Sliding down the market
Remember last year's irrational exuberance? Every time earnings came in a penny over expectations, prices zoomed higher. Even when earnings didn't meet expectations, investors sloughed it off. Well, we are now in a period of irrational depression. It doesn't matter that company's earnings exceed expectations; the stock price still doesn't rise. And if a company makes the mistake of missing earnings by a small amount, it is punished by a sharp drop that far exceeds the miss.

It is not an easy time in today's marketplace. In contrast to a couple of years ago, today's investors are truly pioneers. It is risky business to buy even good solid companies when the chance of a stock price decline seems higher than a price increase. What has caused this bearish sentiment? A drop in consumer confidence coupled with softer economic activity could be one answer. In an interesting op-ed piece in the New York Times, economist Paul Krugman notes how the Bush administration is harping on the fact that economic activity is weak - in order to get Congress to enact the tax cut quickly. It is an interesting departure from previous administrations that usually downplay economic weakness and focus on positive factors - such as a low jobless rate. Ironically, the rhetoric of the current Bush administration is in sharp contrast to the previous Bush (senior) administration that refused to admit to economic weakness during his administration.

Flight to Quality
It was a mixed market in the Treasury arena during this holiday-shortened week. Until Friday, the long end of the curve (10-year and 30-year securities) was running on par with last week or showing slightly higher yields. Yields on the bills and 2-year note decreased over the course of the week - mostly as investors scouted for risk-free investments as stock prices tumbled. The flight to quality bid became even more important by Friday when yields fell across the curve, but once again more dramatically at the front end with much lower yields on the 3-month and 6-month securities as well as on the 2-year. The devaluation in the Turkish lira may have spilled over to other emerging markets such as Brazil. Also, the Turkish devaluation is weighing on the euro since European banks are exposed to this currency. (See International Perspectives for more on this issue). In any case, problems overseas do tend to translate into flight to quality - and U.S. Treasury securities.

In addition, the continuing unraveling of the stock market is re-igniting market talk about an inter-meeting rate cut by the Fed. Until this week, the data were coming in soft, but not weak enough to necessitate a rate cut before the next FOMC meeting on March 20. The downward momentum in the stock market could further dampen consumer confidence, something the Fed lists as its top concern.