My Q4 GDP forecast: 2.75%

GDP growth has never been more difficult to forecast than for Q4. Because of the impact of the housing pullback coupled with some apparent economic strength and volatile inflation and plenty of other mixed signals, it's anybody's guess. My own forecast (guess) is that annualized real GDP growth for Q4 will come in around 2.75%.

I am trying to be as conservative as I can muster, but always striving to be as realistic as possible as well.

Sure, because of the crazy accounting used to calculate and estimate GDP, the actual number could come in as low as 0.50% or as high as 3.50%. I doubt it will be that low or that high, but it is possible.

I would offer a tighter estimated range of +1.25% to 3.25%, with a midpoint of 2.25%. My gut feel is that the economy really was a lot stronger than many analysts and commentaters were willing to let on. I am inclined to go with a higher tighter range of 2.25% to 3.25% with a midpoint of 2.75%.

So, that is my final forecast for Q4 real GDP growth which will be reported at 8:30 a.m. ET on Wednesday, January 31, 2007:

Annualized real GDP growth for Q4 will be in the range 2.25% to 3.25% with a midpoint of 2.75%.

Note: the report on Wednesday is the advanced estimate and will be followed in a month with the preliminary estimate, to be followed in yet another month with the final estimate. The data needed to properly calculate GDP for Q4 simply isn't all known in final form yet. We have to wait two more months to get that final answer.

-- Jack Krupansky

Where is the euro headed?

Everybody had gotten so excited about the rising euro a month ago, but now the momentum of the euro has evaporated and we have seen a modest pullback as people realize that the Fed is not likely to be cutting interest rates any time soon. My current view is that the euro will continue to bounce around in a range for the foreseeable future, possibly between $1.25 and $1.33 for at least the next month.

Frankly, there are simply far too many "stories" going around in financial circles about euro strength and dollar weakness that are almost completely detached from economic reality. Mostly they are fantasy and fiction spun around a tiny core of fact but extrapolated far beyond their factual basis. The simple fact is that people are trying to make money trading off volatility, and the stories are designed not to enlighten investors, but to enhance volatility.

I was just sorting through some stuff from my recent strip to New York City and I had saved the business section of The New York Times from my trip back on Wednesday, January 3, 2007. The right column headline says "Dollar's Skid Puts a Glow On the Euro." Skid? What exactly is a skid? Usually it is trader jargon for a sharp but short-term fall, but the Times article refers to "A steady slide in the value of the dollar since late 2005." That would hardly qualify for a trader's "skid."

In fact, the euro only rose to about $1.33 recently (now back under $1.30) and had hit $1.32 quite a number of months ago, pulled back to around $1.16, rose back up to around $1.25, and finally in December did its "skid" up to $1.33. So, the decline since late 2005 has certainly not been "steady" and overall has not been a "skid."

The Times article goes on to recount some of stories that are going around, but fails to note that people are perpetuating these stories not becaus they reflect fundamental values but because they enhance volatility and hence potential trading profits.

Will the dollar "skid" to $1.40 in the coming months? Sure, it could. A 10% move in either direction is well within the range of volatility that we have seen over the past few years. It is also very possible that we could see the euro "skid" to $1.20 or below as well. And if the Fed raises interest rates to 5.50% in May if the economy continues to gain steam, the euro could "skid" even further.

My call is for the euro to be stuck in a range from $1.18 to $1.38 for the next six months. There are still way too many people who expect Fed rate cuts this year, and the euro will "skid" each time another batch of these people pull back on their betting for those fantasy rate cuts which never arrive.

-- Jack Krupansky

Where is crude oil headed now?

Although crude oil had briefly poked below $50, it popped back up to $55, and now the trend is even murkier. A lot of the movement (volatility) is simply "technical" trading and short-term positioning by speculators. It could take a few months before we see the price of crude settle into something resembling equilibrium. As I stated two weeks ago, I see crude in a wide range of $45 to $60 for the foreseeable future. Plenty of volatility.

