Liquidity Cycle

The equity markets have made a dramatic run through this point in 2012 as this multi year point and figure chart of the SP clearly illustrates:

The Liquidity Cycle Indicator remains in uptrend though this two month chart does reveal a little sideways action the past few days near the highs. The Global version of the LCI also remains positive.

The overlay of the Liquidity Cycle Indicator with the ECRI weekly leading indicators index reveals much more sluggish rebound so far than we have seen in the LCI. These two indices have diverged slightly in the past only to rejoin over time. In 2009 the LCI took off before the ECRI index but later the LCI leveled off and ECRI caught up and powered even higher and both peaked together in first half of 2010. We may be something similar here, or the ECRI may be seeing trouble ahead that the more market based LCI is discounting. Laksman The current price level is also running into zones of expected resistance as is also clear on P+F chart. Plus the obvious and widely noticed divergence between the Industrials and the transports has many worried. The chart overlay below Shows the SPX, the INDU, and the TRAN and certainly recent behavior is eye catching. Achuthan of the ECRI is still firmly backing his recession call. His recent comments are below the chart.

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Comments from Lakshman Achuthan co-founder of ECRI on CNBC: (these comments are a bit disjointed as I extracted them from a conversation
that often include other voices talking over one another) -- when you look at the definitive hard data that is used to officially date business cycle recessions, it has been getting worse not better despite what the consensus view of an improving economy has been. and so i can clearly explain that. i would like to list them. so gdp growth, year over yet peaks in 2010 and falls down to 1.5% by q2 of 2011 and has flat lined essentially since then, the last reading 1.6. similarly personal income growth, -- im talking big, aggregate numbers, has the same kind of pattern, broad sales growth. the broadest measures of sales, same kind of pattern, industrial production growth year over year. as of january it is at a 22-month low. so you put all of this, this is what normally is done. this is not something just done for this conversation. you put it into a coincident index of the u.s. economy and if you look at the year over year growth of that index its now at a 21-month low. so 0, to be clear, it is the definitive measure of economic growth. in english the growth has been slowing. but we feel a lot better than we did. lets get to that but i want to be first on this. the index, the chart on the right-hand side of the chart thats a 21-month low. it has not -- you havent had a decline like that in the past 50 years without a recession following in short order, okay? so the right-hand side of that chart is a 21-month low and the growth rate of all of the indicators output, jobs, income, and sales. okay? and thats not cherry picked data. that is data that that is always used. so thats the reality. I wish this wasnt our forecast. we are the skunk of the garden party. its no fun. but to the point of the fed, whats going on there, youve got -- youve never seen something like this. the worlds central banks, plural, are printing money like crazy. like they know something. its part of the republic you feel better. that does make you feel better but go to where that interacts with the economy. you look at the velocity of money. how often does money exchange -- all that money thats going in, theyre goosing the money supply, how often does it exchange in the economy? thats a really important metric on the health of the economy. it has dropped to a record low in the united states. its near a record low in europe. its even near a record low in china. okay? these are not symptoms of health. and when you have all that money out there, its got to do something. so it is goosing the markets. does the coincidence index -- thats a fact. thats not a forecast. does it give an indication of whats coming in terms of the jobs outlook? have we seen the best number and is the jobs picture going to get worse from here? the index itself does not forecast forward. what weve seen there in that decline in the growth rate you havent seen in the past 50 years is not a recession in short order so that doesnt bode well for jobs. speaking to jobs, i admit, i am acknowledging they have improved through the latest readings, okay? but jobs are basically a bit of a lagging indicator. they follow. they do not lead consumer spending growth. c consumer spending growth -- would your call be that jobs are going to get worse? yeah, and id say in the next few months i would expect them to start to flag because they follow, they lag at turning points where consumer spending growth has been going and we know thats clearly been going down and if you delve into that, look at personal disposable income. this gets to your gas stuff. you look at personal disposable income that has been negative now growth for five months. youve never had that, not even close. we talk about short order. you keep say that go a recession is supposed to follow in short order. last year in the wake of making the call we did say that the recession should begin by midyear 2012. midyear 2012. first off on the leading indicators i look at them across the board. they are not negating our recession forecast, the full array. when we look at weekly index, people say, hey, its running up. its risen a little from its lows in december and given the mountains, i mean, were not in kansas anymore. were printing a lot of money. and given all that money im surprised the index hasnt lifted more because the risk assets are being goosed and look back to early 08. the recession begins in december of 07 and what happens? you get a springtime rally, double digits in s&p. weve gone much further this time. weve printed more money. we were cutting interest rates a little bit and back there inside of a recession oil went to $147 because the economy wasnt able to absorb all that liquidity. it didnt need it for commerce or for activity and or for activity and whats the dollar bill to do? its very troubling. this messes up your election. messes up my election. this is very troubling to you if this were to be -- these are facts not forecast. this is not a black box. gdp year over year growth rate peaked in early 2010. its flat lined at 1 1/2. personal income growth down. sales growth down. industrial production growth down to a 22-month low as of january. those are the indicators that are used to define recessions.

