Equity markets in Asia continued to gain ground in April after a volatile first quarter of 2011. Stock markets ended higher as companies reported strong earnings, while expectations that inflation may have peaked out also helped to support market sentiment. Disruption to manufacturing industry supply-chains and ongoing problems surrounding the Fukushima nuclear power plant have continued to weigh on Japanese stock prices, although the market was able to stabilize from the massive sell-off that followed the Tohoku earthquake.

Last month an American investor named Richard Tropp filed a writ of certiorari with the US Supreme Court to review a decision by the Second Circuit in New York regarding an epic litigation against the Lloyds of London insurance market. To us, the case of Tropp v. the Corporation of Lloyds is troubling not only because it implies that thousands of investors in the Lloyd's insurance market have no contractual rights enforceable at law in the courts of England and Wales, but also because of what it says more broadly about the state of the law in Britain.

A widely anticipated European Central Bank (ECB) rate hike and Portugal?s plea for a bailout in early April failed to dampen investor optimism surrounding the steady, albeit fragile recovery in Developed Europe. However, around mid-April, equity indices in the region did register a sharp fall in response to the news of another jump in the Euro-zone inflation rate, but recovered quickly to remain in an uptrend for the rest of the month. After recording its highest level for 28 months in February, inflation in the Euro-zone climbed further to 2.7 percent year-on-year in March.

Faced with persistent inflation, central banks across emerging Asian economies turned more active in the foreign exchange markets during April, aggressively raising interest rates. However, these actions have coincided with a loose monetary policy in the developed markets. Consequently, the investment capital, which typically chases high interest rates, continued to flow from the developed markets to emerging markets, pushing up the value of the currencies of emerging markets. To prevent a sudden appreciation of their respective currencies, central banks turned into buyers of the U.S. dollar.

Developed Asia Pacific economies that were hit by natural disasters during the initial months of 2011 registered mixed economic performance with some countries in the group recovering faster even as other countries are still dealing with the aftermath of the crisis. While Japan, finalized a fiscal and monetary plan, investment-led growth was helping Australia recover from floods. New Zealand, which also suffered a devastating earthquake, showed a considerable rise in dairy exports. Other advanced economies continued to do well, although strong growth has been stoking inflation.

Global economic growth now appears more sustainable, as the developed economies continue to recover and the emerging economies maintain their rapid pace of growth. The Euro-zone economy is expanding faster than expected while the U.S. growth slowdown in the first quarter is widely believed to be due to seasonal factors. The IMF acknowledged that global economic activity is set to accelerate again, and maintained the global growth forecasts for both this year and 2012 at 4.5 percent. However, the IMF warned that growth remained unbalanced and that inflationary risks have increased.

The International Monetary Fund in its latest report observed that the economic recovery in Europe as a whole is proceeding modestly. However, the agency noted that the pace of growth varied substantially across countries in the region. The large emerging European economies in the region are performing at or above capacity, according to the agency. Preliminary data showed that the Euro-zone economy expanded at a better-than-expected pace in April, allaying concerns that the recent rate hike by the European Central Bank would strengthen the euro and slow down German export growth.

Rising inflation remains the major policy concern across most economies in the Americas region and is attracting stronger policy responses, as energy and commodity prices remain elevated. While some of the Latin American countries continue with monetary policy tightening, Canada is widely expected to start hiking interest rates later this year. In the U.S., the Federal Reserve will end its quantitative easing program by the end of this quarter, though interest rate hikes are not expected until early next year.

According to research by the World Bank, unrest in the Middle East and North Africa has affected economic growth in the region, which previously had been expected to zoom upwards in 2011 until the turmoil began. In its economic forecasts in January, the World Bank had projected that the region, which had come out of the 2009 global recession, would enjoy a rise in gross domestic product (GDP) from 3.3 percent in 2010 to 4.3 percent in 2011. In stark contrast now, some of the affected countries like Egypt will have a growth rate as low as one percent.

During yesterday's drop in oil and other commodities, we heard several commentators say they were puzzled over why stocks were down as commodities were plunging. While their argument seemed to be based on the assumption that lower commodity prices will benefit the consumer, have they been paying any attention at all to the markets in the last two years? Although lower commodity and energy prices will increase the amount of money that consumers have to spend on other things, the reality is that oil and stock prices have been positively correlated for some time now.

