Now close to three years after the last peak of euphoria and the intervening credit crisis, risk for investors is no four-letter fantasy but is instead a reality cross check. Weak U.S. employment numbers and other releases have already raised political temperature for markets in 2010 by, well ahead of the traditional post Labor Day focus during U.S. election years. As well as political considerations are expanding in Asia (such as cooling asset pressures in China) and Europe(such as deficit reduction). Arguably since late 2007 there has for investors been yin/yang over expansion/recession. Now, the focus on short term developments needs to evolve to corporate requirements for the long run. We expect equities to be in the trading ranges established in 2010 to date Hi- Low (S&P 500 1217-1022; MSCI World 1228-1033) ranges until more clarity emerges, likely around mid 2011. The breadth of recent bond rallies from sovereign debt to junk contrasts with potential cash flow pressures if deflation or economic weakness were to spread. Assumptions of nimble behavior in current fixed income represent risk even if the Federal Reserve has signaled via its August 10, 2010 statement maintaining a large $2.3 trillion balance sheet and low rates. Even with faster Asian growth, we are skeptical about the notion of faster corporate revenue growth without corporate leadership. We do not expect equity valuation expansion in major markets like the S&P 500. In some markets like India, P/E ratios appear high versus inflation pressures on the central bank. One source of bifurcation in favor of quality for the investor today lies in differentiating in favor of companies re-investing for the future and stressing stable ROE over those stretching for amplitude. Within a quality overlay, we favor information technology and energy as well as in healthcare, anticipating further restructuring. Gold remains our favored hedge against uncertainty. Yen levels remain of concern to us as a potential unrecognized global risk factor.

Notwithstanding the summer of 2010 brouhaha, for investments, the Sword of Damocles is likely not Greek restructuring and Europe. Instead, the challenge of rotational change may lie in Asia and the Americas, particularly the United States. The earnings reports emerging in recent weeks now include those from the United States, other parts of the Americas, Europe and Asia. The similarities lie not just in accentuated bifurcation that continues among and between industries. Globally, cost cutting has been yielding substantial earnings recovery gains but also in reputedly stable areas, like consumer staples, pressure and disappointments have not been offset by aspiration potential in emerging regions or basic needs in advanced economies. Stripped to its essence, the cycle that ended in 2000 marked the culmination of concept driven growth expectations boosting markets, especially in technology, media and telecommunications ( TMT ). The next cycle that ended in 2007 had as essence risk premium reduction whether viewed from the perspective of sovereign and junk bond yield spreads or viewed from the perspective of rising performance of low quality equity and its relative valuation gain. A less commented upon aspect of the Japan debacle of the 1990s is the consistency in its subsequent performance. Recovery at the company level was determined by the quality of operations and not all succeeded, for instance in its until then global beating consumer electronics and automobile businesses. Japanese Government Bond yields declined and short rates were held at minuscule levels. However, even as earnings recovered, equity valuation in Japan did not and still has not recovered substantively versus prior expectations and stock bond risk premium analysis. Aggregate dividend yields in Japan have increased from among globally the lowest to now middle of the road levels. The global markets of today remain mixed in low government yields and equity leadership. We re-assert that while there has been global and U.S. overlap in low quality led recovery into the first portion of April 2009 to May 2010 of this cycle, quality of delivery is likely to be the enduring feature for countries, industries and companies alike for investors to favor.