Sector Charts from Bespoke

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Fixed Income
Fixed income markets continue to confound by refusing to price in what appear to be inevitable increases in inflation propelled by the extraordinary quantity of money expansion occurring globally. Below are charts of the US treasury 2yr and 10 yr yields which remain very low, providing negative real returns promising only return of money rather than return on money.

Currencies
The foreign exchange markets saw some important levels broken recently as Euro has traded higher on the illusion of a solution to Greek problems. Across the globe the announcement of an inflation target by perennially deflation prone Japan has cut the legs out from under JPY strength while also giving the Nikkei a boost.

The relative calm in these markets reflects some flight to safety from the Euro, some fear of deflation and loss aversion, but mostly repression by central bank efforts to push the investor classes into taking greater risk. This will end badly and likely suddenly. I have a few emerging market bonds but I am out of the bond market otherwise. The risk reward is just too unattractive for my taste. In Europe there has been a good deal of pressure taken off of government yields by the LTRO program. Below is a chart of some of the troubled 5yr CDS values for the past couple of months which shows clearly the ease that has occurred.

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EURUSD and JPYUSD and Yen with Nikkei

Energies

WTI crude was firm all week and gained on Brent slightly while picking up over $3 last week. Iran, Syria and other mid east issues are leading to some protective buying as insurance and worries about oversupply at Cushing were overshadowed. The crude run has been as strong as that of the equity market sine Jan 1.

Agricultural commodities
The small 5 day graphic in the table demonstrates mostly flat to slightly higher ag markets this past week.

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The crude curves in both markets were increasingly backwardated in the face of supply uncertainties surrounding the advancement of the Iranian nuclear materials weaponization program. The speed with which Iran appears to be hardening its research sites deep underground is prompting talks of a very short window of opportunity for Israel to damage those sites with airstrikes only. The war of words has escalated significantly raising anxiety in an already unstable region.

Increases in crude oil prices have pushed gasoline prices up recently. This increase could be partly due to demand picking up as well as concerns about supply stemming from tensions in the Middle East. WTI and Brent spot prices have each increased almost 10% since the beginning of February and near-term gasoline futures (not shown) have increased about 50 cents/gallon since the third week in January (retail gasoline prices have been tracking Brent prices more closely than WTI prices lately).

Metals
Metals prices popped up between the end of December and the end of January, but have eased a bit since then. The CRB metals index was down almost 15%oya late in February. Various metals prices have behaved similarly to this metals index, including copper (shown), zinc, tin, and lead (not shown).

