MOOSPEAK-- December 24, 2010 Welcome to Moospeak, the weekly commentary. Club members who, despite a secret interest in growing their own investments, are annoyed by the actual economic, political and financial realities implicit in that endeavor may choose to avoid the pro-investor opinions expressed on this page.

The Top Ten Moose-Movers for 2010 Washington, DC-- As 2010 draws to a close, it is time to recap the year's top stories-- those which the Moose feels had (and will continue to have) the most impact on you, dear reader, the Dollar investor. #10 The Flash Crash On May 6, 2010, as the Greek debt crisis deepened, the Dow Jones Industrial Average plunged close to 900 points only to recover those losses within minutes. It was the second largest point swing, 1,010.14 points, and the biggest one-day point decline, 998.5 points, on an intraday basis in Dow Industrial history. Six hundred points of the drop occurred in less than fifteen minutes. So basically, if you

blinked you missed it, and if you had stop-losses set, they were blown out at much lower levels. At the end of the day, while the indices recovered a bit, investor confidence in the trading system was shattered. US stocks, which had peaked two weeks before had begun a sharp two-month 16% drop to the year's July lows. A subsequent official report on the Flash Crash did not isolate a specific reason for it, but instead identified several systemic contributors to the event-- leaving the impression that it could happen again. #9 The US Elections On November 2nd, the 111th US Congress-- which once garnered a 9% approval rating, making it the most reviled legislature since polling began-- suffered a defeat of equally historic proportions. Single party control by the Left gave way to a split government. Republicans gained control of the House, while Democrats, though weakened, retain control of the Senate. The 112th Congress, once seated in January, is expected to tilt away from government solutions and transfer recipients in favor of business and taxpayers. That has increased investor confidence that the US economy can begin to extricate itself from the doldrums in 2011, and has helped propel the stock market at year end. The elections' impact in 2011, however, will ultimately depend on whether expectations are met. #8 Financial regulation passed The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010. It is less a law than a framework that requires regulators to create 243 rules, conduct 67 studies, and issue 22 periodic reports, covering every aspect of the private US financial system in 2011-- from banks, to mortgage providers, to insurers, to credit card issuers, to financial advisors, to hedge funds, to market mechanisms. The stated aim of the legislation is: "To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big to fail", to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes." Whether it meets any of those objectives won't be known for years. In the meantime, it will definitely increase compliance costs for financial service providers, who will

pass them on to consumers. Moreover, the legislation did not address Fannie Mae and Freddie

Mac, at the center of the 2008 financial crisis as providers of 85% of US mortgage products. Dodd-Frank can be expected to create uncertainty and weaken the economy in 2011, if and when it is implemented. (See #7.) #7 US State and Federal finances The 111th (Pelosi-Reid) Congress, its days now numbered, famously legislated US deficits in excess of a trillion dollars a year, every year, for the next decade. Then it began a series of addons. Prior to the 2010 elections, it refused to establish a fixed tax policy and refused to publish a Federal budget for the current fiscal year. Lack of transparency continues in the lame duck session with agreement on a two-year extension of the debate over tax rates, and no decision on the current (2011) budget. Senate Republicans effectively filibustered the Pelosi-Reid budget proposal, forcing a hastily passed "continuing resolution," that merely extends the 2010 budget, and keeps the government open. The resolution doesn't include money to implement the financial regulation bill, the health-care bill or any other Congressional "accomplishment" of the past year. Moreover, the prospects for agreement diminish appreciably when the 112th Congress is seated in January 2011. If the Federal government is a fiscal mess, several US states are worse off. Unlike the Feds, states can't print their own money. Major budget problems in California, New Jersey, New York, Michigan, Illinois, Arizona are but the headliners. In all, 46 of 50 states must close over 100 billion in deficits in fiscal 2011. With Federal transfers to profligate states, under the 2009 "non-stimulus bill" now spent, the solvency of the US municipal bond market in 2011 is in question.

