Weekly Strategic Plan 03192012

Liquidity Cycle
The S&P Index closes above 1400 this week as bonds broke down and money flow to equities from somewhat reluctant investors in search of yield. Volumes remain unimpressive but new and higher price prints and enormous central bank liquidity creation is producing more positive sentiment. A financing mishap and things will go pear-shaped but otherwise I expect the trend to keep trying to advance through Tax day in mid April. Beyond that time I am less confident.
The Liquidity Cycle Indicator surged higher as shown in the previous chart and the ECRI Leading Indicator weekly index reluctant keeps following though falling behind.
Flows into tax deferred and retirement accounts are deployed pretty regularly till filing dates April 15th each year. These flows are so influential now that we see some seasonal tendency for prices to advance into that period and top out at least temporarily.
I believe this tax related seasonal tendency will hold again this year but then the market will need additional drivers to avoid at least a corrective pause.
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icmWEEKLY STRATEGIC PLAN
The past week saw price action far more significant than the breach of the 1400 level in the S&P. Late week break of support in the interest rate price support were far more significant. Perhaps this move in the yields will not last but it cannot be ignored either way. This hints at the possibility that fear of future inflation may be growing stronger than the recent fear of debt deleveraging and deflationary pressure.
Heatmap from FinViz.com
Both 2 yr yields and 10 yr yields surged through resistance out of 6 month congestion ranges. The 2/10 rate curve also turned up which can mean the economy is strengthening but with central banks actively holding rates down may also indicate a market signaling that enough is enough to monetary ease.
The overlay of 2 yr yields from US, UK, Germany, and Japan reveal 3 of the markets with potential turns higher. All of these 2 year rates are below %, not very attractive.
The German Bund future too fell through support down to its 200 day MA.
A quick glance at some of the 5 yr sovereign CDS in Europe reveals the steady calming of those markets under the influence of LTRO money policies. The exception is Portugal which is rapidly gaining the wrong kind of attention, even as questions begin to trickle in suggesting that Greece will need even more attention later in the year.
Agricultural Commodities
Softs
Meats
Energies
The crude curve in both Brent and WTI moved higher as prices pushed higher by weeks end. The very back end price moved slightly more than the front. That would seem to indicate that markets are raising long term forecasts for average prices and trying to draw more supplies into longer term storage. The spread moves were not large but as Gartman says attention must be paid.
Environment
The environment continues to give volatility readings that qualify as quiet or extremely quiet. Only cocoa this past week had a reading of volatile. The news flow and the number of potential problems make it seem like all kinds of chaos is going on. But not in markets,yet. Many markets are exhibiting trend characteristics but not volatility.
Supporting Information and Commentary

I received the following communication from my associate John Stotts and the comment and charts are quite pertinent so I am including Johns note: Things are lining up to signal a top (permanent or temporary, I dont know)heres COT for managed money net longs...hitting highs for past 4.5 years.
Second chart is the COT vs. the SX2 charttalk about correlation. (SX2 in orange; COT data in white)
Lastly, I included the X2/X3 spread below that for good measure.
Thanks John
Note from BBL : This last chart is a bullish message but the message of the first two charts is that the trade is already popular and may need a correction to shake a few people out.
A lesson to remember from Dennis Gartman:
Consumer price inflation still moderate

Inflation according to the CPI remains moderate: no surprises. As the chart above shows, inflation is running in the 2-3% range, regardless of whether or not you include the contribution of energy prices. This level of inflation is very close to what we have seen over the past decade. For reference, on an annualized basis, the CPI is up 2.5% over the past two years; 2.4% over the past three years; 2.3% over the past 5 years; and 2.5% over the past 10 years.
We have learned few things that we can count upon in the world of trading but we count upon this: when the term structures of any carry charge market move bearishly it is unwise to trade bullishly. It may not be wise to trade bearishly; but it is almost always unwise to trade bullishly. GEOPOLITICAL GURU: Theres A Bigger Threat To Oil Prices Than Iran
(This is only a portion of the article and the presentation included go to the link at the end of this note to see the full article) All the headlines seem to be focused on the threat from Iran whether it is Iran halting oil-exports, Iran threatening to cut off access to the Strait of Hormuz, or other countries potentially striking on Iran. But Alastair Newton, Nomuras senior political analyst thinks the real threat to oil prices may come from Iraq: ...Both the governance and security situation appear to us [to] have deteriorated further since the US withdrawal (the latter borne out by rising civilian deaths from acts of terrorism), obliging us to stand by our earlier conclusion that, of all the countries in the MENA region, Iraq currently appears to be the one most likely to succumb to civil war. Total loss of Iraqi oil 2.7mbpd of which 1.9mbpd (equivalent to pre-crisis Libya and Yemen combined) would be a serious blow to global oil supply. Indeed, if our assessment is correct that a military strike against Irans nuclear programme may disrupt global oil supply only briefly (see below), we believe that Iraq may pose a more significant threat of a protracted oil price hike than Iran. In other words, for all the headline attention which Iran is likely to continue to attract, we urge market participants to keep one eye over their shoulder on the Iraqi side of the Gulf. In terms of a sustained downturn in oil supply and related increase in prices, Newton argues Iraq could prove to be a bigger threat than an Israeli strike on Iran. Read more.
With Rising Wages in China, Production is Moving

