PayPal money market fund yield holds steady at 5.03% as of 12/23/2006

Here are some recent money market mutual fund yields as of Saturday, December 23, 2006:

• iMoneyNet average taxable money market fund 7-day yield remains at 4.74%
• PayPal Money Market Fund 7-day yield remains at 5.03%
• ShareBuilder money market fund (BDMXX) 7-day yield rose from 4.46% to 4.47%
• Fidelity Money Market Fund (SPRXX) 7-day rose from 5.00% to 5.02% ($25,000 minimum)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day remains at 4.98%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield remains at 4.46%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield rose from 3.13% to 3.32% or tax equivalent yield of 5.11% (up from 4.82%) for the 35% marginal tax bracket and 4.61% (up from 4.35%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield rose from 3.08% to 3.26% or tax equivalent yield of 5.03% (up from 4.74%) for the 35% marginal tax bracket and 4.54% (up from 4.28%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate fell from 4.84% to 4.82%
• 13-week (3-month) T-bill investment rate rose from 4.93% to 4.95%
• 26-week (6-month) T-bill investment rate rose from 5.06% to 5.08%
• Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 4.52%, with a fixed rate of 1.40% and a semiannual inflation rate of 1.55% (updated November 1, 2006, next semiannual update on May 1, 2007)
• Charles Schwab 3-month CD APY remains at 5.09%
• Charles Schwab 6-month CD APY remains at 5.11%
• Charles Schwab 1-year CD APY remains at 5.05%

Note: APY yield is worth somewhat less than the same 7-day yield. See my discussion and table for Comparing 7-day yield and APY.

PayPal continues to be a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking account or even your brokerage checking account for easy access. Right now I am using PayPal as a savings account, putting a little more money in whenever I get a chance and feel that my budget has some "spare change." The PayPal 7-day yield of 5.03% is equivalent to a bank APY of 5.15%.

4-week T-bills continue to not be attractive for cash that you won't need for a month, since the new issue continues to yield significantly less than PayPal and Fidelity Cash Reserves. But, this rate fluctuates significantly from week to week. The rate is locked in for four weeks once you buy the T-bill at the weekly auction, but you can't predict what rate you will get at the next auction since it is based on supply and demand. Simply letting the T-bills automatically roll every four weeks will average out a lot of this volatility.

Check Bankrate.com for the availability of high-rate CDs (5.00% APY to 5.46% APY for 6-month). Alas, there are frequently quite a few caveats, strings, restrictions, requirements, "introductory specials", and other gotchas, so read the fine print carefully. CDs work great for some people, but horribly for others. I have no CDs since I do not have any free cash that I can afford to lock up with restrictions. But, that said, I am considering putting at least a little free cash in short-term CDs (three-month, six-month, or maybe even one-year), around the middle of 2007, especially if the Fed raises interest rates by a quarter-point in the spring.

Please note the disclaimer on Fidelity's web site for mutual funds:

Past performance is no guarantee of future results. Yield will vary.

As always, please note that cash placed in money market mutual funds is subject to the disclaimer that:

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

In practice, that is not a problem at all, but it does incline me to spread my money around a bit.

T-bills and the cash in your bank checking and savings accounts or bank CDs are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC. Please realize that you may not get your full principle back if you attempt to cash out early for Treasury securities since you'll get the price on the open market, which is not guaranteed by the U.S. Treasury. You are only assured of getting your full principle if your Treasury security is held until maturity. (or Treasury "calls" the security or issues an offer to repurchase).

-- Jack Krupansky

ECRI Weekly Leading Index indicator down moderately but growth rate rises and continues to point to a relatively healthy economy ahead

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell moderately (-0.71% vs. +1.33% last week) after rising sharply for two consecutive weeks, but the six-month smoothed growth rate rose moderately again (from +2.8% to +3.4%), to its highest level since mid-February, and is a modest distance above the flat line, suggesting that the economy might be picking up a little steam. The smoothed growth rate has been positive for 7 consecutive weeks. We haven't finished the soft landing yet, but we are in great shape, despite the weakness in the housing sector and the feverish hand-wringing of the pundits.

The WLI is now 19 weeks past its summer low and the six-month smoothed growth rate is now 17 weeks past its summer low. Although not signalling an outright boom, this is a fairly dramatic recovery from the somewhat dark times of August.

A WLI growth rate of zero (0.0) would indicate an economy that is running at a steady growth rate, neither accelerating nor decelerating. A WLI fluctuating in a range from +1.5% to -1.5% would seem to be a relatively stable "Goldilocks" economy. We're actually doing a little better than that now.

Although the WLI smoothed growth rate remains relatively modest and will likely remain so for the next few months, it isn't showing any signs of the kind of persistent and growing weakness (values more negative than -1.5% over a period of time) that would be seen in an economy that was slowing on its way into recession, but does look a lot like an economy moderating on its way to a relatively stable growth rate.

If I were looking at this one indicator alone, I would say that the Fed is succeeding at its goal of moderating the economy to a sustainable growth rate. Goldilocks might not be completely happy with the current state of the economy, but she should be. Ditto for NYU Professor Nouriel Roubini. Sorry Nouriel, but Professor Ben Bernanke has it right this time. Anyone expecting a recession or very weak economy next year will be disappointed.

I will offer the caveat that the Weekly Leading Index and its smoothed growth rate do not tell us how strong the economy will be six or nine months from now, but do tell us whether whether weakness or strength is more likely a few months from now. It works best to tell us whether a "gathering storm" might be lurking just around the corner, but presently indicates "clearing weather" for the next few months.

-- Jack Krupansky

Fed to hold a steady course at 5.25% until at least 2008

For now, my overall assessment of Fed monetary policy remains unchanged:

My view is that the Fed will keep the Fed funds target rate paused at 5.25% for all of 2007.

There will not be a recession next year, nor even enough of a growth slump to trigger a Fed rate cut.

I tentatively say "for now" because I am half-convinced that the Fed may in fact feel the need to make another hike in the spring (March or May) to 5.50%. To my way of thinking, it all depends on what happens with energy commodities. Prices of oil and gasoline futures are still quite elevated, albeit off their Summer peaks, and this constitutes an ongoing source of inflationary pressure that continues to propagate throughout the economy. If prices of energy commodities resume their decline, the Fed will be able to remain paused for all of 2007. But if energy commodities prices do not continue to fall, the Fed may have little choice but to hike to 5.50% in March or May. Another 20% decline is needed by March. If we don't see crude oil below $50 and retail unleaded gasoline under $2.00 by April, expect a Fed hike to 5.50% at the May FOMC meeting. Based on economic fundamentals, we should see the prices of energy commodities come back down to Earth, but unfortunately there is simply so much free cash sloshing around seeking "some action" and a lot of speculators are simply unable to resist the urge to try to run commodities prices back up since "it worked before." My view is that there is a fairly good chance that prices of energy commodities will recede in the coming months, but it may be too soon to bet too heavily against the speculators. My finger is on the trigger, but for now I'll retain my belief that the Fed will remain paused for at least another year.

Note: I am not suggesting that the Fed will "target" commodities prices such as crude oil and gasoline, but that the Fed will be noticing the degree to which elevated commodities prices are influencing the rest of the economy and pushing up even core prices. We did have good news on the inflation front in the past couple of months, but that was primarily the result of the decline of crude oil and gasoline prices off the summer spike, but crude oil and gasoline prices have risen since November.

Although the moderation of the housing boom will indeed hold back the economy over the next couple of quarters, the Fed seems to agree with me that this is to be expected and not an indicator of a coming recession. A lot of people are desperately funneling money into bond funds in response to an expectation of well below-par economic growth, and this is depressing Treasury yeilds and causing an inverted yield curve, but this is ultimately indicating only below-par growth (e.g., 1% to 2.75% rather than 3+%) for the coming six months. Yes, there is a lot of anxiety, but anxiety itself is not a reliable indicator of a particular outcome.

Please not that current Fed policy at 5.25%, or even a hike to 5.50%, is not restrictive, but within the neutral range which is neither accommodative nor restrictive. All "normal" economic activities can be easily financed with Fed policy at this level. This does eliminate a lot of excessive speculative behavior, but won't crimp the average business or consumer.

