Our outlook for 2009 inclides a base case, bear case, and bull case dependent upon the path of key measures of healing in the financial markets. For our base case (or bullishcase) to unfold in 2009 and result in gains for the financial markets, key barometers of financial stress must reflect further improvement. Those key measures we are most closely watching include the spreads of LIBOR (known as the TED spread), mortgage-backed bonds, high grade corporate bonds, and high yield corporate bonds to their Treasury equivalents. A related measure of credit default swaps, which can be defined as the premium charged for insurance against the default of an issuer. Also, the VIX, a measure of the expected degree of future volatility in the S&P 500, is a gauge of financial stress that merits observation.

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