All we can say with some degree of certainty is that the real economy seems to be slowing rapidly from our perspective. The problem is not so much a dearth of credit as a lack of demand for credit and goods of all descriptions. Have you noticed your retailers and service providers trying harder recently? Even the major airlines are treating passengers with a degree of deference that is almost unnerving -- but the planes are mostly full.

In case you haven?t been watching, the price of corn for delivery in July (a futures price set on the Chicago Board of Trade) rose 35% just in the month of April from $216 to $293 per metric ton. As both a commodity and agricultural product, the demand and pricing of corn can provide interesting insights into whether inflation is rising, why and (if so) what factors are driving it. In this Weekly Market Update, we?ll take a look at the market dynamics for corn, what is driving recent price increases and how this is likely to unfold over the remainder of this year and beyond.

As if we needed another reminder of the depressed level of the US economy, a recent WSJ article noted that one out of every seven Americans are on food stamps. Breaking out the numbers by state shows some wide divergences. Mississippi, has the highest percentage of its residents on food stamps at 20.6%. The only other state where one in five residents are on food stamps is Oregon. On the low end of the spectrum, Wyoming has the smallest proportion of its residents on food stamps, 6.6%, and believe it or not there are only seven other states where less than one in ten people are on food stamps.

If it seems there has been a significant uptick in mergers & acquisitions ("M&A") lately, it's not your imagination. In the first quarter of 2011, worldwide M&A activity rose 55% from the comparable period in 2010. More than 9,600 deals with a value of nearly $800 billion were announced, the highest levels since the second quarter of 2008. We believe the recent pick-up in M&A activity is more than a simple rebound off the lows of the Great Recession and is likely part of a broader, longer-term trend. A confluence of factors supports this hypothesis.

We continue to be cautious on the economy, as the ?big? problems (a hangover from the financial crisis and mounting US government debt) are likely to stay with us for some time. The large dosage of negative news and events worldwide, from Portugal to Japan, has been absorbed by the U.S. stock market with barely a hiccup. During the 1 quarter of 2011 we continued to take advantage of opportunities in the market and ended the quarter with a cash balance of 17.2%. Our portfolio today reflects a number of businesses that have proven their ability to thrive in a consumer constrained environment.

QEII is set to end no later than June 30th. Prominent money managers disagree on the impact. PIMCO?s Bill Gross thinks yields are bound to rise as the largest net buyer of Treasuries moves to the sidelines. Gross has sold all of the US Treasury holdings in the flagship Total Return Fund. Jeff Gundlach, formerly of Trust Company of the West and now with DoubleLine Capital, believes the opposite. According to him, yields will fall in the short term because quantitative easing is inflationary. When QEII stops, bond buyers will require lower yields as future inflation expectations recede.

To understand the potential upside for stocks it's important to evaluate the factors that drive returns and how they might behave over our investment horizon. The three key variables are dividends, earnings growth, and changes in the price/earnings ratio. Our analysis focuses on assessing these key factors under several broad economic scenarios. This allows us to estimate return ranges for stocks, and to weigh these potential returns against the risks we see to make informed portfolio allocation decisions.

Total returns began looking better for municipal bonds (munis) after mid-January this year as issuance eased and a wave of non-traditional (not tax-exempt income-seeking) buyers entered the market in pursuit of relative value and return opportunities provided by falling muni prices and rising yields compared with those of Treasuries. But the rewards from that influx of demand have not been uniform across the muni market, the non-traditional ?crossover? buyers have targeted some segments much more than others, creating a divided market that has rewarded some investors at the expense of others.

How interest rate movements impact real estate securities is a complex but topical matter. After studying the historical performance of these securities, our findings indicate that: Not all interest rates move together. Real estate securities have had surprisingly low correlations to interest rates. More often than not, real estate securities have generated positive performance during periods of rising interest rates. These observations indicate that credit quality, yield spreads and underlying fundamentals play an equal or more important role in investment returns than interest rates alone.

In this issue of The Institutional Risk Analyst, we feature a comment from Bob Eisenbeis, Chief Monetary Economist of Cumberland Advisors. Bob clearly states the obvious in his excellent analysis of the choices facing the Federal Open Market Committee, namely that the Fed continues to steer monetary policy based upon largely domestic factors, this even as the global role of the dollar creates dangers for the US and other nations as they flee the perils of deflation.

