2006 Year End Rally: Is Perception and Reality the Same?

Scenario for rally in financial assets is as follows:
1. Pause in monetary tightening as indicted by the Fed Funds rate
2. Moderation of inflation as measured by PPI “Core Finished Goods and Core Intermediate”
3. Lower interest rates in the 2+ year maturity range. (Usually if the 2-Year TSY is below the Fed Funds rate, it is a precursor for lower rates.)

What is the evidential data for the above scenario being successful? Let's see. Number One is a reality. The "Fed" left the fed funds rate at 5.25% at its last meeting. Number Two is 50% reality. The PPI "Core Finished Goods" came in at 1.3% (August 2005 to July 2006). Source is the Federal Reserve Bank of St. Louis at the following URL: : http://research.stlouisfed.org/fred2/series/PPILFE?&cid=31. This is the good news, but, when one looks at PPI "Core Intermediate Goods," the news is not so good. Year-over-year the rate came in at 8.3%. Therefore, inflation is still in the pipeline. See the following link: http://research.stlouisfed.org/fred2/series/PPIITM?&cid=31. Number Three has not been completely resolved. Yes, the 2-Year TSY rate is less that the Fed Funds Rate; however, from a technical perspective, the 2-Year U.S. Teasury Yield Chart might be indicating that higher rates are ahead of us. See the chart, which is from StockCharts.com.

Now, what is your recommendation for the year-end rally?

St. Louis Fed U.S. Dollar or U.S. Dollar Index

Two thirds of the $USD Index is keyed off the Euro currencies. The $USD Index does not contain any relative currency weighting at all to key trading partners such as Mexico and many Asian counties (Korea, Thailand, Taiwan, Singapore, Hong Kong, etc.). The St. Louis Fed does calculate an alternative trade weighted dollar index that is much more representative of the true U.S. global trade. A declining $ is a “forward inflationary measure.”

Go to the following link and indicate what the chart is indicating about upcoming inflationary pressures? Link is as follows: http://research.stlouisfed.org/fred2/series/TWEXB?&cid=15.

Market Sites

Yahoo has a good financial site at http://finance.yahoo.com. In addition, CNN has a good money site at http://money.cnn.com. One of the best overall financial/news sites is Bloomberg, which is at http://www.bloomberg.com. Check out these sites.

Use Morningstar's site to learn about ETFs. The site is located at http://www.morningstar.com/Cover/ETF.html. Find an ETF that can be used as a Gold proxy.