weekly strategic plan 10082012

7/28/2019 Weekly Strategic Plan 10082012

1/11

Liquidity Cycle

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.

The stock market came into the week having corrected the overbought condition created by the surge higher immediately following the QEnity

announcement in mid -September. The prices advanced all week fueled by optimism that OMT in Europe might be coming soon and by Draghis

remarks that the ECB was prepared to buy bonds and support any country that requested conditional aid. The implication being that there is

agreement in place by all necessary parties even if unofcial. Friday The unemployment rate fell sharply in the US fueling a sharp rally in the

morning. The latter part of Friday markets gave back t he early gains, falling enough to make trade at the start of this new week worth watching. The

upside trend must still be given the benet of the doubt given the central banks stated intention of providing ample liquidity almost for free for the

forseeable future. Dont ght the Fed is an old aphorism on Wall Street. But longer term remember the Fed is not looking out for you. The Fed is

owned and works for the banking system. Easy money is always eventually paid for by the middle class until the middle class fails and the nancial

system collapses.

The Liquidity Cycle Indicator pull back was more denitive during the consolidation of the Index but it began to regain momentum this week

too. Allocators are adding risk on assets but seem quick to back away on poor news. Conviction is low. Actual OMT spending in Europe, more

aggressive ease in China and further BOJ action are needed to keep money owing on hopes for better global growth. The US economy has

been performing better than Europe or China none are strong. If growth prospects do look to be improving values in Europe and some of the Asian

markets are more attractive and should begin to catch up to the US.

All three major US indices sold off Friday afternoon.


2/11


Sentiment at least by this measure is rather neutral as the consolidation since FOMC has worked off the overbought conditions. Small investors

represented by the AAII bullish sentiment have been reluctant to follow the equity index higher so far. Should the public become more optimistic, there

is buying power available to power further gains.

The Bespoke Economic Diffusion Indicator has been performing better since late 2011 and is now climbing to the top of its historical ranges. After an

extended upside run optimistic expectations raise analyst estimates and the diffusion indicator begins to disappoint and lose momentum which in turn

weakens enthusiasm among the bulls.

The interactive chart from FinViz.com is linked to its source but even a glance at the 5 day performance clearly shows mostly green as equities

advanced for the week. The late Friday move down did leave some red and those are found mostly in the technology and energy sectors, which have

been leaders on important rallies.
http://www.finviz.com/maps/historical/1005121600/sec_w1/sp500_w1_small.pnghttp://www.finviz.com/maps/historical/1005121600/sec_w1/sp500_w1_small.pnghttp://www.finviz.com/maps/historical/1005121600/sec_w1/sp500_w1_small.png


3/11


This next chart compares the yield curves of Spain, Italy, France and Germany and the spreads between Germany and the others in the botto

Fixed Income: Fixed Income prices are still near al time highs as a result of central bank reafrmation that ZIRP will be maintained till early 2015

and direct purchases in markets will continue for an open ended period conditional upon evidence of more robust and sustained economic strength and

much lower unemployment. The longer term instruments are trying to price in the likelihood and level of higher ination if central bank policies work.

Italy and Spain must pay increasingly heavier penalties in yield at the short end until reaching premiums of 300 and 400 basis points over G

around 5 years leveling off after that. France on the other hand has little extra premium to Germany at present. The prospects for downgrade of

credit and deterioration of French nances make it worth considering a long German short French credit spread in the 3-year duration. I so n

this trade on but I am going to look for a way to take advantage of the setup.


4/11


Volatility Environment Equity Index Volatility

Index implied levels are all in the low end of range which historically has been a marker of complacency about risk. Central bank assurances

money indenitely have apparently reduced the demand for put protection. I personally am somewhat less condent of central banker abili

intentions.

The following has the implied/realized table and the skew table for the indices. The implied to realized vols are pretty similar and skews are ge

in the low end of their ranges sending much the same message of complacency as the implied vols.


5/11THIS 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.

Commodity and Energy Vols

Implied/Realized and Skew table


6/11THIS 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.


7/11


Currency 3 month implied vols

Foreign Exchange

5 day returns versus the dollar last week

Implied to Realized and Skew tables on next page.


8/11


Commitments of Traders Charts from 4 Cast show the big decline in the number of Euro short positions. Longs in Aussie and Canadian Dol

still strong.

USD

EURO

Aussie


9/11


Canada


10/11


Articles and Commentary

I am going to make this short today (as well as late) because I am out of town and so I will use links rather than more complete text.

Unintended Consequences of Well-Intended Policies

In the early 1960s, when JFK was in the White House and William McChesney Martin was Fed chairman, Keynesian economics was in full bloom.

