Why the U.S. States are Not the Next Greece

The purpose of this commentary is to parse out some of the psychology facing the market by presenting data without political overtones and by dialing down the vitriolic tone. It is our contention that California and other states are not in the same precarious financial condition as Greece. Trends in US state revenues however, are weaker as economic activity continues to be lower in the aftermath of the 2008 near collapse of our financial system. Changes in resource allocation and spending choices are necessary and will continue for the foreseeable future. 

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Market Review and Outlook 2nd Quarter 2010

Consumer confidence wavered over the first half of the year, influenced by mixed macroeconomic news along with concerns over the financial crisis in Europe and its potential impact on the U.S. economy. The second quarter ended with a flight to quality as the 10-year Treasury yield declined from 3.8% at the beginning of the quarter to 2.9% at quarter-end.

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High Grade Core Intermediate 2nd Quarter 2010

Greece and stocks – did anything else matter in the second quarter of 2010? Fears of a default by Greece surged, stocks fell sharply, and Treasury yields fell to their lowest levels since the first weeks of 2009.  This was a favorable environment for our value oriented conservative style.  As we will discuss further, this was an environment of spread widening and we added to spread positions opportunistically, but, given the concerns that gripped the market, we decided to refrain from moving aggressively into corporates and found more conservative opportunities to add value.

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Multicurrency Review and Outlook 2Q 2010

In our last commentary we offered that the major free float currency markets would remain in a tug of war:

• The dollar would rally and the yen would outperform when stocks fell and the Eurozone debt crisis moved to the fore.
• The dollar would likely fall when stocks stabilized, the demand for safe haven assets diminished, and the market focused on a Federal Reserve on hold.

At the start of the 2nd quarter our position reflected a belief that monetary and fiscal stimulus will work over time (our overweight towards commodity currencies), that safe haven moves would nonetheless occur (a modest overweight to the yen as an insurance policy and stabilizer), and concerns about the euro would remain considerable (a large underweight to the euro).

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