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The Liquidity Cycle Indicator (blue line in chart) moved up again this week led by stage1strength. The stage1 groups have been very highly correlated to the SPY this year whennormally they would outperform slightly early in a move up or early in a move down and

would then lose momentum to the broad index as the stage2 group took the lead in thelatter portion of the trend. But the persistently poor performance of the financials whichare part of the stage 1 group since has dampened this effect. The past 2 weeks the stage 1ex financials have been strong, which is a bullish indicator of trend for the equity market.Bullishness is also supported by an historical record of market troughs occurring inOctober.Tempering this favorable action is the continued bearish action byt the ECRI weeklyleading indicators index (black in the chart ). These two series frequently have short termdivergences because the ECRI weekly is much smoother and lags very slightly.

The strong downtrend the liquidity cycle has formed a sharp congestive pattern as has theSP500 over the past 2 weeks as the crisis in European finance has finally provoked theleadership in the Eurozone to promise decisive action to recapitalize the banks and

writedown Greek debt values. Breakout from the congestion will depend upon whetherthe Eurozone leadership can actually reach and accept a believable plan or this weekendjust turns out be another cry of wolf.

The Liquidity cycle indicator leads me to believe the US equity market wants to rally andwill produce a very tradable move to the upside if a marginally promising plan ispresented and agreed to by both France and Germany. But this is a high hurdle give theprofound disparity in fundamental beliefs of the two governments.

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Failure to produce a believable plan will only enforce the view of Eurozone managementimpotence and inflame the risk off mentality.

The congestion in these charts is a bottom or continuation and it rests in the hands ofwhat the FT has called the gang that couldnt shoot straight.

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The next group of charts is Pacific ex Japan and only a glance shows when confidence indeveloped country leadership finally broke the expectations for global growth.

The Emerging Markets charts on the next page tell the same story. The plurality ofpessimism revealed by these charts is striking, this is a rare event.

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Global sentiment collapsed in the third quarter and market after market broke sharplylower. Circumstances this weekend remind me of the first Tarp vote in Congress which

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set off an equity market collapse when the vote failed. Failure of Eurozone leaders toproduce credible plans this next few days has the very real potential to trigger panickyflight from risk and the presumption that nothing can be done to save the Euro.

http://www.spiegel.de/images/image-269999-galleryV9-thju.jpg

_________________________________________________________________Federal Reserve Commercial Paper Outstanding By Terry Sheehan Oct 20, 2011

tsheehan@smra.com-- Stone & McCarthy (Princeton)

There has been some disparity between the adjusted and unadjusted data in recent weeksthat seems to be an artifact of the financial crisis in the fall of 2008 when commercialpaper lending activity largely froze.________________________________________________________________________

But in crisis there is opportunity. Should the Eurozone leaders surprise and produce anagreement with painful and realistic mark down of Greek sovereign debt and believable

financing of the banks ( money printing) then psychologically damaged markets have thepotential for a rigorous relief rally. The economy might not be fixed but the fear could goaway.

http://www.spiegel.de/images/image-269999-galleryV9-thju.jpgmailto:tsheehan@smra.commailto:tsheehan@smra.commailto:tsheehan@smra.comhttp://www.spiegel.de/images/image-269999-galleryV9-thju.jpg

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The environment is dominated by neutral conditions as the awaits action in Europe.

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SentimentSentiment also displays massive neutrality (as of Thursday) just as the Environmentindicates.

SpreadsPlans to change the spreads reporting to a 5 point scale of weak soft neutral firm strong isin the works but this issue will have some simple formats.Corn past week saw some strengthening in the front consistent with the price rally.

Soybeans on the other hand saw weakening at the front end.

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Chicago wheat and cotton below also softened over thee week.

Coffee prices rallied as did the bullish spreads supporting the move.

Cocoa spread weakened in the front contract but stayed rather flat in all others.Sugar spreads weakened front to back as the price of the underlyings fell.

Energy spreads are in tabular form below. WTI- Brent spreads narrowed.(Gasoline top right)

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From Other Sources

On Europe as of Sunday morning:

Weekend updateAs more or less expected, the EU summit ended with little

agreement, leading to Wednesday being the key session, which will begin after the closeso no conclusions are likely until Thursday AM. So far the only major news item hasbeen talk that Europe banks will be forced to find EUR 108B in new capital to supporttheir operations..---JPM news update

EU looks at 60% haircuts for Greek debt

High quality global journalism requires investment. Please share this article with othersusing the link below, do not cut & paste the article. See ourTs&CsandCopyright Policy

for more detail. Emailftsales.support@ft.comto buy additional rights.http://www.ft.com/cms/s/0/66bdcbc0-fc11-11e0-b1d8-00144feab49a.html#ixzz1bcs3ZZbV

Greeces economy has deteriorated so severely in the last three months that internationallenders would have to find 252bn in bail-out loans through the end of the decade unlessGreek bondholders are forced to acceptsevere cuts in their debt repayments.