#6 The BP Oil Spill and Aftermath The largest accidental oil spill in history began April 20, 2010, with the Deepwater Horizon drilling rig explosion, in which 11 died. It was three months before the gushing wellhead was capped on July 15, 2010, after releasing close to 5 million barrels of crude into the Gulf of Mexico. On September 19, a relief well was completed and the wellhead was finally declared dead. The economic effects to fishing, shrimping, and tourism along the Gulf coast were devastating and continue today. Moreover, in reaction to the disaster, Washington declared a moratorium on Gulf drilling on May 30, shutting down 33 rigs and a good portion of the oil exploration and services industry, a major job source in the Gulf states. The moratorium was declared illegal in Federal court, but retained on appeal, before the Obama administration eventually lifted it ahead of schedule on October 12 due to election-year pressures and persistently high unemployment. New areas in the Atlantic and Gulf, opened for drilling in early 2010 prior to the spill, however, were subsequently closed after the elections. The reduction in oil supply from the blowout, from the US moratorium, and from subsequent curbs on future US exploration, contributed to a sharp increase in the price of oil. Since late May, WTI crude prices have risen from $68 per barrel to $92, or about 35%, despite a lackluster US economy during the period. Since higher oil prices act as a regressive tax on economic growth, the situation that has arisen out of the spill must be considered a strong negative entering 2011. #5 China: World's #2 economy China surpassed Japan in mid-2010 as the world's second largest economy. Along with India, it has been a key economic driving force in the world since the financial crisis. Aggressive, centrally controlled beggar-thy-neighbor mercantilism has allowed it to grow GDP by double digits even during the 2008-2010 global slow-down. In that respect, it's currency remains tied to the Dollar, only allowed to appreciate slightly, despite its roaring economy. This keeps China's exports cheap, helping its export economy, and it keeps imports into China expensive, protecting domestic manufacturers. Being tied to the Dollar, however, also means that China "imports" US monetary policy. US Fed chairman "GlobeMaster Ben" Bernanke, is following a very expansionary to cope with US domestic problems. (See #2.) As a result, Chinese demand has

sharply increased the cost of energy, metals, and grains, which are traded in Dollars. With inflation on the increase in China, particularly in food and housing, the government has begun to tighten credit. A slower China may be healthy longer term, but a tendency toward "clap-on, clapoff" domestic regulation could create surprise dislocations and volatility in overextended global commodity markets in 2011. That would inevitably feed through into equities and bonds. China is on balance a positive for global growth in 2011, then, but it remains a wild-card for investors. #4 European sovereign debt crisis On April 27, 2010, Standard & Poore's reduced its rating on Greek government bonds to junk. The yield on Greek debt shot above 15%, and the European Debt Crisis was officially underway. Stock markets around the world dropped. In fact, fiscal imbalances had been growing for years in several European nations, known as the PIIGS-- Portugal, Italy, Ireland, Greece and Spain. (Belgium is also a problem, but avoided infamy by not fitting neatly into a cutsie acronym.) Years of deficit spending raise government borrowing costs over time. Eventually servicing the debt can become so onerous as to bankrupt the public treasury. In such cases, there are usually two choices: (1) default on the debt, or, like the US (2) devalue the national currency. In this instance, the European debtor nations share a synthetic currency, the Euro, over which they have no sovereign control. Only option 1 is available to them then, unless the ECB can be convinced to devalue the Euro. That is not a hard sell since most large European banks hold sovereign debt from the PIIGS as part of their capital reserve, and any sovereign default (much less a wave of them) could profoundly shake the global banking and financial system. As a result, the ECB and the IMF have pieced together a program of individual national bail-outs (contingent on austerity measures), coupled with a trillion dollar European Financial Stability Facility. Critics claim that a more proactive approach is needed-- not one that merely kicks the can down the road. The upshot is that the crisis is hardly over and will continue to wreak havoc among investors in 2011. A sovereign default, though highly unlikely at this juncture, would be a major disaster, and is thus an ongoing contributor to market volatility. #3 The foreclosure tsunami Housing remains at the center of US economic weakness with repossessed homes at record levels entering 2011. One in seven U.S. home loans was past due or in foreclosure as of Sept. 30, putting that quarterly delinquency measure at its highest level since 1972, when the Mortgage Bankers Association began reporting it. At the beginning of this year, one in ten loans was past due or in foreclosure. Collapsing home prices have contributed to a reverse wealth effect, not only reducing consumer confidence, but also limiting homeowners' access to additional loans. Home foreclosures peaked early in 2010, but have been coming down since. The November foreclosure totals were way down, but it can be argued that legal challenges in several states over a mortgage transfer technique known as "robosigning" was responsible. For the moment, housing is bumping along the bottom. Foreclosures are likely to climb through all of 2011, despite stabilizing housing prices in some areas. On balance, real property should remain a negative both for the consumer economy and for investors.

#2 The Fed and QE2 The Federal Reserve has maintained its target range for the federal funds rate at 0 to 1/4 percent for all of 2010. That is essentially offering banks "Free money". Further, the Fed anticipates that economic conditions are likely to warrant exceptionally low rates for an extended period. In addition, the Fed is not only reinvesting principal payments from its earlier securities purchases (QE1), but has begun a second round of quantitative easing, or QE2-- tantamount to paying folks to take Dollars. Under QE2, the Fed plans to purchase $600 billion in longer-term Treasury securities through the second quarter of 2011, at a pace of about $75 billion per month. The Fed's easy money stance through June 2011 is a positive for the economy, for equities, for commodities, and for gold, and a negative for bonds. The danger is that a

commodity bubble could form-- not necessarily in the US, but in the emerging markets-- creating a new round of global inflation expectations. The subsequent monetary response to that inflation could quickly reverse investment winners and losers in the second half.

