Gold Update

Gold remains in a long term bull market. Chartwise,
I view the metal as extended by about $50.

Gold has been trending lower on my weekly chart since
the $730+ oz. blow-off top in May. One would have to
allow that the big thrust up since July, 2005 has not
yet been defeated. That would occur if gold fell below
$570. over the next several weeks.

The weekly gold macroeconomic indicator has been trending
down since mid-summer and is now just slightly above
the yearend 2005 level. Weakness primarily reflects the
drop in the oil price over this period coupled with a
further tightening of Federal Reserve bank credit.
Despite the slowing US economy, the basket of cyclically
sensitive materials prices I also include has held up
well. The macro indicator now suggests a price of $500 -
510. for gold, down slightly from the peak $520. seen
earlier in the year.

I guess gold is holding nearly $100 oz. above the base
$500 indicated by the model because gold players are
expecting that a softening economy will push the Fed to
begin accelerating liquidity growth reasonably soon. At
the worst, the Fed will probably add liquidity before
long if only to underwrite the forthcoming holiday season.
There is no shortage of gold bulls still looking for a
big pop in the metal from a geopolitical crisis involving
Iran's nuclear fuels program. But that scene is quiet
now.

October is often a weak month for gold on a seasonal basis
as it is for oil. The gold market could still respond
positively if the Fed picks October as the month to ease up
on liquidity suppression for a stretch. The primary dealers
through which the Fed works are also the main market makers
in currencies. A weakening dollar may well tip off the gold
traders when the Fed does loosen up.

I view the short term outlook for gold as a coin toss now.
If you have an interest in gold or are considering taking a
long position, compare your return projections against my
view that there is clear downside risk up to a $100 oz. if
the positives you perceive do not pan out in the weeks ahead.

Oil Market -- How Is Your Luck?

Oil price bulls are breathing easier this week. Crude
has held support around the $60 bl. level and has bounced
to the upside, buttressed by rumblings of concern by OPEC
and the newly fashionable idea that the US has finagled the
crude price down temporarily to support Republican re-election
chances in November. There is also talk that Iran's nuclear
plans will resurface soon as a hot item that may spark some
buying.

Interestingly, crude is just entering its weakest seasonal
period. Moreover, seen in a wider time frame, the outlook
for crude supply / demand is not favorable for the bulls
without incidents that might trigger panic buying, as inventories
remain very high. I would also have to say that I believe
there is better support in the low to mid $50's than at $60 bl.

But, oil is oversold and we cannot begrudge it more in the way
of a bounce. Over the next couple of weeks it could go to the
$67-68 area without violating the downtrend in place. As I
say, "How is your luck?".

Falling Knives -- Oil & Gas

Oil

The oil price has fallen sharply since the panicky
hedge buying ended in late June. the powerful and
dynamic uptrend in place since 2003 has been broken
decisively. Cover stocks are at or near multi year
highs and there is fresh supply coming onstream in
2007. However, capacity utilization at the wellhead
is still running high.

It is a new ball game, and players need to adjust
accordingly. There is substantial trend support now
in the low to mid $50s per bl. and if oil stays on
the weak side, that would be the next interesting area.
As often as not commodities make spike bottoms as
opposed to lengthy basing periods, so traders need to
be mindful that a sudden turn around to the plus side
could mark a low. Let the falling knife fall if you
want to come in long and think now whether you want a
base to look at or whether you are willing to play a
spike with a stop under it. Barring some major new
event, the fundamentals will be fuzzily negative
reflecting the cover stock overhang and the headwind
of a slow economy.

Nat. Gas

Gas has collapsed from the late 2005 high of $15. mcf.
It is down nearly 70% and has caught hedgies in its
volatile clutches. There is very long term trend support
and several year base support in a range of $4.00 - 5.00.
There is a seasonally strong month straight ahead. There
is still a storage overhang. Let the knife fall. Think
through whether a spike up is for you if there is no
flag waving base. Recognize a drop to $4.00 would not
surprise any seasoned trader. Recognize also that a
bounce up to $5.50 - 6.00 mcf. next month would still
have gas in a bear market.

Best of luck.

Monetary Policy

The Fed is widely expected to keep the Fed Funds rate
steady at 5.25% at tomorrow's FOMC meeting. Based on
traditional rate setting data, a conservative could
still make a case for a higher Fed Funds rate. Data
available through early September show industrial
activity and business loan demand at strong levels.
Moreover, unit labor costs have accelerated sharply
to 5% yr/yr. So, if the FOMC elects to stay in the
"pause" mode, they will be continuing to work off
their economic forecast.

Reflecting the sizable weakness in broad commodities
composites, my longer term inflation indicator -- a
twelve month % ROC measure -- is about to fall below
year earlier levels for the first time since 2001.
From this perspective, the Fed is on sounder footing.

Fed Bank Credit and the monetary base have been flat
since May '06, as the Fed has wrung out Greenspan's
last hurrah, when he let Fed Credit expand at a
rapid 5% rate over a short interval in late '05 -
early '06. However, with the economy having slowed,
BB must be careful to cushion it with a reasonable
expansion of the Fed's portfolio to meet the holiday
season.

Stock Market Diagnostic

With the moderation of inflation pressure underway, my
S&P 500 Market Tracker is accelerating to the upside.
By October, the Tracker could cross the 1400 mark on
the "500." The main reason is that the Tracker is
quickly translating more modest inflation into a higher
p/e ratio (the twelve month earnings estimate is running
a little below consensus). So the Tracker says the market
is adjusting to prospects for less inflation pressure
more slowly during this often nervous seasonal period.

