Entering the last month of Q1/2010, uncertainty appears to drive pinball behavior in markets. Alongside credit shock, we believe key to be the unfolding of standards both at the macroeconomic/government level and in market valuation. To quarter end, developments lie not just from Europe and sovereign risk epitomized by Greece but also on global pathways to deficit control targets of 3% of GDP as being stable as highlighted by Fed Chairman Bernanke that we believe applicable broadly and not least by a traditional release of objectives by China at its National People’s Congress. For equities, not just growth in Asia but also turnaround in Europe is key. As the cycle turned lower, companies with focus on basic products demonstrated resilience. >From a cycle view point, as well as the massive housing and auto industries, the focus next in North America should be to look for signs of recovery of more upscale spending, with the latest results still indicating business interregnum. Using the S&P 500 as benchmark, we have long espoused a 15-18x P/E range as appropriate and we illustrate ranges using a subjective tier of the type favored for risk by many financial regulators. Applying 18x to the delivered base earnings of 50 that were part of 2009 results would give downside risk now of 900; to the next slab of contribution for 2010 of 10 to S&P 500 earnings with an uncertainty discount of 10% and a multiple of 16x emerges an incremental market contribution of 145; with the final potential 15 in earnings (for a potential total of 75 for 2010 dependant on realized early revenue gains and cost cut maintenance) accruing our subjective uncertainty reduction of 20% and a 15x P/E for an incremental point contribution of 180 or in sum, optimistic upside of 1225. This subjective tiered approach to valuation as well as uncertainty on issues like credit risk buttress our assessment of a quality focus in markets overall, range bound risk for the first half portion of the year from present levels (S&P 500 of 1,118 as of March 2, 2010) and greater potential for gain later in 2010 as 2011 comes into focus.

In a fell swoop by increasing its discount rate and with ramifications still to unfold, the Federal Reserve has re-asserted its leadership not only as regulator with respect to private finance but also internationally. Its timing provides maximum flexibility ahead of March 16, a date both of the next FOMC and the finance deadline for Greece from the European Union. The Fed and other central banks still need to provide cover for the politically difficult task of addressing deficits despite stubborn unemployment and the drive for growth. The upcoming Fed Semi-annual Monetary Policy report should be noteworthy. In markets re-adjusting from massive quantitative ease, we expect yields to rise across upward sloping curves globally until neutrality is established with as benchmark, the 10 year U.S. T Notes approaching 5% in yield. Capital markets are likely to monitor developments like fixed income yield curve pivots more closely than is generally recognized. Our theme extends into focus on credit quality within fixed income, with our favor still for the short to mid maturity portion. In equities, it extends into little potential for valuation expansion and more favor for situations able to deliver both dividends (financial strength) and growth (operational strength), available in portions of information technology, healthcare and integrated energy. On risk, we do see as positive the recovery of the U.S. dollar, now to 1.35/Euro and likely to continue with little consternation from the Federal Reserve or other central banks. Separately, we see gold as a hedge against general, not just dollar, uncertainty in an era of large deficits.