A Twofer

Monetary Policy
FOMC left matters largely unchanged today. They acknowledged
an improving economic outlook, and expressed considerable
confidence inflation would remain very well contained. FOMC
normally raises rates on rising business strength, and does so
when my Business Strength Indicator (BSI) rises into the 130 - 140
range. This indicator -- capacity utilization % + ISM mfg. output --
now stands around 121.5. That is way up from the late '08 low
but remains under the monetary tightening threshold because of
a sharply depressed CU%. So, the Fed is continuing to count on
the large gap between capacity and production to anchor its view of
any inflation threat. Short term, they are counting on the CPI,
not seasonally adjusted, to flatten out or recede over the final 3
months of this year. This also implies the Fed thinks that oil and
gasoline prices are also set to flatten or drop on seasonal grounds.
The US has had inflation this year through Aug. ' 09, and this has
undermined the USD.

Cyclical Stocks -- Relative Strength
The relative strength of cyclical stocks is a good measure of economic
growth momentum potential. The MSCI index of cyclicals, $CYC,
divided by the SP 500, has historically peaked in a range of .65 - .75.
The cyclicals relative strength index is up in this historically high
ground now and shows some flattening after a very strong run-up.
Good time to monitor it closely. Chart here.