The bifurcation of the market, with small caps outperforming large caps, has led to a valuation disparity between overvalued small caps and undervalued large caps, which we believe can be profitably exploited. We, and others, have observed for some time that many excellent, growing large cap stocks are quite cheap relative to both the overall market and to more richly priced smaller companies. We expect that, over time, more investors will agree and large cap stocks may then begin to outperform the general market, as they have to a modest extent this year.

Last week, the U.S. Commerce Department released its monthly report on retail sales for March. With gasoline prices up almost a dollar over the past six months and consumer demand already challenged by sagging home prices plus high unemployment, investors and analysts were eager to see if the streak of eight months of positive growth in retail sales through February could be sustained in March. And the answer was ?Yes, but barely.?

In 2008, when the global banking industry was being shaken by the tremors of the unfolding financial crisis, only one bank in India felt the aftershocks, and this, only because one of its overseas subsidiaries had made an opportunistic bet on debt issued by the failed investment bank Lehman Brothers. While the market valuations of all the leading banks in India slipped as equity prices tumbled, their businesses were not affected and their balance sheets remained healthy. Most domestic commentators continue to hold up this as evidence of the inherent strengths of the Indian banking industry.

The East Asian nations of South Korea and Taiwan have transformed themselves from being the manufacturing backyards of US and Japan into high-tech giants in the past four decades. Their growth in the field of electronics has been impressive especially since the late 1990s. Currently, South Korean and Taiwanese firms are not only engaged in the manufacturing of the highly-commoditized chips but also in the production of hi-tech electronic devices such as smartphones, tablets, televisions and personal computers.

With the world preparing for the collapse of the post-WWII, post-Bretton Woods economic order, we thought it might be useful to look at what Keynes actually said. We depart from our optimism due to the situation in Europe. Forget the threat of a ratings downgrade by S&P, Washington on debt ceilings or our part-time POTUS, the final collapse of the southern states of Europe is accelerating. Most banks in the EU are insolvent and the states supposedly backing them cannot access the global markets. The collapse of the EU bank bailout effort could be the next catalyst for global contagion.

Inflation continued to be the watchword for the emerging Asia Pacific economies in March. The world?s second largest economy, China, has slowly but firmly gained control over its banks, whose relentless lending had stoked inflation. Consequently, fears about excess inflation affecting China?s economy are expected to come down over the next few months. However, worries over the damage done to Japan by an earthquake could affect a number of export-based emerging economies in the Asia Pacific region. In other emerging Asian economies, monetary tightening continued at an accelerated pace.

Despite several discouraging developments in March, such as the fighting in Libya, the tsunami devastation and nuclear scare in Japan, as well as the resignation of the Portuguese prime minister, Developed Europe stabilized, following an initial bout of volatility, seemingly shrugging off these events and, instead, focusing on the positive economic data from the region. Portugal?s sovereign debt crisis has been simmering for a while now, and given the scale of the country?s problems, the latest setback was not exactly a surprise to investors.

The economic repercussions to the Americas region from Japan's earthquake are expected to be limited. Though Japan is a large trading partner the percentage share of Japan in their total external trade is low. However, some of the large manufacturers, especially in electronics and automobiles, may face slower output because of shortage in supplies from Japan. Similarly, the escalation of political unrest in the MENA region, have not yet caused a flare up in energy prices. Though retail prices of gasoline have risen, they are not considered high enough to cause damage to consumer spending.

The turmoil in the Middle East region continues, with Libya exploding into civil war, and troops from the Gulf Cooperation Council being called in to suppress the protests in Bahrain. In terms of the economic repercussions, stock markets in the MENA are estimated to have lost around $140 billion in market capitalization during the last month. According to the Arab Monetary Fund, the market capitalization of 16 Arab bourses was valued at $862 billion on March 4, compared with $1.002 billion on January 25, a day before the political crisis in Egypt triggered upheaval across the Middle East.

Back in May 2009, S&P placed its AAA rating for the UK on negative watch for a possible downgrade, in effect putting the UK government on notice that its proposed policy path was unsustainable. Then in October 2010, after the UK took aggressive deficit-slashing measures, S&P revised the UK outlook from negative to stable and maintained the country?s AAA rating (see p. 2). Yesterday, S&P similarly placed the US government on notice with the same warning and equal odds (one in three) of a downgrade, even if this downgrade is unlikely to be realized until after the 2012 election.

