Tragedy in Japan: Its Effects on Globe Markets The Japanese earthquake literally shook the globe.

It also imposed an huge tragedy on the people of Japan that is playing out before our very eyes. Our sympathy goes out to the people who are suffering from the consequences with the quake and the ensuing tsunami. Beyond the tragedy, we have to concern ourselves using the financial implications of the event. A no-risk momentIn the moment, the markets are beset by the unknowns. The greatest unknown, of course, is the immediate economic consequences of Japan. How will the temporary shutdown of the worlds third largest economy impact the globe economy? As stocks are sold globally, the immediate answer from the markets is not favorable. We are able to interpret the markets as telling us that the globe economy is suddenly about to slow down importantly. We have no doubt that the short-run impact of Japan will be negative. The effect, as we see it, is primarily psychological. The global market declines are bound to have their effect on consumer psyches. We have already seen consumer sentiment decline here in response to rising oil costs, and the response to Japan will only intensify the decline. In their attempts to scope out the future path of developments in Japan, observers are turning towards the large Kobe earthquake that hit Japan in 1995. As The Wall Street Journal (March 15) notes, the Nikkei Stock Typical fell 8% in the five sessions following the Kobe temblor prior to rallying 5% within the ensuing 10 sessions. As we look at whats happening now, we are reminded much more of 9/11 than of Kobe. There too, following the market opened, there was general selling of all issues containing risk. The whole U.S. industrial base was on sale, and being sold. We asked the question then, has the value of U.S. industry suddenly depreciated by a sizable amount? The obvious answer (to us) was no. The selling was emotional-out of risk and into safety-no questions asked. We believe we are going through exactly the same thing once more, this time on a global basis. It took some months prior to the U.S. market recovered, but recover it did. We are not about to hazard a view concerning the Japanese market, but we do think the global markets recovery will not be prolonged. The essential thing to keep in mind is that the world economy was generally on the upswing when the earthquake hit. The upswing will slow some due to Japan, but it wont reverse, we believe. It'll then regain force some months from now. The domestic marketplace(In discussing the outlook for the numerous markets maintain in mind that all of the indicators at hand are pre-Japan.) Over the course of this quarter, Wall Street found itself becoming much more optimistic about the economic outlook. Forecasters had been looking for fairly rapid growth on the order of 3.5-4.0%. But then oil costs started to rise as the Arab world shook, and also the outlook started to be shaved. The revisions had been not disastrous, but they had been disturbing, coming following a period of upward revisions. Oil was not

the only source with the revisions, however it was the primary source in our view. If one were to look only at the leading line numbers, oils effect might not be apparent. For instance, retail sales last month were reported up 0.6%, excluding autos and gas. That is a great boost. But if consumer prices are taken into account, retail spending was up a lot much less than appeared. A much more arcane region exactly where oil showed up as a negative is in the trade deficit for January. As Briefing.com put it, the net export deficit has switched from being a strong positive contributor to growth in Q4 2010 to an equally strong negative contributor in Q1 2011. The deficit is now at its widest level because last June. From our perspective, the revisions to the economic outlook dont change the overall outlook for the domestic market. But coming as they do, just as the market was selling off in response to the rise in oil prices, the revisions only add to the negative mood that has enveloped Wall Street. Regardless of oil and the revisions, our outlook for the marketplace has not changed much. Actually, as we write oil costs have fallen below $100. They've fallen, obviously, due to Japan. Beyond oil, within the near-term Japan remains a wild card for the global markets. As we take a look at the odds, we nonetheless see a 9/11 path as probably the most most likely outcome for the U.S. market. Global equities nowWe exited the emerging markets early last month, concerned, amongst other things, concerning the effect of food inflation (and inflation in general) on economic policy in China and India. Aside from immediate policy, we were concerned about a shift in Chinas longer-term policy toward slower growth. China apparently has lowered its growth goal from 8.5% to 7.5%. 7.5% is nonetheless extremely rapid growth compared to the rest of us, but it is slower than before and markets have to adjust to that. Internationally, without the emerging markets, we're left with the created markets, led by Europe. Our recent fund choices have favored Europe, and that generally indicates the European Union. Last summer, Europe was a four-letter word for equity investors, as European markets dived after European bond markets came under attack. The issue was: Had a few of the European member countries borrowed themselves into bankruptcy. The poster-boy for this problem was Greece. The EU has grappled using the sovereign wealth crisis for close to a year. Whilst the issue is far from settled, the latest set of proposals do appear to have met general approval. European funds, particularly small cap, have been slowly climbing towards the leading of our international fund list. What makes the European small cap universe attractive is that it is fairly undiscovered and provides numerous companies to choose from. Prospective price-earnings ratios also are reassuring. Aside from the small-cap sector, the biggest European economy, Germany, has been performing surprisingly well. Its export volume, each inside and without the Eurozone, has been very powerful. Undoubtedly, little caps have profited from the downstream effects of Germanys (relative) boom. As we take a look at the global marketplace outlook now, after Japan, we see the global upswing as having taken a temporary detour because of Japan. Within the end, we think a more worrying issue will be the outcome with the upheaval

within the Arab world. There is reason for optimism about the outlook there, but we have all been surprised before. Getting concentrated on Japan the past couple of days, its worth remembering that China and India are continuing to grow quickly, and this will help preserve the growth of the smaller Asian economies. At the same time, U.S. growth should continue at moderately rapid rate. If the newest U.S. outlook holds, growth more than the rest of this year should run at about three.5%. All in all, the global advance ought to continue having a increase from Japan when recovery sets in. By on Japan