Affirmative.
We have now seen, and the market has responded to, the FED's dramatic policy change, manifested in the extraordinary 75 basis point (bp) inter-meeting FED FUNDS rate cut, followed barely a week later by another substantial reduction. (50bps).
This response has fallen far short of the spectacular signal a new bull market normally gives when the FED initiates a drastic rate-cutting program, and the equity market has already priced in the unfolding economic downturn. Indeed, the rally off of the intraday low in the 11,500 area looked to us more like a bear market rally than the beginning of a bull market, or the signal of the end of a bull market "correction." We must now discard our prior bullish stance vis-a-vis the equity market, and conclude that if it walks like a duck, talks like a duck, and acts like a duck, it is a duck. (Read: BEAR).
It remains to be seen whether or not further dramatic FED rate cuts and energetic re-liquefying efforts by the FED, in conjunction, hopefully, with a comprehensive and decisive bail-out program by Uncle Sam, will contain the economic downturn within traditional, post World War II limits. We would expect to receive an early signal from the equity market.
The normal, upward-sloping shape of the yield curve is a very favorable omen regarding the economy by mid-late 2009. Still, caution is indicated, we think, given the risk that the central bank may be unable to limit the severity of the economic contraction and keep it within reasonable bounds. The deflation in house prices is very serious, and the risk of a general deflationary contraction has become elevated.
