"To believe with certainty we must begin with doubting."
                Stanislaw Leszczynski
After a big market decline on Monday on concerns surrounding the uncertainty of the global recovery, yesterday's performance lacked any real overriding theme.  The most dominant macro theme in the past six months seemed to lack certainty; the dollar fell to its lowest level in two weeks, finishing down 1.1% yesterday as the S&P was virtually unchanged.
On the back of the declining dollar, Materials and Energy outperformed while the underlining reading on the health of the consumer continued to weaken.  No matter where you look to, housing, confidence or retail sales, the incremental news on the consumer continues to suggest that momentum is slowing; the Consumer Discretionary (XLY) was the worst performing sector yesterday, declining 1%.    
The set up for the market today centers on the FOMC meeting and interest rate expectations.  The debate surrounding the meeting revolves around the implications of the balancing act on the part of the Fed to try to both dampen near-term tightening expectations and also try to mitigate inflation concerns by outlining an exit strategy from the free money strategy.
The FOMC committee members will be waking up today to the fact that the Organization for Economic Cooperation and Development (OECD) has raised its forecast for the economy for the first time in two years as the U.S. economy shows signs of improving in the second half of 2009.
As part of my research process, I connect with the management teams of three or four companies every week to try to gauge how business is tracking.  I have yet to find one that will tell me that the trends are getting better.  President Obama is correct to say that "the American people have a right to feel like this is a tough time right now" because it is!  The 32% move from the March 9th low has allowed consumers to be more optimistic "than the facts alone would justify."  I feel much better now that the President has given me permission to feel like crap.
Early this morning, the dollar is weaker and the futures are higher and there are lots of doubts about what the Fed will do.  While the FOMC is unlikely to raise rates today, you can be certain they will need to plan an exit strategy.  
Good luck out there today,
Howard Penney
Managing Director


EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.

QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.

EWC - iShares Canada - We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich British Columbia should provide a positive catalyst for investors to get long the country.   

XLE - SPDR Energy - We think Energy works higher if the Buck breaks down.  

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.

EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs at best that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.

XLY - SPDR Consumer Discretionary - We shorted XLY on 6/19 as our team has turned negative on consumer in the last week.  

XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.   

SHY - iShares 1-3 Year Treasury Bonds - If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

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.
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.