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Market
Commentary
January 22, 2005
How high will the Federal Reserve raise
interest rates and how will this affect
the economy and investments this year?
The
Federal Reserve is about half-way to their
goal of moving from a stance of being very
accommodative to a stance of neutrality.
This
means that they should raise the Fed Funds
Rate until they reach the rate of inflation.
This should be in the range of 3% to 3.5%.
Keeping the Fed Funds Rate low has put a
lot of money into our economy and has consequently
put upward pressure on commodity prices.
(i.e.: too many dollars chasing to few goods.)
Since the Federal Reserve will no longer
be dumping money into our economy, this
will take the pressure off of commodity
prices and inflation. As I have stated before,
the cost of labor is the major contributor
to long-term inflation problems. Because
of global competition for jobs, labor costs
will remain in check and I do not see inflation
as a problem.
The
Treasury Yield Curve has flattened out over
the past 12 months.
| 6
MO |
2.54%
|
| 2
YR |
3.13% |
| 5
YR |
3.63%
|
| 10
YR |
4.14%
|
| 30 YR |
4.64% |
Since the Federal Reserve stated raising
rates, long-term rates have actually come
down. Compare the rates above to Treasury
rates on January 6th 2004.
| 6
MO |
0.95% |
| 2
YR |
1.81%
|
| 5
YR |
3.23% |
| 10
YR |
4.27% |
| 30 YR |
5.10% |
As you can see, the Treasury Yield Curve
is flatting out. (the difference between
sort-term and long-term rates) This is an
indication that GDP will be slowing down
and inflation will remain in check. I would
anticipate that GDP for 2005 will Be in
the 3% area and inflation should be around
2% - 3%.
I
expect longer term bond rates to remain
stable this year. Maturities of 3 years
or less will continue to see rates go higher.
Returns
in the stock market should be decent this
year. Again, I would recommend accumulation
of stocks on pullbacks. Because of raising
interest rates, I would recommend underwaiting
commodities and commodity based companies.
This is also an excellent environment for
using covered call writing strategies.
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
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