Mosaic Global Perspectives

Fundamental and Technical Analysis, but Mostly Judgment

Fourth Quarter GDP Rose to 3.2%, but Obscures Week Ending 1/28/2011

Strong Trends in Underlying Demand

Figure 1 R eal G D P and ISM M FG . N ew O rders
6.0 70 Story of the Week 1
Economic Update 2
4.0
60 Global Leading Indicators 3
2.0
Asset Allocation Strategy 4
0.0 50
Equities 5
-2.0 40 Fixed Income 10
-4.0 Commodities 11
30 Currencies 12
-6.0
Source: BEA and Institute for Supply Management
-8.0 20
2005 2006 2007 2008 2009 2010
Real G DP (LHS ) IS M M F G . New O rders (RHS )

Figure 1, the fourth quarter surge of new orders reflected in recent ISM
Manufacturing reports led us to believe that the consensus GDP estimate
of 3.5 percent might be conservative. However, the strong underlying
trends behind the headline number are very encouraging for continued Dow Jones Industrial Avg. 11,824 11,872 11,578
economic growth in early 2011. S&P 500 1,276 1,283 1,258
Figure 2, consumer Russell 2000 775 773 784
spending, the largest component of the U.S. economy, rose 4.4 percent Nasdaq 2,687 2,690 2,653
in the fourth quarter after increasing 2.4 percent last quarter. This was the
largest increase since the first quarter of 2006. Growing consumer S&P 500 (TR) -0.5% 1.6% 1.6%
confidence can be seen in the 21.6 percent increase in durable goods. Russell 2000 (PR) 0.3% -1.1% -1.1%
Overall fixed investments increased 4.2 percent EAFE (PR) USD 0.4% 2.2% 2.2%
compared with a 1.5 percent increase last quarter. Nonresidential fixed Euro Stoxx 50 (PR) EUR -0.6% 5.8% 5.8%
investment increased by 4.4 percent, and residential fixed investment FTSE 100 (PR) GBP -0.3% -0.3% -0.3%
increased 3.4 percent. Nikkei 225 (PR) JPY 0.8% 1.3% 1.3%
Emerging Markets (PR) USD -0.9% -2.2% -2.2%
Private business inventories increased by
Hang Seng (PR) HKD -1.1% 2.5% 2.5%
only $7.2 billion during the fourth quarter, after increasing $121.4 billion
last quarter. The fall in inventories led to a 3.7 percent subtraction from
10-Year Treasury 3.32% 3.40% 3.29%
GDP. Low inventory levels often set the stage for stronger future growth.
2-Year Treasury 0.54% 0.61% 0.59%
Exports increased 8.5 percent compared with a 6.8 percent 10-Yr. Less 2-Yr. Spread 278 bps 279 bps 270 bps
increase in the third quarter. Imports, which subtract from GDP, provided Moody's Aaa Corporate* 5.09% 5.12% 4.96%
a boost by decreasing 13.6 percent. Moody's Baa Corporate* 6.09% 6.17% 6.05%
The private sector was more
instrumental in driving fourth quarter growth as government expenses Oil (WTI) Mar 11 89.34 89.11 91.38
declined 0.6 percent in contrast to a 3.9 percent increase last quarter. Gold (Comex) Feb 11 1,341 1,341 1,421
Lastly, the “real final sales of domestic product” (GDP less change in
private inventory), increased 7.1 percent in the fourth quarter in contrast EUR/USD 1.36 1.36 1.34
to a 0.9 percent increase last quarter. This represents the largest AUD/USD 0.98 0.99 1.02
increase since the second quarter of 1984. USD/JPY 82.11 82.62 81.09
Looking ahead, next week’s ISM and global PMI reports should provide * Closing levels as of 1/27/10. Source: Federal Reserve
more clarity on near-term growth trends. Underlying trends would seem
to support an ISM headline print above the consensus estimate of 57.5.

M o s a i c M a r k e t R e s e a r c h , L L C
K e v i n A . L e n o x , C F A
W e b s i t e : M o s a i c m a r k e t r e s e a r c h . c o m
EKLenox@Mosaicmarketresearch.com
m a i l : K l e n o x @ M o s a i c m a r k e t r Fundamental
e s e a r c and
h . technical
c o m analysis, but mostly judgment 1
 Economic Update
Figure 2 Personal Consumption Expenditures
Ÿ Initial unemployment claims were higher-than- Percent Change From Prior Period, SAAR
expected at 454K versus the consensus estimate of 405K. The 8.0
less volatile four-week moving average increased by 15,750 to
429K. The weekly reports in January are notoriously volatile, so 6.0
we’ll focus on next week’s payroll reports and the employment 4.0
component of the ISM reports to provide more clarity.
2.0
Ÿ Figure 3, the headline durable goods report
dropped an unexpected 2.5 percent in December versus an 0.0
expected increase of 1.5 percent. Boeing’s delay of Dreamliner -2.0
contributed to the 99.5 percent decline in nondefense aircraft Source: BEA
orders. Our preference is to look at nondefense capital goods -4.0
excluding aircraft for a cleaner assessment of new orders. This 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
metric rose 1.4 percent in December, and increased 16.6 percent
in 2010.
Figure 4, overall GDP prices softened to 0.3 Figure 3 Durable Goods, New Orders
percent in the fourth quarter compared to a 2.1 percent increase Nondefense Capital Goods Excluding Aircraft, Millions
in the third quarter. Additionally, PCE prices increased 1.8
80,000
percent versus 0.8 percent in the prior quarter. In 2010, GDP and
PCE prices increased by 1.0 percent and 1.7 percent
respectively. 70,000

Ÿ The ECI increased by a very mild 0.4

60,000
percent in the fourth quarter. Figure 5, the year-on-year ECI rose
a meager 2.0 percent, the second lowest print ever behind the 1.5
percent result in the fourth quarter of 2009. The wages and 50,000
salaries component only increased by 1.7 percent, while benefits Source: U.S. Census Bureau
increased by 2.9 percent. 40,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Ÿ : The consensus estimate is 57.5 for the headline ISM

