The above is EURUSD as seen through Oanda’s fxTrade platform. Oanda’s platform is free and is an excellent tool. From what I can figure out, I think it shares the same back end as UBS’s professional currency trading platform – so it is of institutional quality.

Below is the FXE (EURUSD ETF) vs S&P:

Last week saw a head-fake that looked at first like EUR was going to outperform the S&P (how is that even possible??? – note sell any outperformance of EUR to the S&P) and then a couple of instances where it looked like the S&P was going to break away from EUR but failed. I think S&P will eventually strip away from EUR, but probably not while North Korea may go to war or while people are discussing dropping a nuclear weapon on the seabed of the Gulf of Mexico to stop an oil leak.

So not much to report. Value has showed up again in small cap high cash flow companies – names like AIPC, RKT, RSH as well as high quality companies – you’ve basically gotten 6 months of growth in WMT for free at the price it is today, but there is some severe deflationary events (sovereign defaults in Europe) and horrible technicals (is there any retail investment left in the stock market and will it ever come back with this volatility?) that it’s quite possible that “good deals” can persist for a while and get even better.

Thus, this is not the environment to stretch or lever up. Buy “high quality” shorter dated high yield (Brazilian USD denominated debt is interesting at these levels) and nibble at high cash flow stocks using existing cash flow from other sources (dividends, coupons, and operational businesses/personal income) to add slowly. High quality companies should prove to be a hedge when inflation eventually comes back (looks like it will be 2 years away minimum at this point).

In my opinion, this is an incredibly challenging environment to invest in. As the title suggests, keep your eye on currencies to understand what’s happening. That is the driving risk factor right now from every number that I’ve looked at. The equity and debt markets are responding to currency/capital flows and liquidity constraints driven by these flows. So until we see stability in the currency markets (and we are not seeing that yet) we will not see a bull market in my opinion.

So to close, here are some interesting thoughts from the St. Louis Fed Monetary Trends June edition:

First the Title: “Why Do People Dislike Inflation?”
- Can there be any debate of the Fed’s wishes with a question like that?

Nevertheless, looking at the aggregate stats I don’t think they are successful or are likely to be successful in the near term:

I see signs of recovery but that’s expected given the large amount of stimulus pumped into the economy. Considering this and the huge amount of slack between employment and capacity utilization, I don’t see how we can have inflation.

This will help support the dollar, which apparently is bearish for the stock market (empirically), so no rush. Good deals should persist and cash flow is a must in my opinion.

Try not to lose money.

Arthur O’Keefe, São Paulo Value
http://www.spvalue.com

http://www.scribd.com/doc/32312831/Keep-Your-Eye-on-Currencies-EURUSD-is-Still-the-Key