Yesterday, the Fed delivered the much anticipated dose of Quantitative Easing (QE) announcing that it would continue to buy U.S. Agency Mortgage Backed Securities (MBS) in an effort to further drive growth in the U.S. economy and decrease the ranks of the unemployed. The monthly purchase rate of $40 billion will be in addition to the already $10 billion that is being reinvested from QE 1&2 in mortgage-backed securities. This new money balance sheet expansion by the Fed accompanies additional guidance that the Fed would stay low on interest rates likely until mid-year 2015.

Emotions may be keeping your clients in cash, putting their long-term goals at risk. Taking a snapshot of headlines and it is not hard to discern where investors' predispositions lay.

European fears have subsided a bit as the European Central Bank's (ECB) president continued to offer words of support for a more comprehensive solutionthough he appeared to dampen the statements with concessions about the ECB's ultimate subservient role to the governments.

There are many indicators that we look for that tends to define cyclical market bottoms and give us signs of an upturn. Recent investor lack of volume and record high cash balances can also point to a change toward higher market valuations. Every day I hear about the relative cheap valuations of U.S. equities. We know that valuations can stay depressed for years, even decades. Why would we be thinking that a potential melt-up might be about ready to happen?

In the third quarter of 2011 the Economic Cycle Research Institute (ECRI) called for a 100% chance of a U.S. recession. They have a stellar track record of calling U.S. economic cycles. What we noted that the ECRI estimated the severity of any slowdown to be shallow and fairly short-lived. Most recessions in the U.S. are over even before they are positively identified.

With the recent initial public offering (IPO) of Facebook stock, the IPO process is once again making headlines and this raises many questions such as, Is the process fair? Is the process flawed? Should retail investors look to get involved? Pretty simple questions but the answers, if there are any, are not.

As the talk of supporting, realigning or destroying the European Union (EU) dominates headlines, it appears crucial to us to look at who benefits most from any of these scenarios. Most of the pressure has been on Germany, as it should since it is by far the biggest component of the EU and currently the most prosperous, though it appears so more on a relative basis.

Last week provided a very scary end to May in both the equity and bond markets. The 10-year Treasury set a new historic low yield and the equity markets ended the week giving back all of its year-to-date gains. European fiscal and banking issues continue to overshadow the slow recovery of the U.S. economy. Of current note, the EU and ECB are trying to successfully deal with the need to recapitalize the banks of Spain. On top of this rosy news, the U.S. economy continued to show a slowdown which was indicated by a much lower than expected job creation for May.

Sometimes it takes heightened uncertainty and increased market volatility to help investors rediscover an old friend in the investment universe. We thought it would be useful in todays difficult market conditions to list a series of questions as a reminder of what municipal bonds, properly selected and managed, can do for investors. Dont worry; the questions we pose arent tough. In fact, it should come as no surprise, given the title of this blog, that you can receive an A grade on the following quiz by answering municipal bonds to each of the questions in this article.

Our research of the last 50 years shows 3% pullbacks occur on average four times a year. So, clearly pullbacks are commonplace during a normal bull market; however, every time they occur they still set investor emotions on edge and test their resolve. At times like this we like to try and decipher what drove the selloff and try to resolve if we think it is just a normal correction or the beginning of a longer trend down and possibly the start of a new bear market.

The tug of war between individual investors and investment professionals is seeing two distinct paths. According to reports from the Investment Company Institute, equity outflows of mutual funds in April were at $18 billion, the most in nearly 28 years. On the other side, according to Bloomberg, the Commodity Futures Trading Commission showed the drastic reduction of bearishness by professional speculators as net short contracts have dropped over 80% since the high set last September. The question is, Who will be right and when?

Crude and gasoline have been in the press a great deal recently. Headlines touting the potential recession being exacerbated by high prices of crude and gasoline have also been met with statements about the need to regulate the speculators who are the ones to blame. We have mentioned our view on this several times over the last few weeks. Last week we mentioned a chart pattern corresponding with a negative backdrop that could push crude down in the short run. Consider the move in the Crude over the last five days.

