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75 Basis Point Federal Reserve Rate Cut to 3.50%

Investment Policy Committee Comments on the “Inter- Meeting” Fed Cut:

The Federal Reserve Board moved boldly this morning to appease global markets, cutting the Federal Funds rate by 75 basis points, to 3.50 percent. The Fed’s statement cited the “weakening of the economic outlook and the increasing downside risks to growth” as the chief motivation for their decision. Although we do not disagree with this, the real motivation behind the move is the recent and sudden deterioration in the financial markets. The result has seen a financial panic and if left untreated it will drag down the global economy.

In addition the Committee also moved to an explicit easing bias stating that “appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments and will act in a timely manner as needed to address those risks." We view the statement as a precursor to another cut on January 30th.

Since 1998, every inter-meeting rate cut has been matched by a similarly sized rate cut at the ensuing meeting. However, given the close proximity to the meeting and the fact that the move was larger than what the markets had been discounting, it is unlikely the Fed will move by another 75 bps next week. Instead, we believe the Fed will cut rates by 50 bps next week lowering the fed funds rate to 3.0%.

The panic has been rippling through the markets since the New Year holiday making 2008 the worst start to a trading year since the major markets began keeping records in 1936. We feel the increase in risk aversion is likely to continue until there is greater clarity regarding write-downs in the financial sector and the depth of economic slowdown in the United States. Consequently, riskier asset classes may experience further downside. As a result, many pundits claim the chances of a recession outweigh those of continued growth. A CNBC survey of almost 40 of the top U.S. money managers, investment strategists and professional economists revealed that more than 54% now feel the US will enter a recession.

At LOM we feel that although market sentiment has deteriorated, the economic data continues to point to an orderly slowdown in growth and a general recession should be avoided. Being said, we feel that U.S. growth under 1% (year over year) will have an adverse effect on global growth causing a systemic global slowdown.

While the markets debate the recessionary possibilities, investors are left worrying about their individual portfolios and what steps they can take to limit their risks. At LOM we continue to recommend a balanced portfolio, with investments in multiple sectors including stocks, bonds, commodities as well as hedge funds.

In addition we feel it would be prudent for individual investors to invest in funds. Among other things, investment in proven funds and fund managers will provide greater diversification as well as give the investor the chance to benefit from the experts’ market knowledge regardless of the financial conditions. Lastly, investment in funds helps take away the psychological component of a financial decision. Many individual investors tend to hold onto stocks too long when the decision was made personally; while fund managers must abide by strict guidelines when buying, selling and holding securities which consequently prevents emotional attachment.

These recommendations are targets and do not represent specific trade ideas. Not suitable for all investors. For further information call LOM Asset Management Limited or your local Relationship Manager.