Lehman Demotions

Lehman Brothers(LEH) has demoted Chief Operating Officer Joseph Gregory and Chief Financial Officer Erin Callan.Ms.Callan's demotion has drawn mixed reactions.William Smith of William Smith Asset Management was bitterly critical of her.Everything Ms.Callan said for the past six months has proven to be false,he alleged.They recently sold their shares of Lehman because they lost confidence.They are not buying them back,either.On the other hand,Jon Najarian of Option Monster.com said he didn't think Ms.Callan was treated fairly.She seemed to him very honest and forthright.She really believed what she was saying.Some think Lehman Brothers cannot survive as an independent entity,now that the subprime crisis has changed the investment banking landscape.As for Ms.Callan,she has reportedly left the firm and is taking the summer off,only having served as CFO for six months.

El-Erian's Advice

Noted investment officer Mohamed El-Erian of Pimco has been giving advice for the current situation.The crisis is far from over,he feels.The reality is that it is morphing again.Now it's the real economy that's in play.The good news is,that's something that we know about.The Federal Reserve's dual objectives of fighting inflation and fostering growth will become increasingly inconsistent.He expects the Fed to stop lowering rates and see what's going on.Investors should be more cautious about areas connected to the consumer.As a long term proposition,you want to have inflation protection.Treasury inflation-protected securities are a way to do that.The Fed has made a huge effort,but it's too little too late.Look beyond the U.S..There are other areas of the world not as threatened.Focus on high quality assets.We tend to be comfortable with home investments,with what we're familiar with.Use diversified instruments to get foreign exposure,Mr.El-Erian counseled.The iShares Lehman Brothers TIPS fund(TIP) provides income from inflation-protected securities.

Red Flags From Factories

As soon as Christmas was over,investors sat down and reviewed economic reports.The first to be scrutinized was the U.S. Commerce Department's Durable Goods report.Orders for these costly items,which are expected to last at least three years,rose just .1%,when they were expected to rise 2.2%.The factories report was down .7%-the second straight monthly decline.Capital goods ex-aircraft fell .4%,while business capital spending dropped .9%.These figures all indicate that businesses are being more cautious in capital spending.They aren't investing as much in the equipment that helps them grow.Next to be reviewed were the Institute for Supply Management's Purchasing Managers surveys.The Manufacturing Index fell to 47.7 in December from 50.8 in November.A number below 50 indicates the sector is contracting.It was the worst reading in five years.New orders plunged to 45.7 from 51.9.Production fell to 47.3 from 51.9.These results show that even strong exports aren't working anymore.Factories are feeling the credit crunch and flattening profits due to higher costs,as domestic businesses cut back on investments or put them off.Indeed,according to Morgan Stanley(MS),global manufacturing fell .8 to51.4-the lowest level in more than four years.Manufacturing was down in Canada,the U.K. and the Euro Zone.Finally,the busy investors pored over the U.S. employment report that was released last Friday.Unemployment rose to 5% in December from 4.7% in November-the steepest increase since the recession of 2001.An uptick of that magnitude is characteristic of recessions.New jobs created totaled a mere 18,000-the least since 2003.Small wonder that the investors saw red flags on the factories,or that many of them looked to bond funds such as Vanguard's Total Bond(BND) and iShares Lehman Brothers TIPS fund(TIP),or the TIAA-Cref Instit MMF/Retail,which offered the highest 12-month yield for a taxable money market fund in 2007,at 5.19%.

Fed Moves May Not Hold

Many Wall Street thinkers continue to be troubled by financial conditions,in spite of recent attempts by the Federal Reserve to calm the markets.The credit problems are so complex and widespread,that recession seems more likely.Investors should contemplate the possibility of an extended bear market.As Brian Wesburg of First Trust Advisors sees it,the Federal Reserve actions do not resolve the long term policy issues of housing,housing finance,and the debt tied to it.Housing is 10% of the economy,yet with the leverage attached to it,it is 50-60% more significant.The credit issue will not go away overnight.We have seen early week rallies followed by sell-offs.Lyle Gramley of the Stanford Washington Research Group notes that the mortgage and mortgage securities markets have seized up,increasing the odds of a recession to 50-50.Richard Bove of Punk Ziegel sees serious systemic problems that will not go away.The bad loans are still out there and must be repaid.The deal market won't soar again,and loans won't be paid off.To Liz Ann Sonders of Charles Schwab,the credit market's seizing up calls economic growth into question.The economy is sound right now,but recessions usually start while rosy numbers are posted,as these figures are lagging indicators.The iShares Lehman Brothers treasury funds,such as SHY,TIP and TLT,are attractive to many of those who are seeking higher ground.