Market Commentary
March 14th 2009

The Federal Reserve has plenty on their plate this year. They have reduced the Fed Funds rate to .5%. The Treasury Yield Curve is very steep:

TREASURY YIELDS

As you can see from the yields above, the difference between a 6 T-Bill rates and the 30 year T-Bonds is over 300 basis points. Spreads between the 6 month and 10 year is approximately 250 basis points.

Just like the flat to inverted yield curve in 2006 told us interest rates were heading lower and an economic slowdown was in our future. The steep yield curve is telling us that Treasury interest rates are heading higher and economic growth is coming in the next 12 to 18 months.

How fast a turnaround comes will depend greatly upon Treasury’s and the Federal Reserves plan to reorganize the financial system. Treasury has stated they will unveil their plan within 2 weeks. I will be looking for how they will get the troubled loans made from 2002-2006 out of the banking system and that they recognize the losses. The sooner we recognize the losses, the sooner we can move on with a recovery. For now I am assuming that GDP for the USA will turn positive in the 1 st quarter of 2010.

BONDS

CD’s and Government Bonds should be kept short term ( 1-2 years) or use a laddered maturity strategy. This will allow taking advantage of increasing interest rates.

Municipal bonds however are very attractive in the long end of the yield curve. Normally municipal bonds rated AA and AAA would yield 80% of Treasury Yields. Currently the opposite is true. This current environment is offering attractive total returns for municipal bonds.

Corporate Bonds and Preferred stocks also are offering upside potential. I would recommend buying both municipal and corporate bonds thru a diversified mutual fund.

Equities and Commodities

If we get a plan from Treasury to deal with the banks distressed assets and a dysfunctional Mark-to-Market accounting methodology, the stock and commodity markets are offering a tremendous value.

Because of the extreme volatility and expectations for a rebound, covered call writing strategies on equity and commodity indexes offer above average returns.

Consumer and technology stocks should carry overweighting. Continue to avoid bank stocks until the government gets paid back on their loans and we know what new regulations they will operate under.

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Sincerely,

Sam Clem
Clem Investments
Registered Investment Advisor

Past Commentaries:

July 2, 2003
July 28, 2003
September 29, 2003
December 3, 2003
January 6, 2004

January 22, 2005

January 6th, 20066