The dire analysis, contained in a strictly confidential report by international lenders and

obtained by the Financial Times, is more than double the 109bn in European Union andInternational Monetary Fund aid agreed just three months ago.

http://www.ft.com/cms/s/0/66bdcbc0-fc11-11e0-b1d8-00144feab49a.html#ixzz1bcsHoeMB

Euro zone seeing tensions among leadersThe London Telegraph says EU finance ministers arebeginning to hit a rift over the regions debt issues. The article says a recent finding shows that Greecescrisis alone could swallow the entire EUR 440B EFSF bailout fund, leading nothing to spare for Italy,Spain, or France. Christine Lagarde, the new IMF chief said the IMF would no longer be willing to pick upa third of the bill for rescuing Greece unless banks were prepared to write off 50% of the countrys debt.Another finance minister said the situation is grim and it is the worst mood I have ever seen, a complete

mess. London Telegraphhttp://tgr.ph/pxgnR0

FranceFrance lobbied Sunday to overcome German opposition to giving the ECB a central role inraising the Euro zones bailout fund, saying it was the only way to draw a definitive line under the regions

debt issues. France is arguing the EFSF should be given a banking license, allowing the fund to leverage itslending capacity by tapping nearly unlimited credit from the ECBs lending window. Reuters

http://reut.rs/ngFEjc That is the exact source of the problem. A new French JohnLaw plan versus the German Weimar Hyperinflation phobia. Bbl

http://www.ft.com/cms/s/0/66bdcbc0-fc11-11e0-b1d8-00144feab49a.html#ixzz1bcsHoeMBhttp://www.ft.com/servicestools/help/termshttp://www.ft.com/servicestools/help/termshttp://www.ft.com/servicestools/help/termshttp://www.ft.com/servicestools/help/copyrighthttp://www.ft.com/servicestools/help/copyrighthttp://www.ft.com/servicestools/help/copyrightmailto:ftsales.support@ft.commailto:ftsales.support@ft.commailto:ftsales.support@ft.comhttp://www.ft.com/cms/s/0/66bdcbc0-fc11-11e0-b1d8-00144feab49a.html#ixzz1bcs3ZZbVhttp://www.ft.com/cms/s/0/66bdcbc0-fc11-11e0-b1d8-00144feab49a.html#ixzz1bcs3ZZbVhttp://www.ft.com/cms/s/0/66bdcbc0-fc11-11e0-b1d8-00144feab49a.html#ixzz1bcs3ZZbVhttp://www.ft.com/intl/greecehttp://www.ft.com/intl/cms/s/0/e2d04e90-fb1c-11e0-bebe-00144feab49a.html#axzz1b96tW1Hfhttp://www.ft.com/intl/cms/s/0/e2d04e90-fb1c-11e0-bebe-00144feab49a.html#axzz1b96tW1Hfhttp://www.ft.com/intl/cms/s/0/e2d04e90-fb1c-11e0-bebe-00144feab49a.html#axzz1b96tW1Hfhttp://www.ft.com/cms/s/0/66bdcbc0-fc11-11e0-b1d8-00144feab49a.html#ixzz1bcsHoeMBhttp://www.ft.com/cms/s/0/66bdcbc0-fc11-11e0-b1d8-00144feab49a.html#ixzz1bcsHoeMBhttp://www.ft.com/cms/s/0/66bdcbc0-fc11-11e0-b1d8-00144feab49a.html#ixzz1bcsHoeMBhttp://tgr.ph/pxgnR0http://tgr.ph/pxgnR0http://tgr.ph/pxgnR0http://reut.rs/ngFEjchttp://reut.rs/ngFEjchttp://reut.rs/ngFEjchttp://tgr.ph/pxgnR0http://www.ft.com/cms/s/0/66bdcbc0-fc11-11e0-b1d8-00144feab49a.html#ixzz1bcsHoeMBhttp://www.ft.com/cms/s/0/66bdcbc0-fc11-11e0-b1d8-00144feab49a.html#ixzz1bcsHoeMBhttp://www.ft.com/intl/cms/s/0/e2d04e90-fb1c-11e0-bebe-00144feab49a.html#axzz1b96tW1Hfhttp://www.ft.com/intl/greecehttp://www.ft.com/cms/s/0/66bdcbc0-fc11-11e0-b1d8-00144feab49a.html#ixzz1bcs3ZZbVhttp://www.ft.com/cms/s/0/66bdcbc0-fc11-11e0-b1d8-00144feab49a.html#ixzz1bcs3ZZbVmailto:ftsales.support@ft.comhttp://www.ft.com/servicestools/help/copyrighthttp://www.ft.com/servicestools/help/termshttp://www.ft.com/cms/s/0/66bdcbc0-fc11-11e0-b1d8-00144feab49a.html#ixzz1bcsHoeMB

