We think Bernanke et al better soon stop talking about quantitative easing and embark on the program to buy coupons: The financial markets are becoming unglued and monetary policy appears to be, in a word, impotent. Since the funds rate was taken to near-0% on December 16th, the yield on the 10-year note has surged 50 basis points. Mortgage rates have come down an insignificant 40 basis points. New car loans rates have jumped 25 basis points. Rates on home equity lines of credit haven’t budged. Three-month Libor is back above 1.3% and has risen 8 bps in the past week. And the Dow has lost 2,400 points – since the Fed went to ZERO. We think it’s time for some dramatic action out of the Fed – not just to bring credit spreads in, which has been met with some but not a whole lot of success, but to take the whole yield curve lower and further ease debt service strains for the overall economy.

Home prices in real terms are also correcting to new lows

Home prices in real terms are correcting to new lows. If home prices correct to the lows of the last two bear markets in the mid-1970s and early 1990s, then the best that can be said is that we are 60% of the way through the price slide. Assuming that inflation remains benign, this would imply another 10-15% decline in residential real estate valuation before the bear market fully runs its course.

Is equity market cheap enough to start chipping away?

The equity market is definitely cheapening up but it is truly unclear as to whether it is cheap enough to start chipping away: Half of the S&P 500 now trade at less than a 15x multiple; and 192 are trading with a single-digit multiple (versus 37 at the end of 2007). Then again, maybe they deserve to, and these are based off of trailing earnings. Who is to say as the recession deepens that the “E” isn’t even lower this year (we believe operating earnings will be 16% lower in 2009)? Trying to apply the right multiple on the equity market at a time of an epic deleveraging process is a mug’s game at best, dangerous at worst. Stay defensive and income-oriented. We have seen far too many “heroes” become casualties this cycle.