Happy New Year!

As we enter the New Year, I am sensing an increase of optimism. This increase of optimism is not because we have solved and righted all the economic & financial ills in the US and around the world. The US still have an unemployment rate close to 10%, huge federal budget deficit, a housing market still seeking a bottom, and many states are in a brink of default. But for whatever the reason(s), people are beginning to feel a bit more positive about the future, and that is a good thing for the future of the economy…especially a consumption economy such as the U.S.

In the beginning of 2010, I mentioned one of the things I will be watching is the US dollars, and as the Euro Zone exposed their financial problems, the US dollars strengthen. When helicopter Ben start contemplating his academic experiment of dropping money out of the sky with his QE2, the US dollars retreated. The UUP chart below shows how the US dollars ended near where it started in 2010 after it has peaked in June.

UUP:



What will I be watching in 2011? Bond! I believe the QE2 is the needle that will pop the bond market bubble. It doesn’t matter if the US decides to reduce its budget deficit, it still have to finance its debt. The arrogance of the Fed to simply print money ($600B) without any regards to those that are holding the US dollars will cause those that been financing the US debt to stop buying the US bonds. This action will force the interest rate to go up and will lead to another economic crisis down the road. One way to profit from this scenario in the market is by trading the short 20+ year treasury ETF, TBF. As US interest rates rise, bond prices will decrease and the price of TBF will increase.

TBF:



Another consequence of a devalued US dollar and rising interest rate is inflation. As inflation starts to creep up, commodities price increases will accelerate. In 2011, I will also be watching for opportunities to trade the agriculture ETF, MOO.

MOO:



While the SP500 broke through the 1250 level, it hasn’t shown any signs of topping out. although it does appear to be extended on the upside, a minor pullback when everyone are back next week will not be a big surprise to me. I’m still looking for higher high from the SP500.

SP500: