November 13 , 2011 Liquidity Cycle The cycle is designed to give indications of where the economy is within its cyclical

rotation from expansion to contraction and back. An idealized cycle would be around 4 years but varies significantly. This current environment is nothing like the idealized version of the design. We seem to be running through the rotation almost annually. The movements are still useful though. The turn higher of the Stage1/3 group was followed by a sharp rally in equities from the late September lows, and has seen the ECRI Weekly Leading Index break its downward momentum with an uptick. But already in this rally we saw the Stage2 groups outperform as we would normally expect in the mid to late cycle expansion and topping phase of a full cycle. The easy assumption is the high degree of uncertainty in the developed economies is leading to very rapid rotation of sector attractiveness and risk on risk off behavior. Outcomes are so potentially divergent, even existential in the case of the European Monetary Union, that allocation decisions are sudden on little evidence and are seemingly all in or all out. Money is moving with short time horizons and on fear based provocations. The markets are at the mercy of mendacious and incompetent politicians of all stripes. Irregular and dangerous conditions will remain until the invisible hands of competing economic self-interests can more freely play themselves out in the marketplace. Until then as Art Cashin says stay nimble .

Note the upturn in the ECRI weekly leading index in the upper chart. The lower spread moves inversely to the equity markets, so the recent move down is a positive. The chart below indicates how much the second stage groups have move ahead of the stage one grops in the recent past. Second stage groups include basic materials and energies which have correlated well with Chinese growth in recent years and may be anticipating policy easing in China soon.

The recent turbulence and volatility looks more like choppy range trade in these next charts . The volume bar charts are of the last 20 days reveal that most of the markets have not been trending .

Both the E-mini and the 10 year have had big daily ranges but mostly sideways net movement. The Eurostoxx bank index and the Euro currency have moved lower but the net fall is not particularly large compared to the intraday volatility.

Gold has had the most trending characteristics and copper rebounded sharply from a big sell off and now seems to be ranging within the congestion.

Finally the yen which is quiet almost every day except for the intervention day is slowly pulling back to the previous levels as the authorities have failed to follow up on their intervention policy.

Global equities are still almost all flat or in downtrends. Only the US market has a buy permission so relative trades remain the better idea for index trades.

Market Environment shows bullishness in the energy sector and some bearishness in grains and softs. A lot of neutral elsewhere.

Spreads: Both the Brent and Wti curves moved to greater backwardation and ETI also gained on Brent again.

The soy and corn curves remained pretty steady on the slightly lower outright prices.

Chicago wheat prices dropped a bit as did the curve, but Minneapolis wheat ralied just a bit and the curve did too widening thee premium to Chicago even further.

Little curve movement in cotton, cocoa, coffee, or sugar. The Eurodollars and euribor curves did not move a lot but the Eurodollar curve flattened as the front end fell sslightly and the long end rallied a bit. Just like operation twist should effect it.