by Arthur Shead

Created on: October 22, 2008   Last Updated: October 27, 2008

By the close of business on <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Friday 10-10-08 the Dow Industrial Average (Dow) finished at 8451.19 or down 128 but not before moving approximately 1000 points. With an intarday day low of 7905 and a high of 8869, the Dow is still testing the July 2002 low of 7591. For the foreseeable future the trading range should setup nicely between 7500 to 9250. (9250 represents the last steep move downward.)<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /

> Keep in mind there are no answers for: Banking/Credit (Newly announced solution but not priced in) Sub-prime paper and other Level 3 assets are still on the books of many commercial banks and investment banks. (Solutions proposed but waiting on results) Federal Funds Interest rates (not even addressed yet) 3rd Quarter Earnings and Economic Indicators (Just getting started) The Problem with Federal Funds Interest RatesThe Federal Funds Rate (FFR) was at 6.5 percent at the start of the 2000-2002 recession. Going into 2003 while coming out of recession, FFR was at 1 percent. So, over the 24 months we were able to move rates 14 times in order to get to 1 percent. The point is that during the recession we were able to get measured decreases over a period of approximately 24 months. The bi-product of these measured decreased gave the Dow and other Indices the ability to rally especially after economic pressures. The effect on "Main Street" helped homeowners to refinance their homes and use the home equity in order to continue to buy and stimulate the economy. By contrast, if we look at the current environment, we came into January of 2008 with a Federal Fund Rate at 4.5 percent. We cut the FFR 5 times since the beginning of the year. January 22 (3.5%) January 30 (3%) March 18 (2.5%) April 30 (2%) October 8 (1.5%) If we move in quarters of a percent we have "6" cut that can be made before we go to "0." In general a quarter point cut translates into a sideways or flat move for the Markets and Main Street. Therefore, the Federal Reserve will have to move in half points or higher, which will limit us to 3 moves before we get to "0" and will probably be greeted by the Markets as being not enough. If we go to "0" before the end of 2008 and at the beginning of "this" recession, what other levers can the Federal Reserve call on in order to add stimulus to both the Markets and Main Street? Going to "0" will mean the best lever for the past 20 years used to release down pressure caused by economic data will be exhausted.

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