As of Friday, Fed funds futures contracts indicate the following probabilities for changes in the Fed funds target rate at upcoming FOMC meetings:

• January: 4% chance of a cut
• March: 12% chance of a cut
• May: 42% chance of a cut
• June: 74% chance of a cut
• August: 100% chance of a cut and a 28% chance of a second cut
• December 2007: 100% chance of two cuts and 10% chance of a third cut
• January 2008: 100% chance of two cuts and 12% chance of a third cut

I personally don't concur with these odds, but that is how a lot of people are actually "betting." I would simply note that such betting can change on a moment's notice as economic and financial data, not to mention commentary and sentiment, unfolds and evolves. Like it or not, the economy proceeds more through Darwinian evolution than "intelligent design." The Fed (and Wall Street) can influence the evolution, of the economy, but not control it as if it were a clockwork machine. Predicting the precise or even general impact of any Fed action or inaction is quite literally a fool's errand. Further, the "betting" on any last Fed move is usually more of an insurance hedge than an outright bet, more of a "just in case I'm wrong" kind of "bet". Finally, studies have shown that Fed funds futures are not a very reliable indicator more than 45 days into the future.

What the Fed funds futures market tells us clearly is that the Fed is most likely to leave rates unchanged at least through May. The market is predicting a cut at the June FOMC meeting, but that meeting is too far in the future for the market to give a reliable forecast.

I also note that as of the November 22, 2006 edition of the UBS As We See It - Market Viewpoint report, UBS Wealth Management Research was forecasting a Fed funds rate of 4.00% by the end of 2007. That would be five quarter-point cuts. They are also forecasting 2% GDP growth for 2007. Obviously I do not concur, although I welcome their alternative perspective.

The bottom line here is that the Fed won't move through January, and any speculation about Fed moves further down the road are simply wild guesses based on contrived stories about a hypothetical future economy that happens to have a mind of its own.

Why are so many smart people so confused about the future? It is simply the fact that the conservative thing for them to do is to assume that economic events such as housing booms always play out in the same pattern every single time. For a bureaucrat, that is always the safe approach. Alas, every economic episode has its own idiosyncratic pattern and the real issue is how to forecast the interactions between the many sectors and regions of the economy, and that is a really hard problem that is absolutely not amenable to the cookie-cutter application of historical patterns.

The current "herd mentality" on Wall Street is basically sending so many speculators and even investors off on a truly wild goose chase, after which Wall Street will quietly acknowledge its error ("the data changed in an unexpected manner") and then chase those same speculators and investors back in the opposite direction, making sure to collect transaction fees and spreads on both legs of the roundtrip "chase."

We saw a fair amount of that "chase reversal" again this past week.

Note that the Weekly Leading Index of the Economic Cycle Research Institute is telling us that the economy will be holding together nicely for at least the next few months.

-- Jack Krupansky

Maybe the euro isn't really staging a true breakout

Although there was a huge amount of chattering about the renewed strength of the euro as it moved from about $1.28 to $1.33, now most of the excitement has completely died off.

It is still very unclear whether the move was a one-time adjustment, speculative activity driven by strictly technical considerations, or maybe even the start of a true upwards move. We may have to wait a month or two to get a solid answer. The problem is that there is so much excess liquidity in the world right now that even a moderate shift can cause significant asset and foreign exchange spikes. Worse, even a very modest shift can snowball into a larger spike due to a piling-on of speculative capital.

The euro has now pulled back from the recent peak and may fall back into its old trading range unless there is a significant ongoing shift of capital from U.S. assets to Euro assets. But, with some renewed belief that the U.S. economy is not really falling off a cliff and that the Fed might actually raise rates rather than lower them, the U.S. could in fact gain from assets seeking higher returns, even if there has been a short-term shift to Euro assets.

My original suspicion remains that that the exodus from dollars was driven in large part by an expectation that the Fed would be cutting interest rates within a few months. But as that rate-cutting expectation continues to evaporate in the face of better-than-expected economic data, money flows could reverse at least somewhat and flow back into dollars.

-- Jack Krupansky

Retail gasoline price mini-spike may or may not have peaked

Gasoline futures rose significantly this past week. This may simply have been due to the chattering about OPEC cutting production quotas and the rise of crude oil futures, or there may actually be some renewed strength in demand at the retail level. Speculators may be betting on extra travel for pre-holiday shopping. If all that shopping is occurring, that is a bullish sign for the economy.

The retail price of gasoline may or may not continue its recent mini-spike. We could see prices rise a bit more, but there is a reasonable chance that prices will soon begin to decline again.

-- Jack Krupansky

Crude oil prices remain in a trading range as of 12/17/2006

Although crude oil futures moved up moderately this past week due to talk of OPEC cutting production quotas, they remain within a fairly narrow trading range, hovering within a couple of bucks on either side of $60 and within the $55 to $65 range, continuing to reflect market uncertainty as to whether the next major move is to the upside or the downside. This trading range scenario is not inconsistent with the possibility that crude oil may rally moderately at some point in the not too distant future, even as there is also the possibility of a further withdrawal of speculative capital from the commodities markets causing a significant decline in prices.

As far as OPEC and production quotas, although I expect there will be some cut in production since there really is a glut in crude oil inventories, OPEC members are notorious for cheating on their self-imposed quotas. The news of quota cuts causes traders and speculators to bid up prices in the near term, but as the days and weeks tick by, those speculative positions will evaporate as the returns become more anemic or turn into outright losses. Also, some of these so-called production cuts will simply be the result of anticipated shutdowns for maintenance and development.

At Friday's closing price of $63.43 (vs. $62.03 a week ago), January crude oil futures are poised to either begin backtracking downwards in the trading range or to in fact stage a breakout. The former seems more likely, but the timing is of course unclear. Crude could move up a bit more before reversing. I would note that crude inventory levels are still quite high despite OPEC cutting their production quotas, so there is little fundamental reason for crude to move much higher.

Crude oil futures prices are in contango (rising as you go out in delivery date) through September 2008, so we could see crude tick up each month for quite some time as each front month expires and the next month becomes the front month. For example, if there were absolutely no change in prices, crude would jump from $63.43 to $64.09 on December 20, 2006 as trading of the January contract ceases on December 19 and the February 2007 contract becomes the front month for trading. That's a $0.66 jump. Similarly, there is a $0.80 jump from February to March futures ($64.89). And so on up to a peak of $69.06 in September 2008. Then, futures go into backwardation (declining prices) all the way out to December 2012 ($66.69). All of this is subject to dramatic change, even on a daily basis.

In short, I am prepared for the possibility of a modest to moderate rise in oil prices in the coming months, even as I feel that a decline is likely at some stage, especially if economic growth continues to be modest and the commodities markets continue to hemmorage capital as frantic speculators grow increasingly weary of anemic or even negative returns.

I would also note that since gasoline prices remain at a fairly high level, the vast majority of car and truck buyers will be very keen to raise their personal energy efficiency. This will be a slow evolution, but the per-capita consumption of energy (at least in the developed countries) is likely to trend down for the forseeable future.

I would also note that the mentality of short-term commodities traders is compatible with the people who are loudly proclaiming that the economy is falling off a cliff due to the so-called "housing recession" and that a full-blown recession is coming in 2007. I don't concur with that outlook, but nonetheless many people do and that could lead to additional downwards pressure on commodities futures. Not seeing such a retreat in commodities lately, I can only conclude that the economy is in fact significantly stronger than the pundits suggest.

Overall, I expect crude oil prices to remain in a relatively narrow trading range of $55 to $65 for the next few months, until we finally see a wholesale exit of the commodities speculators or some renewed economic strength.

-- Jack Krupansky

Actual hotel budget final version 2.0 for trip to New York City at the end of the year

It took several weeks, but I now have my updated and final budget for my hotel nights for my two-week trip to New York City at the end of the year. I used Priceline for all 14 nights, using their Name Your Own Price bidding feature. I actually came in well under budget. Version 1.0 of my hotel budget came to $1,880 for 14 nights or an average of $134.29 per night. That seemed very reasonable for Manhattan My final version 2.0 actual hotel budget came to $1,628 or an average of $116.29 per night, for a total savings of $252 from the original budget.

I didn't include taxes and Priceline fees in the original budget. The grand total for my final, actual hotel budget bill comes to $1,938.76 or $138.48 per night. That is not bad at all for Manhattan, including New Year's Eve.

My air fare was $450.60, so my overall travel expense is $2,389.36. Plus a modest amount for ground transportation. Plus meal expense beyond my usual daily mail expense.

I'll take the Casino bus between Manhattan and Atlantic City, which charges a reasonable fare for the bus trip and then the casino gives you cash back so the trip is really cheap, asuming you don't gamble the cash away.

I will be staying at six different hotels, including the two nights in Atlantic City.

