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Third Quarter 2009

The economy improved significantly in the third quarter and is displaying all the classic signs of an ending recession. At this point in the economic cycle the focus should be on leading indicators which have all demonstrated significant improvement over the past few months--examples include the Conference Board’s Leading Index, the ISM Manufacturing Index and industrial production. Too often investors focus on lagging indicators such as employment and bank lending which will likely continue to worsen even as the economy is improving. Globally the recovery is moving along even faster, as several countries reported economic growth in the second quarter, such as France, Germany and China. We have even seen employment growth in some countries, such as Korea, Brazil, Russia, Japan, Australia and even Canada. These are all very strong indications that the global economy is on the road to recovery. Consumer confidence remains in a general uptrend but has been choppier than other indicators, as reflected in retail sales which have generally been better than expected. Inflation remains contained and is still being impacted by the price collapse from a year ago. Consumer prices have fallen by 1.5 percent on a year-over-year basis through August. The Fed effectively cut interest rates to zero late last year and implemented what is commonly known as quantitative easing, which is essentially printing money by buying U.S. Treasury debt and U.S. agency mortgage-backed securities in the first quarter. Since that time, the Fed has stayed the course and allowed the policy time to work, so there were no policy changes in the third quarter from the Fed.

For the quarter, the yield on the three-month Treasury bill fell 7 basis points to 0.11 percent, while yields on the six-month Treasury bill fell 18 basis points to 0.17 percent. Yields on longer-term money market instruments such as 1-year agency bonds fell 17 basis points to yield 0.35 percent as the Fed has announced its intention to keep interest rates low for an extended period.

Past performance does not guarantee future results.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Conference Board index of leading economic indicators is an index published monthly by the Conference Board used to predict the direction of the economy's movements in the months to come. The index is made up of 10 economic components, whose changes tend to precede changes in the overall economy. The ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.

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