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    A Decade of Revolution Declare Your Research Independence

"The Constitution does not just protect those whose views we share; it also protects those with whose views we disagree."
-Edward Kennedy
Good or bad, everything happens for a reason.  Like the late Ted Kennedy once said, the constitution is working to protect those with differing views, especially those with views of the current administration in Washington.    
It’s fitting that “this change of guard” is happening in Massachusetts, a state that has played a big role in American history:
(1)   Plymouth was the second permanent English settlement in North America.

(2)   During the eighteenth century, Boston became known as the "Cradle of Liberty" for the agitation there that led to the American Revolution and the independence of the United States from Great Britain.

(3)   It was also a center of the temperance movement  and abolitionist activity before the American Civil War.

(4)   In 2004, Massachusetts became the first U.S. state to legally recognize same-sex marriage.

(5)   In 2010, Massachusetts has become Obama’s nightmare.

The S&P 500 has rallied 69.9% since March 9, 2009 and the average American is fed up!  In light of where we may have been heading a year ago and where we are today, this does not make sense.  Or does it?  After the close, the weekly ABC consumer confidence reading came in at -49 versus -47 last week and -50 a year ago.  Consumer sentiment is virtually unchanged from a year ago as most consumers are concerned about their personal finances because Washington is not.  
The nasty consumer confidence reading, combined with Scott Brown winning a U.S. Senate seat in Massachusetts, helps put things into perspective - Americans are fed up with the “Piggy Banker Spread” and the fact that Obama does not represent “change” in Washington.
The S&P 500 is up 3.2% so far in 2010 with the leadership coming from Healthcare, up 6.2% and the Financials, up 5.1%; both sectors are the target of the Obama administration and the re-regulation short sellers.   
Looking forward to today’s trading, here are some risk management items to consider:
(1)   Big intraday reversal to the upside in C got the Financials up again yesterday– XLF looks bullish (big driver of this recent breakout)

(2)   Yesterday was the 9th day out of 11 trading days this year that the S&P 500 has been up - short sellers of year-end feeling shame; pain trade is still up.

(3)   The closing price of the S&P 500 at 1,150 and the NASDAQ at 2,320 are higher highs – this is bullish.  

(4)   A loss for the Democrats in Massachusetts puts all of the re-regulation short sellers in the penalty box – XLV outperformed the S&P 500 yesterday by 120 bps.

Our 1Q 2010 MACRO themes continue to play out as planned.  
“CHINESE OX IN A BOX” - In China, it’s the “end of an emergency” as the cost of borrowing money is on the rise.  According to the China Securities Journal (citing unidentified people in Beijing and Shanghai), some of the nation’s banks have been told to “limit lending.”  The Shanghai index was down 2.9% last night and is now down 3.9% year-to-date.
Also, the “BUCK BREAKOUT” theme got a lift from the events in the Commonwealth, as the Dollar is once again looking more like a safe haven, trading at levels not seen since September 2009.  Yesterday, the Dollar index rallied 0.6% and is up 0.6% in early trading again today.  
Change is good!
Howard Penney
Managing Director

EWC – iShares Canada
— We remain bullish on the intermediate term TREND for Canada. With a pullback in the ETF on 1/15/10 we bought Canada.
XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.
UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

VXX - iPath S&P500 Volatility — The VIX broke down to our immediate term oversold line on 1/6/10, prompting us to add to our position on VXX.
EWG - iShares Germany —Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil — As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8/09 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.


IEF – iShares 7-10 Year Treasury
One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.

RSX – Market Vectors Russia
We shorted Russia on 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.
EWJ - iShares JapanWhile 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.