My hotel stay itinerary works out as follows:

1. Nights 1-4: Wednesday, December 20,2006 through Saturday, December 23, 2006 (4 nights) at the Holiday Inn Express Manhattan - Chelsea on West 29th Street at $80 per night.
2. Nights 5-6: Sunday, December 24,2006 and Monday, December 25, 2006 (2 nights) at the Murray Hill East Suite Hotel on East 39th Street at $80 per night.
3. Nights 7-8: Tuesday, December 26,2006 and Wednesday, December 27, 2006 (2 nights) at the Best Western Envoy Inn in Atlantic City at St. James Place and Pacific Avenue at $49 per night.
4. Nights 9-10: Thursday, December 28,2006 and Friday, December 29, 2006 (2 nights) at The Roosevelt Hotel at 45th Street and Madison Avenue near Grand Central Terminal at $180 per night.
5. Nights 11-12: Saturday, December 30,2006 and Sunday, December 31, 2006 (2 nights) at Holiday Inn Wall Street District near Gold Street and Maiden Lane at $220 per night.
6. Nights 13-14: Monday, January 1, 2007 and Tuesday, January 2, 2007 (2 nights) at Grand Hyatt on 42nd Street near Park Avenue and Grand Central Terminal at $125 per night.

It took me a total of 91 bids in 14 sessions over a 28 days to arrange these nights. That is a lot of effort, but this was a complicated trip since the demand and pricing for hotels varies so greatly from almost day to day during the holiday season and I did want to stay within a tight budget for an expensive city. In the old days, I would simply pay $199 per night and be done with it. I haven't arranged this itinerary before. Next year, I'll have a much more clear sense of the hotel market in Manhattan during the holidays and be able to bid more quickly, although I might not get better results.

Now I need to find out what each hotel offers for Internet access.

And I really need to work out a meal budget. Some nights I'll have to eat pizza or fast food so that other nights I can spend $60 to $85 on dinner alone.

Note: I didn't use the Name Your Own Price feature of Priceline for the two $49 nights in Atlantic City since I tried a $45 bid which was rejected and $49 is so cheap that saving such a small amount is not worth any significant effort.

Note: Some people (many if not most people) mistakenly refer to Grand Central Terminal as Grand Central Station. There actually is a Grand Central Station near Grand Central Terminal, but it is a post office.

-- Jack Krupansky

PayPal money market fund yield holds steady at 5.03% as of 12/16/2006

Here are some recent money market mutual fund yields as of Saturday, December 16, 2006:

• iMoneyNet average taxable money market fund 7-day yield remains at 4.74%
• PayPal Money Market Fund 7-day yield remains at 5.03%
• ShareBuilder money market fund (BDMXX) 7-day yield remains at 4.46%
• Fidelity Money Market Fund (SPRXX) 7-day rose from 4.99% to 5.00% ($25,000 minimum)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day rose from 4.95% to 4.98%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield rose from 4.44% to 4.46%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield rose from 3.12% to 3.13% or tax equivalent yield of 4.82% (up from 4.80%) for the 35% marginal tax bracket and 4.35% (up from 4.33%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield remains at 3.08% or tax equivalent yield of 4.74% for the 35% marginal tax bracket and 4.28% for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate remains at 4.84%
• 13-week (3-month) T-bill investment rate fell from 5.00% to 4.93%
• 26-week (6-month) T-bill investment rate rose from 5.03% to 5.06%
• Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 4.52%, with a fixed rate of 1.40% and a semiannual inflation rate of 1.55% (updated November 1, 2006, next semiannual update on May 1, 2007)
• Charles Schwab 3-month CD APY remains at 5.09%
• Charles Schwab 6-month CD APY remains at 5.11%
• Charles Schwab 1-year CD APY rose from 5.00% to 5.05%

Note: APY yield is worth somewhat less than the same 7-day yield. See my discussion and table for Comparing 7-day yield and APY.

PayPal continues to be a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking account or even your brokerage checking account for easy access. Right now I am using PayPal as a savings account, putting a little more money in whenever I get a chance and feel that my budget has some "spare change." The PayPal 7-day yield of 5.03% is equivalent to a bank APY of 5.15%.

4-week T-bills are once again not attractive for cash that you won't need for a month, since the new issue is now yielding significantly less than PayPal and Fidelity Cash Reserves. But, this rate fluctuates significantly from week to week. The rate is locked in for four weeks once you buy the T-bill at the weekly auction, but you can't predict what rate you will get at the next auction since it is based on supply and demand. I personally am quite satisifed with the rate I got three weeks ago (5.25%) and relieved that I didn't get stuck with "the bag" these past two weeks at a relatively skimpy 4.88%. My bills will get rolled over on 12/21, and I am not so optimistic that I'll get a decent rate. On the other hand, simply letting the T-bills automatically roll every four weeks will average out a lot of this volatility.

Check Bankrate.com for the availability of high-rate CDs (5.00% APY to 5.46% APY for 6-month). Alas, there are frequently quite a few caveats, strings, restrictions, requirements, "introductory specials", and other gotchas, so read the fine print carefully. CDs work great for some people, but horribly for others. I have no CDs since I do not have any free cash that I can afford to lock up with restrictions. But, that said, I am considering putting at least a little free cash in short-term CDs (three-month, six-month, or maybe even one-year), around the middle of 2007, especially if the Fed raises interest rates by a quarter-point in the spring.

Please note the disclaimer on Fidelity's web site for mutual funds:

Past performance is no guarantee of future results. Yield will vary.

As always, please note that cash placed in money market mutual funds is subject to the disclaimer that:

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

In practice, that is not a problem at all, but it does incline me to spread my money around a bit.

T-bills and the cash in your bank checking and savings accounts or bank CDs are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC. Please realize that you may not get your full principle back if you attempt to cash out early for Treasury securities since you'll get the price on the open market, which is not guaranteed by the U.S. Treasury. You are only assured of getting your full principle if your Treasury security is held until maturity. (or Treasury "calls" the security or issues an offer to repurchase).

-- Jack Krupansky

ECRI Weekly Leading Index indicator up sharply for a second week and continues to point to a relatively healthy economy ahead

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose sharply (+1.37% vs. +1.14% last week) and the six-month smoothed growth rate rose moderately (from +1.9% to +2.8%) and is now a modest distance above the flat line, suggesting that the economy might be picking up a little steam. This is the sixth consecutive positive reading for the smoothed growth rate in 20 weeks (June 21, 2006). We haven't finished the soft landing yet, but we are in great shape, despite the weakness in the housing sector and the feverish hand-wringing of the pundits.

The WLI is now 18 weeks past its summer low and the six-month smoothed growth rate is now 16 weeks past its summer low. Although not signalling an outright boom, this is a fairly dramatic recovery from the somewhat dark times of August.

A WLI growth rate of zero (0.0) would indicate an economy that is running at a steady growth rate, neither accelerating nor decelerating. A WLI fluctuating in a range from +1.5% to -1.5% would seem to be a relatively stable "Goldilocks" economy. We're actually doing a little better than that now.

Although the WLI smoothed growth rate remains relatively modest and will likely remain so for the next few months, it isn't showing any signs of the kind of persistent and growing weakness (values more negative than -1.5% over a period of time) that would be seen in an economy that was slowing on its way into recession, but does look a lot like an economy moderating on its way to a relatively stable growth rate.

If I were looking at this one indicator alone, I would say that the Fed is succeeding at its goal of moderating the economy to a sustainable growth rate. Goldilocks might not be completely happy with the current state of the economy, but she should be. Ditto for NYU Professor Nouriel Roubini. Sorry Nouriel, but Professor Ben Bernanke has it right this time. Anyone expecting a recession or very weak economy next year will be disappointed.

-- Jack Krupansky

Predictions for 2007

I usually don't waste my time doing detailed "predictions" for events that will happen in the coming year, but now that I see other people doing their predictions, I've decided to revisit the reasons why predictions should be considered as well as my old reasons for refraining from them. I haven't decided to do ahead and make predictions, but I am giving the concept serious consideration.

One angle on predictions is to simply identify your niche areas of expertise and simple express that expertise.

Another angle is to pick niche areas where you wish you had expertise and make some wild guesses, and then use the results to gauge your intuitive grasp of those niches.

Actually, I just remembered that I did in fact make some predictions about the stock market and economy back on January 3, 2006. I had intended to update those predictions at mid-year, but didn't since I became a full-time employee (not one of my predictions). I haven't checked any of those predictions, but it's a couple of weeks early anyway. I suppose at a minimum that I will update those 2006 predictions for 2007.

One other thing... it may actually be more fun and enlightening to simply list out questions that you wish you could answer for the coming year. If you have suggested answers, fine, but simply asking good questions can be enlightening if not entertaining in itself.

A few:

1. Will GM or Ford declare bankruptcy?
2. Will Microsoft finally gain significant search market share?
3. Will Sun be acquired?
4. Will the Web 2.0 bubble burst?
5. Will venture capital investment surge?
6. Will Robert Scoble jump to another company?
7. Will there be at least a 25% drawdown of U.S. forces in Iraq?
8. Will Iran continue to "slip the noose" that the Neoconservatives keep trying to skip over its neck?
9. Which tech startup will zoom up to be "the new Google"?
10. Will Apple finally begin to lose digital media player market share?
11. Will Zune be more than an "also ran" distant number two or three?
12. Will "global warming" become a bigger problem, or recede for at least the year?
13. Will the dollar fall below $1.45 to the euro?
14. Will the Fed cut interest rates, raise them, or keep them the same?
15. Will crude oil finally hit $100 per barrel?
16. Will speculators finally abandon commodities?
17. Will inflation fall back below 2%, rise above 3%, or remain in the 2% to 3% range?
18. Will GDP hit 3% in any quarter?
19. Will there be a recession?
20. Will there be a "mega" terrorist attack (more than 500 deaths in one attack)?
21. Will Saddam Hussein be executed in 2007?
22. Will the Democrats actually accomplish anything in 2007?
23. Will blogging be an even bigger hit or sprial into a decline?
24. What will the next big Web 2.0 technology look like?

-- Jack Krupansky

Predictions for 2007

I usually don't waste my time doing detailed "predictions" for events that will happen in the coming year, but now that I see other people doing their predictions, I've decided to revisit the reasons why predictions should be considered as well as my old reasons for refraining from them. I haven't decided to do ahead and make predictions, but I am giving the concept serious consideration.

One angle on predictions is to simply identify your niche areas of expertise and simple express that expertise.

Another angle is to pick niche areas where you wish you had expertise and make some wild guesses, and then use the results to gauge your intuitive grasp of those niches.

Actually, I just remembered that I did in fact make some predictions about the stock market and economy back on January 3, 2006. I had intended to update those predictions at mid-year, but didn't since I became a full-time employee (not one of my predictions). I haven't checked any of those predictions, but it's a couple of weeks early anyway. I suppose at a minimum that I will update those 2006 predictions for 2007.

One other thing... it may actually be more fun and enlightening to simply list out questions that you wish you could answer for the coming year. If you have suggested answers, fine, but simply asking good questions can be enlightening if not entertaining in itself.

A few:

1. Will GM or Ford declare bankruptcy?
2. Will Microsoft finally gain significant search market share?
3. Will Sun be acquired?
4. Will the Web 2.0 bubble burst?
5. Will venture capital investment surge?
6. Will Robert Scoble jump to another company?
7. Will there be at least a 25% drawdown of U.S. forces in Iraq?
8. Will Iran continue to "slip the noose" that the Neoconservatives keep trying to skip over its neck?
9. Which tech startup will zoom up to be "the new Google"?
10. Will Apple finally begin to lose digital media player market share?
11. Will Zune be more than an "also ran" distant number two or three?
12. Will "global warming" become a bigger problem, or recede for at least the year?
13. Will the dollar fall below $1.45 to the euro?
14. Will the Fed cut interest rates, raise them, or keep them the same?
15. Will crude oil finally hit $100 per barrel?
16. Will speculators finally abandon commodities?
17. Will inflation fall back below 2%, rise above 3%, or remain in the 2% to 3% range?
18. Will GDP hit 3% in any quarter?
19. Will there be a recession?
20. Will there be a "mega" terrorist attack (more than 500 deaths in one attack)?
21. Will Saddam Hussein be executed in 2007?
22. Will the Democrats actually accomplish anything in 2007?
23. Will blogging be an even bigger hit or sprial into a decline?
24. What will the next big Web 2.0 technology look like?

-- Jack Krupansky

Will distress in the sub-prime mortgage sector do great damage to the overall financial system?

Uber-cynic Prof. Nouriel Roubini has a blog post entitled "The Sub-Prime Lending and Borrowing Disaster..and the Broader Risks to the Financial System" in which he continues to argue that distress in sub-prime mortgage lending will soon lead to serious risks and distress in the financial system.

I am not convinced, nor persuaded by his "the sky is falling" arguments. So, in short, my answer to the headline question is simply: No.

I'm sure that some lenders will have significant difficulties or fail, but a larger-scale level of distress does not seem likely either now or in the near future. For one thing, as even Prof. Roubini's "evidence" shows, failing lenders are frequently either closed outright or sold at fire-sale prices. That reduces the overall risk or contagion from sub-prime lenders to the overall financial system.

Prof. Roubini "worries" that the GSEs (Government Sponsored Enterprises, Fannie Mae and Freddie Mac) are at great risk, but he grossly overstates that risk. He has a distinct penchant for referencing worst-case scenarios, but doesn't do a very good job of demonstrating how such scenarios could realistically occur, other than if everything experiences a worst case scenario. Unlike private-sector enterprises, the implicit government backing of Fannie Mae and Freddie Mac gives them the ability to exploit short-term market distress by borrowing at a discount and buying up precisely the distressed securities that weak-willed investors may be dumping.

Simple fact: Not all (100%) of sub-prime mortgages will fail. Even Prof. Roubini's own numbers suggest that defaults for sub-prime mortgages are quite modest in nature: "The problem is especially bad on mortgages originated with less-than-full documentation, which had a 60-day or more delinquency rate of 3.57%. The comparable delinquency rate on fully documented loans originated this year is 2.01%." At 3.57% or 5% or even 10% or even 20%, surely there is a market-clearing price at which Fannie Mae, Freddie Mac, or even investment banks and private investors such as Warren Buffett will find the remaining, more sound mortgages to be financially attractive. Prof. Roubini offers no clue that he understands the nature of a classic "fire sale" and the special ability of the GSEs to exploit such opportunities, if they should ever arise.

I'm not sure if he suffers simply from an inability to see reality and realistically judge risks, or if he has placed investment bets which he is seeking to enhance through the incitement of market volatility.

Simple fact: in a mere three weeks the year 2006 will be completely behind us, and as of even this late date there has been no significant sign of the dire consequences that Prof. Roubini "warned" would have occurred by now.

-- Jack Krupansky

I'm a degenerate consumer

Yes, it is true, I am a degenerate consumer. What does that mean? It simply means that I don't participate in many of the consumption activities characteristic of the "average" consumer.

• I don't watch television.
• I don't have a radio.
• I don't listen to or buy music.
• I don't have a CD player.
• I don't have a DVD player.
• I don't cook or buy groceries.
• I don't have a car or even drive.
• I don't have a cell phone.
• Without a TV, I don't have cable.
• I don't subscribe to any newspapers or magazines.
• I don't have or even want a broadband Internet connection.
• I don't play games or video games.
• I don't make many long distance phone calls or even local calls.
• I'm not married.
• I don't have any kids.
• No pets.
• I don't own a home or even want to.
• I don't even have any furniture.
• I don't have any jewelry or even a watch.
• I don't wear glasses or contact lenses even though I am a little nearsighted.
• Spending $6 on a sandwich is usually out of the question.
• Although I am 52 years old, I take no medications, other than an occasional aspirin.
• The list goes on.

In fact, I can walk through a shopping mall without buying anything, or even wanting to buy anything. It all seems do foreign to me.

Judging from the norms for consumer behavior, I simply am not normal. As a consumer, I am... degenerate.

Now, to be honest, there are still a fair number of traditional consumer activities that I do participate in, including going to the movies, eating in restaurants, buying linen and toiletries, and basic clothing. I have a notebook PC and dial-up internet service and an old Sony PDA, but nothing fancy, I occasionally buy paperback books, and I do have a couple of credit cards.

My point is that as a consumer, I am not a very good representation of what an "average" consumer is like or how they behave. In fact, when I read descriptions of "consumer spending" and "consumer behavior", I have to shake my head and assume that I must be from another planet. If I have a few extra bucks in my pocket, my question is not what to spend it on, but how quickly I can put it into a savings account of some form.

The real question I have is whether going forward the average consumer will be even less like me, or even more like me. Will the average consumer trend towards spending more, or spending less?

Or to put that question in more operational terms, how will the spending patterns of a young person a year out of school evolve over the next few years?