Manufacturing PMI report. In addition, PMI reports from around Figure 4 Overall GDP Prices
the world should provide important guidance for global growth Percent Change From Prior Period, SAAR
trends during the first quarter. The fourth quarter U.K. GDP report
is expected to show that growth slowed to 0.5% versus growth of 5.0
0.7 percent in the third quarter. 4.0
Ÿ The U.S. initial unemployment claims is expected to 3.0
remain volatile due to seasonal and weather related factors. The 2.0
consensus is 425K. 1.0
Ÿ The U.S. employment report is expected to show that 0.0
150k private sector jobs were added in January. We consider the
-1.0
continued growth of temporary jobs as a reliable leading indicator Source: BEA
of future economic growth; whereas, the payroll data and -2.0
unemployment rate are seen as lagging indicators. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Earnings season is in full swing

as 205, or 41 percent of the S&P 500 reports are in the books.
Positive earnings surprises remain strong at 72 percent, according Figure 5 Employment Cost Index
Percent Change From Year Ago
to Bloomberg. Ex-financials, energy and basic materials have the
strongest earnings growth at 46.8 and 36.0 percent respectively. In 8.0
contrast, consumer staples and utilities have the weakest earnings
results with 5.1 percent and negative 6.9 percent respectively. 6.0
Overall fourth quarter earnings are projected to increase by 21.7 4.0
percent, 13.2 percent ex-financials on a year-over-year basis.
Revenues are tracking higher by 8.2 percent, 8.8 percent ex- 2.0
Source: U.S. Department of Labor
financials on a year-over-year basis. Earnings for 2011 are
0.0
expected to increase by approximately 15 percent to $95.65,
according to Standard and Poors. Please review the 2002 2003 2004 2005 2006 2007 2008 2009 2010
appendix for detailed Q4 sales and earnings results for the largest
companies in each sector of the S&P 500. This listing represents Total Compensation Wages & Salaries Benefits
approximately 65 percent of the market cap for the S&P 500.
KLenox@Mosaicmarketresearch.com Fundamental and technical analysis, but mostly judgment 2
 Global Leading Indicators
F i n a n c i a l C o n d i t i o n s A s s e t P r i c e s & E c o n o m i c D a t a

Libor-OIS Spread (3M) Neutral Range-Bound Australian Dollar Elevated Range-Bound

Euribor-OIS Spread (3M) Elevated Flattening Copper Extended Range-Bound
SHIBOR (1M) Multi-Year High Parabolic
Emerging Mkt. / S&P 500 RS Above Average Weakening
U.S., 2-Year Swap Spread Low Range-Bound Global Small / Large Cap RS Above Average Range-Bound
Europe, 2-Year Swap Spread Elevated Flattening Global Cyclicals / Global Defensives RS Above Average Strengthening
Moody's Baa - Aaa Seasoned Corporate Low Range-Bound
High Yield - Corporate Low Flattening Taiwan Export Orders Above Average Strengthening
PMI Mfg., Asia ex-Japan Above Average Strengthening
U.S., Equity Average Lower PMI Mfg., Europe Above Average Strengthening
Europe, Equity Average Lower Belgian Industrial Survey, Mfg. Below Average Strengthening
Currency Average Lower U.S. Initial Unemployment Claims Elevated Strengthening
U.S. ECRI WLI (level) Average Neutral
XBD / S&P 500 RS Average Turning Neutral U.S. ISM Mfg. New Orders-to-Inventory Below Average Strengthening
Europe, Sov. and Financial CDS Elevated Narrowing U.S. ISM Mfg. Headline Above Average Strengthening