A rising interest rate environment over the next few years is an investment scenario to which many investors now subscribe. The prospect of rising rates often prompts investors to think along the following lines: Interest rates are going rise and thats bad for bonds, so Ive got to cut back or stay away completely. But what if we suggested that investment grade, intermediate muni's might weather a rising rate storm comparatively well? We believe there are a number of factors worth considering that could help municipal bonds lessen the negative impact of generally rising interest rates.

Simply ignoring the immense amount of data would be foolhardy and we must use more corroborating data and scrutinizing the data among trends and the volatile monthly data. This has given rise to the more artistic aspect of viewing the markets than how we may have in the past. This is why ones prediction for the markets may differ completely from another while looking at the exact same data. As such, the importance of the rationale for why one may feel a certain way about the markets is as important as the actual conclusion.

The long-time trends are firmly in support of consistent price inflation during the history of the US. Inflation is a natural inclination for people, businesses, politicians and central banks. Given the Feds ultra-easy monetary policy aimed at creating inflation, we will eventually see it. Higher inflation requires investors to rethink where they invest. Cash and fixed income do little to cope with inflation and actually can be losers if held at times of higher than normal inflation rates. We think investors should take advantage of current bargains in real estate and equity asset prices.

There is a potential danger out there lurking for bond investors who are anxious for interest rates to increase. That danger for these yield-seekers is getting stuck in a bond mutual fund that might never deliver an investor the opportunity to realize the return of their capital. Bond mutual funds have been the beneficiary of a huge outflow of funds from the equity markets in 2011. The trend continued through the first quarter of 2012 even as equity markets turned in one of the best quarterly performances in a decade.

As we near the summer, if you listen close you might hear the anticipation of yet another macro shock to stall out the equity market gains. Over the last couple of years, the risk of a domestic double-dip recession, natural disasters, public political debates and European sovereign debt crises have all had the effect of stalling out positive momentum gained in the first quarter. Through April of last year, the S&P 500 showed a total return of 9.05%. However, by the end of September it was at negative 8.67% including dividends and thus rebounded to show total return of 2.11% by year end.

So, even though we saw healthy growth and returns to investors over this time requiring patience during the credit crunch of 2008 when returns were negative the market has built up a large base of holders to offset the lack of primary dealers holding net positions. It still brings to bear whether these positions have been measured for duration risk in case of higher rates as we have discussed many times before; however, demand for yield and risk aversion has at least tempered the loss of primary dealers utilizing capital.

The Wall Street adage, Never sell a dull market short, might be particularly applicable at this juncture. The volatility index has been in a steady downtrend since last October and is now trading at an eight month low. Reviewing the charts of the 30 DJIA components reveals surprisingly similar horizontal compressed trends since January. Referring to on-balance volume characteristics, however, these flat-line patterns may be masking significant accumulation trends that could unleash considerable upside price pressure by the second quarter.

Yesterday, the Fed was moved to release the latest round of stress test results for the largest 19 banks in the US one day early. Midday, JP Morgan announced a significant dividend increase which gave the appearance of jumping the gun so the Fed chose to make all of the results public late yesterday. The news caused prices of most U.S. banks to rise as the tests confirmed the continued progress being made towards strengthening their businesses. We believe that this is simply the beginning of a renaissance of the U.S. banks and their ability to grow earnings and dividends in the next few years.

While the markets and economy continue its path upward with each trepid step more anxious than the previous, the anxiety about future crude prices has now hit the political circuit. However, one base analysis that has seemed to slip memory is the correlation of Chinas growth and its growing demand of oil and the price of oil itself. What makes this important is the recent dichotomy that we are seeing in the underlying economic growth of China and the price of crude oil.

Many prognosticators continue to discount the shape of the yield curve and what bits of wisdom one might see in its steepness or flatness. Though not a perfect indicator from the past, it does represent some interesting expectations from institutional investors that should not go unaddressed. Though these numbers may not appear meaningful to the average investor, the institutional investor sees this as highly significant as it pertains to investor appetite, economic impacts and hedging of interest rate swaps and currency expectations.

