Once again, the economic releases continued to be on the strong side for the U.S. and on the weak side for Europe. Yet, events surrounding the debt crisis in Cyprus, not economic releases, were the primary concern for investors this week. Cyprus is a small part of the EU, but it is serving as a canary in the mine shaft for larger economies whose sovereign debt may also be under siege. Equity markets declined — those in the EU even more so. Government bond yields declined and credit spreads widened in a flight to safety. Eurozone concerns narrowed the Brent to WTI spread as Brent declined and WTI rose. The U.S. dollar rose against the Euro and Looney, but declined against the Yen and Pound. Gold prices rose, but silver prices slipped on the week.

Perspective:

Two years ago at an alumni forum on presidential politics at Amherst College, participants asked former Virginia Congressman Tom Davis how Washington had become so partisan and what could be done about it. Clearly, the inability of the two parties to work together has had a negative impact on our recovery and has led to poor public policy, the downgrade of U.S. debt, and, most recently, sequester. Tom cited two responsible factors — campaign financing rulings and gerrymandering. The Supreme Court decision on super-Pacs has allowed unlimited and undisclosed campaign financing of extreme special interests to unduly affect election outcomes. The result of gerrymandering is that in every congressional race from 1964 to 2012, at least 85 percent of incumbents nationwide retained their seats, according to the Center for Responsive Politics and data compiled by Bloomberg. In order to win an election in most districts, candidates only need to win the support of primary voters in their own party and they do so by pandering to the party's extremes. The result of the process is that a normal distribution of political views of our Nation is miss-represented by a bi-modal Washington population.

To address the gerrymandering issue, California took the redistricting responsibility away from the Legislature and put it in the hands of a separate non-political commission that redrew boundaries. The result was a 26 percent turnover in the state's delegation. Bloomberg also reported that several other states have undertaken redistricting reforms, but those states have left the process in the hands of legislative appointees. Good luck with that! If we want change in Washington, we need to make changes in the process.

I am not optimistic that politicians can change their stripes, but there were some positive signs this week. Having been an outspoken supporter of Simpson/Bowles style tax reform, I was pleased to see reported in the Wall Street Journal that congressmen Camp and Baucus have been meeting to lay the groundwork of a "sweeping overhaul of the U.S. tax system." This week on Bloomberg's Charlie Rose, Senator John McCain said that Republicans should compromise and increase tax revenue as part of a long-term bargain on the budget, and praised President Barack Obama for speaking with senators across the aisle. Chances of success are low, but the probability of a grand bargain may be higher than the probability of Harvard making it to the final four in the NCAA March Madness Basketball tournament.

Economic Releases:

The US Federal Reserve met this week and, as expected, kept the targeted Fed Funds Rate unchanged in the range of 0% to 0.25% and continued quantitative easing; KC Fed President Ester George dissented on extending QE. The Fed's statement was little changed from the previous meeting's, acknowledging improvements in segments of the economy, but preferring not to make policy changes due to concerns about the potential for fiscal drag. The table below shows the Fed's forecast. As compared to the December forecasts, GDP growth and unemployment are projected to be a touch lower than they were in December. Inflationary expectation changes were mixed with lower expectations in 2013 and but higher expectations in the next two years for only the core rates.

This week's reports show that Housing continued to improve in February while remaining well below the pre-recession levels. U.S. Housing Starts (red in the chart) increased to 917,000 and Permits (blue in the chart) increased to 946,000 in February. Furthermore, Existing Home Sales increased to 4.98 million with an increase in the supply of homes and the median prices as well. On the soft side of housing, the National Association of Home Builders' Index slipped in March.

Other Economic Releases

Besides U.S. housing releases, employment data also showed signs of firming. The weekly Initial Jobless Claims inched higher to 336,000, but the four-week average of claims fell to 339,750 (a post-recession low) the week of March 16. Similarly, Continuing Claims rose to 3.053 million, but the four-week average fell to 3.076 million, a post-recession low. The Philadelphia Fed Survey of General Business Conditions rose in March; the Markit Purchasing Managers' Index flash report for March slipped to 54.9, but remained well inside the expansion zone.

The German ZEW Surveys of Current Conditions and Business Expectations both rose, but the Ifo Surveys of Economic Sentiment, Current Conditions, and Business Expectations all fell in March. France's Business Climate Indicator remained unchanged in March. In the UK, the unemployment rate remained unchanged at 7.8% and the claimant count remained unchanged at 4.7%, but the number of claims fell. Retail sales in the UK rebounded 2.1% in February. Inflationary pressures were starting to build in the UK in February; CPI rose +0.7% and PPI rose +0.8% for Output and 3.2% for Input.

The March flash report for China's Markit PMI for Manufacturing increased over a point to 51.7.

Equities Markets:

This week's worries about Cyprus put pressure on equity markets, particularly those in Europe. Both the High Yield and Corporate bond markets managed to post gains on the week despite the widening of credit spreads; Emerging Market spreads widened too much and it posted a loss on the week.

Bond Markets:

Government bond prices gained (and yields fell) in a flight to safety over concerns about the impact of Cyprus. Credit spreads widened.

Currencies & Commodities:

The U.S. dollar fell against the Yen and Pound, but rose against the Euro and Looney this week. Problems in Euroland put pressure on Brent Crude prices and narrowed the WTI gap on the week. Natural gas and gold prices rose, but silver prices slipped on the week.

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Who is John Davidson?

John W. Davidson, CFA, started writing these Comments over a decade ago as a personal discipline when he was promoted to chief investment officer from portfolio manager.

Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine.

He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts, and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income, and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.

His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.

His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he has appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services often quote his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and courses at the National Graduate Trust Officers' School.

Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a Naval Officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserves, from which he retired as a captain in 1994.

Davidson is treasurer and board member of the Camden Conference. He is treasurer of the Maine Conference of the United Church of Christ, serving on the executive committee and the coordinating council, the governing board of the conference. He is also on the investment committee of the Pen Bay Health Foundation.

In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.