The "500" is running modestly ahead of my monetary base
model. I interpret this to mean that investors are betting
on a benign monetary policy going forward. The monetary
base has been on the flat side since May, '06. Soon, the
base will be due for a seasonal expansion to accomodate the
holiday season, and the market appears to be anticipating
same.

My dividend discount model has been in a strong uptrend
for several years reflecting the excellent 10% growth of
the S&P 500's dividend. The model's value trails that of
the "500", because over the long run, it seems too risky
to posit a continuation of 10% dividend growth. However,
the market is not at enough of a permium to this model to
warrant much concern now.

The premium of the S&P 500's earnings / price yield has
narrowed further relative to the "risk free rate" (91-day
T-bill yield %), but not enough to trigger a warning.

Summary

Investors are counting on a continuation of good progress
for earnings and dividends through 2006, and are betting the
Fed will not take action which could damage the market.
Investors are also more cautious about the degree of
deceleration of inflation in the short run, which is
holding back the market.

Long term, investors are exhibiting no caution about the
prospects for earnings and dividend growth, but such
lack of caution is not yet overdone.

Economic Comment

As expected, the US economy continues to show signs it
will slow further. Measured yr/yr, the $ value of
production continues to rise faster than does consumer
spending. Inventory accumulation although still moderate
is accelerating. This all suggests further moderation of
production, a headwind for materials prices and a
deceleration of profits growth. The latter should be more
pronounced in Q4 '06, as last year's Q3 results were
hurt by Katrina and Rita.

The production side of the economy has been growing faster
than has the broad measure of liquidity (my M-3 proxy). This
liquidity deficit has constrained the stock market. Over
the next several months, the real economy may well require
less liquidity, leaving a positive residual for the stock
market. This does not assure a stronger market, but it would
certainly not hurt.

The yr/yr% measure of the CPI has dropped through its twelve
month moving average, confirming a moderation of inflation.
Moreover, the sharp decline of fuels and some key materials
prices so far this month reinforces the idea.

Stock Market -- The Seasonal Nasty Is Here

Investorus Nervousa is at hand. The symptoms can last into
early October. This is one of the more delicate times of the
year, so we'll see how the current rally holds up against
the usual case of the September Willies.

9/11 -- Remembrance After All

It is the pensiveness and forbearance of people in the
greater New York area that you most notice on 9/11 days.
We go about our business, but we know there are thousands
of people in our midst who are brimming with grief. We
do not know who as we mix with all the strangers around us.
We give everyone a wide berth. There is silence on this day
even with everyone at work, the kids in school, all the
stores open. And even if we are free of immediate loss, we
think back to that shimmering late summer morning five
years past. We have moved on, but the shock has not worn off;
each anniversary brings it back along with the sadness and
for most, the deep anger.

Going forward, it is that anger that most concerns me. It is
very powerful in us, but subtle. Perhaps it was exploited by
GWB to move the country to attack Iraq. I do not know. Ask him.
What I do know, as I read about how foreigners have lost their
regard for us and how we are seen as the primary danger in the
world, is that they too sense the anger. But, they underestimate
it, for they have seen only the wrath of an insouciant, spoiled
dilletante who inhabits our White House. They have not seen the
America I know lash out in earnest.

So on this day of quiet remembrance, it my hope that time will
pass peacefully enough to allow the fury within to dissipate and
that our enemies will not underestimate us......

Oil Comment

The oil market is trading well down from the $70-72bl
needed to sustain the powerful uptrend underway since 2003.
As discussed prior, this is a weak seasonal period for oil,
but the dip is a reminder of the speculative arc of pricing
over this period, as players anticipated hurricanes and
varied geopolitical difficulties seen as bullish for oil.
We may get the storms, both in the Gulf and with Hurricane
Khameini, but take this little dip as a reminder that with
oil cover stocks at multi year highs, processors will
crush the market if they cut back further on disaster hedge
buying.

The weekly chart has turned bearish, taking out support running
back into 2005. Click.

The monthly chart I have attached needs some compression to show
perfectly how oil has just come off a parabolic up extending back
to the late 1990s when it was a mere $10 bl. This chart also suggests
that oil needs a natural or geopolitical disaster to return to
that powerful uptrend. Click.

Stock Market -- Seasonal & Technicals

Seasonal

Historically, the period that runs roughly from post-Labor
Day through the end of October is one of stock market
vulnerability. Knowledgeable market players know this all
too well. It is an edgy time when strategists can even
pressure themselves to look for negatives or to overemphasize
minor ones. In this way, they look good if the seasonals
hold to form. In a like manner, many investors and traders
tend to adopt a more critical or stand-offish attitude. To
boot, there are players out there who think the well respected
four year cycle low, "due" in 2006, has not played out yet.
Occasionally, the seasonal lore has weighed heavily enough
to create a self-fullfilling prophecy.

Technicals

The technical view as I see it is not at all so bleak and is
out of synch with the seasonal view. I have to affirm that
the market is mildly overbought short term on price level,
and moderately overbought based on my A/D oscillator. But,
these readings are not at all ominous. As I read the tea leaves,
the market is in an uptrend that can last into 12/06
reflecting a positive turnaround underway in key internal supply/
demand factors coupled with an uptick in my longer term
momentum measure. I see the SP500 eclipsing the 1326 interim
peak established in May and eventually moving up to challenge
trend resistance of 1350 - 1375 later in the year. I also
suspect that as the rally matures, there will be a strong
albeit temporary rotation back into the small and mid cap
groups.

This piece can serve as a technical companion to last week's
"Out Of Synch" post (8/30).