In aggregate, financial conditions in the U.S. and
Europe reflect a rather complacent attitude toward risk
oriented assets. We are closely monitoring additional
financial conditions such as SHIBOR for indications of
heightened levels of risk aversion within the emerging
markets universe.
Ÿ : The U.S. Libor-OIS spread remains
range-bound, but very gradually trending higher along with
short-term interest rates. Meanwhile, reduced anxiety about
sovereign debt issues resulted in the Euribor-OIS spread
flattening for the fifth consecutive week. However,
increasing evidence of a potential economic hard landing in
China can be seen through the dramatic increase in
SHIBOR rates. The 1-month SHIBOR rate increased
another 65 basis points this week to close at 8.13 percent,
according to Bloomberg. An increase in demand for cash
before the week-long Lunar New Year (February 3-9) was
expected, but it appears that some banks may be
experiencing difficulty due to less liquidity and tighter credit
conditions
Ÿ The U.S. 2-year swap spread narrowed
slightly for the third consecutive week, but the European 2-
year swap spread narrowed more dramatically from 65.7 to
61.6 basis points, according to Reuters. In the U.S., the
spread between various high yield and corporate bond
yields was mostly flat this week, but remain near secular
lows.
Ÿ The VIX had been trending lower all week, but
spiked on Friday to close above 20 for the first time since
early December, according to Bloomberg. We’ve been
talking about the crowded short volatility trade, and the
news out of Egypt probably sparked more of a short-
covering rally than a pronounced level of risk aversion.
Ÿ : European CDS spreads widened slightly this week,
but remain well below the levels seen in early January. The
AMEX B/D index (XBD), led by Goldman Sachs, has shown
relative weakness versus the S&P 500 during the past two
weeks after leading the market since early October.
KLenox@Mosaicmarketresearch.com
Ÿ Overall, our leading indicators support a
continuation of the recent stronger-than-expected trend in
global growth. The cyclical sectors continue to outperform,
but commodity induced inflationary pressures are
intensifying throughout many of the emerging market
countries. We believe that the economic cycle is in a more
mature phase that will likely be more favorable for the
more developed countries and large cap companies.
Ÿ : The Aussie remains range-bound
as future export levels have become clouded while China
moves to restrain liquidity and the availability of credit. In
addition, increasing signs of domestic weakness will likely
keep the RBA’s interest rate policy on hold. The technical
picture has been said by many to be forming a head-and-
shoulders pattern, but it looks to be forming a more
constructive pattern of higher highs and higher lows.
Copper remains strong due to widely acknowledged
supply constraints and increasing speculative flows. In the
near-term, we sense that copper will be more heavily
influenced by trends in risk appetite than pure demand for
the metal itself.
Ÿ : The S&P 500 has been
consistently stronger than the Emerging Markets index
(EEM) since early November. Persistently high
commodity-induced inflation is increasingly problematic in
many emerging economies as inflation expectations are
becoming more pronounced. The relative strength of
global small caps has turned neutral versus large caps
over the past month. Valuation levels remain stretched for
small caps, and our assessment of the business cycle
favors large cap stocks. Globally, the cyclical sectors
remain consistently stronger than the defensive sectors.
Ÿ : The ECRI’s WLI report declined to
127.5 this week, and lowered the 4-week moving average
to 128.3, according to the Economic Cycle Research
Institute. This marked the lowest level since December 10,
but it’s premature to make any assessment at this point.
Next week’s PMI reports should provide meaningful
guidance for Q1 growth trends and inflationary pressures.
Fundamental and technical analysis, but mostly judgment 3
 Asset Allocation Strategy
Ÿ : Our series of financial conditions and global leading
indicators remain supportive of continued global growth. That said, we
believe that inflation will produce stronger-than-expected headwinds in
Nov. 19 U.S. Large Cap 3% Europe 3%
2011. It’s only January, but policy makers in emerging countries such
as China, India, South Korea, Taiwan and Brazil have already Jan. 7 Cash 3% Long USD 3% (All)
announced measures to tighten monetary this month as inflationary Jan. 14 U.S. Large Cap 6% U.S. Small Cap 6% (All)
pressures continue to build. At this point, it’s too early to assess how Jan. 28 Cash 5% Asia ex Japan 5% (All)
effectively policy leaders will be able to slow the rate of inflation while
maintaining real economic growth. In the meantime, we’re
incrementally positioning for higher-than-consensus global inflationary
pressures and margin compression.
Ÿ : We’ve decided to exit our Asia ex Japan position despite the
consensus among fund managers at a recent Reuters summit that
emerging markets were a top pick for 2011. The long-term structural
view remains very favorable for this region. However, the combination Large Cap 35 11 46
of intensifying commodity-induced inflation and expected reduction in
Mid Cap 6 0 6
global liquidity have decreased the appeal of this crowded trade. Also,
record inflows into Asia ex-Japan funds over the past year represent Small Cap 4 -4 0
approximately two percent of the market cap for this asset class.
Historically, twelve month net asset flows that approach this level have EAFE 13 -5 8
been followed by strong underperformance the following year.
Europe 0 2 2
Japan 0 0 0
Large Cap U.S. Diversified Defensive Equity Income
Large Cap - E/W EAFE Asia ex Japan Financial Dividend Growth Diversified 2 -2 0
Mid Cap Europe Latin America Cyclical Total Return Asia ex Japan 0 0 0
Small Cap Japan Frontier Resources Capital App. Latin America 0 0 0

Treasuries 0 0 0
Core Bond 35 -35 0
Energy Overweight Positive Above Avg. Mach. & Equip. Coal Corporate 0 15 15
Materials Overweight Positive Above Avg. Aluminum Gold
High Yield 3 0 3
TIPS 2 5 7
Industrials Overweight Positive Above Avg. Conglomerate Airline
Technology Overweight Positive Highest Semi. Equip. Sys. Software EM 0 0 0

Consumer Cyclicals Neutral Neutral Below Avg. Gaming Gen. Merch.

Global REIT's 0 0 0
Consumer Staples Underweight Negative Above Avg. Super Centers Tobacco Volatility 0 0 0
Health Care Overweight Negative Average Providers Biotech 0 5
Telecom Underweight Negative Lowest Wireless Integrated
0 0
Utilities Underweight Negative Low Gas Electric

Financials Neutral Neutral Low Consumer Fin. Regional Bank

Ÿ : Our positioning within fixed income remains unchanged Ÿ No current allocation.

for the fourth straight month. We’re maintaining an underweight
Ÿ The PMI cycle continues to favor
position within the asset class along with a high conviction tactical tilt
commodities, and we prefer broad-based
toward the A - BBB credit range. We still see an unfavorable
implementation at this level. Our views on
asymmetric risk/reward ratio for Treasuries, agencies and muni’s. Risk
specific commodities are typically implemented
oriented assets remain highly correlated, so we’re holding cash for an
via focused exposure in the equity markets.
opportunistic development.
Ÿ No current allocation.

Cash Treasury / Agency Non-Callable Nominal U.S. Dollar Global REIT's Industrial Metals USD
Short-Term A-AAA Corp. Callable Floating Rate Non-Dollar - G7 Volatility Precious Metals EUR/USD
Intermediate BBB Corp. Structured Note TIPS Non-U.S. Dollar Energy USD/JPY
Long-Term High Yield Puts / Calls CPI Notes Emerging Mkts Grains AUD/USD

KLenox@Mosaicmarketresearch.com Fundamental and technical analysis, but mostly judgment 4

 S&P 500 Sector & Fundamental Data
S & P 5 0 0 T o t a l R e t u r n ( % ) S & P 5 0 0 E a r n i n g s E s t i m a t e s

-0.53% 1.59% 8.40% 1.59%

Energy 12 1.16% 4.66% 20.33% 4.66% Energy 35.16 40.58 104% 15% 12.91
Materials 4 0.94% -1.63% 9.79% -1.63% Materials 12.72 16.40 79% 29% 14.39