I read that the Saudis would like to see oil at $50. Maybe that is true.

I did notice that there has been a modest bit of renewed speculation in crude oil futures. I say this because the duration curve for crude oil futures had recently returned to being purely in contango with prices rising for each monthly futures contract all the way out to the longest dated contract, suggesting an exodus of many speculators, but this past week we saw a return to a split curve with contango (rising prices) out to June 2009, but then prices went into backwardation (declining) all the way out to December 2012. To be sure, the duration curve is in a state of flux and it may take anther month for it to settle into a clear trend. Speculators are truly conflicted about whether to stay in oil or bail out and move on.

Speculators will bounce in and out of the crude oil futures market for the foreseeable future until prices decline to a level where even the hardest core commodities bulls pull out. Sure, there will always be short-term traders to push oil up and down a couple of bucks, but it is the massive wave of speculators such as hedge funds and investment banks that are keeping oil up at $55 rather than letting real supply and real demand let it fall back into the $20's.

-- Jack Krupansky

PayPal money market fund yield holds steady at 5.02% as of 1/27/2007

Here are some recent money market mutual fund yields as of Saturday, January 27, 2007:

• iMoneyNet average taxable money market fund 7-day yield remains at 4.73%
• PayPal Money Market Fund 7-day yield remains at 5.02%
• ShareBuilder money market fund (BDMXX) 7-day yield rose from 4.45% to 4.46%
• Fidelity Money Market Fund (SPRXX) 7-day yield rose from 4.99% to 5.03% ($25,000 minimum)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield fell from 4.97% to 4.96%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield remains at 4.45%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield rose from 3.17% to 3.26% or tax equivalent yield of 5.02% (up from 4.88%) for the 35% marginal tax bracket and 4.53% (up from 4.40%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield rose from 3.10% to 3.21% or tax equivalent yield of 4.94% (up from 4.77%) for the 35% marginal tax bracket and 4.46% (up from 4.31%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate rose from 4.98% to 4.99%
• 13-week (3-month) T-bill investment rate rose from 5.11% to 5.13%
• 26-week (6-month) T-bill investment rate rose from 5.15% to 5.16%
• 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 rose from 4.99% to 5.09%
• Charles Schwab 6-month CD APY rose from 5.11% to 5.16%
• Charles Schwab 1-year CD APY rose from 5.20% to 5.25%

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 5.02% is equivalent to a bank APY of 5.14%.

4-week T-bills are once again fairly attractive for cash that you won't need for a month, since the new issue yields fairly close to the yield of 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.

I would note that T-bill yields have been rising, implying that their prices are declining, as people find more interesting places to invest, including the rising stock market. The implication is that as people become more confident that the economy is stronger than they thought, more money will flow out of Treasuries and into stocks, causing Treasury yields to rise. In theory.

Check Bankrate.com for the availability of high-rate CDs (5.00% APY to 5.47% 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

Fed to hold a steady course at 5.25% for all of 2007 and probably into 2008

It has been amazing how dramatically the market has come around in the past few weeks to sharing my belief that Fed rate cuts are simply not in the cards any time soon. Not too long ago three cuts before the end of the year were considered likely. Now, there is zero expectation by the market for a cut in the first half and only a 62% expectation way out in December.

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, and probably into 2008.

There will not be a recession this 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 10% decline is needed by March. If we don't see crude oil consistently below $50 and retail unleaded gasoline consistently 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.

From two weeks ago: Crude oil has fallen to within striking distance of $50 and wholesale gasoline has similarly fallen to within striking distance of the equivalent of $2.00 retail, but both are now sitting in a technically oversold position, so they could pop back up a bit in the near-term even if they do eventually resume their decline.

Update: Both crude oil and gasoline have bounced up a bit (even as declines at the retail level may continue for gasoline for awhile longer), but this was likely a technical move rather than based on fundamentals. Crude is at $55.50 and wholesale gasoline is at a level equivalent to $2.08 to $2.13.

