Every rose has its thorn…

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					Every rose has middle course.
I warn you, Icarus, fly a its thorn…
                                                                                                                    May 2009
The rally in corporate spreads is now two months old and getting long in the tooth as spreads              US Treasuries 30-Apr to 29-May
approach pre-Lehman levels. Two technical factors are driving the rally: first, after last year’s
                                                                                                           Benchmark                          Yield
rout in equities, corporate bonds are largely perceived to be safer investments with
historically high yields, and second, large money managers with high cash balances are                     3 Month                            .13%
taking advantage of the new-issue market to get fully invested after sitting on the sidelines              6 Month                            .28%
through early 2009. Issuance in the 1-3-year space has been scarce with financials issuing                 2 Yr                               .92%
via the FDIC’s Temporary Liquidity Guarantee Program and industrials taking advantage of
                                                                                                           5 Yr                             2.34%
investor demand in the 5-year and 10-year space. This has resulted in stronger demand than
supply for high quality 1-3-year industrial bonds, driving front-end yields for high quality bonds         10 Yr                            3.46%
lower even in a rising rate environment.                                                                   30 Yr                            4.33%

The Merrill Lynch AA, A, and BBB 1-3-year indices, below, show that the recent rally in
corporate spreads, which began in early April, has not abated despite the recent record-
                                                                                                           Merrill Lynch Indexes
breaking new issuance and rising Treasury yields.                                                          Index                            Return
                                                                                                           1-3 Yr Gov/Corp ≥ A              0.34%
        Chart 1: Merrill Lynch AA, A, BBB 1-3 Year Index OAS Spreads                                       1-3 Yr Municipals                0.23%
                                                                                                           1-3 Yr Agencies                  0.43%
                                                                                                           0-3 Month Treasuries             0.07%
                                                                                                           S&P 500                     -    5.59%

                                                                                                           Top Performing Sector
                                                                                                           Index                            Return
                                                                                                           1-3 yr Financials                4.60%
                                                                                                           1-3 Corp BBB                     4.04%
                                                                                                           1-3 yr Corp BBB-A                3.28%
                                                                                                           1-3 yr Corp                      2.96%
                                                                                                           1-3 yr Corp A                    2.74%

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    Source: Merrill Lynch
                                                                                                           Source: British Bankers’ Association, Federal
                                                                                                           Reserve, FDIC, US Treasury, Bloomberg, Barclays,
The single-A index has rallied the most since early April, but it has also experienced the                 Financial Times, JP Morgan
highest number of member downgrades or negative outlooks. This is because the single-A
index is skewed towards financials and corporates heavily dependent upon financing for
product sales. The Federal Reserve’s comments about keeping interest rates low and the
Treasury’s assurances that no bank would fail the stress test correspond with March’s rally in
bank stocks, which helped to kick off the bond market’s rally in early April.

With gross investment-grade issuance at $519bn year to date, issuance is on track to beat
2008’s total of $750bn. In the month of May, $95bn of investment-grade bonds were issued
with $82bn of that as non-guaranteed paper. For the first time in at least ten years, issuance
from industrials and utilities is outpacing issuance from financial companies—financials only
representing 10% of non-guaranteed total investment-grade issuance in 2009.

                              Clearwater Advisors · 950 W. Bannock Street · Suite 1050 · Boise, ID 83702
Below is a list of financial companies that have successfully issued unguaranteed senior debt in the market so far this year.

                      Chart 2: Senior Unsecured Financial Issuers and Issues in 2009

                                Source: Bloomberg, Barclays

These companies are not issuing in the market to take advantage of the low rates or diversify their funding bases, but rather
are attempting to prove to the Federal Reserve and Treasury Dept. that they can raise capital if needed and are even willing to
do so at punitive rates relative to government-sponsored funding programs. Given the government’s willingness to change
terms and conditions, financial firms would rather take their chances in the markets than deal with the heavy hand of the
federal government.

The ability of the above companies to issue unguaranteed debt should not be interpreted as a panacea or an indication that all
is well in those financial institutions, as they continue to face a long consumer-led recession. We still remain cautious on many
of the large money-center financials and avoid some of them altogether given their exposure to commercial and residential
real estate, unsecured lending through credit cards, and the perception that many of the delinquency concerns with consumers
will persist even if the economy starts to rebound in the near term. Another concern we have is the federal government’s
willingness to pressure creditors, specifically bondholders, to take losses or haircuts to restructure troubled companies
(witness the GM and Chrysler situations). Therefore, we are very cautious on financial institutions that rely primarily on capital
from the federal government

The industrial sector is a different story. This sector has seen $228bn of term paper issued year to date. This is easily on track
to surpass 2009’s expectations, the majority of which is in the 5-year and 10-year space with the strongest non-financials able
to borrow at reasonable yields. Companies like Proctor & Gamble, ConocoPhillips, Chevron Corporation, British Petroleum,
Pfizer, Microsoft, Wal-Mart, and Hewlett Packard have been able to borrow billions this year and even companies with mid-
BBB credit ratings with solid balance sheets like Kraft, Comcast, and General Mills have been able to borrow as needed.

In the industrial sector we like the companies that are able to issue long-term debt, which helps to extend their debt profiles
and minimize their use of short-term borrowings. In many cases these companies have more cash on hand than short-term
debt outstanding or debt due in the next two or three years. We suggest considering industrials with proven ability to refinance
their debt obligations, even if the credit is high-BBB, over higher credits or single-A-rated financials that have not been able to
extend their debt profile.

                              Clearwater Advisors · 950 W. Bannock Street · Suite 1050 · Boise, ID 83702
This material is for your private information, and we are not soliciting any action based upon it. Certain
investments, including those involving futures, options and other derivative products give rise to substantial risk
and are not suitable for all investors. The risks inherent in these investments may lead to material loss of capital.
Past performance may not be indicative of future results. Results portrayed, including those of indices, reflect the
reinvestment of dividends, as well as the effects of material market and economic conditions. Different market and
economic conditions could have a material impact on performance. Index results are used for comparison
purposes only and have been unaltered from their original state as received from independent sources. Historical
results reflect returns that a typical investor would have received based on stated fees and do not necessarily
reflect returns that actual investors received. Opinions expressed are our present opinions only. The material is
based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it
should not be relied upon as such. This document is intended for your internal use only and may not be
distributed outside your organization. This is neither an offer to sell nor a solicitation of an offer to buy an
investment product.

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make a request please email Compliance@ClearwaterAdvisors.com or call Brittany Pfister at 208-489-

                           Clearwater Advisors · 950 W. Bannock Street · Suite 1050 · Boise, ID 83702

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