Industrials 11 0.0% 3.34% 12.58% 3.34% Industrials 17.73 20.26 25% 14% 15.48
Technology 19 0.57% 3.55% 7.21% 3.55% Technology 26.00 30.04 49% 16% 14.13
Consumer Cyclicals 11 -1.74% -0.76% 6.08% -0.76% Consumer Cyclicals 17.91 19.96 63% 11% 15.03

Consumer Staples 10 -1.63% -1.31% 1.66% -1.31% Consumer Staples 19.34 21.28 5% 10% 14.37
Health Care 11 -1.8% 0.37% 1.86% 0.37% Health Care 29.05 32.72 10% 13% 11.37
Telecom 3 -0.53% -2.92% 3.15% -2.92% Telecom 7.65 8.05 6% 5% 15.69
Utilities 3 -0.91% 1.06% 1.03% 1.06% Utilities 12.59 13.17 9% 5% 12.38

Financials 16 -1.36% 1.84% 12.01% 1.84% Financials 15.27 18.35 248% 20% 12.04
Source: Standard & Poor’s Source: Standard & Poor’s, data as of 1/25/11

S & P 5 0 0 S e c t o r O v e r v i e w
Ÿ We’re maintaining an overweight position
in both energy and basic materials based on favorable
financial conditions, improving global growth trends and
strong fourth quarter earnings. It appears that excess global
liquidity is finding the path of least resistance in these
sectors. Energy: Our preferred tactical implementation
strategy for a bullish sector view is the more cyclically
sensitive oil/gas equipment and services industry. Basic
Materials: The continued weakening of gold relative to the
CRB index is likely due to a reallocation trade away from
gold as sentiment continues to shift from fear to growth.
The bias remains toward the global growth oriented
commodity chemicals, industrial metals and agriculture.
Ÿ The positive backdrop of strength in last month’s
global PMI’s and Friday’s GDP report certainly favor the
cyclical sectors of the market. However, the weakening
relative strength of the transportation industry and the
consumer discretionary sector compared to the S&P 500
has now continued for nearly two months. It appears that
the market is transitioning toward the “ISM peak-to-50”
stage. Global cyclicals have not rolled over, but our weekly
deep-dive within each sector shows increasingly more
selectivity. The tactically overweight position remains in
place for both the industrial and technology sectors while
we remain neutral on the consumer discretionary sector.
Industrials: The rotation of leadership from the
transportation industry to the aerospace/defense industry
has continued throughout January. The ongoing strength of
the rails is encouraging, and suggests that higher energy
prices are impacting this industry more than an expected
downturn in economic growth. The global growth oriented
infrastructure and heavy construction/mining remain well
positioned in this environment. Technology: Strong fourth
quarter earnings (see page 12) and significant international
sales provide a solid fundamental underpinning for this
sector. On an even-weighted basis, semiconductor stocks
continue to outperform the sector.
KLenox@Mosaicmarketresearch.com
S & P 5 0 0 S e c t o r O v e r v i e w , C o n t .
Ÿ We prefer a tactical tilt toward the higher
beta semiconductor stocks to express a bullish sector view.
The large cap hardware and software companies continue
to weigh on the sector. Consumer Discretionary: Consistent
with our ISM cycle indicator, we’re maintaining a neutral
weighting in this sector despite strong consumer spending
patterns. As an update, our basket of 12 global high-end
consumer stocks have decidedly trailed the sector since
late December. Interestingly, the leading industries over the
past month have been homebuilders, autos and gaming.
The current stage of the ISM cycle along,
lackluster earnings and a rising global interest rate
environment present continued headwinds for the defensive
sectors of the market. We remain underweight in each
sector except healthcare. Consumer Staples: Margin
pressure due to higher input costs will likely be a significant
headwind throughout 2011. Some companies have been
proactively reducing the size of their products in order to
maintain price points. Health Care: Legislative headline
risk is keeping valuation levels attractive at the sector level,
and negative sentiment toward big pharma continues to
weigh heavily on the sector. Our tactical tilt toward the
managed care industry continues to benefit from the current
environment. Telecom & Utilities: Within telecom, the
wireless equipment industry remains strong, but comprise a
small weighting within the sector. Modest earnings growth
along with an expected rising interest rate environment is
an unfavorable combination for the rate-sensitive integrated
telecom stocks and utility sector.
Our ISM cycle framework is the primary
reasoning for the continued neutral sector weighting.
However, there’s a growing list of positive catalysts to
support strong sector returns. Improving credit conditions
along with a steepening yield curve are favorable for bank
earnings. Expected increases in M&A activity and higher
investment flows should boost the broker/dealer industry.
Tactical tilts toward these two industries remain in place.
Fundamental and technical analysis, but mostly judgment 5
 S&P 500, Technicals and Valuation
Figure 6

Ÿ Figure 6, the S&P 500 has

increased 1.5 percent so far this year despite Friday’s 1.8 Figure 7
percent decline. The market settled on Friday at the key
support level of 1,276. The MACD line and McClellan Oscillator
are both flattening with a slight downward bias while the A/D is
still trending higher. The percentage of stocks in the S&P 500
above their 50- day moving average fell sharply to 67 percent
from 76 percent last week. Since the recent upward was
powered by favorable financial conditions and strong tape
action, we think that any pullbacks are likely to be shallow.
Figure 7 (lower), the MS Cyclical/Defensive relative strength
continues to point toward continued economic growth.
Ÿ : Figure 7 (top), the Russell 2000 has
weakened relative to the S&P 500 in January, but global small
caps remain strong. Our judgment is that the comparative
valuation gap and current stage of the PMI cycle is more
favorable for large caps.
The S&P 500 is currently valued at 13.5 X the 2011
bottom-up estimated earnings from Standard & Poors. A
simplistic view would suggest that equities should trade at a
higher multiple based on today’s low rate environment.
However, net profit margins are at peak levels near 8%, and we
believe that commodity induced inflationary pressures will lead
to margin compression. This potential headwind does not
appear to be factored into current consensus estimates. Based
on slightly handicapping consensus earnings estimates, our fair
value estimate for the S&P 500 remains at 1,290. To be clear,
the markets often deviate significantly from fair-value
estimates, so we primarily use this as a risk management tool
for position-sizing when markets disconnect substantially from
underlying valuation levels.