Upbeat forecasts from the European Commission as well as stable financial and economic conditions in European economies indicated that the recovery is on track in the region despite the tragic developments in Japan, increasing oil prices, and the continuing political unrest in the MENA region. Equity markets also seem to be signaling that the sustained pace of global economic recovery will offset these developments. The decision by seventeen Euro governments to strengthen the ?440 billion rescue fund and to lower interest rates on Greece?s bailout helped allay fears of a lingering debt crisis.

While the earthquake and the tsunami have caused extensive damage in Japan, the impact on global economic growth is not expected to be significant. Though exports to Japan may slow in the short term, this will likely be offset by increased demand as the country starts rebuilding. The supply disruptions faced by manufacturers who depend on Japanese components are also likely to be short-lived. Global equity prices saw increased volatility during March, but recovered towards the end of the month as fears of slower global economic growth due to the disaster in Japan subsided.

During March, most developed Asian economies faced headwinds to export growth. Continued efforts to tighten credit in China, inflationary pressures and strengthening currencies were some of the factors affecting export growth across many developed Asian economies. However, a devastating earthquake that struck Japan in early March disrupted supply chains across Asia. Japan, which accounts for 9 percent of the worlds GDP, plays a crucial role in the functioning of the global auto and electronics industry. It is estimated that Japan will require another 2-4 quarters to recoup the losses suffered.

Herb Meyer said during tough economic times family size tends to shrink because people tend not to get married, and if they do they try to avoid having children because they can?t afford them. It was only a few days after this talk that we read that the birth rate in the U.S. from 2007 through 2009 fell 4%, which was the single largest drop in any two year period since the mid 1970s. The stock market declined by 50% in the mid ?70s and interest rates climbed to over 20%. That?s right ? 20%! In short, a thriving economy creates a growing population which in turn creates a thriving economy.

This week marks a quarterly ritual on Wall Street where companies report their actual financial results for the most recent quarter, and analysts use these results to update their forecasts for companies, including their target share price and sell or buy recommendations. Most expect to see a continuation of the growth that began in 2009 as the economy was struggling to exit the Great Recession. This recovery of U.S. corporations has been the one bright spot for our economy, which continues to struggle with high unemployment, record government budget deficits and a weak housing market.

Asian equity markets began the year in a particularly volatile state as they came to terms with regional inflationary pressure, unrest in the Middle East and North Africa, and the natural disaster in Japan. Notwithstanding these negative factors, most markets in Asia rebounded in late March to end the quarter on a positive note. The MSCI AC Asia Pacific Free Index including Japan, however, decreased by 1.4% in the first quarter of 2011, while the MSCI AC Asia Pacific ex Japan Free Index increased by 1.5%.

Energy is a fundamental building block of all modern economies. As such, it should not be an overstatement to say that the availability, or lack of energy has been a primary driver of growth. This is why it has been imperative for all nations, to secure stable sources of energy. With Japan?s current nuclear crisis and high oil prices causing concern, the topic has drawn recent attention. And as Asia's population continues to climb, the region?s energy demands are also set to soar. China and India, are expected to develop ever greater appetites for energy sources, such as nuclear power.

The OECD recently issued its annual Society at a Glance report which highlights and compares trends in income, age, and other vital statistics across countries. One interesting aspect of the report highlights trends in the age of the global population. In the charts below we compare the percentage of the entire OECD population above the age of 65, as well as in BRIC and G7 countries. As shown in the top chart, 14.61% of the population within all OECD countries is currently above the age of 65 years old. Between now and 2050, this percentage of the population will increase to 25.66%.

Investors sometimes walk a fine line between either over-reacting to temporal changes, which ultimately don?t have a lasting impact on either the economy or the markets, or underestimating the impact of real risks that can bring about lasting and meaningful changes. Currently, the main areas of concern are the Japanese triple disaster, the Middle Eastern/North African ?Arab Spring,? and inflation. While we do not believe the Japanese and Middle Eastern situations pose a real threat to financial markets long term, we do believe inflation may.

In this issue of The Institutional Risk Analyst we feature a comment on the XBRL pilot program at the Securities and Exchange Commission by Daniel Roberts CEO of raas-XBRL. First let's focus briefly on some related technical developments at the IRA HQ in Torrance, CA. Both of these data points directly impact investors, regulators and other consumers of financial data. And we feature a reader comment on the endgame of the private mortgage insurers at Fannie Mae and Freddie Mac, namely stuff the taxpayer.

