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"Because things are the way they are, things will not stay the way they are."
  -Bertolt Brecht
 
Arbitrarily we titled two posts yesterday "In search of...."  I know I'm in search of why the S&P is levitating at 931.  Don't get me wrong I'm happy the S&P is at 931, I just want to understand why.
 
Yesterday, there was some bearish manufacturing numbers and a warning from Federal Reserve Chairman Ben Bernanke that U.S. deficit spending is contributing to higher long-term interest rates.
 
On top of that the there are also similar indications from senior officials in Germany and Australia that interest rates are going higher!  Guess what, interest rates can only go one way - UP!  
 
And the reality is they are! Interest rates on 30-year fixed-rate mortgages averaged 5.25% this week, up from 4.81% last week.  The biggest sequential jump since October!  As mortgage rates rise, this leads to a decline in mortgage applications, which suggests the good news on housing has peaked too.
 
On top of that you can only conclude that there are a number of factors that are likely to continue to weigh on consumer spending; a weak labor market, a decline in consumer assets, increased savings rates and tight credit.  All of this should cast a bearish cloud over stocks, yet it has not.  
On this news, the S&P 500 was ONLY down 1.3% yesterday.   Amazing resilience to unsettling trends!
 
I can't find a company that is going to tell me that they are going to provide guidance to the investment community that will include positive trends for the balance of 2009; and when I ask them about 2010 they just laugh.  How many times have you heard there is no visibility into our current trends!   
 
As I sit here this morning the futures are looking higher, despite the fact that most retailers will communicate a mixed bag of May sales trends.  As we look at the numbers today we will be "in search of" signs of a second-half economic recovery.  Clearly things are less volatile and bottoming, but it's still not "good."  I guess I'm jaded because I spend every waking moment talking to consumer centric companies that continue to express to me the reality that things are not really getting better for the consumer.    
 
Coming into Friday's jobs report, we have zero exposure to US equities.  As we said yesterday, Friday's employment report should be less constructive than the last two - which were bullish catalysts for us as we looked for signals that the rate of job losses was compressing.  Now our thesis has become consensus- as is optimism.
 
Anything less than a relatively strong payroll number can give the bulls something to think about, but who is bullish?  


The Early Look is brief today, because I'm in "search of" good news and I can't find it. If I do find any you'll be the first to know!
 
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.

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
 
XLU - SPDR Utilities - As long term bond yields breakout to the upside, Utility investments are the relative yield loser. Utilities underperformed the market yesterday, closing down 1.7%.

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.