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“We are in the only business where we are wrong everyday on something - yet we still enjoy it.”
This was a quote that we received from a client yesterday and I thought it was great.  We are all in a business where the facts change daily and we need to make decisions to adjust to what we have learned.  There is a high probability we are going to be wrong, but we all work hard to lessen those probabilities.  
I know if I have done my homework and work through all of the probabilities, the first thing I always say is, “I could be early.” In this business, duration is very difficult to solve for.  I would rather be early than late.  Personally, I just don’t like being wrong.   
Yesterday, Keith came down hard on himself for being too early in introducing one of our new 4Q09 themes, the “Bombed Out Buck.” For the past two weeks the US Dollar rallied and the S&P 500 corrected as a result.  So far this week, the US Dollar has burned to a higher-low, keeping the most dominant global macro TREND in place, dollar down - stocks up.  Yesterday, the dollar ended slightly higher and stocks were mixed.   
As we have said in the past, those that have benefited the most from the burning buck are bankers, politicians and debtors, and I’m going to add the US consumer.  Keith has challenged me to think that a “bombed out buck” is good for the consumer, but I’m not there yet.  Based on metrics we see for those that analyze consumer confidence, we live in a time where we calculate the health of the US economy and thus, consumer confidence, by using the price of a stock market.  The 56% move in the S&P 500 since the March 9th low has done wonders for the consumer. Consumers have once again regained some confidence in one of their most important Assets – the 401k.  
Keith may have been early introducing the “bombed out buck” theme, but in global MACRO themes take time to gestate and this theme should not be ignored.  Why?  The crashing of our currency is not going to end well.  The Re‐flating of assets and creating another bubble is bad, not good and an unhealthy means to an end.  In the long run, there is a real possibility that the US Dollar's stature as the world's reserve currency will be dead.  This is BAD!
Helping to find a tactical bottom in the dollar will be the performance of some key commodities.  Yesterday, Gold climbed to a record level for a third day, while oil and copper were higher as the dollar is burning.  It’s a vicious circle we are in now - the dollar is burning, driving commodities higher as inflation fears grow.  As inflation fears grow greater, interest rates rate are headed higher which means the buck is bottoming.
The bigger issue we need to consider with the “bottomed out buck” is the politicians in Washington.  The “I-Believe-in-Strong-Dollar Turns Relic as China Begs Stability” story on Bloomberg today does not instill any confidence at all.  The Obama administration has no creditability in the currency markets when talking about a “strong dollar” policy.
In 2009, the most dominant theme in global MACRO has been the “burning buck.”  We are now working on setting the stage for the next chapter of the US dollar – “the bottomed out buck.”   
Early or not, it’s a factor that cannot be ignored.
Howard Penney
Managing Director

EWG – iShares Germany
Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. 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. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

XLV – SPDR Healthcare
We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

CYB – WisdomTree Dreyfus Chinese Yuan
The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global 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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.


We shorted oil on 9/30. The three Fed Heads put rate hike rhetoric right on the table. If the Buck stops Burning, Reflation stops working.

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

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.