Favored Muddle-Thru 40%;Double-Dip 30%;Seamless- Recovery 30%.

For capital markets after unprecedented central bank quantitative ease and government deficit financing, we see more to range bound behavior than generally ascribed. We are circumspect about ascribing it to market technical factors and/or investor shell shock. Admittedly subjective, we assign probabilities of 40% to our favored muddle-through scenario; 30% to the double-dip scenario that has been adhered to on one extremus as well as 30% to the seamless-recovery scenario from which markets have appeared to derive momentum especially over March to December 2009. The renewed double dip drops in economies end would (as in Japan in the 1990s) favor lower government debt yields and defensives on safety for longer. The extremus other end of quick return to strong growth would favor low quality and cyclical leverage more so than others. Both scenarios have recently been seen at play.

However, government finance is generally unable to withstand even a 150 basis point difference from coupon assumptions as claimed by Greece for itself, the quality divide seems only likely to rise. Focus at the upcoming FOMC is likely to be on the appropriateness of still underscoring extended ease but more may be achieved by the Federal Reserve and others by raising rates soon by 25 basis points to signal changed dynamics but then to pause and monitor. Our muddle through has recovery occurring but taking time with exit strategies from deficits and quantitative ease being important. It favors stronger more agile smaller currency zones in fixed income and only quality of delivery/strong balance sheets of companies becomes crucial across sectors. Such would hold not only in our favored sectors like healthcare information technology, industrials, and integrated energy but also for strong ,long lasting upscale luxury for the consumer as well as the crucial financials segment. It also seems likely that market correction is incomplete. In muddle-through, sustainable gain out of trading ranges seems likely later, after mid 2010 as a better 2011 comes into view.

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