KLenox@Mosaicmarketresearch.com Fundamental and technical analysis, but mostly judgment 6

 Core EAFE
Figure 7

Ÿ Figure 8, the EAFE index (using Figure 9

EFA as a proxy), closed on Friday at the key support area of
$59. The MACD is still positive, and the chart remains
constructive with secondary support around $57.5. Figure 9,
London’s FTSE 100 continues to weigh on the EAFE, while the
EU markets have rallied strongly as the pressures of the debt
crisis continues to wane. Japan represents the largest
weighting in the EAFE index, and underperformed slightly in
January for the second straight month. The continued strength
of the European financial sector versus broader European
indices remains encouraging news for the region.
Ÿ In most cases, we prefer specific regional and/or
country allocations due to the wide disparity of economic growth
patterns among the representative countries. Japan and the
U.K. comprise 43 percent of the EAFE index, and their
respective equity markets have both trailed the broad index.
Japan’s more aggressive monetary and fiscal actions have not
been able to provide the desired economic growth despite
favorable global growth trends. The continued strength of the
Yen is proving how strongly Japan’s export-driven economy is
effected by currency trends. Within the U.K. this week’s
Household Finance Index (HFI) dropped to a 20-month low as
concerns about increasing inflation and a worsening job market
paints a picture of stagflation. The manufacturing and export
sectors of the economy remain vibrant, but doesn’t represent a
large enough portion of the economy to offset the broader
weakness. Across Europe, despite the negative headlines
about Europe’s periphery, the recent Eurozone PMI reports
have been surprisingly strong. This week’s Eurozone Flash
report indicates that growth is becoming more widespread than
just Germany and France. We remain tactically underweight
this broad asset class, with preferred implementation involving
a focus on broad-based European exposure with a tilt toward
the cyclical sectors of the market.
KLenox@Mosaicmarketresearch.com Fundamental and technical analysis, but mostly judgment 7
 Emerging Markets
Figure 10

Ÿ Figure 10, the Emerging Figure 11

Markets index (using EEM as a proxy), broke decidedly below
the 50-day moving average on Friday as increasing political risk
provides a potentially new dynamic for investors to assess in
addition to intensifying inflationary pressures. The tape looks
heavy, and the $45 area is probably an important level of
support for the chartists. Figure 11 (top), points toward the
weakening relative strength of EEM compared to the S&P 500.
This is significant since January is an important month to watch
for signs of reallocations among institutional investors. Of the
larger constituents, China, South Korea, Taiwan and Russia are
each exhibiting greater relative strength than the broader index.
In contrast, India’s BSE broke down again this week to levels
not seen since early September.
Ÿ Figure 11 (bottom) shows how the popular ETF
for the FTSE China 25 (FXI) has trailed the Hang Seng index.
This is largely attributable to the approximate 47 percent
weighting of the underperforming financial sector. The poor
relative performance of China’s financial sector and very
elevated SHIBOR levels are indicative of a more difficult
economic environment than the consensus forecast. All of the
major constituent countries have taken action this month in Ÿ : Russia continues to be the
order to quell the intensifying inflationary pressures and strongest market among our basket of commodity
inflation expectations. Current economic momentum continues oriented countries as the price of Brent reflects
to impress, and the long-term structural dynamics of this region stronger global demand for oil than WTI. Australia and
remain strong. However, our perspective is that inflation will Canada have largely mirrored the performance of the
prove to be more problematic than expected, and the very ACWI for the past two months, but Brazil’s Bovespa
crowded long Asia ex trade may unwind in a disorderly manner. index has declined sharply to the lowest level since
Asset flows in Asia ex funds have approached two percent of early September. Collectively, the global PMI cycle
the total Emerging Asia market cap, according to Nomura. remains favorable for commodity producing countries,
Inflows of this magnitude have historically been met by but the overall environment is looking more late-cycle
significant future underperformance. Based on the weight of the than the consensus forecasts.
evidence, we’ve decided to exit our Asia ex-Japan allocation
this week. We will wait for a more opportunistic entry point.

KLenox@Mosaicmarketresearch.com Fundamental and technical analysis, but mostly judgment 8

