The stock market, to say the least, did not give the Fed's December 11^th 25 basis point cut in rates a resoundingly favorable reaction – perhaps, because the market had already anticipated such a small interest rate cut.  The Dow Jones Industrial Average closed the week 110.8 points higher for the week ended December 21^st, 2007 at 13,450.65,  still modestly below the 13,930.01 posted (approximately 3.4% lower) by the Dow on October 31^st when the Fed also lowered short-term rates by one-quarter of a percentage point. The 50 basis points of interest rate reductions have not helped the stock market sustain or push beyond the 14,087.55 high posted at the beginning of October. 

The December meeting was a difficult call because this Fed (as opposed to the Greenspan regime) has been taking a very measured approach to rate cuts.  In a speech given in late November, Fed Chairman Bernanke surprised analysts by naming three conditions that would guide his agency’s interest-rate actions. They are:

1.     That financial markets remain distressed

2.     That the risk to inflation does not increase

3.     That the next round of economic data does not come in stronger than expected. 

We did not feel that these criteria were made to stabilize a very unstable market at the time but rather to serve as the Fed’s philosophical foundation under Bernanke's tutelage. The stock market at this juncture has no reason to rise.  As long as the credit markets are in disarray, consumer confidence uneasy and the housing market not showing any meaningful signs of bottoming-out, it is difficult to have a bullish outlook for stocks.  One only need listen to the comments of economists and financial analysts (such as "this will probably be the most widely anticipated recession in history"). Many market commentators hope to see the Fed Funds rates drop into the 3% vicinity. 

One sign of the nervous times for the markets was the abandonment by Citigroup, Bank of America and J.P. Morgan Chase of a plan to create a super-fund that would help bail out so-called Structured Investment Vehicles (SIVs), large investments hurt by the sub-prime mortgage crisis. The move comes after the banks struggled to raise money for the fund but found there was minimal investor interest.  This SIV fund was supposed to be part of the government’s bold effort to get the giant private sector banks to help restore financial stability resulting from the sub-prime mortgage crisis. The banks had been trying since September to establish the super-fund that would buy securities tied to such mortgages. 

The Risk Premium Differential Has Made a Modest Bullish Reversal

The Risk Premium Charts have surrendered their lethargic bullish advance and are now in plateau phase – we see no need for a BUYING spree right now.  We hope the Fed will act more aggressively than currently anticipated by the markets, particularly going into an election year with a buffet of candidates worthy of a K-mart “blue-light special.” These risk premium figures below speak for themselves:

• The Industrial Risk Premium ended at 6.13% versus 6.18%
• The Transportation Risk Premium increased to 6.99%  from 6.95%
• The Utility Risk Premiums decreased to 5.42 % compared to 5.43%

The risk differential indices for the week ended December 21^st, 2007 have flattened out since October, replaced by a market that can best be characterized as anxiously indifferent.  n

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