Bullish on Large Caps and Short Term Dollar

The downward unemployment revisions in June and July confirm what we had suspected for some time. Employment was and will continue to slow. Given all the economic data recently, we are of the opinion that a 50 bp cut in Fed Funds happens by year end followed by another 50 bp cut into next year. We had held out that there was a strong possibility for them to hold for the current meeting. We are now shifting to a 60% cut and 40% hold for the current meeting.

It is our thesis that the economy was on a good course until the short term credit crisis. A lower dollar happens to help the Fed at this point. We see a few short term drivers working on the dollar. The first being the strong influence of lower rates pushing the dollar down. However, a dollar collapse will be prevented from the demand for US goods and the desire for US Treasuries (demand being driven from European short term credit insecurity). We still advocate Large Cap position with a bias toward Growth over Value iShares S&P 500/BARRA Growth Index Fund (IVW) and iShares S&P 500 Value Index Fund (IVE).

We are still eyeing an entry point into PowerShares DB G10 Currency Harvest Fund (DBV) below $27. We are happy to have not chased the markets back up and suspect the market will move back into negative territory again this year. From a technical stand point this could be the potential double bottom or a break to lower ground. We are in favor of the latter.