 Fixed Income
Figure 12 U.S. Treasury Yields
4.50
4.00
3.50
3.00
2.50
2.00
Source: St. Louis Federal Reserve
1.50
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11
10-Year Treasury 2s10s
Ÿ Figure 12, the 2s10s curve remains in a tight
range, but the 2s10s curve in Europe is flattening as the
rising two-year yield is creating a bear flattening scenario.
Figure 13, the TIPS spread remains rather sanguine
about the future prospects for inflation, so the Fed
appears to have the green light to continue QE2.
Maintaining shorter than benchmark levels of duration
remains in place as the bias remains toward higher yields.
Ÿ Intermediate-term Treasuries are slightly
outperforming the Barclay’s Aggregate Bond index in
January, but only due to Friday’s risk-off day. Short-term
and long-term Treasuries continue to trail the index. We
view a gradual upward trend in the 10-year Treasury and
2s10s as bullish for economic growth, but bearish for
government paper. We continue to avoid this sector.
Ÿ : MBS are maintaining a bid as a relative value
trade for banks versus Treasuries. Aside from this
constituency, the risk/reward ratio remains unattractive.
Ÿ Intermediate-term corporate bonds at the lower
range of investment grade status remains our highest
conviction sector within the fixed income universe.
Favorable financial conditions, improving economic data
and consistent flows represent a better investment
climate for the credit oriented sectors. The sweet spot of
A- to BBB paper is less rate sensitive than higher grade
paper, and trades at more reasonable valuations than
high yield. The high yield market continues to be the best
performing sector of the fixed income market. The
positive catalysts that are keeping the spread over
investment grade paper near secular lows around 350
bps are still in place, but current valuations are priced for
perfection. The neutral weighting is due to a very crowded
trade with an increasingly unfavorable risk/reward ratio.
Reducing our high yield allocation is at the top of the list
in the event of another incremental step to reduce risk at
the portfolio level.
KLenox@Mosaicmarketresearch.com
Figure 13 10-Year TIPS Spread
3.00
2.50
2.00
1.50
Source: St. Louis Federal Reserve
1.00
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11
Ÿ We continue to find muni’s unattractive on a
fundamental basis, and envision several bouts of headline
risk persisting throughout 2011. Municipals have recovered
some ground lately, but has been the worst performing
sector of the fixed income market in January. That said,
higher income investors can selectively find very attractive
TEY’s as compared to broad-based municipal ETF’s. John
Mica of Florida, who is the Chairman of the House
Transportation and Infrastructure committee, has stated
that he wants to “reincarnate” the Build America Bond
program in 2011 with a different format. This would be
positive for sentiment, and we anticipate that a modified
version gets attached to a larger infrastructure program.
Ÿ Surprisingly, the EM debt funds
that we track have performed slightly better than the
Barclay’s Aggregate Bond index so far in 2011, after
suffering steep declines late last year. In our opinion, this
asset class has the risk level of a leveraged bet on the U.S.
high yield market, and the downside risk is significant. This
is a very crowded trade with massive inflows over the past
year from what we surmise are predominantly weaker
hands. The structural fundamentals remain compelling, but
we’re content to wait for a more opportunistic entry point.
Ÿ We’re expecting global interest rates to rise in
2011, but the key is whether rates rise in association with
improving economic growth or increasing inflationary
pressures. Commodity-induced price inflation continues to
build around the world, but more acutely in many emerging
market countries. Each of the major Asia ex countries have
taken action this month to help slow the rate of inflation. It’s
noteworthy when governments and companies are
stockpiling food and commodities in anticipation of rising
prices. Figure 13, the U.S. TIPS spread confirms the
sanguine view of inflation in the Treasury curve. This paints
the picture of potentially rising rates due to economic
growth rather than inflation. The market may also sense
that the chances of QE3 have lessened considerably as
growth trends have improved. Wage inflation is the primary
driver of inflation trends in the U.S., and this week’s ECI
report reflected very anemic wage growth. As such, near-
term inflation risks appear limited.
Fundamental and technical analysis, but mostly judgment 9
 Commodities
Figure 14 Copper, COMEX Figure 16 Crude Oil, NYMEX
COT Report, 1/8/10 - 1/28/11
COT Report, 1/8/10 - 1/28/11
300,000 3,000,000
60,000 180,000
40,000 200,000
170,000
2,750,000
20,000
100,000
160,000
0
0 2,500,000
-20,000 150,000
-40,000 -100,000
140,000
-60,000 2,250,000
130,000 -200,000
-80,000
Source: CFTC Source: CFTC
-100,000 120,000 -300,000 2,000,000

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

Producers Managed Money Other Reportables Producers Managed Money Other Reportables
Non-Reportables Open Interest (RHS) Non-Reportables Open Interest (RHS)
Source: LME

Figure 15 Gold, COMEX Figure 17 Corn, CBOT

COT Report, 1/8/10 - 1/28/11 COT Report, 1/8/10 - 1/28/11

300,000 1,100,000 600,000 3,000,000

400,000
200,000
950,000 200,000 2,500,000
100,000 0
0 800,000 -200,000 2,000,000

-100,000 -400,000
650,000 -600,000 1,500,000
-200,000
Source: CFTC -800,000
Source: CFTC
-300,000 500,000 -1,000,000 1,000,000
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

Producers Managed Money Other Reportables Producers Managed Money Other Reportables

Non-Reportables Open Interest (RHS) Non-Reportables Open Interest (RHS)