One of its major tenets is the Phillips Curve, which posits a stable inverse relationship between the rate of ination and the unemployment rate. Yale

professor James Tobin and others argued that the social outcome could be improved by a more activist monetary and scal policy. Specically, they

contended that the unemployment rate could be lowered while only resulting in slightly higher ination.

The argument posited the notion that economic policymakers had sufcient knowledge to intervene or ne-tune the economy with tools like those of

a surgeon. Presidents Johnson, Nixon, and Carter (two Democrats and one Republican) followed this policy. At one point,

President Nixon made the famous statement that We are all Keynesians now. Moreover, as the White House led, the Fed chairmen of the era

Martin, Burns, and Miller generally acquiesced.

To judge the effectiveness of this policy, an objective standard is needed. Arthur M. Okun, Yale colleague of Tobin, developed such a standard,

which he called the Misery Index the sum of the ination and unemployment rates.

Under the activist, Phillips Curve-based policy, some reduction in unemployment was temporarily achieved. However, ination accelerated much

more than was anticipated, and the net result was higher unemployment and faster ination, an outcome not at all contemplated by the Phillips

Curve. The Misery Index surged from an average of 6.7% in the 1950s, to 7.3% in the 1960s, to 13.6% in the 1970s, with peak rates above 20%

in the early 1980s. Many US households suffered. Wages of lowerpaying positions failed to keep up with ination, and when higher unemployment

resulted, many of those people lost their jobs. Those on the high end had far more resources that enabled them to protect their investments and

earned income, so the income/wealth divide worsened. A half-century later, the United States has never regained the prosperity of the 1950s.

Working independently in the late 1960s, economists Milton Friedman and Edmund Phelps, who would both eventually be awarded the Nobel Prize

in economics, had determined that while the Phillips Curve was observable over the short run, this was not the case over the long run. While the

economics profession debated the Friedman/Phelps research, the US had to learn its ndings the hard way.

Growing Evidence of the Long-term Depressants from Activist PoliciesIn addition to the compelling evidence that more active monetary and scal policy involvement did not produce benecial results over the short

run, three recent academic studies, though they differ in purpose and scope, all reach the conclusion that extremely high levels of governmental

indebtedness diminish economic growth. In other words, decit spending should not be called stimulus as is the overwhelming tendency by the

media and many economic writers.

Whereas government spending may have been linked to the concept of economic stimulus in distant periods, t hese studies demonstrate that such

an assertion is unwarranted, and blatantly wrong in present circumstances. While ofcials argue that governmental action is required for political

reasons and public anxiety, governments would be better off to admit that traditional tools only serve to compound existing problems.

These three highly compelling studies are:

Debt Overhangs: Past and Present, by Carmen M. Reinhart, Vincent R. Reinhart, and Kenneth S. Rogoff, National Bureau of Economic Res

Working Paper 18015, April 2012;

Government Size and Growth: A Survey and Interpretation of the Evidence, by Andreas Bergh and Magnus Henrekson, IFN Working Paper N

858, April 2011; Page 2 Quarterly Review and Outlook Second Quarter 2012

The Impact of High and Growing Government Debt on Economic Growth An Empirical Investigation for the Euro Area, by Cristina Cheche

Philipp Rother, European Central Bank, Working Paper Series 1237, August 2010.

These papers reect serious research by worldclass economists from the US, Europe, and Sweden and they all conrm the detrimental

consequences of extreme governmental indebtedness.

Misery on the Rise Again

In the past year, Okuns impartial arbiter averaged 10.5%, the highest on record for the third year of an ofcially recognized economic recove

almost double the average of the 1950s. The latest readings have occurred despite US gross public debt in excess of 103% of GDP and with

Federal Reserves unprecedentedly large balance sheet that approaches nearly $3 trillion.

Other measures of well-being conrm the Misery Index. The Poverty Index in 2011 appears to have reached 15.7%, the highest reading in ve

decades. Not surprisingly, two unenviable records have been set: 46 million, or 14.6% of the population, are now in the food stamp program, u

from 7.9% in 1970 and a record-high 41% pay zero national income tax.

In the eleven quarters of this expansion, the growth of real per-capita GDP was the lowest for all of the comparable post-WWII business cycle

expansions. Real percapita disposable personal income has risen by a scant 0.1% annual rate, remarkably weak when compared with the 2.9

post-war average. It is often said that economic conditions would have been much worse if the government had not run massive budget deci

the Fed had not implemented extraordinary policies. This whole premise is wrong.

In all likelihood the governmental measures made conditions worse, and the poor results reect the counterproductive nature of scal and mo

policies. None of these numerous actions produced anything more than transitory improvement in economic conditions, followed by a quick re

to a faltering pattern while leaving the economy saddled with even greater indebtedness.

The diminutive gain in this expansion is clearly consistent with the view that government actions have hurt, rather than helped, economic

performance. Sadly, many of those whom the government programs were supposedly designed to help the most have suffered t he worst.