#1 Unemployment Unemployment was clearly the number one economic, investment, and personal story of 2010. With the official US unemployment rate at 9.8% and the broader rate closer to 17%, many are wondering if such stubbornly persistent joblessness is now structural. Can low unemployment levels of 4-5%-- seen as recently as the Bush administration-- ever return? Given an aging babyboom demographic and a US economy in which workforce skill-sets seem to be evolving more rapidly than ever, it may take awhile. Until then, joblessness will be the biggest drag on economic growth, dampening demand and eroding confidence. Entering 2011, new claims for unemployment insurance have been declining gradually, but remain well above the 250K-300K level usually associated with falling unemployment. Online job postings are up-- also a hopeful sign, but online postings often describe more technical or managerial positions. Retail and construction jobs, the bulk of the economy, are under-represented. All reports are that retail has had a good Christmas, but those jobs can be seasonal. And until real estate recovers, construction will languish. The recovery has stalled out for the past nine months, with employers hesitant to hire, consumers hesitant to spend, and the government having shot blanks for the last two years.

MOOSECALLS-- December 24, 2010 Index Moose provides deeper insights into the current state of global financial markets than simply the best place to put your money.

The Author's Take on the Latest Signal "This thing, what is it in itself, in its own constitution? What is its substance and material? And what its causal nature (or form)? And what is it doing in the world? And how long does it subsist?" --Marcus Aurelius, 167 AD

LATEST SIGNAL: (12/24/2010) HOLD US Small Caps (IWM) through 01/02/2010. (In this section of the Moose Calls newsletter, the author discusses his thinking on the validity and duration of the current signal. This may be a good thing or a bad thing, as the signal is more aggressive and has often proven itself a better predictor of the future than its somewhat skittish author with his more moderate risk profile.)

Season's Greetings from Beijing While most westerners were out doing last minute Christmas shopping, slugging down eggnog, or traveling to grandma's this holiday weekend, the Chinese quietly raised interest rates in the dead of night. This frankly demonstrates a great deal of growth in Chinese sensitivity toward their own increasing importance in the global investment community. They are becoming more sophisticated with

respect to standard operating procedures. Whenever pols want to do something that they know will be very unpopular, it is best to do it at midnight on the first day of a long weekend. The US Congress does it all the time, most egregiously last Christmas with Health Care. The idea is to keep a low profile, to hide out, and to give the people you're angering time to cool off before they do anything rash… while also giving yourself time to get out of town. Obviously, the Chinese communists have leaned a thing or two from Nancy Pelosi. The 25 basis point interest rate increase is China's second since mid-October. It targets the one year lending rate at 5.81% and the one-year deposit rate at 2.75%. With Chinese rates expected to go up by another 100 basis points (1%) in 2011, but starting from a low base, it is not likely that GDP growth will be allowed to drop below 8%.The latest move comes after 5% inflation was reported in November, mostly in food and housing. The Moose holds IWM, but it would not surprise me if a market correction ensues at Monday's open. Equities are over-valued at the moment and this China news could be the catalyst for a correction-- even though their rate hike has been widely expected and is partially built into the market. The global investment community, which considers China a driver of economic growth, is never happy to see them applying the brakes. As a result, commodity, gold, and equity markets could have a shaky final four sessions of 2010. I was hoping we could get to January before correcting-- me and everyone else who'd like a restful year-end. It may still happen, but we must be realistic. Not all wishes are granted. If one has the stomach to hold through the next correction, though, stocks should head higher afterward. The reasons to be bullish on equities that were outlined in this space last week remain valid. (See 2010.12.17.pdf). We'll have to wait and see. Meanwhile, this festive season of good cheer gives us a holiday news report from South Africa. There, an intoxicated driver was pulled over by police this week and arrested after testing 32 times the legal limit for alcohol. Oh yeah, he also had fifteen sheep in the back of his Mercedes Benz. Must have been some party. Hope you have a good one this season too. Health, Happiness, and Prosperity in 2011.