Ÿ The CRB index broke out of its five-week
trading range on Friday, and closed above 335 for the first
time since September 2008. The grains continue to be the
strongest sector, while precious metals remain the
weakest. So far in 2011, the CRB is up 0.8 percent while
the S&P 500 has doubled that with a 1.6 percent return.
The global economic cycle continues to favor
commodities, and our preferred allocation involves broad-
based exposure with a bias toward the agriculture sector.
Ÿ High Grade Copper has now been consolidating
in a fairly narrow range over the past four weeks, and the
market is probably waiting to assess the level of Chinese
demand for copper before the week-long Chinese Lunar
New Year. The bias remains to the upside, but demand
destruction will intensify if the $5 level is reached. Strong
global growth trends, expectations of continued supply
constraints and increasing investment demand remain the
mantra for the bullish case. On the supply side, stocks at
LME warehouses have risen from around 350,000 to
397,000 tonnes since late December. Although small by
comparison, NYMEX stocks just started to show an
increase over the past week. Figure 14, the latest COT
report for copper showed a reduction of 8,515 net long
contracts in Managed Money, while Producers reduced
their net short position by 5,539 contracts.
KLenox@Mosaicmarketresearch.com
Ÿ COMEX gold was basically unchanged this week,
but down 5.6 percent this month. Our assessment is that
the weakness of gold and strong copper/gold ratio is
indicative of improving economic trends. As a result,
reallocations of capital are flowing away from gold as the
trend in risk appetite improves. There are other sizable
participants in the gold market, but it appears that
investment related flows are dominant at this point.
Ÿ Brent oil (March), rose $1.68 this week to close at
$99.31, as tensions in Egypt have led to increasing
concerns about supply disruptions. This week’s closing
Brent-WTI spread increased to $10.01, while the debate
intensifies about the level of international oil supplies.
OPEC’s Secretary General Abdullah Al-Badrii commented
that oil futures prices have become disconnected from the
physical market. He stated that the current 60 days of
floating and commercial stocks along with current OPEC
production of 29.3 million barrels per day did not justify
higher production levels. However, the IEA’s Nobuo
Tanaka asked OPEC to increase production since high oil
prices are a “detriment to the world economic recovery.”
The incremental demand is coming from the producing
countries due to continued government subsidies.
However, the perception is growing that supplies will
tighten markedly if increasing global growth leads to
higher-than-expected OECD demand.
Fundamental and technical analysis, but mostly judgment 10
 Currencies
Figure 18
Ÿ Figure 18, the Euro finished the week basically
unchanged to close at 1.36. The political unrest in Egypt
sparked a wave of risk aversion that pressured the Euro
after reaching 1.37 on Thursday, the highest since
November 22. We found this week’s COT report to be
particularly noteworthy given the extreme change in
sentiment following the 5.4 percent surge in the pair over
the past three weeks. Short dollar positions are now at
their highest level in two months, while the EUR has
switched from a net short position of 45K contracts two
weeks ago to being net long by 23K contracts. Within the
Eurozone, Monday’s PMI reports will be gleaned to see if
they reflect the strength seen in this week’s Flash reports.
In addition, Monday’s Eurozone CPI report and
Thursday’s ECB rate decision will also be key focal points.
Meanwhile, Monday’s ISM report and Friday’s Nonfarm
payroll report will be the key economic reports in the U.S..
Ÿ The Yen appreciated by 0.6 percent this week
versus the Euro. This pair represents our longer-term
highest conviction idea for a widening rate differential, but
the recent four percent surge was likely fueled by short
covering. We might be interested in this pair at a more
opportunistic entry point.
Ÿ The Swissie appreciated this week as the
combined attributes of risk aversion and solid
fundamentals have many regarding CHF as THE safe
haven currency. We typically get a very good feel for
trends in risk appetite by watching this pair as compared
to the Yen. That said, it’s worth noting that Switzerland is
not immune from potential problems in the EU, since the
majority of the country’s exports are to the Eurozone.
KLenox@Mosaicmarketresearch.com Fundamental and technical analysis, but mostly judgment
Figure 19
Ÿ Figure 19, the Aussie remains impressively
resilient despite billions in flood damage and growing
fears of a reduction of exports to China. It appears that
the market is focusing on stronger-than-expected global
economic trends and an increasing appetite for risk
oriented assets. In addition, continued stable and rising
markets create a favorable environment for carry trades.
This week’s CPI report for the fourth quarter came in 2.7
percent on a year-on-year basis compared with the
consensus estimate of 3.0 percent. This further supports
the view that the RBA will leave rates unchanged at next
week’s meeting. The Aussie is very sensitive to trends in
risk appetite, and we sense that the bias is for an
eventual break above the current trading range. However,
our assessment of varied economic reports indicate that
the economy was slowing before the onset of the floods.
Ÿ The Yen strengthened by 0.5 percent this
week to close at 82.1 as the political situation in Egypt
triggered demand for Yen as a safe haven currency over
fears that the crisis might spread to other Arab countries.
This was a reversal from Thursday’s sharp decline in the
Yen versus the dollar as S&P lowered Japan’s credit
rating to AA-. S&P listed ongoing deflation and political
gridlock as obstacles in dealing with Japan’s 943 trillion
Yen debt burden. However, we anticipate that the primary
driver of USD/JPY will revert back to the 2-year yield
spread. At this point, the current yield differential
suggests that the pair should trade around the 84.0 level.
Stronger U.S. economic growth and solid fourth quarter
earnings should serve to widen the rate differential in
favor of the dollar.
11
 Q4 Earnings, Cyclical

Exxon Mobil XOM Jan. 31

Chevron CVX Jan. 28 51,825 47,588 9% 2.64 1.53 73%
ConocoPhillips COP Jan. 26 1,929 1,803 7% 1.32 1.20 10%
Occidental Petroleum OXY Jan. 26 5,063 4,382 16% 1.47 1.35 9%
Apache APA Feb. 17
Anadarko Petroleum APC Jan. 31
Devon Energy DVN Feb. 16
Schlumberger SLB Jan. 21 9.067 5.744 58% 0.76 0.65 17%
Halliburton HAL Jan. 24 5,160 3,686 40% 0.68 0.53 28%
National Oilwell Varco NOV Feb. 3

Du Pont (E.I.) DD Jan. 25 7,742 6,814 14% 0.5 0.44 14%

Dow Chemical DOW Feb. 3
PPG Industries PPG Jan. 20 3,379 3,116 8% 1.24 0.85 46%
Praxair PX Jan. 26 2,623 2,407 9% 1.25 1.09 15%
Air Products & Chemical APD Jan. 21 2,392 2,174 10% 1.35 1.16 16%
Monsanto MON Jan. 6 1,830 1,697 8% 0.02 (0.02) "P"
Alcoa AA Jan. 10 5,433 5,652 (4%) 0.24 (0.27) "P"
Freeport-McMoRan FCX Jan. 20 5,603 4,610 22% 3.25 2.15 51%
Nucor NUE Jan. 27 3,854 2,938 31% (0.04) 0.18 "L"
Newmont Mining NEM Feb. 24

General Electric GE Jan. 21 41,377 41,046 1% 0.36 0.27 33%

United Technologies UTX Jan. 26 14,864 13,979 6% 1.31 1.15 14%
3M MMM Jan. 25 6,709 6,122 10% 1.28 1.30 (2%)
Emerson Electric EMR Feb. 1
Fedex FDX Mar. 17
United Parcel Service UPS Feb. 1
Union Pacific UNP Jan. 20 4,410 3,754 17% 1.56 1.89 (17%)
Boeing BA Jan. 26 16,550 17,937 (8%) 1.56 1.77 (12%)
Caterpillar CAT Jan. 27 12,807 7898 62% 1.47 0.36 308%
Deere DE Feb. 16

