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“Seldom, very seldom, does complete truth belong to any human disclosure; seldom can it happen that something is not a little disguised, or a little mistaken.”

-Jane Austen

It's the end of the first quarter, and what a quarter it’s been!  The S&P 500 is up 5.2%, led by the Industrials (XLI +13.1%), Consumer Discretionary (XLY +11.1%) and Financials (XLF +10.6%).

It’s the beginning of spring and spirits have been lifted with a strong first quarter; but that doesn’t mean “something is not a little disguised, or a little mistaken.”  It’s hard to see how improving sentiment can override leveraged US balance sheets, anemic demand, high unemployment, and unruly state and household budgets.

As Keith posted yesterday, “We could easily see an early month correction in April like we did in February. The intermediate term TREND line of support for the SP500 is at 1118.  From today’s price, that would be a -5% correction that my models wouldn’t consider anything but proactively predictable.”

While we did not short the S&P 500 yesterday, we did buy the VXX, as the S&P 500 tries to confirm higher-highs into quarter-end.  In early trading today, the overseas markets are reluctant to push higher ahead of quarter end, the shortened holiday week and Friday's US jobs data.  That being said, there is an outside chance we see the S&P 500 trade in the 1175-1178 range; a level we would consider managing risk around.

Some things to consider as we head into the second quarter:

(1)          While the bond market isn’t blowing up, it is sending a clear message that interest rates will be headed higher sooner than expected.

(2)          The squeeze in the “pain” trade is nearly over.

(3)          A +11.2% melt-up in the S&P 500 over a 7-week timeline is not normal.

(4)          Can the 1Q earnings season exceed expectations and deliver continued upward guidance?

(5)          Global sovereign debt issues will act as a governor on any significant upside potential.

On the sovereign debt front (and as ridiculous as ratings agencies may be), Moody’s said that Aaa-rated sovereigns with financing costs at 10% or more of revenue exceeds the limits of “debt affordability.”  This increases the number of countries that could potentially see rating “downgrades.” 

China’s stocks fell for the first time in four days last night, declining 0.6%.  For 1Q10, this puts the Chinese market down 5.1%, the worst quarterly drop since August last year.  While we have not yet officially introduced our 2Q10 themes yet, continued property-related policy risks surrounding China is still a slight MACRO headwind.

Nothing is really ever what is seems on the surface.  Just ask the venerable European institution Gartmore, which plunged 31% following the announcement of potential “breaches of internal procedures regarding directing trades.”

Function in disaster; finish in style.

Howard Penney 

Managing Director

Seldom Do We See - sp1