Weekly Market Review-- December 24, 2010 Monday, US equities dropped to open the holiday-shortened week, but by the end, the Dow had clawed back to within 17 points of its Friday close. Tuesday, stocks rallied from start to finish, albeit on very low volume. There was again no economic data to speak of. The Dow Jones Industrial Average rose 55 points (0.6%) Wednesday, financials finished off session highs, but still led the broader market to another gain and a new two-year closing high. Data did little to move stocks. The final estimate for third quarter GDP indicated that the economy expanded at a 2.6% annual clip from July through September, up from the previous estimate of 2.5%. Q3 personal consumption increased 2.4%, down from the previous 2.8% estimate. November existing home sales increased 5.6% month-over-month to an annualized rate of 4.68 million units, on par with the expectations. The dollar was quiet, commodities were mixed, and the Dow was up 26. Thursday, stocks finished mixed in the final trading session before the Christmas holiday following a stack of US economic data. US durable goods orders came in below expectations. Jobless claims

roughly matched economists' forecasts, while personal income and spending figures were mixed. Treasuries were mixed in an abbreviated trading session Overseas, Asia and Europe were also mixed. Japanese markets were closed. The Dow was up 14. Friday, the US markets were closed. When all was said and done, it was other good week for equities. US small caps (+0.9%) and US largecap's (+1.0%) rose. Offshore, equities were mixed. Europe (+0.5%), Japan (+0.3%) and Latin America (+0.6%) were up. Pacific ex-Japan (-0.6%) retreated on China weakness. Commodities (+2.7%), including oil (+3.1%) and gold (+0.3%) were higher in the face of a flat US dollar (+0.1%). US Treasury long bonds (-1.1%) continued their swoon. Fed assurances that it will buy Treasuries until the cows come home, has not been helping long T-bonds. If anything, it seems to be contributing to the volatility. The ten-year T-bond yield rose another 6 basis points to 3.39%. Welcome to Treasuries trading like junk. It has been a three week rout. See the week's detail below.

Weekly Market Table-- at the close December 24, 2010 RANK

CI

1 2 3 4 5 6 7 8 9

59 50 31 36 36 27 17 -0

ASSET US Small-cap Equity Index (IWM) US Large-cap Equity Index (SPY) Pacific ex-Japan Equity Index (EPP) Japan Equity Index (EWJ) Latin America Equity Index (ILF) Gold Bullion (GLD) Europe 350 Equity Index (IEV) Cash-- MMF or three month T-bills Long Zero-Coupon Treasury Bonds (BTTRX) Other Considerations Fed Check (what the Fed ought to do) Impact of interest rates on US Equities Impact of the CBOE Volatility Index on US Equities Impact of the US Dollar on Foreign Equities and Gold Commodity Inflation Trend Crude Oil Price Trend

Overall Technical Trend (change) very bullish (+) very bullish (+) slightly bullish (-) very bullish (+) very bullish (-) bullish (-) bullish (-) -bearish (+)

+100 +100 +49 +100 +81 +72 +55 --87

hike rates (-) bullish (+) very bullish (+)

0.86 +72 +99

neutral (-)

+19

very bullish (+) very bullish (+)

+100 +96

TS

*CI is the "confidence index" measuring the model's overall confidence in the asset. It combines the relative strength (rank), the technical strength (TS), and the Fed Check. For more information, see the Club FAQs. (+)= bullish improvement this week. (-) = more bearish this week.

Assumptions & Perceptions-- December 24, 2010 Global Economy Assumptions-- Global Economy OCT 1--According to the IMF, world growth will come in at about 4.6% in 2010. This represents a slowing in the second half from an earlier 5% pace. Emerging markets should continue outperform the developed world in the second half, and grow by 6.8% in 2010. Developed economies, meanwhile, are only expected to grow by 2.6% this year. Among developed countries, the newly industrialized Asian countries (+6.7%) should outperform due to their proximity to China. The weakest developed region is expected to be the Eurozone (+1.0%) due to financial turbulence. In 2011, world growth will come in at about 4.3%, down slightly from this year. Emerging markets should continue outperform the developed world, and grow by 6.4% in 2011. Developed economies, meanwhile, are only expected to grow by 2.4% next year. Among developed countries, the newly industrialized Asian countries (+4.7%) should outperform due to their proximity to China. The Eurozone (+1.3%) is expected to continue to be the weakest developed region due to financial turbulence. Caveat: Downside risks have risen sharply. Near term, the main risk is an escalation of financial stress and contagion, due to rising concern over sovereign risk. This could lead to additional increases in funding costs and weaker bank balance sheets and hence to tighter lending conditions, declining business and consumer confidence, and abrupt changes in relative exchange rates. Given trade and financial linkages, the ultimate effect could be substantially lower global demand. Current Perceptions-- Global Economy The global economy is looking less rosy. Sovereign debt fears in Europe, mitigated by ECB backstop assurances, by promises of austerity, and by "successful" bank stress tests last summer have resurfaced in Ireland, Portugal and Spain. China is tightening credit to slow its economy, but that threat to Asia-Pacific growth and prosperity recently has been overshadowed by hostilities on the Korean peninsula. Higher taxes and growth-stunting regulation scheduled in the US are on hold after recent elections. An uneven recovery from the financial crisis, has beggar-thy-neighbor currency actions on the rise, but G-20 ministers have promised that will change. Economically, we are seeing weaker second half performance all round, but emerging countries are still expected to lead a nascent recovery in 2011, and continue to outpace the developed world.

