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Heading into the end of March European Summit

03/25/2010

Heading into the end of March European Summit, the 16 nations that comprise the European Union have one thing on their minds - the rapidly declining value of their currency. Unfortunately for those members, I don't believe there will be a dramatic change in the downward momentum of the Euro. The currency is under significant "fundamental" selling pressure currently. However, let me clearly state that I do not believe a declining Euro is the catalyst to disrupt the U.S. capital markets recovery, nor does it alter my end-of-year outlook for Commodities and Natural Resources. They remain sectors in which to be invested.  However, this is clearly a bump in the road.

Spot Euro Currency

Source:  Bloomberg

On March 24, Fitch cut Portugal's credit rating, basically confirming a "contagion spread" in the Euro zone. The rating for Portugal dropped to AA- with a negative outlook.

Germany, the largest economy in the Euro zone, is encouraging Greece to seek financial assistance from the Washington D.C. based IMF. ECB President Jean Claude Trichet and French President Nicholas Sarkozy are adamantly against an IMF plan for fears that it will further weaken the Euro and the credibility of the European Union.

The problem is that, financially, the only answer is the IMF, with an attractive 1.25% interest rate on a loan. The European Union just cannot come up with the money to solve the debt burdens of countries like Portugal, Italy, Ireland, Greece and Spain.  Could they buy the debt of these nations?  Maybe, but in a modest recovery with their own domestic economic challenges that will be a difficult "political sell."  The problem with an IMF loan is the flood gates now open. First Greece, in need of 10 billion Euro by May; next up Portugal.  Let's not forget the financial troubles in Spain. So, we have a sovereign debt crisis that will not be disappearing anytime soon. Kind of makes me really appreciate Canada - their currency and Capital Markets look pretty good.

The by-product of this Euro drama will be a well supported U.S. Dollar. Also, watch the 10 year Treasury yield. The chart below depicts it is moving uncomfortably higher once again.

US Ten Year Treasury Source:  Bloomberg

Overall, this is exactly what a baseball season of frustration looks like.  Please re-read your personal December 2009 investment plan for 2010 and stay committed to patience and strategy adherence.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.