"I went to a fight the other night, and a hockey game broke out."
 - Rodney Dangerfield
 
That quote is for my boss who loves a good quote, but is preparing for a Bloomberg TV interview right now so he has less control over what I'm doing! I digress!
 
As it stands going into today's market action we will likely end on a positive note for the month.  Currently, for the month the Dow is +2.89%, S&P +3.90%, Nasdaq +2.01%, and Russell 2000 +0.95%.  We are getting to the end of the line here as people try to protect their month end.  Next week starts a new month - Game On!
 
After a good, solid month like this and with the S&P at 906, it is important to remember that "less bad" is different from "good."  We now need "good" to be the dominant story and I don't think we are there yet.  Coming into the last day of the month, the risk reward for the S&P 500 has 888 on the down side and 919 on the upside.    
 
Yesterday's market action saw the USD down again intraday, which means REFLATION up!  The reality is that the only parts of the market that were working were things that America isn't the only incremental buyer (Energy (XLE), Materials (XLB), OIL (USO), etc...).  The glaring negative divergence in performance was in Consumer Discretionary (XLY).  
 
The negative divergence in consumer discretionary is occurring at a time when two of the four key aspects of our MEGA consumer call are starting to turn slightly negative.  (G)as - nationwide gas prices at the pump stand at $2.45 a gallon, up $0.40 in a month and (M)oney - right now the average rate for 30-year fixed-rate loans is 5.44%, the highest level since early February.  
 
When consumers worry more about their potential gasoline bills, consumer spending slows.  With oil trading at $65 and looking to go higher, it's only a matter of time.  Also, the implication of higher mortgage rates supports our call that the "less bad" news on housing (part of the A(ssets) in MEGA) is behind us.  We are also seeing increased consumer credit and deleveraging concerns gaining momentum.
 
Yesterday, we Re-shorted the US dollar as a vote of no confidence.  A number of polls have suggested that Treasury Secretary Geithner will not be in his job by year end and now he is headed to China.  Supposedly he will urge China to boost domestic demand and loosen controls on the Yuan! It's a nice thought, but the reality is he can't "urge" them to do anything. He is going to China and they will end up telling him what to do.  We need them more than they need us.  
 
This is a trip President Obama did not want to make because he could potentially be seen as weak, knowing the Chinese will tell him what to do.  So what does he decide to do, send his treasury secretary who is perceived as weak and who most Americans don't believe should be in the position he is in.  So what is the right thing for us to do - short the dollar!    
 
The biggest loser on the day yesterday was Bill Ackman.  If you were unsure if activist investing went the way of the buggy whip, you are sure of it now.  Target Corp. said yesterday a preliminary count shows shareholders "by a comfortable margin" appear to have re-elected the company's four incumbent directors and backed a proposal to set the board's size at 12, dealing a sucker punch to activism.
 
Not only has Bill Ackman lost billions on his investment in Target, he has now spent millions trying to save face by tying to get on Target's board, all for nothing! Courtesy of CNBC, Bill had seemingly endless time on air to make his case and that did not work because he had nothing to offer. His response to all of this: "We can work together going forward, but these guys run the company. We do not want to get involved in any kind of day-to-day involvement."  
 
Please stop right now!
 
Function in disaster; finish in style
 
Howard Penney
Managing Director
 

LONG ETFS

CAF - Morgan Stanley China Fund- A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

EWD - iShares Sweden-The country issued a large stimulus package to combat its economic downturn and the central bank has effectively used interest rate cuts to manage its economy. Sweden's sovereign debt holds a strong AAA rating despite Swedish banks being primary lenders to the Baltic states. We expect Sweden to benefit from export demand as global economies heat up.

XLV - SPDR Healthcare-Healthcare looks positive from a TRADE and TREND duration. We've been on the sidelines for the last few months, but bought XLV on a down day on 5/11 to get long the safety trade.

TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%.  We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD - SPDR GOLD -We bought more gold on 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.

 
SHORT ETFS
 
UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback. The Euro is up versus the USD at $1.4082. The USD is down versus the Yen at 95.9510 and down versus the Pound at $1.6128 as of 6am today.

XLU - SPDR Utilities - As long term bond yields breakout to the upside, Utility investments are the relative yield loser. This was not the case yesterday. We remain short.  

EWW - iShares Mexico- We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.