For myself, I expect my consumption behavior to continue to degenerate. "Ever simpler." That may be my motto. On the other hand, I may be rapidly approaching the point at which opportunities for further frugality and simplicity are either not readily available or not particularly palatable.

-- Jack Krupansky

Retail gasoline price mini-spike may have peaked

The retail price of gasoline had been moving higher recently, but this mini-spike may have peaked. We could see prices rise a bit more, but there is a reasonable chance that prices will soon begin to decline again.

-- Jack Krupansky

Crude oil prices remain in a trading range as of 12/10/2006

For yet another week, crude oil prices continue to remain within a fairly narrow trading range, hovering within a couple of bucks on either side of $60 and within the $55 to $65 range, continuing to reflect market uncertainty as to whether the next major move is to the upside or the downside. This trading range scenario is not inconsistent with the possibility that crude oil may rally moderately at some point in the not too distant future, even as there is also the possibility of a further withdrawal of speculative capital from the commodities markets causing a significant decline in prices.

At Friday's closing price of $62.03, January crude oil futures are poised to either begin backtracking downwards in the trading range or to in fact stage a breakout. The former seems more likely, but the timing is of course unclear. Crude could move up a bit more before reversing. I would note that crude inventory levels are still quite high despite OPEC cutting their production quotas, so there is little fundamental reason for crude to move much higher.

Crude oil futures prices are in contango (rising as you go out in delivery date) through September 2008, so we could see crude tick up each month for quite some time as each front month expires and the next month becomes the front month. For example, if there were absolutely no change in prices, crude would jump from $62.03 to $63.09 on December 20, 2006 as trading of the January contract ceases on December 19 and the February 2007 contract becomes the front month for trading. That's a $1.06 jump. Similarly, there is a $0.82 jump from February to March futures ($63.91). And so on up to a peak of $68.67 in September 2008. Then, futures go into backwardation (declining prices) all the way out to December 2012 ($65.71). All of this is subject to dramatic change, even on a daily basis.

In short, I am prepared for the possibility of a modest to moderate rise in oil prices in the coming months, even as I feel that a decline is likely at some stage, especially if economic growth continues to be modest and the commodities markets continue to hemmorage capital as frantic speculators grow increasingly weary of anemic or even negative returns.

I would also note that since gasoline prices remain at a fairly high level, the vast majority of car and truck buyers will be very keen to raise their personal energy efficiency. This will be a slow evolution, but the per-capita consumption of energy (at least in the developed countries) is likely to trend down for the forseeable future.

I would also note that the mentality of short-term commodities traders is compatible with the people who are loudly proclaiming that the economy is falling off a cliff due to the so-called "housing recession" and that a full-blown recession is coming in 2007. I don't concur with that outlook, but nonetheless many people do and that could lead to additional downwards pressure on commodities futures. Not seeing such a retreat in commodities lately, I can only conclude that the economy is in fact significantly stronger than the pundits suggest.

Overall, I expect crude oil prices to remain in a relatively narrow trading range of $55 to $65 for the next few months, until we finally see a wholesale exit of the commodities speculators or some renewed economic strength.

-- Jack Krupansky

The great debate over the timing of the housing contraction

It is fascinating to read the wildly divergent views among academic and professional economists and analysts concerning the timing and impact of the contraction of the housing sector. Unfortunately, so many economists and commentators are falling back on passionate rhetoric and reliance on dubious "historical patterns" for their forecasts.

To wit, there are some snippets of this great debate in an article in The New York Times by Louis Uchitelle entitled "Employers Added 132,000 Jobs Last Month." It quotes "analysts at Bear Stearns Economics" as saying:

"The economy continues to absorb job losses in construction and manufacturing well. ... With the labor market tight and average hourly earnings growth continuing to rise, the gains in employment do not support the view that the Fed will be cutting rates in 2007."

The Times goes on to say:

But others disagreed, arguing that the housing market will deteriorate further, halting the steady job growth of recent months and the improving wages of millions of production workers.

They quote Ian Shepherdson, chief United States economist for High Frequency Economics as saying:

"What I am hearing from some of my colleagues is that this is as bad as housing and the economy are going to get. ... I think that is completely wrong."

No clue is given why other esteemed economists are so "completely wrong" or why it is absolutely impossible that they might be only partially wrong. It sure sounds as if quite a few people are busier grinding axes than trying to be reasonable.

The Times then goes on to tell us about the moderate views from Morgan Stanley:

“I describe what is going on as a two-tier economy,” said Richard Berner, chief United States economist for Morgan Stanley, who is more optimistic about the future than Mr. Shepherdson. “We are in the midst of a housing recession,” Mr. Berner said, but “the sharp declines in construction activity and in housing prices will soon fade.”

Mr. Berner argues that consumers are not as dependent as the pessimists contend on the wealth they extract from their homes to drive their spending. The more important factors today, he said, are the recent decline in energy prices and, above all, rising incomes.

I wish The Times had gotten some quotes from Stephen Roach, Mr. Berner's colleague at Morgan Stanley, who is almost always far more bearish in his economic views.

My own view is that when presented with passionate arguments at two extremes, the likely scenario is that the true is somewhere in the middle. I'm not convinced that the negative economic effects of the housing contraction are completely over, but I do not think that the worst is yet to come either. I suspect that the housing sector will be somewhat of a drag on the economy for a few more months, with the emphasis on a modest to moderate drag, but that by spring we will be seeing the beginnings of a modest recovery of housing, with the emphasis on modest.

What Mr. Shepherdson and his ilk seem to be ignoring are the simple facts that as long as demographics are growing, productivity is growing, employment is growing, income is growing, and mortgage rates remain quite low, it simply isn't within the realm of reason to argue for housing to be the sole or primary influence on the entire rest of the economy. Quite a few people have been mistakenly arguing that housing was the only "leg" propping up the economy during the past few years, and that is what drives their belief that without a strong housing sector the overall U.S. economy will crumble dramatically. Yes, housing was what was giving the economy extra strength, but the modest strength in the rest of the economy was not driven exclusively by housing. So, without housing we lose the extra strength, but the modest strength remains.

And these people are also ignoring the simple fact that productive capital seeks its most productive use, and although housing attracted a lot of that capital and may no longer be the most productive use of that capital, that capital will now simply shift to other areas (including commercial construction). That process doesn't happen overnight, but over the coming year we will see where in the U.S. economy money can be used for growth. Actually, we just saw Ford raise $18 billion in capital. I suspect that Detroit will become less of a drag over the next year and even become a source of strength in the coming years as the car companies work through their restructuring processes.

Some economists, including Charles Plosser, the new president of the Federal Reserve Bank of Philadelphia, are beginning to argue that the long-term sustainable rate of growth for the economy is going to be a bit lower in coming years as demographic growth remains modest (1%) and productivity gains become more modest (2%). Plosser suggests that something closer to 3.00% real GDP growth is more realistic in contrast to the old model of 3.50% real GDP growth.

To be conservative, I would suggest that we should start thinking of 2.5% to 3.5% as the normal range of volatility for trend growth of a stable and sustainable U.S. economy. Sure, we might see an occasional spike up to 4.00% or higher and dips to 2.00% or lower, but 3.00% should be considered "the sweet spot" and a range of 2.75% to 3.25% should be considered a "strong" U.S. economy.

-- Jack Krupansky

Fed to hold a steady course at 5.25% until at least 2008

For now, my overall assessment of Fed monetary policy remains unchanged:

My view is that the Fed will keep the Fed funds target rate paused at 5.25% for the rest of the year, and for all of 2007.

There will not be a recession next year, nor even enough of a growth slump to trigger a Fed rate cut.

I tentatively say "for now" because I am half-convinced that the Fed may in fact feel the need to make another hike in the spring (March or May) to 5.50%. To my way of thinking, it all depends on what happens with energy commodities. Prices of oil and gasoline futures are still quite elevated, albeit off their Summer peaks, and this constitutes an ongoing source of inflationary pressure that continues to propagate throughout the economy. If prices of energy commodities resume their decline, the Fed will be able to remain paused for all of 2007. But if energy commodities prices do not continue to fall, the Fed may have little choice but to hike to 5.50% in March or May. Another 20% decline is needed by March. If we don't see crude oil below $50 and retail unleaded gasoline under $2.00 by April, expect a Fed hike to 5.50% at the May FOMC meeting. Based on economic fundamentals, we should see the prices of energy commodities come back down to Earth, but unfortunately there is simply so much free cash sloshing around seeking "some action" and a lot of speculators are simply unable to resist the urge to try to run commodities prices back up since "it worked before." My view is that there is a fairly good chance that prices of energy commodities will recede in the coming months, but it may be too soon to bet too heavily against the speculators. My finger is on the trigger, but for now I'll retain my belief that the Fed will remain paused for at least another year.

Although the moderation of the housing boom will indeed hold back the economy over the next couple of quarters, the Fed seems to agree with me that this is to be expected and not an indicator of a coming recession. A lot of people are desperately funneling money into bond funds in response to an expectation of well below-par economic growth, and this is depressing Treasury yeilds and causing an inverted yield curve, but this is ultimately indicating only below-par growth (e.g., 1% to 2.75% rather than 3+%) for the coming six months. Yes, there is a lot of anxiety, but anxiety itself is not a reliable indicator of a particular outcome.

Please not that current Fed policy at 5.25%, or even a hike to 5.50%, is not restrictive, but within the neutral range which is neither accommodative nor restrictive. All "normal" economic activities can be easily financed with Fed policy at this level. This does eliminate a lot of excessive speculative behavior, but won't crimp the average business or consumer.

As of Friday, Fed funds futures contracts indicate the following probabilities for changes in the Fed funds target rate at upcoming FOMC meetings:

• December: 4% chance of a cut
• January: 8% chance of a cut
• March: 28% chance of a cut
• May: 68% chance of a cut
• June: 100% chance of a cut and a 16% chance of a second cut
• August: 100% chance of a cut and a 74% chance of a second cut
• December 2007: 100% chance of two cuts and 48% chance of a third cut
• January 2007: 100% chance of two cuts and 52% chance of a third cut

I personally don't concur with these odds, but that is how a lot of people are actually "betting." I would simply note that such betting can change on a moment's notice as economic and financial data, not to mention commentary and sentiment, unfolds and evolves. Like it or not, the economy proceeds more through Darwinian evolution than "intelligent design." The Fed (and Wall Street) can influence the evolution, of the economy, but not control it as if it were a clockwork machine. Predicting the precise or even general impact of any Fed action or inaction is quite literally a fool's errand. Further, the "betting" on any last Fed move is usually more of an insurance hedge than an outright bet, more of a "just in case I'm wrong" kind of "bet". Finally, studies have shown that Fed funds futures are not a very reliable indicator more than 45 days into the future.

What the Fed funds futures market tells us clearly is that the Fed is most likely to leave rates unchanged at least through March. The market is predicting a cut at the May FOMC meeting, but that meeting is too far in the future for the market to give a reliable forecast.

I also note that as of the November 22, 2006 edition of the UBS As We See It - Market Viewpoint report, UBS Wealth Management Research was forecasting a Fed funds rate of 4.00% by the end of 2007. That would be five quarter-point cuts. They are also forecasting 2% GDP growth for 2007. Obviously I do not concur, although I welcome their alternative perspective.

The bottom line here is that the Fed won't move through January, and any speculation about Fed moves further down the road are simply wild guesses based on contrived stories about a hypothetical future economy that happens to have a mind of its own.

Why are so many smart people so confused about the future? It is simply the fact that the conservative thing for them to do is to assume that economic events such as housing booms always play out in the same pattern every single time. For a bureaucrat, that is always the safe approach. Alas, every economic episode has its own idiosyncratic pattern and the real issue is how to forecast the interactions between the many sectors and regions of the economy, and that is a really hard problem that is absolutely not amenable to the cookie-cutter application of historical patterns.

The current "herd mentality" on Wall Street is basically sending so many speculators and even investors off on a truly wild goose chase, after which Wall Street will quietly acknowledge its error ("the data changed in an unexpected manner") and then chase those same speculators and investors back in the opposite direction, making sure to collect transaction fees and spreads on both legs of the roundtrip "chase."

We saw a fair amount of that "chase reversal" this past week.

Note that the Weekly Leading Index of the Economic Cycle Research Institute is telling us that the economy will be holding together nicely for at least the next few months.

-- Jack Krupansky

Got the new credit cards

Both of by new credit cards came this week. I now have three, which is probably enough for me for the foreseeable future.

One is a MasterCard from Household Bank (HSBC) and offers 0% interest on purchases for the first six months. I intend to put most of the rest of my New York City trip expenses on it, make the minimum monthly payments (plus a modest amount) and pay it off over those six months and let the cash that I could have used to pay off the expenses sit in savings where it earns roughly 5% interest. My expectation is that I can use fresh savings (extra cash after trimming expenses) to pay down the card balance without touching my existing savings.

The other is a MasterCard from Barclays Bank of Delaware that is branded for Frontier Airlines Early Returns frequent flyer program. It doesn't have an introductory rate for purchases, but does earn miles for purchases. I will probably begin using this card for my regular daily and weekly expenses and pay off the balance due every month.

Both cards have no annual fee.

Unfortunately, they both have fairly low credit limits. Together they have only half of the credit limit of my CapitalOne card.

-- Jack Krupansky

PayPal money market fund yield holds steady at 5.03% as of 12/9/2006

Here are some recent money market mutual fund yields as of Saturday, December 9, 2006:

• iMoneyNet average taxable money market fund 7-day yield remains at 4.74%
• PayPal Money Market Fund 7-day yield remains at 5.03%
• ShareBuilder money market fund (BDMXX) 7-day yield rose from 4.45% to 4.46%
• Fidelity Money Market Fund (SPRXX) 7-day remains at 4.99% ($25,000 minimum)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day remains at 4.95%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield fell from 4.46% to 4.44%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield fell from 3.21% to 3.12% or tax equivalent yield of 4.80% (down from 4.94%) for the 35% marginal tax bracket and 4.33% (down from 4.46%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield fell from 3.19% to 3.08% or tax equivalent yield of 4.74% (down from 4.91%) for the 35% marginal tax bracket and 4.28% (down from 4.43%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate fell from 5.26% to 4.84%
• 13-week (3-month) T-bill investment rate fell from 5.04% to 5.00%
• 26-week (6-month) T-bill investment rate fell from 5.13% to 5.03%
• Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 4.52%, with a fixed rate of 1.40% and a semiannual inflation rate of 1.55% (updated November 1, 2006, next semiannual update on May 1, 2007)
• Charles Schwab 3-month CD APY remains at 5.09%
• Charles Schwab 6-month CD APY rose from 5.06% to 5.11%
• Charles Schwab 1-year CD APY remains at 5.00%

Note: APY yield is worth somewhat less than the same 7-day yield. See my discussion and table for Comparing 7-day yield and APY.

PayPal continues to be a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking account or even your brokerage checking account for easy access. Right now I am using PayPal as a savings account, putting a little more money in whenever I get a chance and feel that my budget has some "spare change." The PayPal 7-day yield of 5.03% is equivalent to a bank APY of 5.15%.

4-week T-bills are once again not attractive for cash that you won't need for a month, since the new issue is now yielding significantly less than PayPal and Fidelity Cash Reserves. But, this rate fluctuates significantly from week to week. The rate is locked in for four weeks once you buy the T-bill at the weekly auction, but you can't predict what rate you will get at the next auction since it is based on supply and demand. I personally am quite satisifed with the rate I got two weeks ago (5.25%) and relieved that I didn't get stuck with "the bag" this past week at a relatively skimpy 4.88%. On the other hand, simply letting the T-bills automatically roll every four weeks will average out a lot of this volatility.

Check Bankrate.com for the availability of high-rate CDs (5.00% APY to 5.51% APY for 6-month). Alas, there are frequently quite a few caveats, strings, restrictions, requirements, "introductory specials", and other gotchas, so read the fine print carefully. CDs work great for some people, but horribly for others. I have no CDs since I do not have any free cash that I can afford to lock up with restrictions. But, that said, I am considering putting at least a little free cash in short-term CDs (three-month, six-month, or maybe even one-year), around the middle of 2007, especially if the Fed raises interest rates by a quarter-point in the spring.

Please note the disclaimer on Fidelity's web site for mutual funds:

Past performance is no guarantee of future results. Yield will vary.

As always, please note that cash placed in money market mutual funds is subject to the disclaimer that:

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

In practice, that is not a problem at all, but it does incline me to spread my money around a bit.

T-bills and the cash in your bank checking and savings accounts or bank CDs are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC. Please realize that you may not get your full principle back if you attempt to cash out early for Treasury securities since you'll get the price on the open market, which is not guaranteed by the U.S. Treasury. You are only assured of getting your full principle if your Treasury security is held until maturity. (or Treasury "calls" the security or issues an offer to repurchase).

-- Jack Krupansky

The little expenses that catch you short

I have a fairly detailed personal budget spreadsheet which shows expected expenses and income on a daily basis for the next three months and I have done a great job of tracking anticipated expenses that don't occur on a daily weekly or monthly basis, but every once and a while something slips through. For this reason, amongst others, I track and update my spreadsheets at least weekly and sometimes even daily. Just this morning I checked my Fidelity brokerage account, which I now use as my primary checking account, and it was short by $67 and close to zero to boot. Hmmm. Oops!

A little investigation, not a lot of time, but nonetheless a waste of my time, showed that the $67 was the fee for my passport renewal.

My passport expired back in 2003 and since I was having financial difficulties (big time) and not anticipating even being able to afford international travel any time in the foreseeable future, I let it slide. Then, last spring, when I got a full-time job offer (from The Evil Empire) and would be moving in the Seattle area and might want to hop up to Canada for a weekend or whatever, I decided to renew my expired passport. I actually got the pictures at the post office in Boulder, CO, but since I was going to be moving fairly soon and was in a short-term cash crunch (waiting for that first pay check), I let it slide again.

Just a few weeks ago I finally had worked through enough of my higher priority tasks and decided to finally get the passport renewal out of the way. So, I filled out the application online, printed it and signed it, and mailed it (and the photos) with a $67 check to the U.S. Department of State. I even wrote the details in the check register for my Fidelity account. I'm so diligent. But, because I did this at work (shame on me), I didn't have immediate access to my home PC and neglected to enter the check and expense in my spreadsheets when I got home that night.

On top of that, I made an extra payment to the IRS for my back taxes installment plan since I thought I had a little extra cash in my Fidelity account.

I get paid twice a month and my expenses are not evenly balanced through the month, so there are times when I have lots of cash sitting idle and other times when I have next to nothing in the account. I'm always trying to save a little more, so any "extra" cash gets quickly shuffled to somewhere where it earns more interest or cuts my back taxes.

Actually, this is the habit I developed when I was primarily using my Wells Fargo checking account which pays next to nothing in interest. My theory had been that when I switched to using my Fidelity account I would keep some extra free cash in the account since it would be earning a reasonable level of interest, but somehow the implementation of that theory slipped through the cracks of my mind.

I really do need to keep an extra buffer in my main Fidelity account so that relatively small mistakes such as this passport renewal, not to mention truly unexpected expenses, don't cause me such grief. The Fidelity account does pay a semi-decent level of interest, so the dollar or two of higher interest I would lose each month by keeping an extra $1,000 in the Fidelity account really isn't a big deal financially, especially since it gains me significant peace of mind.

Now, I do actually have plenty of cash in a money market fund in that Fidelity account, and Fidelity will actually automatically "sell" from that fund to prevent a check from bouncing, but my intention is to keep that money intact as both a high-interest savings vehicle and for truly emergency rainy day uses.

The other minor difficulty I have right now is that I am spending a fair amount of money on my two-week trip to New York City at the end of the month, and that introduces a temporary spike in my expenses over the next couple of months. I have already identified the source of the funds to pay for those expenses, but it simply wreaks havoc with the normally "smooth" flow of cash through my account and budget spreadsheets.

-- Jack Krupansky

The euro and the dollar, revisited

The week before last we saw a dramatic rise in the exchange rate of the euro relative to the U.S. dollar, but this past week the exchange rate basically went nowhere, other than both up and down in almost equal measures. In other words, the "trend" from the week before last was not sustained. It is still too soon to judge whether this past week was merely a breather before a continued advance, a pause before a decline, or whether the exchange rate has reached a stable level.

Since the initial momentum has petered out, the short-term momentum speculators may begin to lose interest unless there really is a sustained movement of dollars to euros.

I suspect that the exodus from dollars was driven in large part by an expectation that the Fed would be cutting interest rates within a few months. But as that rate-cutting expectation continues to evaporate in the face of better-than-expected economic data, money flows could reverse at least somewhat and flow back into dollars.

-- Jack Krupansky

ECRI Weekly Leading Index indicator up sharply and continues to point to a relatively healthy economy ahead

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose sharply (+1.15% vs. -0.34% last week) and the six-month smoothed growth rate rose modestly (from +1.5% to +1.8%) and remains relatively near the flat line, suggesting an economy that has leveled out. This is the fifth consecutive positive reading for the smoothed growth rate in 19 weeks (June 21, 2006). We haven't finished the soft landing yet, but we are in great shape, despite the weakness in the housing sector.

The WLI is now 17 weeks past its summer low and the six-month smoothed growth rate is now 15 weeks past its summer low.

A WLI growth rate of zero (0.0) would indicate an economy that is running at a steady growth rate, neither accelerating nor decelerating. A WLI fluctuating in a range from +1.5% to -1.5% would seem to be a relatively stable "Goldilocks" economy.

Although the WLI smoothed growth rate remains relatively weak and will likely remain so for the next few months, it isn't showing any signs of the kind of persistent and growing weakness (values more negative than -1.5% over a period of time) that would be seen in an economy that was slowing on its way into recession, but does look a lot like an economy moderating on its way to a relatively stable growth rate.

If I were looking at this one indicator alone, I'd say that the Fed is succeeding at its goal of moderating the economy to a sustainable growth rate. Goldilocks might not be completely happy with the current state of the economy, but she should be. Ditto for NYU Professor Nouriel Roubini. Sorry Nouriel, but Professor Ben Bernanke has it right this time. Anyone expecting a recession or very weak economy next year will be disappointed.

-- Jack Krupansky

Crude oil prices remain in a trading range as of 12/3/2006

Crude oil prices continue to remain within a fairly narrow trading range, hovering within a couple of bucks on either side of $60 and within the $55 to $65 range, continuing to reflect market uncertainty as to whether the next major move is to the upside or the downside. This trading range scenario is not inconsistent with the possibility that crude oil may rally moderately at some point in the not too distant future, even as there is also the possibility of a further withdrawal of speculative capital from the commodities markets causing a significant decline in prices.

At Friday's closing price of $63.43, January crude oil futures are poised to either begin backtracking downwards in the trading range or to in fact stage a breakout. The former seems more likely, but the timing is of course unclear.Crude could move up a bit more before reversing. I would note that crude inventory levels are still quite high despite OPEC cutting their production quotas, so there is little fundamental reason for crude to move much higher.

Crude oil futures prices are in contango (rising as you go out in delivery date) through July 2008, so we could see crude tick up each month for quite some time as each front month expires and the next month becomes the front month. For example, if there were absolutely no change in prices, crude would jump from $63.43 to $65.01 on December 20, 2006 as trading of the January contract ceases on December 19 and the February 2007 contract becomes the front month for trading. That's a $1.58 jump. Similarly, there is a $1.12 jump from February to March futures ($66.13). And so on up to a peak of $70.57 in July 2008. Then, futures go into backwardation (declining prices) all the way out to December 2012 ($67.48). All of this is subject to dramatic change, even on a daily basis.

In short, I am prepared to see a moderate rise in oil prices in the coming months, but I would not bet against declining oil prices either, especially if economic growth continues to be modest and the commodities markets continue to hemmorage capital as frantic speculators grow increasingly weary of anemic returns.

I would also note that since gasoline prices remain at a fairly high level, the vast majority of car and truck buyers will be very keen to raise their personal energy efficiency. This will be a slow evolution, but the per-capita consumption of energy (at least in the developed countries) is likely to trend down for the forseeable future.

I would also note that the mentality of short-term commodities traders is compatible with the people who are loudly proclaiming that the economy is falling off a cliff due to the so-called "housing recession" and that a full-blown recession is coming in 2007. I don't concur with that outlook, but nonetheless many people do and that could lead to additional downwards pressure on commodities futures. Not seeing such a retreat in commodities lately, I can only conclude that the economy is in fact significantly stronger than the pundits suggest.

Overall, I expect crude oil prices to remain in a relatively narrow trading range of $55 to $65 for the next few months, unless we see a wholesale exit of the commodities speculators or some renewed economic strength.

-- Jack Krupansky

The euro and the dollar

Despite a 5% decline in the dollar relative to the euro, it is too soon to judge whether that was more of a "technical" correction and short covering or the start of a larger move. Unless the euro moves up beyond the $1.35 range to the $1.38 range and above, there is nothing here to pay too much attention to.

Part of the move was surely technical, as once the euro moved above technical "resistance", short positions had to be covered and momentum speculators starting to come out of the woodwork. But as the initial momentum has petered out, the short-term speculators may begin to lose interest unless there really is a sustained movement of dollars to euros.

