During extraordinarily busy corporate earnings and budget releases, markets have generally remained in trading ranges. Under the surface, the focus is likely shifting to when delivery actually occurs over elucidations of “whenever” that in the last year, were accompanying quantitative ease by authorities and cost-cutting driven earnings stabilization by companies. This assessment for 2010 is one core to our theme of likely resurgence of vigilante-like demand for credit quality and corporate delivery from revenues. On deficits and exit strategies, we would peruse IMF Analysis Paper release of February 23, 2010 titled: “Exiting from Crisis Intervention Policies” and the Federal Reserve of St. Louis Review March/April 2010 article titled “Lessons Learned? Comparing the Federal Reserve’s Responses to the Crises of 1929-1933 and 2007-2009”. Our takeaway from them and our experience is that the Greece crisis and other developments including China likely changes risk premiums in markets in underscoring fragility in global government finance from lack of budgetary flexibility. Bifurcation seems accentuating on clarity in budgets / central bank policy, with Australia and Canada likely already leading not just slow growth U.S. and Europe but even strong growth China and India. For equities, irrespective of application of low government yields to capital asset pricing models for the cost of capital, corporations amassing cash, refinancing were possible and increasing differentiation by raising dividends indicate a different mind-set from markets seemingly less quality conscious. We favor the corporate view especially if policy bifurcation at the government level rises globally.

At the credit and authority level, since December 2009 (ranged from Japan to the United States to Germany to India to China and ongoing down to Greece, Argentina and others) there have arguably close to a half dozen budgets or budget- like deliveries and equivalent central bank policy deliveries. We see the tribulations of Greece, of Dubai and even the Chinese potential clampdown on province guarantees announced March 5, 2010 as indicating risk premiums and expenditure management need internal belt tightening not isolated in application neither by size of economy nor by economic zone location. For extensive analysis on the issues, we would especially peruse the IMF Analysis Paper release of February 23, 2010 titled: “Exiting from Crisis Intervention Policies” (http://www.imf.org/external/pp/longres.aspx?id=4418). Our own takeaway as well as from experience in the markets is that deficit/debt targets (3% and 60% of GDP broadly) appear sustainable from both a market response and sociological view point. It underscores for the present markets the principle of already establishing exit strategies ahead of when private activity is ready to take up its contribution. Fiscal/monetary policy do interact and arguably unpredictably when at extremes, more so than authorities are willing to concede. Thus, incremental years of deficits can be very costly on political interactions between governments, the central bank concerned and the populace at large.

The second extensive analysis we would peruse for takeaway is from the Federal Reserve of St. Louis Review March/April 2010 article titled “Lessons Learned? Comparing the Federal Reserve’s Responses to the Crises of 1929-1933 and 2007-2009” (http://research.stlouisfed.org/publications/review/). Our takeaway was about the longer term distortion risk of implicitly expecting continued or repeat interventions to limit financial losses for individual firms and/or countries. The linkage of these takeaways is to the advantages on focus now, unlike 2009, on policy bifurcation. It relates not just to Fed Chairman Bernanke’s comment about stabilizing U.S. deficits but to the implicit demands of Greece for re-finance at current top quality rates even in crisis in that On cost of credit, even for U.S. 10 year Treasury Notes, the yield range from 2001 to late 2008 was 3.5-5.5% ( albeit only 2.1% on December 26,2008) compared to a still distorted present rate of 3.7%.

In our view, the machinations of the Greece funding crisis could be crucial for risk premium developments in capital markets over the rest of Q1/2010 and well beyond. It for instance underscores fragility in global government finance in raising the issue of a lack of budgetary flexibility even if the cost of credit returned to the levels of just the last cycle which were not onerous as compared to apportionment of risk premiums of the types seen well into the 1990s. Bifurcation seems now developing on clarity on budgets / central bank policy with for instance Australia and Canada leading those elsewhere from the U.S. to European equivalents to even and notwithstanding the flexibility afforded by strong growth, China as well as India. On the issue of when over whenever, as Canada discovered over the 1980s into 1995, complacency is dangerous and there is no time like the present at least to make a start or the choices get harder and harder.

For equities, irrespective of an orthodox application of the capital asset pricing model to the cost of capital, the level of government issued debt has historically been an important benchmark for investors focused upon portfolio return. Over the last eighteen to twenty four months, we have observed industry, geographic and quality convergence to behavior we would ascribe to acceptance if not dependency on government largesse as well as decreased favor for quality discrimination. Corporations amassing cash, refinancing were possible and in select cases increasing differentiation by raising dividends by contrast indicate a different mind-set. Our scenario of an upcoming bifurcation of government and central bank policy would when extended into equities equally indicate more portfolio benefit from the tier segmentation evident among companies over the convergence seen in investor behavior in recent months.