During a quarter marked by furious political debate in this country and much hand-wringing over sovereign debt globally, stock markets around the world continued the rally that began in earnest last year. Investor perceptions have evolved from relief that things are not as bad as they could be to grudging acceptance that many of the green shoots that began to appear late last year are beginning to flower. The S&P 500 index advanced 5.4% including dividends for the quarter. Indeed, some positive data points supported the rally that has run some 73% since a year ago March.  Business investment in equipment and software has been picking up and consumer spending increased further in January. Output in the manufacturing sector continued to trend higher as firms increased production to meet strengthening final demand and to slow the pace of inventory liquidation. Perhaps most important, the labor market - the last of the lagging economic indicators - has arguably fallen into place as a positive for the economy. As reported recently, private sector payrolls increased 162,000 in March (198,000 including upward revisions to prior months). Meanwhile, civilian employment, an alternative measure of jobs that includes the self-employed and start-up businesses, is up 1.36 million in the past three months, the most for any 3-month period since 1994.  All of this points to a recovery, albeit a much more sluggish one than has been seen following previous recessions.
 
As fiscal and monetary stimulus begins to fade over the coming months, the economy is going to require some self-sustaining mechanisms to kick in, and growing employment levels would certainly be beneficial. Corporate profits have been healthy as a majority of companies were able to post better-than-consensus earnings during the first quarter. Just as summer follows spring, we will be watching with great interest to see if the economy will successfully shift from an economic recovery to an economic expansion.

Municipal bonds are fixed income securities issued by various states, cities, and authorized authorities. The total size of the municipal bond market is estimated at $2.8 trillion dollars. This compares to the corporate bond market of $4.0 trillion and the U.S. Treasury market of $7.5 trillion, according to the U.S. Federal Reserve Flow of Funds report for 3Q09. We have long utilized traditional, tax-exempt municipal bonds for accounts under our management where appropriate. The yields offered on municipal bonds are typically less than those offered on taxable bonds to account for the tax-exemption. For those clients in the higher tax brackets, the tax exempt status makes these bonds especially appealing. Historically, the credit quality of investment grade municipal bonds has been excellent, and second only to that of U.S. Treasury obligations. A recent study by Moody's of the cumulative default rates illustrates this point. The ten year cumulative default rates of Aaa rated municipal bonds was 0.00% compared to 0.52% for Aaa rated corporate bonds. The ten year cumulative default rate on Baa rated municipals was 0.13% and 4.64% for similarly rated corporate bonds. These investments have and continue to serve their purpose in portfolios of generating reliable current income and providing a measure of stability to the market value of the overall portfolio.  Thanks to the American Recovery and Reinvestment Act of 2009, we now have an additional tool to use for the fixed income portion of portfolios.
 
The aforementioned stimulus act created "Build America Bonds" or BABs as they are often referred to. These are taxable municipal bonds whose issuers benefit from a direct federal payment subsidy equal to 35% of the interest payments on the bonds. This subsidy reduces the net interest cost to the issuer and in some cases results in lower borrowing costs than the traditional tax-exempt financing. The investor in these BABs bonds enjoys the higher, taxable interest rate. These issues are typically priced at a higher yield than U.S. Treasuries and in some cases even corporate bonds of similar maturity. The appeal of these taxable municipal bonds includes the strong credit profile of municipal bonds in general, opportunity for diversification in the portfolio, and attractive yields. These bonds have been met with an enthusiastic reception in the market and now comprise nearly 30% of all municipal bond issuance. There were $64 billion Build America Bonds issued in 2009 and over $100 billion is expected for 2010. We may utilize these investments in portfolios selectively where taxable income and credit quality are of primary importance. This could include the use of these bonds in tax deferred accounts such as an IRA where the traditional municipal bond would not be a good fit.