From Mark Perry at Carpe Diem 1.From the WSJ on Wednesday: Global companies already have been facing higher labor prices in China over the past year, despite a weak global economy, as workers demand a greater share of the countrys economic boom. In recent months, the pressure also has intensified in countries across Southeast Asia that have marketed themselves as alternatives for companies seeking to escape Chinas rising costs, leaving those companies now with fewer places to move. Over the past year, for example, U.S. menswear retailer Jos. A. Banks Clothiers has moved some manufacturing from China to cheaper locations in Asia such as Indonesia, as the price of labor and goods increased. 2. And now even Chinese bicycle manufacturers are started to move production overseas: Chinese bike manufacturers are beginning to look at expanding into new markets in Southeast Asia in the face of rising labor costs and restrictive export duties to Europe. Manufacturing has already begun shifting inland from Chinas coastal cities as labor costs have risen, and now producers are beginning to look overseas to keep prices competitive on low-end mass production.
There is nothing alarming about this level of inflation in any sense. No sign of a big inflation increase, and no threat of deflation either. The Fed has absolutely no need to engage in any further quantitative easing or easing of any variety. The Feds next move will likely be to increase rates, but the timing of that move is unfortunately still shrouded in mystery. Recent action in the bond market (e.g., a 20 bps rise in 2-yr Treasury yields, and a 40 bps rise in 5-yr yields) suggests that the Fed will begin tightening sooner than was expected just a few months ago. I think its reasonable to assume that we will see more of this action in the months to come. From Scott Grannis
Dylan Grice Explains When To Sell Gold

Full article here Here is the summary line: : Eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability. Until it does, the temptation to inflate will remain, as will economists with spurious mathematical rationalisations as to why such inflation will make everything OK. Until it does, the outlook will remain favorable for gold. But eventually, majority opinion will accept the painful contractionary medicine because it will have to. That will be the time to sell gold. Why does Grice own gold? The reason I own gold is because Im worried about the long-term solvency of developed market governments. I know that Milton Friedman popularised the idea that inflation is always and everywhere a monetary phenomenon but if you look back through time at inflationary crises from ancient Rome, to Ming China, to revolutionary France and America or to Weimar Germany youll find that uncontrolled inflations are caused by overleveraged governments which resorted to printing as the easiest way to avoid explicit default (whereas inflation is merely an implicit default). Its all very well for economists to point out that the cure for runaway inflation is simply a contraction of the money supply. Its just that when you look at inflationary episodes you find that such monetary contractions havent been politically viable courses of action.
The Fact That Iceland Is Repaying Its IMF Loans Early Seems To Suggest Defaults Work
Weve talked multiple times about how unique Icelands response to the crisis was putting bankers and former heads of state on trial, and forgiving 13 percent of the countrys debts. The prepayments of the IMF loan seem to suggest that these tactics, along with the defaults, have worked. While the IMF has said it has some reservations, the Icelandic economy will grow 2.5 percent, and will be at 2.5 to 3 percent in the medium term. So, are these tactics a viable option for Greece? Read more
I hate to sound like the local rabid conspiracy theorist and in truth I believe most conditions attributed to conspiracy can arise propelled only by normal human self serving behavior but either way I suggest you read the article linked just below. I find this very disturbing.
We Are This Far From A Turnkey Totalitarian State - Big Brother Goes Live September 2013
In its April cover story, Wired has an exclusive report on the NSAs Utah Data Center, which is a must read for anyone who believes any privacy is still a possibility in the United States: A project of immense secrecy, it is the final piece in a complex puzzle assembled over the past decade. Its purpose: to intercept, decipher, analyze, and store vast swaths of the worlds communications as they zap down from satellites and zip through the underground and undersea cables of international, foreign, and domestic networks.... Flowing through its servers and routers and stored in near-bottomless databases will be all forms of communication, including the complete contents of private emails, cell phone calls, and Google searches, as well as all sorts of personal data trailsparking receipts, travel itineraries, bookstore purchases, and other digital pocket litter.... The heavily fortified $2 billion center should be up and running in September 2013. In other words, in just over 1 year, virtually anything one communicates through any traceable medium, or any record of ones existence in the electronic medium, which these days is everything, will unofficially be property of the US government to deal with as it sees fit... As former NSA operative William Binney who was a senior NSA crypto-mathematician, and is the basis for the Wired article (which we guess makes him merely the latest whistleblower to step up: is America suddenly experiencing an ethical revulsion?), and quit his job only after he realized that the NSA is now openly trampling the constitution, says as he holds his thumb and forefinger close together. We are, like, that far from a turnkey totalitarian state.
That will be all this week as I am being visited by my 3 wonderful grandchildren and I do not want to waste the opportunityg getting to know them as they change so rapidly. Have a great week. March 19, 2012 Bruce Lawrence

Weekly Strategic Plan 03192012

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Liquidity Cycle

icmWEEKLY STRATEGIC PLAN

Heatmap from FinViz.com

icmWEEKLY STRATEGIC PLAN

icmWEEKLY STRATEGIC PLAN

icmWEEKLY STRATEGIC PLAN

icmWEEKLY STRATEGIC PLAN

Supporting Information and Commentary

icmWEEKLY STRATEGIC PLAN

A lesson to remember from Dennis Gartman:

Consumer price inflation still moderate

With Rising Wages in China, Production is Moving

Dylan Grice Explains When To Sell Gold

icmWEEKLY STRATEGIC PLAN

icmWEEKLY STRATEGIC PLAN

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