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Most people believe that the initial estimate of GDP is the most heavily rigged and politicized data point put out by the government.  Knowing this do you think tomorrow’s GDP number is going to be better or worse than consensus?  Yes, the FED is trying to tell us something. 

A day before the government reports 4Q09 GDP, the Federal Reserve declared that the U.S. economy is in “recovery” mode.  Yet it maintains a monetary policy that was put in place during the “great recession.”  As of tomorrow, by definition the recession is over as the US economy will have posted two straight quarters of GDP growth. 

What are the markets doing with this information?  As of 5am, stocks around the world are rallying the futures in the U.S. are indicated higher.  The VIX is down 5% and the Dollar index is flat on the day. 

Yesterday, the S&P 500 US equities finished higher on accelerating volume.  Early in the day a negative tone was set by tightening concerns that drove a fourth consecutive downturn in China stocks.  Last night China was up slightly, while the rest of Asia rebounded nicely.

On the MACRO front yesterday, new home sales fell 7.6% month-over-month to a seasonally adjusted annualized pace of 342,000, compared with consensus estimate of 366,000.  The median home price in December declined by 3.6% year-over-year, while the months' supply of new homes for sale rose to 8.1 from 7.6, but remained below the 12.4 months seen in early 2009. 

Yesterday, news flow also helped fuel a continued bounce in the dollar, which was up 0.31% yesterday and 1.04% year-to-date.  The VIX has seen a three day correction declining 5.74% yesterday, following a nearly 3.38% decline Tuesday.   

After being the worst performing sector on Tuesday, the Financials (XLF) outperformed the S&P 500 by 190bps on Wednesday.  Yesterday’s outperformance was driven by the BKX, which was up 2.9%.  Within the banking sector the regional names were the best performers. 

The RECOVERY trade got hammered again for the second day in a row.  Yesterday the Materials sector was the worst performing sector, declining 0.98%.  No surprise that the tightening concerns out of China, sovereign credit concerns and the accompanying bounce in the dollar are putting pressure on the RECOVERY trade. 

The CRB declined 1.8% yesterday and now declined 5 out of the last 6 days.  Since the beginning of last week the CRB has declined 5%.

Howard Penney

Managing Director