It will take many more months for the US housing market to stabilize and US financials to work off their bad debts, and there will be negative effects throughout the global economy.

Whatever you hear today, tomorrow and during the next several weeks, Monday’s and Tuesday’s market action in Asia and Europe made it clear that investors the world over have finally capitulated. Whether an indication of mounting fear or a necessary, final catch-up step, the US Federal Reserve’s emergency move to cut 75 basis points from its key lending benchmark, the federal funds rate, punctuated the market’s two-day statement with an exclamation point.

It also paved the way for what was probably the most uplifting, triple-digit down day ever. As overseas markets sold off overnight, the Dow Jones and S&P futures indicated calamitous Tuesday openings. Orders were waiting to be executed in global portfolios in spite of a Fed cut, regardless of stimulus package. The Dow Jones Industrial Average surrendered nearly 500 points off the open before stabilizing and rallying back more than 300 points.

The Fed could have let the market play out to allow for a necessary revaluation of assets and risk–a cleansing, if you will. Curing an economic problem that’s the child of easy money with more easy money does seem a little insane, and it may set the table for the next bubble (to inflate after the 2008 recession).

The Bank of Canada (BoC) was going to cut rates Tuesday morning. That decision was essentially made the last time the governors met in December, and the market priced in a 25-basis-point reduction.

The negative reaction to President Bush’s stimulus package announcement Friday and the global selloff Monday prompted calls for a 50-point cut, which only got louder after the Fed made its unscheduled 75-basis-point cut. But the BoC stuck to its plan, accounting for its hard inflation targets, and also left itself room to cut further in March.

Economic fundamentals are different up north; employment is strong, housing is stable (there was no “ownership society”-driven weakening of lending standards), and the world is still hungry for Canada’s natural resources. Though it slowed in the fourth quarter, the Canadian economy continues to operate above its production capacity. Companies and workers in some parts of the country are still benefiting from higher prices for Canadian commodities such as oil, metals and farm products.

A weaker US economic outlook will increase the pressure on Canadian exports, but domestic demand up north should remain strong. The BoC now projects weaker growth in 2008 than was anticipated in its October Monetary Policy Report. The BoC will release an updated Monetary Policy Report on Thursday.

The full text of the BoC’s rate-cut announcement is available here. 

Central bank injections have improved interbank liquidity, but trust in counterparties and collateral across the system is still shaky. The major question now is: Can a rate cut restore confidence?

Global growth is slowing; how much and for how long are questions the National Bureau of Economic Research (NBER) will answer, at least as far as the US is concerned, some months in the future. At this point in the game, from an investor’s perspective, the best-case scenario is that we’re in the midst of a recession, that a peak will soon be identified and that we’re probing for a trough.

According to the most recent statement on the matter from its Business Cycle Dating Committee, the NBER doesn’t define a recession in terms of two consecutive quarters of decline in real GDP. The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales.

Of the five indicators named, three are declining and one is flattening. Three of the five numbers peaked in September. Only one has grown appreciably in the past few months, but it’s now weakening.

Nonfarm payrolls have risen at an annual rate of 0.9 percent during the past three months, a pace that at least warns of recession.

Real incomes–the current resources available to consumers–peaked in September and have risen at an annual rate of 0.1 percent over the three months ending in November. Declines in home prices and stock prices in the past few months are probably reducing household wealth for the first time since 2002.

Industrial production, the broadest measurement of the health of the factory sector, was flat in December after peaking in July and September. Output fell at an annual rate of 0.9 percent in the fourth quarter, despite strong export growth.

Retail sales fell 0.4 percent in December in nominal terms before adjusting for the 0.3 percent rise in consumer prices. Nominal sales for wholesalers and manufacturers were very strong in November, before accounting for the 3.2 percent rise in wholesale inflation.

The government publishes its GDP figures on a quarterly basis only, with the first estimate for the fourth quarter to be released Jan. 30. Economists forecast annualized growth of about 1 percent.

