weekly strategic plan 10092011

8/3/2019 Weekly Strategic Plan 10092011

1/11

Liquidity Cycle PictureThe stage 1/3 ratio remains in the overall downtrend indicating weaker equities andcontinued weak prospects for the ECRI weekly leading indicators index. Some of theinternal components are beginning to hint at changes in play. Financials continue to bevery weak as a group especially under the influence of the crisis in European banks due

to sovereign debt exposure. The other components of the stage 1 group are performingmuch better and on their own would be signaling bottoming action and anticipatingfirming in the economy soon. The downside leadership in the market in the last fewweeks has been in the stage 2 group. Industrials became very weak in late summer thenmore recently the basic materials collapsed and the energies also corrected sharply. Suchprice action is consistent with corrective part of the cycle as is the outperformance of thestage3 defensive sectors.

Interest rate markets have been consistent with this equity price action as continued easyFed policies confirm the centralbanks pessimistic outlook. The past week saw some


2/11

pull back in the fixed income charts at the long end and operation twist already pushed upthe front end rates a tiny bit. This is also a very small hint at a change in marketconditions.

Equity seasonality is bottoming right now, as early October has for many years been the

average calendar low in the stock market.Earnings season is beginning for Q3 and recent pessimism has led to a large number ofnegative earnings revisions which improves the possibility for positive surprises to occur.The Bespoke chart and comment below illustrates the point.

The chart above shows the net analyst earnings revisions ratio for S&P 1500

companies over the last four weeks. At a current level of33.6%, a full one

third of companies have seen their earnings forecasts cut over the last

month. This is the lowest level since April 2009. Three months ago, net

revisions were right around flat as we headed into Q2 earnings season, so

analysts are much better prepared for weak numbers or guidance this

quarter than they were last quarter. One could even argue that the bar has

been set so low that it will be nearly impossible for companies to not to step

over it. On the other hand, if results fail to live up to these reduced

expectations, it could be ugly.

Bearish sentiment is reaching extremes as illustrated in the following Bespoke charts.


3/11

Notice every sector has had net negative revisions.

Advisor sentiment is way up and individual investors follow on next page.


4/11

Sentiment is not a timing tool but it is a useful warning of the potential for correctiveprice movement. I do not feel the economy is going to plummet or vigorously reboundsoon but I do feel the equity market is setup to rally sharply with any positive trigger,especially out of Europe.

PluralityOne of the most notable factors in the recent market turbulence has been a the reductionof global growth prospects and the seemingly sudden realization that Asia is vulnerableto this slower growth forecast. This has exaggerated the move in market sentiment to thedownside. Look at the sharp breaks in related markets and commodities.

Copper and Korea ETF


5/11

Germany ETF and Singapore ETF

During the September period market participants worldwide realized the Eurozoneleadership had no plan and no agreement to the sovereign risk problem and the Bernankhad nothing to offer either. The leadership vacuum in the developed world finally hithome. I could include Asian currency , basic materials indices, energies, commoditycurrencies charts all show the same picture. A colossal loss of confidence that a solutionto European sovereign risk was near triggered a massive liquidation in trades that hadbeen relative strength leaders. Fear took over.

Multiple scenarios could be considered but only two are pertinent at present.1. Europe finds a way to backstop the banking system allowing Greece to repudiate

its wildly excessive debt.2. Europe fails to save the banking system before it cascades into chaos.

Scenario one is hopeful and would result in a bit of rebound and continuation of theeconomic recovery in the US albeit at the same shuffling pace we have been experiencingup to now. Deep recession in Europe but not a collapse and renewed growth in Asia.

Scenario two will mean a very sharp new leg of the recent liquidation and a depression inmuch of Europe. Recession in the US and possibly Asia.

I believe this will be determined in the next 4 weeks. The strategy for an investor that Iwould suggest is :Invest in companies, countries, and currencies with the strongest balance sheets to insurethe return of your money. Within those groups look for the most reliable and protectedyields to insure some return on your money. Will Rogers would be proud.


6/11

Spreads and Curves

WTI and Brent crude curves retained their widely differing shapes but both moved up some fromone week ago. Some steepening in the very front of both curves occurred WTi remained incontango and Brent is backwardated still.

Todd Hybels forwarded me this item indicating the lengths to which the industry is going in orderreconcile price discrepancies resulting from storage and shipping limitations at Cushing.from today schork...

Crude oil prices were strong yesterday following a general rally in the equities and weakness in the dollar. Less

relevant to the short term, but no less interesting, were reports that Enbridge is talking to refiners along the East

Coast about reversing the companys Line 9 pipeline, which currently runs from Quebec to Ontario. The reversal

would allow crude to move to Portland, Maine on the Portland- Montreal pipeline system and then to points further

south.