U.S. Economy Assumptions-- US Economy NOV 3-- The pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Current Perceptions-- US Economy The good: Q3 GDP final revision up to 2.6%. NOV existing home sales (4.68M) in line with expectations. Personal income (+0.3%) better than expected. OCT FHFA home price index (+0.7%) up. The bad: DEC Michigan Sentiment weaker than forecast. NOV personal spending (+0.4%) up less than expected. Durable orders (-1.3%) down more than expected. New home sales (290K) weaker than expected. The ugly: Weekly jobless claims (420K) fell but still high. Continuing claims fell too, still above 4 million (4.06M). NOV unemployment rate at 9.8%.Non-farm payrolls (+39K) U-6 unemployment 17.0% vs 16.4% a year ago.

The Fed Assumptions-- The Fed NOV 3-- The Federal Reserve is maintaining the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Fed will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Fed Check suggests that inflation could become a problem at some point, and that the Fed may not need to become more accommodative in the near term. Current Perceptions-- The Fed The Fed Check (0.90) plunges deeper into rate hike mode this week, questioning whether the Fed should be engaging in quantitative easing (QE2) at all. Commodity prices remain very strong, but bond prices fell this week. The Fed ended its initial purchases of US Treasuries in early 2010, but then announced this fall that it would roll mortgage bond positions into Treasuries instead of liquidating them as they mature. In November, they announced 600B in new T-note purchase through April 2011. 3-month LIBOR (0.30%) rose a tick this week, and the T-Bill yield (0.12%) fell 1, raising the 3-month LIBOR/T-Bill spread to 18 basis points. (The spread has been coming down since peaking in June. A lower spread suggests easier bank-to-bank credit, and a more confident banking system.)

Inflation Assumptions-- Inflation NOV 3--Measures of underlying US inflation are currently below those the Fed judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. Although the Fed anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Fed decided today to expand its holdings of securities. Current Perceptions-- Inflation OCT core consumer prices (+0.0%) very tame. OCT consumer prices (+0.2%) tame. OCT core producer prices (-0.6%) vary tame. OCT producer prices (+0.4%) hot. NOV export prices (+0.8%) hotter. NOV import prices (+0.8%) much hotter. NOV PCE annualized (+1.4%) up. NOV core PCE annualized (+0.8%) below Fed range. Q3 employment cost index (+0.4%). Not overheated. Q3 GDP deflator (+2.1%) getting hot. Q3 unit labor costs (-0.1%) much cooler than expected.

U.S. Dollar Assumptions-- The U.S. Dollar OCT 1-- The Dollar began to weaken in March 2009, bottoming in January 2010. There it rallied 14% into this June, as investors fearing sovereign debt default in Europe fled the Euro. As fear trades go, the June 2010 Dollar high basically matched its highs in 2008 and 2009 during the height of the financial crisis. It pulled back quickly this time, as fear dissipated, and has gone from very bullish to very bearish in three months. The Fed outlook on the US economy-- and its renewed commitment to quantitative easing-- continues to be a major contributor to the weak Dollar. Until sovereign debt issues or some other crisis reappear, then, the Dollar should trend lower against most currencies.The US Fed cannot embrace austerity per se, as current fiscal policies-- from the "stimulus" that wasn't, to socialized healthcare, to financial regulation-- are all expected to raise the cost of labor and capital substantially, making US investment less attractive, and thus job creation and growth less likely. Current Perceptions-- The U.S. Dollar The Dollar (+0.1%) was basically flat this week. The overall technical trend in the Dollar improved to neutral. The greenback's price is up over the last 13 weeks (+2%), and up over 52 weeks (+3%). The Dollar is bullish against the Euro and Pound Sterling, but bearish against the Yen, the Aussie Dollar, the Canadian Dollar.

quantitative easing-- continues to be a major contributor to the weak Dollar. Until sovereign debt issues or some other crisis reappear, then, the Dollar should trend lower against most currencies.The US Fed cannot embrace austerity per se, as current fiscal policies-- from the "stimulus" that wasn't, to socialized healthcare, to financial regulation-- are all expected to raise the cost of labor and capital substantially, making US investment less attractive, and thus job creation and growth less likely. Current Perceptions-- The U.S. Dollar The Dollar (+0.1%) was basically flat this week. The overall technical trend in the Dollar improved to neutral. The greenback's price is up over the last 13 weeks (+2%), and up over 52 weeks (+3%). The Dollar is bullish against the Euro and Pound Sterling, but bearish against the Yen, the Aussie Dollar, the Canadian Dollar.

