I think this chart is a must-have for investors and advisors because you can visually see how commodities have fluctuated from year to year. Take natural gas, for example, which posted outstanding increases in 2002 and 2005, but has been a cellar-dweller for the last four years as a result of overabundant supply and softening demand. The industry is also still trying to digest breakthrough technology that opened the door to vast shale deposits at a much lower cost.
http://www.investmentpostcards.com/2012/01/14/what-the-next-decade-holds-for-commodities/#ixzz1jZjnKev4

Der Verkauf Ist Verboten - Germany Considers Ban On Sovereign Bond Sale Zerohedge When back in August, Europe declared a short selling ban of any financials (here we are willing to channel Romney, and make a $10,000 bet with anyone that said ban will never be lifted), and which as we predicted has had no favorable impact on bank stocks which have since tumbled, we suggested that the next step will also be the final one: the passage of laws prohibiting sales of any kind. As usual we were partially joking. And as so often happens, we are about to be proven right again. As the FT reports in its headline article today, whose gist is simple enough, that Europe is on the verge, it is the tactically-placed final paragraph that is of particular curiosity. It says the following: "Speaking on the fringes of a start-of-year retreat of her Christian Union lawmakers in the city of Kiel, Ms Merkel said she would consider calls from her party colleagues for legislation to bar institutional investors such as insurance companies from selling bonds when ratings were downgraded, or fell below investment grade." Allow us to recopy and repaste the key part: "legislation to bar institutional investors such as insurance companies from selling bonds." And there you have it: after everything else has failed, the state, not the politically independent, if at least on paper central bank, is about to formally enter the capital markets. And yes, first it will be a ban of selling on downgrades, then it will be a ban of selling on any downtick, and finally it will be a ban of selling anything and everything. FT article Fed worries and QE considerations In the meantime, the Fed remains concerned about the housing market as is clear from its recent advice that Congress should be allowed the Fannie and Freddie to lose even more money to support housing!Thus, a Fed study on US housing market sent to Congress last week stated that some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery (see Federal Reserve white paper The US housing market: Current conditions and policy considerations, 4 January 2012). The report also noted that since early 2006 more than US$7tn in home equity, measured as aggregate home values less mortgage debt, has been lost with the home equity to disposable personal income ratio falling to a record low of 54% in 3Q11 (see Figure 4). From Greed and Fear Jan 12,2012

This is a big worry for the Fed. QE2 was largely triggered by Fed worries of deflationary expectations taking hold and leaving the Fed with few viable tools to fight. So QE2 was initiated to anchor inflationary expectations in the Feds own words. I remember that language clearly because I found it an ironic twist on the exact phrase being used in the late 70s when the Fed was trying to lower inflation expectations that were running away upside. Deflation is still the Feds biggest fear. QE will come to help secure more expectation of inflation, not to fight it. BBL ______________________________________________________________________________

This does not look to be a signal of impending Global Growth

Saudi Arabia a Net Consumer of Energy ??

A report by the Thinktank Chatham House suggests Saudi Arabia is facing an energy crisis as domestic consumption is rising by 7% pa, a rate that will double domestic consumption over the next 10 years, and on a business as usual trajectory would become a net importer of energy by 2038. Clearly that is not going to happen, but in the absence of change and with the countrys high dependence on oil revenues, the economy would collapse long before that point. The government is already in budget deficit, but at USD80bbl, the price the government thinks is fair, it would run into an intractable current account deficit by 2022. To move towards a more sustainable system, it will have to reverse its history of low energy prices and manage a transition to higher prices, but of course that would raise the issue of no taxation without representation, potentially putting government at risk, particularly given the rapid growth and young age (over 1/3rd of its population are less than 14) of its population. At present growth rates, the export market could be deprived of 2m bpd or around 30% of Saudis crude oil, refined product and NGL exports, totally undermining the IEAs supply scenarios Chatham House pdf report

Bill Gates Has Given Away $28 Billion Since 2007, Saving 6 Million Lives
Neat infographic on Bill Gates from Frugal Dad. Since 2007 Gates has given away 48% of his net worth, or $28 billion, which has helped save 6 million lives. It takes a second for the graphic to load. (For more check out 10 ways Bill Gates is saving the world.)

Read more: http://www.businessinsider.com/bill-gates-infographic-2012-1#ixzz1ja0Epapu

This graphic is linked to the Infographic and is worth the time.

Final remarks Watch China for more signs of easing policy. They face some very big problems but food inflation risk is falling, global trade is softening ahead of the real impact of European austerity plans, the US recovery is limping along but is not sufficient to carry the global economy on its own as it has in the past. The payroll tax extension expires soon and debate needs to resume and will be impeded by campaign concerns rather than sound policy. The country can ill afford further embarassments like the debt ceiling fiasco, and by the way that issue comes up very soon again. So pay attention to Washington for it will once again be churning the markets mood. But the big worry remains Europe where Greece is on the edge of deciding default is a better answer than perpetual servitude to an EU budget committee. Plus as we close in on the end of January target for a framework for new fiscal budget authority at the EU level sacrificing national sovereignty will be a bitter, and I believe, unacceptable pill for the citizenry of many members of the Eurozone. That is going to be the pivot point for the survival or failure of the single currency. It is enough to make ones head hurt, so I am taking vacation. Have a great week.