Instead, it would behoove the Fed to leave administered rates unchanged until late 2010, to focus liquidity measures on the mortgage markets and other collateral but to allow long Treasury yields to move upwards. Further, the much vaunted Scandinavian solution to financial crisis has been shown to be deficient in that exposure of Swedish banks to Baltic states (soon after meltdown on domestic real estate) has necessitated an ECB loan to the Riiksbank. A rallying cry into 2006/7 was the purported ability to create alpha while the reality was magnification of beta. The admonishments of another age remain appropriate now against trying to create a silk purse from a sow’s ear. We favor quality and caution that seamless transition now is likely to be as misplaced for financial markets as for industry CEOs in the 1990s. Despite our expectation of a new cycle and S&P 500 operating earnings recovery to 75 in 2010, we have suggested corrective potential ahead of a new cycle from late 2009. In early March, we suggested markets were below fair value. All the while, we have maintained a near term S&P 500 trading range of 750-900.
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