U.S. Treasury securities could take their place alongside other bubble assets like tulip bulbs did in the 1630s. There are signs of a secular change afoot in the U.S. Treasury market as rates set historic lows. The U.S. Treasury market is indeed a crowded market as Euro-singed capital is being tucked behind the ultimate safety of the U.S. obligations. Add to that the Feds own record setting buying binge in these securities and you have an asset that may have well crossed the line of what its long-term value could possibly be.

With the ever so slowly resolution for Greece becoming a reality, most markets are turning their anxiety to the rising price of crude. The international energy markets have been shaken by the realization that Iran and its 2.5% of the worlds oil production may soon cause another economic shock. Though this concerns Europe more than the other continents, it surely puts a strain on everybody needing oil to help sustain the positive growth in the global economy. As such, we have seen a steady and sharp rise in gasoline prices.

One of the bullish features of this market is that there is a good balance in performance among the leading industry sectors. For instance, agriculture had been a leading sector following the markets lows after the financial debacle. But, stocks in the sector generally consolidated through much of last year. I believe that the consolidation was completed in the fourth quarter and that agriculture can reclaim its longer-term leadership. Numerous stocks in the sector have exhibited good relative strength recently and several stocks have begun to breakaway from downward or neutral trends.

The safety that Structured CDs provide, in terms of the return of principal when held to maturity in addition to FDIC insurance, may have the calming effect that an investor who has reached their destination is looking for while the performance of said CD linked to some underlying asset class (commodity, currency, equity or fixed-income) may be what the investor who is still traveling to their destination is seeking in order to reach said destination.

2012 will likely be the tale of two bond markets. You have the high-grade debt market that has been the recipient of a huge flight to quality and fear trade. The prices of these obligations have skyrocketed and yields plummeted. Additionally, the Fed has turned out to be the biggest buyer of longer-dated Treasuries in the markets today. It is rumored that they might engage in a mortgage buying campaign later this year. That would have the effect of lowering mortgage rates further than the record lows where they are at. In short, the world has sought refuge in the U.S. bond high-grade market.

An interesting article on the resurgence of production of oil in the United States details the rebound in the amount of oil produced daily in the United States. It relays the expectation by the U.S Energy Information Administration that output could pick up over half a million more barrels per day by 2020. That would put daily output at over 6 million barrels per day, well short of the estimated daily usage. However, it does show that the production gains of 1.3mm per day over the last four years were greater than the gains in Russia, China and Brazil combined (1.2mm total).

S&P announced they were cutting the credit rating of nine European countries and stripping Austria and France of their AAA credit rating. Reminiscent of the removing of the AAA status from the US nearly six months ago, all eyes are on what will happen to their debt markets and currency. The markets had long expected some sort of credit rating warning or downgrade with regard to the United States. So too is the reaction from the European downgrades on Friday. Consider what has occurred in the debt markets over in Europe and you can then compare it to the United States movement.

Interest rates fall and the temptation to reach for higher yields in longer maturity bonds is difficult for bond investors to resist. Are we again at that kind of point in the interest rate cycle? Municipal (muni) bond yields are at or close to their historical lows and it easy to see how investors might be unimpressed with the yields currently available. Dont despair. We suggest in environments such as these that muni bond investors repeat a few simple but helpful reminders to themselves.

Commercial air travel can be pretty frustrating these days, but nothing compares to the call from the cockpit as you approach your destination that the flight is entering holding. Immediately many questions enter travelers minds including: Why? How long? Where will we land? Given the S&P 500 essentially experienced a holding pattern in 2011, many investors must be asking themselves similar questions right now. Specifically the S&P lost .04 points last year as it began 2011 at 1257.64 and ended the year at 1257.60.

As we kick off the New Year, the markets are starting like Usain Bolt off the line. The European markets are up already for the year after two trading days with the German DAX index up 4.55% and the Euro Stoxx 50 up 3.17%. The U.S. markets are moving higher with gains of nearly 2% for the day. Though a few trading days dont translate to what will happen over the year, the combination of improved manufacturing data across the globe and a further comprehension of the dramatic comments made by the ECB (European Central Bank) President Draghi last week seems to be fueling the gains.