Commodities Assumptions-- Commodities OCT 1—Commodities have mirrored the Dollar, rising throughout 2009, falling in the first half of 2010, and rallying since June. The overall trend in commodities is very bullish at the moment. Oil, after bottoming at $35 in late 2008, rose through 2009, and has been trading between $67 and $87 this year. It too became bullish this fall. While global economic growth is still uncertain, with both Japan and the US engaged in quantitative easing, and the UK considering it, fiat currencies are less and less respectable, making hard assets like commodities and oil more attractive. Current Perceptions-- Commodities Commodity prices (+2.7%) resumed their recent rally. A flat dollar (+0.1%) did not hurt. Rising oil (+3.1%) prices led commodities higher. The overall trend in commodities is still very bullish. Commodities are up over 13 weeks (+16%), and up over 52 weeks (+17%). As for oil, the overall trend in USO remains very bullish this week. Its price is up over the last 13 weeks (+17%) and over 52 weeks (+2%).

Gold Bullion Assumptions-- Gold Bullion OCT 1-- Gold opened 2010 near $1200 an ounce and managed to creep higher in the first half, despite fighting a strengthening Dollar for most of the year. It recently pushed above $1300. Gold’s strength relative to other dollar-denominated commodities reflects systemic and fiat currency fears rather than price inflation fears. A global reflation effort by governments has made the major trading currencies less attractive, inducing central banks to diversify their reserve holdings with gold. The added liquidity from global deficit spending could spike price inflation, but only once economies start moving again. Meanwhile, gold is bullish and expected to remain that way in the long term. Current Perceptions-- Gold Bullion Gold (+0.3%) gained as the Dollar (+0.1%) stayed flat. It is in 6th place in the model, and is more attractive than cash. Gold's traditional year-end rally has been called into question this month, but rumors that China may diversify its reserves out of fiat currencies helps. Longer term, given the global rise in fiat money supply, and the systemic uncertainties that exist, gold may be the most attractive store of value. The overall technical trend in gold is bullish. Its price is up over the last 13 weeks (+6%), and up over 52 weeks (+24%).

US Long Treasury Bonds Assumptions-- US Long Treasury Bonds OCT 1—Treasury bonds were bearish entering 2010, but turned bullish in the second half as US growth prospects have diminished. The ten-year yield is below 3% for the first time since the spring of 2009, when the fear of total financial collapse was just beginning to wane. Though the Fed Funds rate has remained at 0.00 to 0.25% since early 2009, the weaker growth forecast is in part due to Fed tightening in the first half-- first by ending its purchases of US Treasuries, then by ending all swap agreements with foreign central banks, and then by raising the discount rate. Finally, it ended mortgage bond purchases this spring. Closing out those programs, combined with the Obama administration’s announced five trillion in U.S. government expenditure through 2010 sent the tenyear yield above 4% and mortgage rates above 6% by June. Rising yields in the first half helped to slow US economic growth generally, including housing. Seeing that, the Fed reversed course and resumed quantitative easing. Rolling over the principal from earlier mortgage bond purchases into Treasuries, it hopes to flatten the yield curve and improve an anemic velocity of circulation. That may or may not work, but it has flattened the 3-month to 10-year yield curve by 150 basis points year-todate (to around 237 basis points); portending weaker GDP and increased deflation fears. Threemonth Treasury bills (cash) pay next to nothing (0.15%), a sign that fear of risk remains. Current Perceptions-- US Long Treasury Bonds U.S. 25y+ Long Bonds (-1.1% ) remain in ninth place-- dead last in the model. They are in a three week free-fall. The overall technical trend in Long Treasury prices is very bearish with the price down over the last 13 weeks (-10%), but up over 52-weeks (+13%). The 10-year yield rose 6 bps. to 3.39% this week. Cash yields, meanwhile, rose to 0.13%. That steepened the 3M-10Y-yield curve to 326 basis points. Overall, the yield curve trend has begun to steepen, which indicates that growth and/or inflation prospects are improving-- a poor sign for bonds, but positive for stocks.

