Monetary Update

The Fed is widely expected to increase the FFR% tomorrow.
The cyclical fundamentals support an increase, with
the economy, capacity utilization, short term credit demand
and sensitive commodities prices all trending up. The Fed
remains about 75 basis points behind the curve suggested
by the underlying trend of the CPI (5.0% FFR implicit).

In the wake of the hurricanes and the resulting surge of
fuel prices, the Fed moved aggressively to liquify the system
through the holidays. Fed system credit surged by $43 bil.
or a sizable 5.4% over the final four months of '05 through
the new year.

As discussed in prior posts, such injections of liquidity can
be bullish for gold and bearish for the US dollar. Such was
the case this time as well. Note though, that the Fed has been
draining liquidity rapidly so far in 2006, already shrinking its
portfolio of Govs. and RPs by over $20 bil. This development
puts dollar fundamentals back on a firm positive footing and
leaves the gold bugs having to search around for another reason
to add to their piles.

All players will read the Fed's comments tomorrow with great interest.
Buttressed by knowledge of Fed liquidity injections, analysts and
pundits elected to put a very positive spin on the commentary
attending the 12/05 FFR% hike. With liquidity now being drained,
the appraisals of tomorrow's linguistic tealeaves may be more
sober.

Stock Market -- What Am I Smoking?

SP 500: 1267

Well, here I sit. Feeling like an old Wall Street tout.
The fundamental work I do implies 2006 will be an ok year
for the stock market, with the SP 500 closing out the
year around 1385 - 1405 for a gain in the range of 11 to
13%. I have also been fiddling around with business cycles
in terms of confidence, and this bit of experimental thinking
suggests 2006 will see the US at least with a sunnier
disposition.

The keys to what I suspect is an utterly mundane consensus
view are as follows: Moderate 7% topline sales growth, further
expansion of profit margins, increased share buybacks and an
inflation picture, which, while volatile, will wind up the year
at around 3.5% (CPI).

I am well aware of the of the four year cycle of important
bottoms in the market, and by my calculations -- based upon
SP 500 data going back through 1872 -- a typical or average
significant price low could come in the Jun / Jul interval
of this year. A number of well regarded chartists and
technicians are factoring in a substantial sell-off this
year with the Mar / Oct period common. May be, but my
reads of the fundamentals do not now support this view.

However, when I look at 2007, I see a rather negative picture
developing, with inflation pressure intensifying as the
economy closes in on effective capacity. In fact, I now
see 2007 as a down year for the market which could only be
rescued by a strong surge of capacity expansion to balance
off the growth of demand.

I also use a couple of models based on Federal Reserve Credit
and the Adjusted Monetary base. These models correctly forecast a
dull and minor advance in 2005, but have recently turned a little
rosier.

I use this little exercise as the basis for a game plan for the
year and then track the market and the key fundamentals against
it. I play close attention to the deviations in actual from
expected, because they are often the kernels of opportunity.

Katrina On The Installment Plan

Systems here have been down since the last post on Jan. 18. Following nearly 18
inches of rain in October in this area, we've had one 11" snow and several major rain storms, including a doozy this Wednesday with winds topping 70 mph. The 'net
cable connection went down with the power, McAfee slipped a disc and took out
operating system directives. So, we had to rebuild and reboot in the bargain.

This was the week I had expected the S&P500 to top out at 1310. It made 1296 just a short while back, but with Iran carefully kiting the oil price, the jitters set in.
That combined with tech earnings shortfalls certainly ended the March over 1300. The
more conservative guidance from the tech sector was also largely unanticipated.

It was a good run up from late October, with nice trades for all heads up players.
I plan to reconnoiter for a week or so since the short term play to the upside over
the last three months is certainly suspect as of today.

Stock Market -- Short Term Technical

SP 500: 1273

As discussed in a brief technical note on 12/12/05, I have been looking
for this market to pop further to the upside, with the SP 500 projected
to move up to 1310 by mid to latter January.

My view has been that the price momentum and breadth compression witnessed
from 6/05 through early October was rather unusual and that a breakout - be
it up or down - should be powerful and time compressed into a three month
frame. The market did break out of the tight period to the upside, with the
SP 500 moving quickly from 1178 0n 10/20 up to 1265 on 12/2. It then meandered
up to 1273 on 12/14, and then entered a well deserved back and fill period
until yesterday. In the two trading days of '06, we have seen a move from 1248
up to 1273.

For the coiled spring to pop fully, the SP 500, which has been bumping up
against well observed trend resistance in place since 3/04 on every technician's
chart, really needs to get a move on. Players seem to be involved in a game of
"Alphonse and Gaston" -- You go first; No, you go first, with many waiting
patiently for the other guys to run the market up decisively through resistance.

The clock is running on my gambit and if the market does not pop up strongly
over the next week or two, I will have to head back to the drawing board.