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“You are the most bearish person at the firm”
 -Keith McCullough
Yesterday, in our internal research meeting, Keith said that I’m the most bearish person at the firm.  I’m OK with that.  I would much rather be called a bear with the S&P 500 at 1,066, than the index at 672.  Just to point out, I’m a survivor on many different levels so I’m happy to be alive and always an optimist.    
As I have said consistently for the past three months, as we head into 4Q09, there has been a disconnect between the demand side of the equation and stock prices within some sectors of the market.  As a consumer analyst, I see it every day and at times it’s frustrating.    
The Conference Board’s consumer confidence will release the October number shortly, and I don’t expect it to be much different than consensus, it actually may tick up slightly versus the 53.1 reading in September.  With unemployment drawing closer to 10% and consumers still skeptical about economic recovery rumblings, it’s hard to make a case that more people feel confident and /or very confident in chances for a strong economy.
And since I’m the resident bear, this is not a very merry sign for retailers headed into a critical holiday season.  I know this is consensus thinking, but the current unemployment trends and the implications for consumer demand are bad for some stocks.
The following has been engraved on every Research Edge employee’s forehead – Dollar down = Stocks up!  In January, walking down the streets of NYC we got some funny looks.  Today, being dollar bearish is the consensus!  It’s always dangerous to bet on the consensus being right, so I’ll take the other side of that trade!  So what is going to change the course of the dollar?  I have no idea, but this is what I do know….
(1)   The Obama train is off the tracks.  The decline in Barack Obama's popularity since July has been the steepest of any president at the same stage of his first term for more than 50 years - DOLLAR BULLISH!
(2)   Crude is up 81% year-to-date for the wrong reason – everything priced in dollars has gone up with the decline in the dollar. It does not matter what letter of the alphabet you use to describe the recovery.  It is the US dollar that has driven the price of oil so far beyond the realities of what normal supply and demand fundamentals appear to be - DOLLAR BULLISH!  
(3)   According to a BLOOMBERG survey, beginning in 3Q09, GDP growth will remain positive in each quarter through the end of 2010.  If this is correct, interest rates are headed higher – DOLLAR BULLISH!
(4)   Setting aside the Case-Shiller data due out at 9 am, the news on housing will be an incremental negative in 1H10 - DOLLAR BULLISH!
(5)   We are losing the WAR in Afghanistan and the outlook for democracy in Iraq is slim – DOLLAR BULLISH!
(6)   The improvement in the US financial system is over shadowed by continued bankruptcies.   The KBW Regional bank index is down 27% year-to date and 3.6% over the past month.  Behind the headlines of the “too big to fail” banks, there are still significant issues lingering within the US financial system.  Shelia Blair is still putting out fires and is running out of money.  Yesterday, regulators seized seven banks bringing this year’s number of seized banks to 106 and the total since the recession started to 131. As a point of reference, 181 institutions collapsed during the savings-and-loans crisis.  Currently, 416 banks are on the FDIC’s watch list.  According to Bloomberg, to date bank failures have cost the FDIC’s fund about $25 billion and is expected to cost $100 billion through 2013.  This has negative connotations for risk – the VIX was up sharply again yesterday – 9.7%.  The VIX closed at 24.31, above the immediate term TRADE line of 24.19 - DOLLAR BULLISH!  
Yesterday the S&P 500 did not break down and close below her trade line at 1,065, which is bullish, as the futures are trading slightly higher when I got up today.  Earnings season is winding down and we are now headed into the MACRO season.  The upcoming MACRO season is setting up to be more Dollar bullish than we have seen at any time in 2009.  
The dollar is the world “reserve-currency” and will be for some time to come.  Between our blundering politicians and the current financial crisis, right now it’s easy to take shots at the US Dollar and question her status as the world’s “reserve-currency.”  This too shall pass.
Yes I’m the resident bear at Research Edge, but I’m not alone, just outspoken.  I’m also proud to be an American!
Function is disaster; finish in style.
Howard Penney

EWT – iShares Taiwan
With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

XLU – SPDR Utilities
We bought low beta Utilities on discount (down 1%) on 10/20. Bullish formation for XLU across durations.

FXC – CurrencyShares Canadian Dollar
We bought the Canadian Dollar on a big pullback on 10/20. The currency ETF traded down -2%, but the TRADE and TREND lines are holding up next to Daryl Jones’ recent note on the Canadian economy.
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.

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.

XLY – SPDR Consumer Discretionary Consumer Discretionary has rallied from the freak-out “short everything consumer” lows, prompting a short on 10/22 as a hedge for a TRADE.

UUP – PowerShares US Dollar We re-shorted the US Dollar on strength on 10/20. It remains broken across all 3 investment durations and there is no government plan to support it.

FXB – CurrencyShares British Pound Sterling
The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.
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.