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Commentary and Information

The Strait of Hormuz
By Chris Campbell, Steven Bernard, Martin Stabe and Katie Carnie of Financial Times Over the past month Iran has threatened to block the Strait of Hormuz if western powers target its oil exports. This map shows Iranian naval assets in the region along with international maritime boundaries, shipping lanes, terminals, pipelines and major oil and gas fields. Military leaders have warned that 80 per cent of the UKs liquefied natural gas imports would be halted if Iran made good its threat to block the Strait. A closure of the Strait would leave Gulf states scrambling for alternative routes to export the millions of barrels a day of oil on which the world depends, and oil prices have risen above $110 a barrel since Irans threat to shut down Hormuz. Chart links to interactive chart at FT.com

Environment and Volatility

N. Alaska May Hold 80T Cubic Feet of Shale Gas

Alaskas North Slope shales may hold as much as 80 trillion cubic feet of gas, or more than half the highest estimate for the Marcellus formation, and as much as 2 billion barrels of oil, the U.S. Geological Survey said. President Barack Obamas administration and the state of Alaska are offering more access to oil and natural gas resources on land and in the Arctic waters to help lower dependence on imported fuel and push more crude through a major oil pipeline crossing the state. Royal Dutch Shell Plc (RDSA) plans to start drilling this year in the Chukchi and Beaufort seas, which are off the coast of the North Slope. Alaskas energy resources hold great promise and economic opportunity for the American people, Interior Secretary Ken Salazar said today in an e-mailed statement. The geological service, part of the Interior Department, said in a statement that North Slope shale hasnt been developed because of economic and infrastructure considerations. The assessment, the first made of North Slope shale resources, is based on success in extracting oil and gas from similar formations, such as the Marcellus Shale in the U.S. East. The agency last year estimated Marcellus may hold as much as 144 trillion cubic feet of gas. Shale gas and shale oil, produced by horizontal drilling and hydraulic fracturing by injecting water and chemicals underground, led to record natural gas output in the U.S. last year and 33 percent decline in prices in the past 12 months.

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Money is leaking out of banks in southern Europe

By John Glover Feb. 24 (Bloomberg) -- Money is leaking out of banks in southern Europe as customers scoop deposits out of Greece, Spain and Italy to move cash to less indebted nations such as Germany. Greece s total deposits plunged 28 percent from the peak in June 2009 to 169 billion euros ($225 billion) at the end of December, according to data compiled by Bloomberg. In Spain, deposits slid 5 percent in the five months through November to 934 billion euros, the least since April 2008. Italian banks held 974 billion euros in November, the lowest in 18 months. Deposits in Germany have climbed by almost 10 percent since May 2010, when Greece was granted its first bailout. Deposits have risen every month except five since the end of 2009, and reached 2.15 trillion euros at the end of 2011, Bloomberg data show. The deteriorating growth outlook in the euro region risks exacerbating those flows, according to Dario Perkins, an economist at Lombard Street Research in London. The biggest systemic risk is if people lose confidence in keeping their euros in Spain, Portugal or Italy, Perkins said. It makes sense to put your cash into Germany just to be safe and thats where the real systemic danger lies. That contagion isnt priced in, and bank deposits are the place wed spot it. Declines in Spain and Italy picked up speed amid contagion from Greece in the middle of last year. Company deposits slumped 11 percent in Spain from June to November, and in Italy by 6.5percent, with multinational companies keeping as little money as possible in the most-affected nations. For individuals, the decline was less than 3 percent in Spain and about 1 percent in Italy. Vodafone Group Plc , the worlds largest mobile-phone operator, moves cash from Greece to the U.K. every evening, Chief Financial Officer Andy Halford said on a Feb. 9 conference call. GlaxoSmithKline Plc, the U.K.s largest drugmaker, started repatriating cash held in most euro-area banks early last year, said Chief Executive Officer Andrew Witty. Paul Richardson, finance director of WPP Plc, the worlds biggest advertising company, said Feb. 8 that WPP removes excess euros from its banks in Europe and changes them for dollars daily. Reckitt Benckiser Group Plc also takes cash out of its European businesses daily, CEO Rakesh Kapoor told reporters, also on Feb. 8.