Apple Computer AAPL Jan. 18 26,741 15,683 71% 6.43 3.67 75%
Hewlett-Packard HPQ Feb. 22
Intel INTC Jan. 13 11,457 10,569 8% 0.59 0.40 48%
IBM IBM Jan. 18 29,019 27,230 7% 4.18 3.59 16%
Cisco Systems CSCO Feb. 9
Qualcomm QCOM Jan. 26 3,348 2,668 25% 0.82 0.62 32%
Microsoft MSFT Jan. 27 19,953 19,022 5% 0.77 0.74 4%
Oracle ORCL Mar. 24
Google GOOG Jan. 20 8,440 6,674 26% 7.81 6.13 27%
EMC EMC Jan. 25 4,889 4,100 19% 0.29 0.19 53%

Walt Disney DIS Feb. 8

Amazon AMZN Jan. 27 12,948 9,519 36% 0.91 0.85 7%
Comcast CMCSA Feb. 16
Time Warner TWX Feb. 2
Directv DTV Feb. 17
Ford Motor F Jan. 28 32,500 34,800 (7%) 0.30 0.43 (30%)
Home Depot HD Feb. 22
Lowe's LOW Feb. 23
Target TGT Feb. 24
McDonalds MCD Jan. 24 6,214 5,973 4% 1.16 1.11 5%
Coach COH Jan. 25 1,264 1,065 19% 1.00 0.75 33%
Macy's M Feb. 22
lNordstrom JWN Feb. 17
Abercrombie & Fitch ANF Feb. 16
Darden Restaurant DRI Mar. 23
Marriott MAR Feb. 14
Starwood Hotel HOT Feb. 3
Carnival CCL Dec. 21 3,497 3,282 7% 0.31 0.24 29%
Harley Davidson HOG Jan. 25 917 764 20% (0.18) (0.63) "L"
Tiffany TIF Mar. 21

KLenox@Mosaicmarketresearch.com Fundamental and technical analysis, but mostly judgment 12

 Q4 Earnings, Defensive & Financial
Proctor & Gamble PG Jan. 27 21,347 21,027 2% 1.11 1.01 10%
Colgate-Palmolive CL Jan. 27 3,978 4,081 (3%) 1.24 1.21 2%
Coca-Cola KO Feb. 9
PepsiCo PEP Feb. 10
Kraft Foods KFT Feb. 10
Wal-Mart WMT Feb. 22
CVS Caremark CVS Feb. 3
Walgreen WAG Mar. 22
Altria Group MO Jan. 27 5,927 6,014 (1%) 0.44 0.35 26%
Philip Morris PM Feb. 10

Pfizer PFE Feb. 1

Merck MRK Feb. 15
Bristol-Myers Squibb BMY Jan. 27 5,111 5,033 2% 0.47 0.47 0%
Eli Lilly LLY Jan. 27 6,187 5,934 4% 1.11 0.91 22%
Amgen AMGN Jan. 24 3,841 3,809 1% 1.17 1.05 11%
Johnson & Johnson JNJ Jan. 25 15,644 16,551 (5%) 0.70 0.79 (11%)
Abbott Labs ABT Jan. 26 9,968 8,790 13% 1.30 1.18 10%
United Health UNH Jan. 20 24,030 21,784 10% 0.94 0.81 16%
Medtronic MDT Feb. 22
Baxter International BAX Jan. 27 3,498 3,470 1% 1.11 1.03 8%

AT&T T Jan. 27 31,361 30,708 2% 0.18 0.46 (61%)

Verizon VZ Jan. 25 26,395 27,091 (3%) 0.93 0.22 323%
Qwest Communications Q Feb. 15
Century Link CTL Feb. 15
American Tower AMT Feb. 23

Southern Co. SO Jan. 26 3,771 3,511 7% 0.18 0.31 (42%)

Exelon EXC Jan. 21 4,500 4,148 8% 0.96 0.92 4%
Dominion Resources D Jan. 28 3,667 3,176 15% 0.63 0.63 0%
Duke Energy DUK Feb. 17
NextEra Energy NEE Jan. 25 3,410 3,660 (7%) 4.30 4.05 6%

JPMorgan Chase JPM Jan. 14 26,722 25,236 6% 1.12 0.74 51%

Bank of America BAC Jan. 21 12,439 11,559 8% -0.37 -0.60 (38%)
Wells Fargo WFC Jan. 19 21,494 22,696 (7%) 0.61 0.08 663%
Citigroup C Jan. 18 18,371 5,405 240% 0.04 -0.33 "P"
US Bancorp USB Jan. 19 4,721 4,376 8% 0.49 0.30 63%
Goldman Sachs GS Jan. 19 8,642 9,615 (10%) 3.79 8.20 (54%)
Morgan Stanley MS Jan. 20 7,807 6,836 14% 0.43 0.18 139%
Berkshire Hathaway BRK.B Feb. 4
Metlife MET Feb. 9
American Express AXP Jan. 24 4,093 3,645 12% 0.88 0.59 49%
S o u r c e : C o m p a n y W e b s i t e s

KLenox@Mosaicmarketresearch.com Fundamental and technical analysis, but mostly judgment 13

 Disclaimer
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investment or follow a particular strategy, but only the expression of an opinion. Such opinions are based upon information the author considers reliable, but it
should not be relied upon as such.
The author is not under any obligation to update or correct any information available in this report. The author may be actively involved in securities discussed
herein. Also, the opinions expressed may be short-term in nature and are subject to change without notice. Past performance is not indicative of future
results.
You should be aware of the real risk of loss in following any strategy or investment discussed in this report. Strategies or investments discussed may fluctuate
in price or value. Investors may get back less than invested. Investments or strategies mentioned in this report may not be suitable for you. This material does
not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you.
You must make an independent decision regarding investments or strategies mentioned in this report. Before acting on any information, you should consider
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KLenox@Mosaicmarketresearch.com Fundamental and technical analysis, but mostly judgment 14