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China

Source: Bloomberg;

Leading indicators point to slower growth in China. To wit: Chinas yield curve spread hascollapsed to one basis point, the lowest level on record. Both narrow and broad liquidity continueto slow, and China EMBI spreads, while off their most recent highs, remain 2.5x their average ofthe last decade. None of this suggests to us that a rebound is in the offing, which is why wecontinue to take a cautious view of those sectors most leveraged to the China boom (energy,material, industrials). Michael T. Darda Chief Economist, Chief Market Strategistmdarda@mkmpartners.com

Charts from MKM Partners

Dardas concerns for industrial, materials and energy seem well founded when the correlation toChina growth expectations are so tight. But the collapsing money supply growth is extreme andChinese officials will ease on any convincing relief in food inflation.

mailto:mdarda@mkmpartners.commailto:mdarda@mkmpartners.commailto:mdarda@mkmpartners.commailto:mdarda@mkmpartners.com

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"Refashioning the Continent's Energy Arteries" Shale Gas is Fueling A

Pipeline Construction Boom

CANADA GLOBE AND MAIL-- "Spectra Energy Corp. (SE-NYSE) is driving NorthAmericas pipeline construction boom into the heart of New York City, part of a massive

industry push to connect previously untapped shale gas and oil reserves to under-servedmarkets. From the growing Alberta oil sands to booming production in Pennsylvanias

Marcellus shale gas reserves, new fuel sources are prompting pipeline companies torefashion the continents energy arteries.

From "Made in China" to "Made in the USA"

THE TENNESSEEAN (AP) -- "Four years ago, the Tennessee-based companyPro Charging Systemsoutsourced manufacturing of several key components of itsnew line of battery chargers to China. The idea was to take advantage of lowerlabor costs and other advantages the company was counting on as it made

charger parts there that would end up in hunting vehicles and golf carts sold inthe United States.

Over the past year, though, Pro Charging has shifted that work and some otherassignments back to U.S.-based suppliers. The Tennessee company illustrates asurprising trend call it a trickle in which some manufacturers are bringingjobs back to America from Asia. With U.S.jobless rates stubbornly high, its partof a welcome reversal fueled bythe Chinese economy starting to lose its costadvantages for many products made abroad but bound for final assembly andsale here. This is not the first company to move production back to the US.Woody Brock predicted a significant return to US based production last year at

the BCA Conference.

Kyle Bass @ AmeriCatalyst 2010 |this is a long but interesting

interview from August 2010.