?Dodd-Frank? is shorthand for the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The main focus of the legislation is on increasing regulation/supervision of banks and other major players in derivatives, lending, and securitization businesses. Few of the law?s provisions are aimed directly at the registered fund industry, likely reflecting the industry?s distance from the 2008 financial crisis and general effectiveness of the framework already in place. Nevertheless, a number of provisions could affect mutual funds and their investment advisers in meaningful ways.

There is always a lot of attention paid to the price changes that sectors have experienced during the current bull market, but there's not much focus on the changes in their valuations. Below we take a look at both using a scatter chart that shows the percentage change in both price and P/E ratio since March 9th, 2009. As the price of the sector rises, earnings need to rise just as much or else the P/E ratio will increase. It's common for P/E ratios to expand during bull markets, but a sector becomes more attractive if it can keep its valuation down as its price increases.

Here at Bespoke, we have a huge database that has every US earnings report going back to 2001. For each earnings report, we have how earnings and revenues came in versus expectations, any guidance that was issued, and in-depth price action analysis. From our database, we're able to combine all of the earnings information for individual stocks to come up with macro earnings trends as well. Since 2001, there have been more than 64,000 quarterly earnings reports. Of those 63% of companies have beaten consensus analyst earnings per share estimates, while 25% have missed earnings estimates.

Many of you may remember the movieThis classic shed some interesting light on the world of commodities.Commodities include natural resources, industrial metals, precious metals, and agricultural products. Or, as Duke explained to Billy Ray Valentine, "Commodities are agricultural products...like the coffee you had for breakfast...wheat, which is used to make bread...pork bellies, which are used to make bacon, which you might find in a BLT sandwich. And then there are other commodities, like frozen orange juice...and gold. Though, of course, gold doesn't grow on trees like oranges."

After several years in which worldwide M&A activity dropped steeply, corporate dealmaking could make a comeback in 2011. Corporate cash balances are near record highs, and management teams are turning to M&As to create shareholder value, a trend that is likely to continue over the next 12 to 18 months. Last year saw worldwide small-cap M&A deals jump 14.7% over the previous year, especially among technology, healthcare and industrial names. The Small Cap team at Eagle Boston, witnessed the same trend in their portfolios, as several holdings were acquired by larger competitors during 2010.

This week in The Institutional Risk Analyst, we feature a comment by Richard Alford on the false dicotomy between discretionary and rules-based regimes when it comes to monetary policy. But first we want to do a little review of the latest disgorgement of documents by the Fed. Listening to the debate between the "borrow and spend" camp led by Paul Krugman et al and the cut the deficit camp led by the Tea Partiers in Congress and around the nation, we are reminded again of the film "The Matrix" and its predecessors.

Here we are at the end of the first quarter of 2011 and we watched the markets move basically upward for the first six weeks of the year, advancing as much as 8% in some cases.Then, uncertainty escalated around the world beginning in mid February.First, there was the fall of the Tunisian and Egyptian governments, along with unrest in other Arab countries. Then in mid March, Japan suffered its earthquake. Meanwhile, the U.S. government kept itself running by passing a series of continuing resolutions, while the politicians still could not come to grips with an approved budget and deficit.

Last week brought more bad news regarding the residential housing market. There were declines in sales volume of both new and previously occupied homes for the month of February. Additionally, one major and closely followed home price index exhibited a 3.1% decline in January, marking the fourth consecutive month of price declines for this index. In most regional markets, the situation remains deflationary as prices continue to slip and (as is characteristic of deflationary markets) demand declines as buyers await further price declines before jumping in.

We believe the outlook for small- and mid-cap growth stocks remains bright as we move into the later stages of the economic recovery. While the asset class is typically expected to underperform at this point of an economic rebound, there are three important distinctions that make this cycle different: 1) scarcity of growth, 2) continued M&A activity and 3) commodities inflation.

While traders are already eagerly awaiting this Friday's employment report, we thought we would tide you over with a look at recently released levels of unemployment by state from the Department of Labor. The states with the lowest unemployment rates are North Dakota (3.7%), Nebraska (4.3%), and South Dakota (4.8%). While some will attribute the low unemployment rates in these states to the boom in agriculture, the reality is that these states have routinely had among the lowest unemployment rates in the country throughout history.