China and Japan announced a joint effort to diversify themselves from the U.S. dollar by allowing direct trading of their currencies. The interesting aspect is the still high dependence upon the U.S. consumer. At its peak, the U.S. consumer was (with all in consumption, Medicare and Medicaid transfers and other expenditures added in) from Merrill Lynch at 18.9% of global consumption. If we simply use the total chained consumption metric, the consumer is 15.0% of current world GDP. The central point to the global economy is still primarily on the U.S. consumer.

As we and many have noted during the debt crisis in Europe, the ultimate end to the current dilemma requires a comprehensive and coordinated solution from all of its members. In an article over night from Bloomberg we read that, a measure of ECB leverage may grow from a record 30 times, raising the risk of a widening in sovereign bond spreads unless governments commit a detailed rescue plan for members. The two challenges we have seen from Europe is the conscious effort to do just enough to get by which doesnt instill confidence and inability to comprehend the severity of the situation.

Mario Draghi, President of the European Central Bank, said that banks may borrow money from the ECB to purchase sovereign bonds. This is a form of quantitative easing that circumvents the prohibitive inflexibility many other central banks around the world dont have to meddle with. Like any additional indirect action, its ultimate impact may be more subtle than a direct action but it does bring about some creative solutions where leadership has stalled. Other assistance could come from a discussion in increasing liquidity by nearly 200 billion Euros via the International Monetary Fund.

Not that we havent been whipsawed by the procrastination from European leaders before, but the last week and half of trading in the European bond markets are offering a glimmer of hope that there might be push to come to a resolution. At this point, there is no sense in calling for the end to their dilemma as all long-standing concerns usually require drawn out solutions. However, the confirmation today of more austerity measures from Italy coupled with generally better global economic numbers is causing a large rally in Spain and Italys sovereign debt.

We have long taken the contrarian perspective to the fear that dominates market sentiments. Overnight we have now seen the recognition that Europe is unable to fully solve this on their own and needed mediation in the form of a Federal Reserve lowering of the overnight swap rates to release the pressure cooker on European liquidity. Though we have witnessed many interventions this year, this one is pronounced in what it says in a very subtle manner.if you could ever call an intervention like this as subtle.

The market is trying to better understand the Feds announcement yesterday regarding seemingly new stress tests for U.S. banks. Many posit that the Fed is worried about the health of the U.S. banking system in light of the issues in Europe. Some feel that it is an attempt to show the market that the U.S. banks are actually healthy in light of the potential economic hazards. The truth here might be a bit more innocent than many think. The stress tests are actually part of the requirements of Dodd Frank. They are not new and this is actually the third set that will have been routinely done.

As we approach the third Congressional deadline for Fiscal measures in 2011, the lack of investor anxiety is very telling. Just like the parable of the boy who cried wolf, most investors are still staring beyond Washington to Europe and the daily reactions to their evolving solutionor lack thereof to some. There are possibly two reasons for this: 1. The general public appears tired of the Armageddon finger pointing and isnt convinced the wolf is out there. 2. A pre-determined $1.2 trillion in cuts will automatically be put in effect if the gang of six cant come to an agreement.

An interesting week of economic data has allowed the slight respite from the European soap opera to push a more fundamental scrutiny of the economy. The two-day heavy release reveals quite a few of positive surprises, even if they are slight. In Q1 we grew at 0.4%, the Q2 at 1.3% and the non-revised number for the Q3 is at 2.5%. This growth is in light of the acceleration of the European situation that started in July and should have impacted the domestic GDP growth rate. However, we saw just the opposite due to the relative strength of the Euro compared to the U.S. dollar.