Mark Grant On The Greek Annexation

My advice is to put all of the headlines aside because they are not accurate. No deal has actually been struck and there is just the possibility of one at present. The PSI is also nowhere near certain. There has certainly been a proposal made with innumerable and probably impossible conditions to be met by Greece including a demand for a Constitutional change, which under the current Constitution, cannot even be voted on until 2013. I often wonder if Europe really wants to bail Greece out or if Germany is not forcing so many conditions that they are trying to have them exit the Euro on their own so the Germans are not seen as the Lord High Executioner; to quote Mr. Gilbert & Sullivan.

Interesting that Mark Grant makes the comment highlighted in yellow as Grant Williams of TTMYGH came to the exact same conclusion. His article on Greece leads his letter this week and it is a very good article but too long for me to include. I will forward the letter to anyone interested along with the link to sign up for your own copy. Grant Williams generously offer the letter for free to those interested. ---BBL Investment advice during times of uncertainty
Despite his bearish projections, Rosenberg said that there still ways to build wealth, When choosing investments in such a troubled environment, Rosenberg emphasizes scarcity value. You want to own what is scarce and what is in demand, he said and that, right now, is income. This is especially relevant for the capital appreciation demographic a segment of the population between the ages of 25 and 49 who have demand for income and stable cash flows. For Rosenberg, that means telling investors to focus on safe yields and take an income orientation to investing. We are not just talking about Treasuries or corporate bonds, he said. We are talking about MLPs; we are talking about REITs. Even hard assets work well in uncertain environments, he added, pointing to alternative assets and precious metals. He recommended gold, as a good hedge against both his bullish view on income and the current deflationary environment. Elsewhere, Rosenberg sees good investment opportunities in Canada, as Canadian banks cheapened up a lot last year creating a stable banking sector, strong currency, and earning power. The Canadian government is pro-capital, pro-business, and not subject to the same political gridlock that deters similar policy changes in the United States. The Bank of Canada is one of the few central banks that is not printing money right now. Taken as a whole, Rosenberg argues that these factors make Canada a good alternative for the foreign market. Despite whatever woes may lie ahead, Rosenberg concluded, safety and income at a reasonable price still works.

BCA on Gold this week

We consider virtually all paper money to be suspect.To varying degrees, all central banks are intent on devaluing their currencies. Foreign exchange rates will depend on which central bank is more aggressive than the other. However, in absolute terms, all at money is heading to its intrinsic value, zero. We believe gold will be the strongest currency of all, rising not just in dollar terms, but against all paper currencies.

BUFFETT

Shareholder letter out and interesting as usual.

The first time I ever heard of Warren Buffett was in a book written in 1972 called SuperMoney by Adam Smith. (the pseudonym of George J.W. Goodman) In the book Goodman is describing a meeting with Benjamin Graham whom he callsthe Dean of Security Analysts:

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Remember these words are from a book published in 1972, Buffett has continued to perform for another 40 years.

Why BCGs Hal Sirkin Is Bullish on the Future of American Manufacturing

For years, conventional wisdom has maintained that manufacturing in the U.S. is in terminal decline. But the tide is now turning, according to Hal Sirkin, a senior partner and managing director at the Boston Consulting Group. Rising wages and currency rates, among other factors, have dramatically narrowed the gap between manufacturing costs in China and the U.S., with the result that several U.S. companies are now in-sourcing manufacturing jobs back to America. Sirkin, who recently spoke at the White House about this research, discusses the implications for U.S. jobs and competitiveness in an interview with Knowledge@Wharton.

This looks to be an eventful week with Greek decisions looming, several meetings of various European officials and the scheduled LTRO auction. I find it hard to believe the Greeks will submit to pledging all their gold or to having German tax collectors come and impose themselves into the process but we will see. Soon I hope. Personally I believe the Greeks would be better served by kicking all troikaites out of the country and forming a new government and new drachma. To paraphrase one of my old friends, no sweat, we were looking for new government when we found this one. Feb 26 2012 Bruce Lawrence

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