Bringing crude oil to refineries on the East Coast makes sense given how tight refining in the region has been relative

to the Midwest. Consider that Bonny light out of Africa (used by East Coast refiners) is currently trading at 108.31,

whereas Canadian syncrude is trading more than 15 dollars lower at 92.59. This may not make margins as sweet as

those seen by refiners in the Midwest, but it would be a big boost for East Coast refiners. Our only concern is the

timeline - if approved, would not take place until 2014 at the earliest, and in the meanwhile refiners like Sunoco and

ConocoPhillips are already looking to mothball their East Coast refineries.

Rbob and heating oil also priced higher this past week with a slight steepening at the very front end of the curves

consistent with the price increase. There is talk that the shutdown of east coast refineries may lead to steeper prices

for the deep winter to april price spreads.


7/11

Grains and Softs

New crop corn prices advanced slightly this week and front contracts in the delivery yearalso steepened within the contango confirming some mild bullishness. The drop after the

crop updates has found some demand at those levels.

Soybeans also rallied on the week and like corn found the front contracts gaining on moredistant deliveries even within the same crop year. A very slight flattening in the contangois supportive of the price increase.

Meal and Oil curves were little changed except for the contracts out 2 crop years did gainon the front flattening the backwardation some.

Sugar too saw modest upward price moves but movement was largest in deferred monthscontrasting slightly with the price move. But this may be the sugar market accepting thattight supplies globally will last longer than previously espected.

Coffee saw a price increase but back months moved much better than front, reducing thecontango.


8/11

Cotton rallied with bullish gains in the backwardation supporting the direction andindicating continued robust demand.

Wheat had little net movement in Chicago which is in contango with indicatingreasonable supplies. The Kansas City wheat is also in contango but with much less slopethan Chicago indicating tighter supply. Minneapolis is still the standout frading muchhighe in price than the other types and in clear backwardation still as buyers reach forspring wheat.


9/11

Environment and volatility


10/11

Commentary and Items that caught my eye - BBL

Chart fromCan markets find the road back to positive

territory?

Two China articles

China Could Send 3 Million Jobs Back To The US By 2015

Two Worrying Possibilities For China's Disappearing Bank Deposits

No one knows exactly what happened to $173 billion that was withdrawn from China'sbanks in July.

Victor Shih draws some disturbing conclusions in an essay atbeyondbric

US statstics

Consumer Credit Unexpectedly Fell In August By Most In Over A Year

The alarm over this big swing in consumer credit is misplaced. The previous numbershowed a very large jump in government non-revolving loans to consumers of 15Bdollars. That is the surge in school loans that we get just before fall and Januarysemesters. The following month does not have that jump and falls back. This happenstwice a year. The overall picture though is still worrying. Over 100% of the gain inconsumer credit since the bottom of the 2008 panic is due to student loans. There is nogrowth of any consequence in consumer consumption. As we have said for two years
http://www.investmentpostcards.com/2011/10/08/can-markets-find-the-road-back-to-positive-territory/http://www.investmentpostcards.com/2011/10/08/can-markets-find-the-road-back-to-positive-territory/http://www.investmentpostcards.com/2011/10/08/can-markets-find-the-road-back-to-positive-territory/http://www.investmentpostcards.com/2011/10/08/can-markets-find-the-road-back-to-positive-territory/http://www.businessinsider.com/china-could-send-2-to-3-million-jobs-back-to-the-us-by-2015-2011-10http://www.businessinsider.com/china-could-send-2-to-3-million-jobs-back-to-the-us-by-2015-2011-10http://www.businessinsider.com/two-worrying-possibilities-for-chinas-disappearing-bank-deposits-2011-10http://www.businessinsider.com/two-worrying-possibilities-for-chinas-disappearing-bank-deposits-2011-10http://blogs.ft.com/beyond-brics/2011/10/07/guest-post-chinas-disappearing-bank-deposits/#axzz1a5JtkMtlhttp://blogs.ft.com/beyond-brics/2011/10/07/guest-post-chinas-disappearing-bank-deposits/#axzz1a5JtkMtlhttp://blogs.ft.com/beyond-brics/2011/10/07/guest-post-chinas-disappearing-bank-deposits/#axzz1a5JtkMtlhttp://www.zerohedge.com/news/consumer-credit-contracts-most-may-1998http://www.zerohedge.com/news/consumer-credit-contracts-most-may-1998http://www.zerohedge.com/news/consumer-credit-contracts-most-may-1998http://blogs.ft.com/beyond-brics/2011/10/07/guest-post-chinas-disappearing-bank-deposits/#axzz1a5JtkMtlhttp://www.businessinsider.com/two-worrying-possibilities-for-chinas-disappearing-bank-deposits-2011-10http://www.businessinsider.com/china-could-send-2-to-3-million-jobs-back-to-the-us-by-2015-2011-10http://www.investmentpostcards.com/2011/10/08/can-markets-find-the-road-back-to-positive-territory/http://www.investmentpostcards.com/2011/10/08/can-markets-find-the-road-back-to-positive-territory/


11/11

now, until we see good growth in this number and in bank C&I loans we are not out ofthe woods. This is evidence of continued deleveraging and a changed liquiditypreference.

weekly strategic plan 10092011

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