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"Thou art not listening to me. Be calm. As for me, am I not calm? I am altogether calm."
- Oscar Wilde, "Salome"
 
The ink is not yet dry on President Obama's proposals for overhauling the financial regulatory system, and already it looks like it is being sidelined.  In order to succeed, this behemoth of a proposal must satisfy two key requirements.  It must materially increase transparency across all markets, and it must address the special interests, so as to hold water politically.  
 
The largest and most complex financial institutions are those that benefit most from the cloaking provided by regulatory inefficiencies.  This is no secret, and it lies at the heart of President Obama's credibility.  What everyone from the highest levels of government, to the popular media are calling the "interconnected" financial firms are, in fact, the most conflicted ones, and those most likely to balk at lifting the veils.
 
But lift them we must.  Systemic Risk Czars and resolution authority over large institutions are all to the good.  These mechanistic repairs will plug gaping holes in the system - assuming they are unambiguous as to authority and staffed with the right people - two big "ifs".  But fundamental and lasting benefit will result from Mr. Obama's proposals only to the extent they result in greater disclosure of information, and greater uniformity of that information, for the future of the marketplace rests in transparency.
 
While the world is still enamored of Mr. Obama, the world is very decidedly not in love with the US model of market capitalism.  This leaves us at a precarious tipping point: on the one hand, we have the moral momentum of a new President with the world's backing to force dramatic change.  At the same moment, we are the inheritors of what the world considers a failed and discredited model.  The press today is referring to the reigning "Anglo-American" market model that the entire world has definitively rejected.  
 
This explosive convergence - damning failure of our market model, coupled with the resounding success of our political choice - has created a window of opportunity that is at once quite large, but that will not remain open for long.
 
We fear that President Obama's power is already on the wane domestically, and the lack of muscularity in his White Paper proposals will not be seen by the world as hope they can cling to.
 
While the markets are being roiled by fits of economic uncertainty, we fear that regulatory uncertainty will prove to be most devastating of all.  If the United States does not lead a massive charge to restructure the oversight of financial markets, the certainty is that fragmentation will rule for some time to come.  Then markets will not be able to coalesce into a global engine for recovery for transnational capitalism.  Rather, countries with closed-off markets and tightly controlled economies will assert themselves, both regionally, and in those markets where they have clout.
 
Think China, which has replaced the Dictatorship of the Proletariat with dictatorship of the Bourgeoisie, and which controls enough US dollars to dictate the direction of our hedge funds industry.  Think Russia which, now that oil has struck a speed bump, may need geopolitical unrest to restock its coffers.  Think Europe, whose low-octane capitalism has not managed to drag itself even to the level of indecision of the US, and that will hobble the engines of growth with a Vonnegutian web of regulation.
 
Think how quickly political unrest can rock the cradle - or how quickly it can be snuffed before it even draws breath.  We have another hour to show real leadership.  Bland as much of Mr. Obama's proposals are, they will be seen as meaningful if he attacks Congress, Wall Street and industry with a muscular and even-handed ruthlessness to make the plan a reality.
 
Alas, it looks as though President Obama intends to throw the overhaul of the financial markets to the political process.  Already we hear talk of the all-important health care and global warming bills before congress.  Already, our expectations are being managed to a certainty that the debate on financial markets reform will not even begin before next year.
 
While there are indisputable social and economic issues to be addressed in the areas of health care and the environment, every day we put off definitive changes in our financial markets, we lose credibility and stoke anger worldwide.
 
Obama's promised reform - the one with immediate global implications - will be eviscerated before the debate even starts.  By placing what will be perceived as domestic initiatives ahead of market reform, Obama is paradoxically signaling to the world that the Business of America is Business as Usual.
 
Be afraid.  Be very afraid.

Moshe Silver
Chief Compliance Officer
 

LONG ETFS

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.
 

SHORT ETFS

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.