U.S. Large Cap Stocks Assumptions-- US Large Cap Stocks OCT 1-- US large-cap stocks were technically very bullish entering 2010. Then they peaked in April, weakened in the summer, and only began to recover with any seriousness this September. Suddenly their outlook is very bullish, but that could change, if the Bush tax cuts expire and if the costs of mounting regulations really begin to stifle domestic growth. On a positive note, the Dollar is weakening again, which should help the US export sector and large cap multi-nationals with offshore income. After the Dollar peak in June, large caps outperformed for awhile, but lately they have been lagging small-caps and offshore equities. Current Perceptions-- US Large Cap Stocks U.S. large caps (+1.0%) were up again this week-- as bonds wavered. The volatility index is very bullish this week-- lots of complacency. Otherwise, the technicals are very solid, and SPY moves to #2 in the model-- more attractive than cash. The overall technical trend in large cap stocks (SPY) stays very bullish this week. Its price is up over the last 13 weeks (+9%), and up over 52 weeks (+12%).

U.S. Small Cap Stocks Assumptions-- US Small Cap Stocks OCT 1-- US small-cap stocks were technically very bullish entering 2010. Then they peaked in April, weakened in the summer, and only began to recover with any seriousness this September. Suddenly their outlook is very bullish, but that could change if the Bush tax cuts expire and if the costs of mounting regulations really begin to stifle domestic growth. A stronger dollar in the first half of 2010 helped smaller firms over larger exporters, but that changed briefly in June. Now the Dollar is bearish. As a result, small caps ended the third quarter at the top of the index rankings. Out-performance in September provided a sufficient boost for the rest of the period. Small cap performance vs. large declined through mid-July, saw a brief recovery at the end of the month, and declined again until midAugust. Since mid-August, however, small caps have been showing strength against large caps. Moreover, small-cap growth stocks continued to beat out value stocks in both the S&P 600 and Russell 2000 indices. Growth has bested value during September, Q3, YTD, and the last 12 months. Current Perceptions-- US Small Cap Stocks U.S. small caps (+0.9%) lagged large caps a bit this week, but are outperforming longer term. The model holds IWM again this week. IWM's technicals are very bullish, and improving. It is #1 in the model, more attractive than both large caps and cash. Its price is up over the last 13 weeks (+16%), and up over 52 weeks (+21%).

European Large Cap Stocks Assumptions-- European Large Cap Stocks OCT 1-- European stocks are very bullish entering the last quarter of 2010. The Europe 350 clawed its way higher in September, despite lingering fear over sovereign debt issues that could take down the region’s banking system. By June, however, the European Central Bank had brokered a deal in Greece and set up a safety net (that in part requires austerity) to handle potential debt problems in Portugal, Italy, Ireland, or Spain. This helped to stabilize and then strengthen the Euro and revive equities this fall. The danger, of course, is that a resurgence of those sovereign debt fears could occur at any time. The problems have not been solved, per se, only kicked down the road. Current Perceptions-- European Large Cap Stocks European stocks (+0.5%) edged higher this week, after taking a big hit on Irish sovereign debt fears. earlier this month. This after global optimism amid unchanged interest rate decisions from the Bank of England and the European Central Bank had been helping European stocks. The Euro remains bearish. The overall technical trend in European stocks (IEV) slips to bullish this week. It holds at #7 in the model, and though less attractive than US stocks, is more attractive than cash. Its price is up over the last 13 weeks (+3%), but flat over 52 weeks (0%).

Japanese Stocks Assumptions-- Japanese Stocks NOV 1-- Japanese equities are neutral as 2010 draws toward a close, and have gone nowhere in the past year. It is 30% above where it was at its March 2009 nadir, but still 40% below the high reached in October 2007. The Japanese consumer remains weak, and yet another in a string of new governments is still finding its way. Demand for Japanese exports has slowed in the second half due to China's successful effort to cool its economy and an unsuccessful US government stimulus effort. To make matters worse, the Yen continues to strengthen against the Dollar, depressing Japan's export trade. Government efforts to manage the Yen have slowed its ascent, but not ended it. On a positive note, after a decade of failed public stimulus bills, Japan has lowered its corporate tax rate in an attempt stimulate job creation and capital investment via the private sector. Current Perceptions-- Japanese Stocks Japanese stocks (+0.3%) rallied as Japan came to a new budget agreement this week. A bullish but weakening Yen is also helping Japan's exporting economy and its equities, in part thanks to recent BOJ efforts to bring the Yen down. The BOJ has announced it will keep its rates near zero until “price stability is in sight,” and that it may purchase up to 5 trillion yen ($60 billion) in various assets to help foster economic growth by slowing a surging yen. Ironically, it is the recent violence in Korea, and debt fears in Europe that have done more to weaken the Yen vs. the Dollar. The overall technical trend in Japanese equities (EWJ) is very bullish this week. It is #4 in the model and more attractive than cash. Its price is up over the last 13 weeks (+9%), and up over 52 weeks (+8%).

