In the final week of the first quarter, economic releases were mixed, but tended to be stronger is the U.S. and weaker in Europe. The impact of the EU's support of Cyprus continued to hang over the capital markets. Equity markets were similarly mixed with the U.S. markets mostly higher and the European markets mostly lower. Government Bond yields were lower, but credit spreads were a touch wider on the week. The U.S. dollar was mixed, energy prices were higher, and metals prices were lower on the week. For the quarter, the Dow and S&P 500 reached new all-time highs and generated low double digit returns; the U.S. dollar strengthened and U.S. interest rates rose during the quarter.

Perspective:

This weekend our daughter and her significant other picked up a new golden retriever puppy on their way up Maine to join us for Easter weekend. Everybody, especially my wife, instantly fell in love with the 8⁺-week-old puppy. My pictures of Otis on Facebook evoked numerous "likes" and admiration. Otis' first night with us in a dog crate in the mud room was filled with cries and howls. Our noise machine kept my wife and me in the dark, but we were told that the puppy managed to get about three hours of sleep from 3 to 6 a.m. Our daughter and her partner dealt with the realities of new puppy ownership. They both grew up with dogs and were prepared to manage their way through puppy-hood. They have a long-term view of the benefit of the companionship of a golden retriever and are willing to put up with the short-term challenges of puppy-hood to gain that benefit.

This week as the equity markets reached new highs, they have become as attractive as a new golden retriever puppy. These new highs have generated interest on the part of talking heads and investors alike. Yet, getting involved with the equity markets at these levels, like acquiring a new golden retriever puppy, should be done with the understanding of all of the risks and responsibilities. The price/earnings ratio of the S&P 500 is over 18 times historic earnings, a bit higher than the long-term average. On the basis of projected earnings, the ratio is just over 14 times, a bit lower than the long-term average. Those who invest at these levels need to understand that the valuation levels are high and the rewards are likely to develop only over a long term horizon. The near term may be filled with the challenges of puppy-hood.

Economic Releases:

In the U.S., Personal Income and Spending firmed in February in spite of having to deal with higher payroll taxes. Personal Income rose 1.1% after a minus 3.7% fall in January. Consumer Spending increased 0.7%. On a year-over-year basis, Personal Income (red in the chart) increased 2.6% and Consumer Spending (blue in the chart) increased 3.3%. The PCE deflator (a favorite Fed inflation measure) rebounded 0.4% after a flat January; the YOY rate remained tame at 1.3%.

Initial Jobless Claims rose to 357,000 in the week of March 23. The four-week average of claims (blue in the chart) rose to 343,000, but the Continuing Claims (red in the chart) fell to a new post-recession low of 3.050 million. The trend in claims has continued to show overall improvement in the U.S. employment.

Other Economic Releases

In other U.S. releases, the fourth quarter GDP was revised three ticks higher to 0.4%; this follows a 3.1% gain in the third quarter. In February, New Orders for Durable Goods increased 5.7% following a minus 3.8% decline in January; showing the impact on orders of the transportation sector, Durable Goods Orders ex-transportation fell minus 0.5% in February after a 2.9% increase in January. The Case-Shiller Home Price Index of 20 cities (SA) rose 1.0% in January; the year-over-year rate increased 8.1%, the fifth successive higher increase in home prices. On the softer side, February's New Home Sales (SAAR) were 411,000, below January's numbers and expectations. The Conference Board's Consumer Confidence in March fell to 59.7; The University of Michigan's consumer Survey rose to 78.6 for the same period.

Economic, Industrial and Consumer Sentiment in the Euro-zone slipped in March. In Germany, Retail Sales rose 0.4% in February; the Unemployment Rate remained unchanged at 6.9% in March. France's fourth quarter GDP was revised four ticks to a minus 0.3% contraction. The UK's fourth quarter final GDP remained as a minus 0.3% decline.

China's CFLP Manufacturing Purchasing Managers Index rose less than a point within the expansion zone to 50.9. Japan's Industrial Production unexpectedly fell minus 0.1% in February.

Equities Markets:

With the exception of the Hang Seng, equity markets finished the quarter with solid high single and double digit returns with the highest returns generated outside the Eurozone. Within the quarter, both the Dow and S&P hit all-time record highs. Among the Merrill Lynch (BofA) Bond Indices, the narrowing spreads in the riskier (high yield and emerging) markets generated positive returns in spite of the rising interest rates in Government Bonds; the Investment Grade Bond Market fell on the quarter.

Bond Markets:

Government bond yields fell in the final week of the quarter, but, with a few exceptions, most yields rose during the quarter. Credit spreads narrowed on the quarter with the high yield spreads narrowing the most.

Currencies & Commodities:

The U.S. dollar was mixed on the final week of the quarter, but rose against the other four currencies in the table on the quarter. Commodity prices were mixed on the week, but mostly lower on the quarter; natural gas price gains stood out with the best QTD performance. On the quarter the WTI-Brent spread narrowed as WTI rose and Brent fell.

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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.