-- Jack Krupansky

Retail gasoline prices moving higher again

The retail price of gasoline has been moving higher again lately. In fact, the price of a gallon of regular unleaded gasoline is now 7.7 cents higher than a month ago. Inventories are down and lower than a year ago.

My primary read on this is that the economy is stronger than thought and people are feeling good enough about their finances to keep pumping gas into their cars.

I am still tempted to up my estimate of Q4 GDP growth to 2.5% from 1.7%.

-- Jack Krupansky

Relatively cheap hotel room in New York City for New Year's Eve weekend

After numerous attempts I was finally successful at using Priceline.com's Name Your Own Price feature to get a relatively cheap and decent hotel room in New York City for Saturday and Sunday nights of New Year's Eve Weekend on my two-week trip to New York City at the end of the year. I tried bidding on five different days for a total of 37 bids and was finally successful on that 37th bid at the 3-star Holiday Inn Wall Street District on Gold Street for $220 per night. With all of the taxes and Priceline service fee, that added up to $522.27 or $261.14 per night. That's not bad at all for a decent hotel on a high-demand weekend.

These were the toughest two nights of my trip, so I wanted to get them nailed down since they would be the priciest and then I can adjust my budget, and then do the remaining nights after my next credit card statement date (December 10) so that I won't have to pay until February. I know that at least one of the hotels that wanted more than $400 for New Years Eve had a rate of $199 for other nearby nights, so I should be able to get room nights in the $100 to $150 range. I'll stay some of the nights in fancier hotels and then some in much less fancy digs to make my budget work.

I probably could have gotten the hotel with a lot fewer bids, but I also would have probably paid more. I needed 37 bids because I inched my way up from $110 to find the lowest price so that I would leave as little money as possible on the table. My budget was for $300, so if I was only going to make only six bids, I probably would have tried $200 and then $250.

Travelocity.com offered to sell me the same hotel room for $484 per night, plus taxes, so I got the room for more than 50% off. Priceline's public "Special Rate" was $484 as well.

I might have gotten a better deal if I had bid closer to my stay dates, but it could have gone the other way as well given the special nature of these nights in this city.

I would have preferred a midtown hotel, but downtown isn't bad considering that there are plenty of good restaurants in SoHo and Tribeca, a short walk (for me) from the financial district. I would typically wander through this area (stopping at the nearby South Street Seaport and Pier 17 area) on my typical New York Saturday walk all around lower Manhattan anyway. Usually I would walk back up to Midtown and not have the energy to travel back downtown again in the same day, but this hotel arrangement will make dining in the area my default choice, at least on Saturday. I might actually eat dinner uptown and then walk downtown after midnight to get a fuller view of the "cultural experience" called New Year's Eve in New York City. Who knows, maybe I'll skip a fancy dinner and eat some fastfood and then go hang out in the massive crowd north of Times Square. Maybe it will simply depend on the weather.

Finally, here's a great unanswered philosophical question: Is it New Years Eve or New Year's Eve (the apostrophe)? I think the latter is the "proper" form, but the former seems to be commonly accepted these days. You could argue the former in the sense that it is a plural across all years. The Merriam-Webbster dictionary has New Year's Day, so I'll start using the apostrophe: New Year's Eve.

I'm just glad to have this reservation out of the way since it was really taking a lot of effort. Now to adjust my hotel budget. On December 11 I'll bid for one night to see how good a rate I can get for a "normal" New York night. I'll try to get a 3-star for $85 and a 1-star for $55. I probably won't get either of these very low-ball bids, but it costs nothing to try and then I'll know for sure that the cheapest price is higher.

-- Jack Krupansky

Fed to hold a steady course at 5.25% until at least 2008

For now, my overall assessment of Fed monetary policy remains unchanged:

My view is that the Fed will keep the Fed funds target rate paused at 5.25% for the rest of the year, and for all of 2007.

There will not be a recession next year, nor even enough of a growth slump to trigger a Fed rate cut.

I tentatively say "for now" because I am half-convinced that the Fed may in fact feel the need to make another hike in the spring (March or May) to 5.50%. To my way of thinking, it all depends on what happens with energy commodities. Prices of oil and gasoline futures are still quite elevated, albeit off their Summer peaks, and this constitutes an ongoing source of inflationary pressure that continues to propagate throughout the economy. If prices of energy commodities resume their decline, the Fed will be able to remain paused for all of 2007. But if energy commodities prices do not continue to fall, the Fed may have little choice but to hike to 5.50% in March or May. Another 20% decline is needed by March. If we don't see crude oil below $50 and retail unleaded gasoline under $2.00 by April, expect a Fed hike to 5.50% at the May FOMC meeting. Based on economic fundamentals, we should see the prices of energy commodities come back down to Earth, but unfortunately there is simply so much free cash sloshing around seeking "some action" and a lot of speculators are simply unable to resist the urge to try to run commodities prices back up since "it worked before." My view is that there is a fairly good chance that prices of energy commodities will recede in the coming months, but it may be too soon to bet too heavily against the speculators. My finger is on the trigger, but for now I'll retain my belief that the Fed will remain paused for at least another year.

Although the moderation of the housing boom will indeed hold back the economy over the next couple of quarters, the Fed seems to agree with me that this is to be expected and not an indicator of a coming recession. A lot of people are desperately funneling money into bond funds in response to an expectation of well below-par economic growth, and this is depressing Treasury yeilds and causing an inverted yield curve, but this is ultimately indicating only below-par growth (e.g., 1% to 2.75% rather than 3+%) for the coming six months. Yes, there is a lot of anxiety, but anxiety itself is not a reliable indicator of a particular outcome.

Please not that current Fed policy at 5.25%, or even a hike to 5.50%, is not restrictive, but within the neutral range which is neither accommodative nor restrictive. All "normal" economic activities can be easily financed with Fed policy at this level. This does eliminate a lot of excessive speculative behavior, but won't crimp the average business or consumer.

As of Friday, Fed funds futures contracts indicate the following probabilities for changes in the Fed funds target rate at upcoming FOMC meetings:

• December: 6% chance of a cut
• January: 24% chance of a cut
• March: 70% chance of a cut
• May: 100% chance of a cut and a 46% chance of a second cut
• June: 100% chance of a cut and a 98% chance of a second cut
• August: 100% chance of a cut and a 100% chance of a second cut and 58% chance of a third cut
• December 2007: 100% chance of three cuts and 26% chance of a fourth cut

I personally don't concur with these odds, but that is how a lot of people are actually "betting." I would simply note that such betting can change on a moment's notice as economic and financial data, not to mention commentary and sentiment, unfolds and evolves. Like it or not, the economy proceeds more through Darwinian evolution than "intelligent design." The Fed (and Wall Street) can influence the evolution, of the economy, but not control it as if it were a clockwork machine. Predicting the precise or even general impact of any Fed action or inaction is quite literally a fool's errand. Further, the "betting" on any last Fed move is usually more of an insurance hedge than an outright bet, more of a "just in case I'm wrong" kind of "bet". Finally, studies have shown that Fed funds futures are not a very reliable indicator more than 45 days into the future.

What the Fed funds futures market tells us clearly is that the Fed is most likely to leave rates unchanged at least through January. The market is predicting a cut at the March FOMC meeting, but only tentatively and that meeting is too far in the future for the market to give a reliable forecast.

I also note that as of the November 10, 2006 edition of the UBS As We See It - Market Viewpoint report, UBS Wealth Management Research was forecasting a Fed funds rate of 4.00% by the end of 2007. That would be five quarter-point cuts. They are also forecasting 2% GDP growth for 2007. Obviously I do not concur, although I welcome their alternative perspective.

The bottom line here is that the Fed won't move through January, and any speculation about Fed moves further down the road are simply wild guesses based on contrived stories about a hypothetical future economy that happens to have a mind of its own.

Why are so many smart people so confused about the future? It is simply the fact that the conservative thing for them to do is to assume that economic events such as housing booms always play out in the same pattern every single time. For a bureaucrat, that is always the safe approach. Alas, every economic episode has its own idiosyncratic pattern and the real issue is how to forecast the interactions between the many sectors and regions of the economy, and that is a really hard problem that is absolutely not amenable to the cookie-cutter application of historical patterns.

The current "herd mentality" on Wall Street is basically sending so many speculators and even investors off on a truly wild goose chase, after which Wall Street will quietly acknowledge its error ("the data changed in an unexpected manner") and then chase those same speculators and investors back in the opposite direction, making sure to collect transaction fees and spreads on both legs of the roundtrip "chase."

-- Jack Krupansky