The possibility of Jefferson Countys filing was discussed by us in our July 27th blog entry. Of course at that time, we could not know how the Jefferson situation would ultimately play out. We did believe that it was still a possibility that a reasonable settlement could be worked out if the political will could be mustered by government officials. Regardless of the outcome, we stated at that time that a bankruptcy filing by Jefferson County should absolutely NOT be used as evidence of the beginning of a wave of defaults descending on the municipal bond market. We feel the same way now.

One thing lost in the market moves is correlation between the volatility in the equity and Treasury markets. Standing alone, one notices that the Treasury volatility index from BofA/ML has spiked up since the initial potential downgrade by S&Ps in April. This coincided with a spike in the Equity volatility though it has tempered a bit lately. When we look at traditional analysis, one would expect both volatilities to be somewhat divergent, yet now we stand at the third highest correlation over the last 10 years.

In the last 24 hours, there have been three key developments that should catch investors attention. The Greek Referendum vote has been canceled in light of the ultimatum that Germany and France has put forth to Prime Minister George Papandreou. It appeared to us that this referendum vote was initiated by political pressures to maintain his position of power which he ultimately denied. This little turn of events is just one of the many on the road that lies ahead.

We have seen a violent reaction in the equity and bond markets globally over what seems to be a return to chaos in Europe. After seemingly removing the nuclear option by levering up the EFSF (European Financial Stability Facility) and the 50% voluntary haircut for holders of Greek debt the markets are once again headed south. Compounding the problem is the Monday morning bankruptcy of MF Global was not necessarily unexpected but the magnitude of the leverage embedded on the firms balance sheet is remarkable.

October is on track to post the best monthly S&P gain of this current recovery, the first double-digit monthly gain since December 1991 and the best October gain since 1974. Though we felt the equity markets were overdue for a bounce we do feel we are now ripe for a bit of consolidation before they move higher. We think as perceptions begin to align a bit more with reality that the S&P 500 should be able to move towards the April highs We recommend investors focus on the themes of quality dividends, quality growth and quality balance sheets that we have been highlighting for quite some time.

After recently discussing the Economy and its metrics for a select group of clients, we forwarded the concept that at some point market indicators are as relevant as economic indicators. Since we are living in an age when economic metrics are difficult to trust at their outset, most look at the revised number. We like to combine economic metrics with the multitude of market indicators to affirm a trend or potential reversal of a trend. As such, reading the market and economic tea leaves has become more artistic than scientific; though long-term success still requires both.

A few weeks ago, I had the pleasure of reading a White Paper by Cutwater Asset Management. The paper is titled, Inflation Protected Bonds How TIPS Can Drive You Tipsy and discusses the lack of correlation between the returns on Treasury Inflation Protected Securities (TIPS) and gusts of inflation. TIPS were created to give investors protection against the devastating effects that inflation can have on the loss of purchasing power. I consider it a very good idea that was executed in a very poor fashion.

Quality in bond land is expensive and promises little return for a fair amount of risk. The Fed is punishing Treasury investors with historically-low yields. We believe the only way to generate a return in these markets is by price appreciation because these notes have very little in the way of coupon income. This lack means that they will trade more like zero coupon bonds when, and if, the Fed ever removes the buying pressure on that market. History has shown us that the market will move before the Fed does. Our discipline has thus far beaten our benchmark.

This morning I read a Bloomberg article titled: Strategists See Biggest S&P 500 Gain Since 98. Could this be a misprint? We would tend to agree with the potential for an explosive Q4. The markets have traded down on the Euro scare which has spread to Ameri scare. The truth is that the U.S. is in a MUCH better place than Europe, in our opinion. Our banks are very well capitalized. Our consumer has much less debt and is actually holding up well. We believe markets often turn when sentiment is at its worst. Could it be time to be greedy in the midst of all of this fear? We think so.

When markets are not able to determine efficient use of capital and transfer excesses to underutilized areas, concern arises. We often hear about the rise of Socialism in the United States, and though compared to more free-market periods from years ago, there may be some accuracy to it; the relative capitalism benchmark versus other economies is still profoundly different. As evidenced by the situation in Europe it should serve as a warning sign for elected leaders setting more protectionist policies in light of our pursuit for free market forces.