The Way Out

The original theoretical argument in favor of decit spending originated in J.M. Keynes The General Theory of Employment, Interest and Mon

A search of Keynes work reveals no recognition of the bang point, or the condition where a government engages in decit spending for such

prolonged period of time that a massive buildup of debt leads to denial of additional credit to the government because of fear that t he existing

will not be repaid. Nor did Keynes address the situation where a large number of countries are all simultaneously getting deeper and deeper in

and there are gradations of debt among these countries serious shortfalls in the basic Keynesian theory.

Keynes, as opposed to some of his interpreters and predecessors, may have implicitly recognized that a bang point could occur, because he d

recommend constant budget decits. Instead, he advocated cyclical decits, counterbalanced by cyclical budget surpluses. Under such a sys

government debt in bad times would be retired in good times. However, Keynes original proposition was bastardized in support of perpetual d

something Keynes himself never advocated.

Milton Friedman, whom many consider to have been the polar opposite of Keynes, also never addressed the concept of a bang point, but he m

also have understood implicitly that such a situation could occur. The reason is that Friedman advocated balanced budgets, which if followed

or required constitutionally as Friedman argued, would prevent a buildup of debt. This view was largely rejected as being inhumane since in a

recession, government policy would not be responsive to unemployment and other miseries of such a condition. What should have been discu

is whether some short-term misery is a better option than putting the entire country and economic system in jeopardy, as numerous examples

Europe currently illustrate.

The most sensible recognition of budget policy came not from Keynes nor Friedman, but from David Hume, one of the greatest minds of man

whom Adam Smith called the greatest intellect that he ever met. In his 1752 paper Of Public Finance, Hume advocated running budget surplu

good times so that they could be used in time of war or other emergencies. Such a recommendation would, of course, prevent policies that wo

send countries barreling toward the bang point. Countries would have to live inside their means most of the time, but in emergency situations

have the resources to respond. In the context of todays world, this approach would be viewed as unacceptable because it would limit the abil

politicians to continue their excessive spending, thereby saddling future generations with obligations and promises that cannot be honored. Bu

Humes recommendation exactly what we teach our children in preparing them to manage their own personal nances? --Lacy Hunt PH


11/11


Jim Grant video Chinas naked truths reveal emperors garb

The Chinese Communist party would like the world to believe that the forthcoming trial of Bo Xilai will be a triumph of authoritarian self-policin

evidence of its ability to root out a few bad apples.

In fact, the downfall of one of the countrys most senior politicians and the lurid details of murder, sex, money and power that accompanied it h

had almost entirely the opposite effect.

From revelations of massive corruption to the murder of British businessman Neil Heywood by Mr Bos wife Gu Kailai, the sordid affair has sho

the Chinese people and the world that the rot goes right to the top.

For the last three decades, the party has carefully cultivated the perception that, while there may be corruption and wrongdoing at lower levels

system is governed by clean and seless elites who live only to serve the masses.

Kyle Bass Interview

Fukishima repair beyond current technology

Instead of my usual comment I am turning over the podium to my nominee for the new US Ambassador to the United Nations. Here is the link

video commentary.

Have a good week

Bruce Lawrence Oct 8, 2012
http://www.zerohedge.com/news/2012-10-03/jim-grant-asks-phd-standard-allow-markets-finally-clearhttp://www.ft.com/intl/cms/s/0/5429129e-0e2b-11e2-8d92-00144feabdc0.html#axzz28LaAYJKdhttp://www.zerohedge.com/news/2012-10-03/kyle-bass-federal-budget-i-dont-know-how-fixhttp://www.zerohedge.com/contributed/2012-10-04/fixing-fukushima-beyond-current-technologyhttp://dotsub.com/media/b5ee5ada-5b37-4b0b-9916-e0896337ec4b/embed/enghttp://dotsub.com/media/b5ee5ada-5b37-4b0b-9916-e0896337ec4b/embed/enghttp://dotsub.com/media/b5ee5ada-5b37-4b0b-9916-e0896337ec4b/embed/enghttp://dotsub.com/media/b5ee5ada-5b37-4b0b-9916-e0896337ec4b/embed/enghttp://www.zerohedge.com/contributed/2012-10-04/fixing-fukushima-beyond-current-technologyhttp://www.zerohedge.com/news/2012-10-03/kyle-bass-federal-budget-i-dont-know-how-fixhttp://www.zerohedge.com/news/2012-10-03/kyle-bass-federal-budget-i-dont-know-how-fixhttp://www.ft.com/intl/cms/s/0/5429129e-0e2b-11e2-8d92-00144feabdc0.html#axzz28LaAYJKdhttp://www.zerohedge.com/news/2012-10-03/jim-grant-asks-phd-standard-allow-markets-finally-clear

weekly strategic plan 10082012

Documents