If history is a useful guide, and we are in fact in a recession, a relief rally is on the horizon. But there’s more downside–perhaps as much as 10 to 15 percent–before a true turnaround materializes. According to past experience, the major indexes must suffer declines on the order of 20 to 25 percent to signal a trough.

Barry Ritholtz, CEO and director for equity research for Fusion IQ, discussed the mood of the market in a manner familiar to many at his blog, The Big Picture: stages of grief. At the time of the Jan. 7 post, Ritholtz suggested we were in the “bargaining” phase.

The last three days may be the beginning of stage four, depression, but that means acceptance is right around the corner. And that stage “is a great time to buy equities.”

There’s more tumbling ahead, but the process of finding a bottom has begun. Don’t be quick to jump into the bargain hunting; you’ll miss out on the short-term bounce around the corner, but you’ll avoid the return to Earth as this sucker plays out.

Stick with the solid distribution payers. Don’t average down.

Speaking Engagements

Join me and my colleagues Personal Finance Editor Neil George and Associate Editor Elliott Gue in the Sunshine Shine state for the World Money Show in Orlando Feb. 6-9, 2008, at the Gaylord Palms Resort. Reserve your spot today by calling 800-970-4355 and mentioning priority code 009859, or click here to register online. Be sure to tell them I sent you.

The Roundup

Gas/Propane

Eveready Income Fund (TSX: EIS-U, OTC: EISFF) will no longer pay a monthly cash distribution; the fund will instead pay a quarterly “in kind” distribution of its units worth the same amount as a way to save money and invest more in growing the business.

The “in-kind” distribution will come in the form of a quarterly distribution of 18 cents Canadian per unit. Both the old monthly distribution and the new quarterly distribution equal 72 cents Canadian per unit on an annualized basis.

“In kind” means unitholders will receive additional units instead of cash. The “in-kind” units will be issued at a price equal to the volume-weighted average price of all units traded on the Toronto Stock Exchange on the 10 trading days preceding the applicable record date.

The next distribution will be paid on or about April 15, 2008, to unitholders of record as of the close of business on March 31, 2008. Eveready Income Fund is a hold.

Business Trusts

Aeroplan Income Fund (TSX: AER-U, OTC: AOPIF) unit Loyalty Management Group (LMG) has boosted its stake in Rewards Management Middle East, operator of air miles programs in Qatar, United Arab Emirates and Bahrain, from 20 percent to 60 percent, paying CAD10.8 million. Aeroplan, which runs Air Canada’s frequent-flier program, bought LMG, which runs the Nectar loyalty program in Britain, for CAD717 million last year. Hold Aeroplan Income Fund.

Ag Growth Income Fund (TSX: AFN.UN, OTC: AGGRF) has acquired Indiana-based Applegate Steel, which manufactures livestock gates, panels, stock tanks and feeders, for USD3 million. Applegate has posted annual revenues of between USD9 million and USD12 million in recent years.

Ag Growth’s recent US expansion includes a vacant Union City, Ind., plant, which it bought vacant for USD850,000; Illinois-based Union Iron, a handling and conveyor equipment, for USD20.2 million; and South Dakota-based Hansen Manufacturing, maker of the Hi Roller grain conveyor product line, for USD18.5 million. Buy Ag Growth Income Fund up to USD34.

Clearwater Seafoods Income Fund (TSX: CLR-U, OTC: CWFOF) has suspended its distribution while it studies its options amid shrinking cash flow and a falling stock price. The shellfish harvester distributed 60 cents Canadian per unit in 2007, more than the company’s cash flow.

Clearwater was hurt by the strong Canadian dollar, problems with its clam fleet and weaker-than-expected sales. If it remains an income trust, distributions will be determined quarterly and paid in arrears for unitholders.

The company will continue to pay interest semiannually on its outstanding convertible debentures. Sell Clearwater Seafoods Income Fund.

Natural Resources Trusts

Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF) is assessing the cost of a fire that damaged one of its Prince George, British Columbia, mills. The fire at PG Pulp and Paper damaged the conveyer that delivers chips to the mill but not the pulping or paper-making equipment or the chip supply.

There were no serious injuries in the fire. Canfor Pulp Income Fund is a buy up to USD13.