After the latest round of news and economic data, we wanted to share our outlook on the market and discuss two stocks that we are adding to our watch list in the Stocks Under $10 model portfolio.

We cover stocks that are trading below $10 a share for TheStreet.com. We released much of this article yesterday to our subscribers of Stocks Under $10. (

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for a free trial to receive all of our alerts.) As anyone who covers the market, we are always watching the economic data and the signals that they represent.

Last week, we saw many market pundits change their tone and become optimistic when stocks rose in the face of negative economic data. Some even suggested that the credit crisis may have hit bottom as homebuilders, retailers and financials all trended higher over the past month. As noted in past Weekly Summaries, which subscribers to Stocks Under $10 receive every Friday, we have been adamant in our opinion that this was certainly not the case.

This week,

American International Group

(AIG) - Get Report

,

Fremont General

(FMT)

and

Thornburg Mortgage

(TMA)

confirmed our thesis and became the latest victims of the credit meltdown. Also, we continue to see analysts lowering their estimates on the major financials not only for the current quarter, but next quarter as well.

With the media pounding these risks into everyone's heads, it's not surprising to see this selloff in the markets. The headlines suggest that if the current short-term interest rate cuts are not stimulating the economy, then it doesn't make sense to continue easing rates -- considering the negative impact on inflation. On this point, investors and pundits need to look at the bigger picture and, most importantly, be patient.

In the previous easing cycle, which began in February 2001, the

Dow

was at 10,800 as the

Fed

lowered the fed funds rate from 6.5% to 5.5%. The Fed continued to ease into 2002, to 1.75%, and left rates steady for 11 straight months. However, as is the case today, the cuts did not appear to have a major impact as the Dow fell to 7100 in October 2002.

The Fed then eased to 1% and held rates steady for 12 consecutive months. These cuts led to a huge surge in the Dow back above the 10,000 level, to 10,400. Amazingly enough, the Fed still kept the fed funds rate at 1% -- which arguably had a hand in the housing bubble and the credit crisis we are facing today.

While it's easy to criticize the Fed for acting too late, it's important not to get caught up in the media hype. The last thing this market needs is the Fed making the same mistake of lowering rates too far based on short-term hysteria. These rate cuts will have a positive impact, but it will take time.

We'll see a much quicker turnaround in the market if the government stays on the sidelines and lets this crisis play out. Bailing out the banks and bond insurers that decided to take on extra risk or offer better terms for subprime borrowers who had no business buying a home will only prolong the process, leading to a needlessly protracted downturn.

The credit crisis continues to push stocks into the under $10 universe, which makes us quite happy. It also has kept us busy, as we try to provide the best under-$10 stocks that offer limited downside risk and above-average price appreciation potential. Here are two that we are adding to the Watch List of the Stocks Under $10 model portfolio:

The first is

R.H. Donnelley

(RHD)

, which has seen its shares plummet from $60 in October 2007 to a recent price of $6. Last week, the telephone directory publisher issued a bleak outlook for 2008 and warned of a challenging selling environment. Also, the company announced that it would not pay out a dividend and instead use the cash to pare debt.

Overall, R.H. Donnelley's outlook was terrible, and several analyst downgrades followed. But at first glance, it appears as if the stock is severely oversold, thus making it a good candidate for our Watch List.

Next up is

Vasco Data Security

(VDSI)

. Most readers should be familiar with this software security company since it was a former model portfolio member. We closed out the stock at $19 a few months ago after recommending shares in the single digits. The stock has been hammered since, after two consecutive earnings misses.

Shares of Vasco are now trading at the $10 level after two recent analyst downgrades, but the company has a strong presence internationally and the pullback may be a buying opportunity. We are in our early stages of research on this name, and if a buying opportunity presents itself we will alert readers.

R.H. Donnelley and Vasco Data Security are on the watch list of TheStreet.com Stocks Under $10 model portfolio. Frank Curzio regularly writes about stocks that are priced below $10 a share, such as Level 3 (LVLT) , Motorola (MOT) and Unisys (UIS) - Get Report

.

In keeping with TSC's editorial policy, Frank Curzio doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Frank X. Curzio is a research analyst at TheStreet.com, where he works closely with Jim Cramer and writes

TheStreet.com Stocks Under $10

newsletter. He also hosts "The Real Story" -? a daily podcast on TheStreet.com on which he reviews the latest headlines and offers stock-picking advice. He is a regular guest on FoxBusiness News and previously was the editor of The FXC Newsletter and portfolio manager for Greentree Financial. He appreciates your feedback;

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