http://mjperry.blogspot.com/2011/10/refashioning-continents-shale-gas-is.htmlhttp://mjperry.blogspot.com/2011/10/refashioning-continents-shale-gas-is.htmlhttp://mjperry.blogspot.com/2011/10/refashioning-continents-shale-gas-is.htmlhttp://www.theglobeandmail.com/globe-investor/new-gas-oil-reserves-a-boon-for-pipeline-construction/article2210069/http://www.theglobeandmail.com/globe-investor/new-gas-oil-reserves-a-boon-for-pipeline-construction/article2210069/http://www.blogger.com/goog_828397436http://www.blogger.com/goog_828397436http://www.blogger.com/goog_828397436http://mjperry.blogspot.com/2011/10/from-made-in-china-to-made-in-usa.htmlhttp://mjperry.blogspot.com/2011/10/from-made-in-china-to-made-in-usa.htmlhttp://www.tennessean.com/article/20111016/BUSINESS/310160022/No-longer-made-China-U-S-companies-start-re-importing-some-jobshttp://www.tennessean.com/article/20111016/BUSINESS/310160022/No-longer-made-China-U-S-companies-start-re-importing-some-jobshttp://www.dualpro.com/http://www.dualpro.com/http://www.google.com/url?sa=t&rct=j&q=kyle%20bass&source=video&cd=1&ved=0CDQQtwIwAA&url=http%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DWWgtzwqWh60&ctbm=vid&ei=ymikTu7BEaTg0QH67tjVBA&usg=AFQjCNGWTDePHlFUsHKXKYRiwxmYE6syww&cad=rjahttp://www.google.com/url?sa=t&rct=j&q=kyle%20bass&source=video&cd=1&ved=0CDQQtwIwAA&url=http%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DWWgtzwqWh60&ctbm=vid&ei=ymikTu7BEaTg0QH67tjVBA&usg=AFQjCNGWTDePHlFUsHKXKYRiwxmYE6syww&cad=rjahttp://www.google.com/url?sa=t&rct=j&q=kyle%20bass&source=video&cd=1&ved=0CDQQtwIwAA&url=http%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DWWgtzwqWh60&ctbm=vid&ei=ymikTu7BEaTg0QH67tjVBA&usg=AFQjCNGWTDePHlFUsHKXKYRiwxmYE6syww&cad=rjahttp://www.google.com/url?sa=t&rct=j&q=kyle%20bass&source=video&cd=1&ved=0CDQQtwIwAA&url=http%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DWWgtzwqWh60&ctbm=vid&ei=ymikTu7BEaTg0QH67tjVBA&usg=AFQjCNGWTDePHlFUsHKXKYRiwxmYE6syww&cad=rjahttp://www.google.com/url?url=http://www.youtube.com/watch%3Fv%3DWWgtzwqWh60&rct=j&sa=X&ei=ymikTu7BEaTg0QH67tjVBA&ved=0CDUQuAIwAA&q=kyle+bass&usg=AFQjCNFCFVrGVb9q-1WQSea12R75rTY8Hghttp://www.google.com/url?url=http://www.youtube.com/watch%3Fv%3DWWgtzwqWh60&rct=j&sa=X&ei=ymikTu7BEaTg0QH67tjVBA&ved=0CDUQuAIwAA&q=kyle+bass&usg=AFQjCNFCFVrGVb9q-1WQSea12R75rTY8Hghttp://www.dualpro.com/http://www.tennessean.com/article/20111016/BUSINESS/310160022/No-longer-made-China-U-S-companies-start-re-importing-some-jobshttp://mjperry.blogspot.com/2011/10/from-made-in-china-to-made-in-usa.htmlhttp://www.blogger.com/goog_828397436http://www.blogger.com/goog_828397436http://www.theglobeandmail.com/globe-investor/new-gas-oil-reserves-a-boon-for-pipeline-construction/article2210069/http://mjperry.blogspot.com/2011/10/refashioning-continents-shale-gas-is.htmlhttp://mjperry.blogspot.com/2011/10/refashioning-continents-shale-gas-is.html

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Comments

The news is pretty much all Europe all the time and the officials of theEurozone and its many members have in the last few days accomplishedsomething I never thought I would see; They have made the US Congress lookcompetent and efficient. No wonder Jerry Lewis was popular in France.

From all accounts discussions are proceeding rapidly. Rapidly down the drain.The opening tonight in Asia will be instructive or maybe the markets willpatiently await the new line in the sand which is Wednesday. Europeans havetaken Obummers Hope and Change and converted it to Hope for Change.

Meanwhile, back in the states, quietly under cover of European ineptitudeplans seem to be afoot for some new pseudo QE in the mortgage market. I donot believe it to be merely a coincidence that the Fed is allowing some veryquestionable accounting legerdemain by BAC as they move some $53B ofderivatives from the holding company into the FDIC backed commercial bank.This all may be kosher but it does not pass the smell test in my world. Primemortgage MBS have been weakening sharply at the same raising the spectreof round two in the mortgage debacle.

Both Euro sovereign debt and the mortgage problems here have one commoncharacteristic; the authorities refuse to take the pain necessary to impose theloss and therefore the wound festers and healing cannot begin. The one goodoutcome of the Lehman shock is that it wasnt prevented. Bang Lehman failed,time to clean up what is left. Granted that is painful, but it is also over.

That sudden finality is what is needed in Europe and the US mortgage mess.Politicians prefer to talk and pull the band aid off one hair at a time. The resultis prolonging the pain and more importantly preventing the healing. As long asthe authorities are being controlled by events the outlook will remain poor.

I believe the equity markets in the US and much of Asia are prepared to beenthusiastic at just one indication of politicians executing a stop loss occurs.

BBL 10/23/2011

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