make matters worse, the Yen continues to strengthen against the Dollar, depressing Japan's export trade. Government efforts to manage the Yen have slowed its ascent, but not ended it. On a positive note, after a decade of failed public stimulus bills, Japan has lowered its corporate tax rate in an attempt stimulate job creation and capital investment via the private sector. Current Perceptions-- Japanese Stocks Japanese stocks (+0.3%) rallied as Japan came to a new budget agreement this week. A bullish but weakening Yen is also helping Japan's exporting economy and its equities, in part thanks to recent BOJ efforts to bring the Yen down. The BOJ has announced it will keep its rates near zero until “price stability is in sight,” and that it may purchase up to 5 trillion yen ($60 billion) in various assets to help foster economic growth by slowing a surging yen. Ironically, it is the recent violence in Korea, and debt fears in Europe that have done more to weaken the Yen vs. the Dollar. The overall technical trend in Japanese equities (EWJ) is very bullish this week. It is #4 in the model and more attractive than cash. Its price is up over the last 13 weeks (+9%), and up over 52 weeks (+8%).

Latin American Stocks Assumptions-- Latin American Stocks NOV 1-- Latin equities bottomed out in early July and have recovered since. ILF is technically bullish approaching year end. The rally has followed stronger commodity markets and a weaker US Dollar. The Asian region is leading the global recovery and is Latin America's best customer. China's gradual, sporadic efforts to slow its torrid growth rate in 2010 have had a minimal impact, despite higher interest rates and the Yuan creeping fractionally higher. That has helped ILF. Should China further strengthen the Yuan, as promised, commodities would benefit even more, as would materials exporters in resource rich regions like Latin America. Current Perceptions-- Latin American Stocks Latin American equities (+0.6%) inched ahead this week. ILF benefitted from higher commodity prices (-2.7%) in general, specifically oil prices (+3.1%). The resource-rich region is more attractive than cash for the moment, and in fifth place in the model. The overall technical trend in Latin equities (ILF) is very bullish. Its price is up over the last 13 weeks (+8%), and up over 52 weeks (+11%).

Pacific ex-Japan Stocks Assumptions-- Pacific ex-Japan Stocks NOV 1-- Pacific ex Japan equities bottomed out in early July and have recovered since. EPP is technically bullish approaching year end. The rally has been due to stronger commodity markets and a weaker US Dollar. China has been taking gradual, sporadic action to slow its torrid growth rate in 2010. So far, the impact on its growth appears to be minimal. despite raising interest rates and allowing the Yuan to creep fractionally higher. Should China further strengthen the Yuan, as promised, commodities would benefit, as would materials exporters, and the financiers thereof. As a result, the Asian region continues to lead a sputtering global recovery, with Pacific equities showing solid momentum. The danger is that any flight to Dollar safety will weaken the resource-rich region's ability to export its raw materials and manufactures, and could damage Asian bank profitability. Current Perceptions-- Pacific ex-Japan Stocks Pacific ex-Japan equities (-0.6%) were down this week. China has been tightening to fight the threat of inflation, and North Korea has been saber-rattling of late. On the positive side, in the US, QE2 and hints of US tax rate extensions give hope that US consumers would be buying Asian again soon. The overall technical trend in Pacific ex-Japan equities (EPP) is slightly bullish this week. It is #3 in the model, and is more attractive than cash for the moment. Its price is up over the last 13 weeks (+4%) and over 52 weeks (+13%).

Carry-Trade Corner-- at the close December 24, 2010

TS

Medium Term Implications for non-Dollar investors

Euro (FXE) Yen (FXY)

Overall Technical Trend (Change) bearish (-) bullish (+)

-58 +59

Australian Dollat (FXA)

very bullish (+)

+98

British Pound (FXB)

bearish (-) slightly bullish (-)

-57

Euro investors out-performing the USD Moose Yen investors under-performing the USD Moose Aussie Dollar investors under-performing the USD Moose Sterling investors out-performing the USD Moose Canadian Dollar investors under-performing the USD Moose

Currency vs. Dollar

Canadian Dollar (FXC)

+30

Non-Dollar investors who want to maximize their profits using the Moose should incorporate a "carrytrade" currency strategy into the decision, making it a two-step process. First , decide whether it's a good time to switch to US Dollars, then use the Moose to identify the best place to put those Dollars. (Generally, if one's currency is weakening against the Dollar, non-Dollar investors in the Moose will outperform.) This table is intended to give non-Dollar investors an additional clue as to whether following the Moose might work for them. It may not be right every time-- as the currency markets can be volatile, and government intervention can make them even more so-- but more information is probably better than less. Copyright, QuantStreet Corporation, 2003-2010, all rights reserved