My latest thinking is that $60 may be the magic number for crude oil for the Fed in May even though $50 is what they would really like to see. If crude is $60 or higher in May, the Fed will have a high probability of a hike to 5.50%. If crude is below $50, the probability of a hike is very low. If crude is at $55, it will be a 50/50 coin flip. At $58, the Fed would seriously consider a hike. At $53, the Fed would likely hike only if there were some other significant factors, such as a strong resurgence in housing demand.

The point here is not $58 crude oil per se, but the fact that $58 crude oil means that either real demand is overly strong, or there is too much monetary liquidity in the financial system that inspires speculators to throw too much money around because it is relatively too cheap and the Fed will feel some pressure to "mop up" such excess liquidity.

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 yields 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 note 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 (this coming Wednesday): 2% chance of a cut
• March: 0% chance of a cut
• May: 2% chance of a hike
• June: 4% chance of a cut
• August: 20% chance of a cut
• September: 26% chance of a cut
• October: 42% chance of a cut
• December: 62% chance of a cut
• January 2008: 76% chance a cut

I personally don't concur with these odds after September, 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 October. The market is predicting a cut at the December FOMC meeting, but that is too far in the future for the market to give a reliable forecast.

My feeling is that if the housing retrenchment hasn't caused a Fed cut by the January FOMC meeting (this coming Wednesday), it is unlikely that housing will be enough of a problem to cause a Fed cut for the rest of the year either.

I note that as of the January 11, 2007 edition of the UBS As We See It - Market Viewpoint report, UBS Wealth Management Research continues to forecast a Fed funds rate of 4.00% by the end of 2007. That would be five quarter-point cuts. They also continue to forecast 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 October, 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."

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

ECRI Weekly Leading Index indicator down sharply but continues to point to a relatively healthy economy in the months ahead

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell sharply (-1.14% vs. -0.61% last week), a second consecutive decline that puts the index where it was three weeks ago, but the six-month smoothed growth rate rose slightly (from +4.4% to +4.5%), and continues to be a modest distance above the flat line, suggesting that the economy has picked up a little steam. The smoothed growth rate has been positive for 15 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 25 weeks past its summer low and the six-month smoothed growth rate is now 22 weeks past its summer low. Although not signalling an outright boom, this is a fairly dramatic recovery from the somewhat dark times of last summer.

The six-month smoothed growth rate of the WLI is now at approximately the same rate as one year ago.

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 somewhat 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

ECRI Weekly Leading Index indicator down moderately but continues to point to a relatively healthy economy in the months ahead

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell moderately (-0.64% vs. +1.74% last week) but the six-month smoothed growth rate rose modestly (from +4.1% to +4.4%), and is now a modest distance above the flat line, suggesting that the economy has picked up a little steam. The smoothed growth rate has been positive for 14 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 24 weeks past its summer low and the six-month smoothed growth rate is now 21 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 bit 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

NASDAQ finally closes above 2,500

I almost didn't even notice, but on Friday NASDAQ quietly managed to close above 2,500 for the first time in almost six years. The last time NASDAQ closed above 2,500 was on Thursday, February 15, 2001 when it closed at 2,552.91. The last intraday high above 2,500 was 2,593.09 on that same day.

Incidentally, the first time NASDAQ closed above 2,500 was on Friday, January 29, 1999 when it closed at 2,505.89, with an intraday high of 2,506.68 on that same day. NASDAQ was above 2,500 for a period of not much more than two years.

I don't expect NASDAQ to climb above its former peak over 5,000 any time soon, but the 3,000 level is certainly within striking distance as the economy gradually picks up steam. That would be a 20% gain, which is quite doable in one to two years. NASDAQ was only above 3,000 between Wednesday, November 3, 1999 when it closed at 3,028.51 and Monday, December 11, 2000 when it closed at 3,015.10. That's a period of a little over one year. The last time NASDAQ was over 3,000 was the intraday peak of 3,001.72 on Wednesday, December 13, 2000.

The way I like to think about this is to forget about the boom (and crash) and simply go back to that first time we hit 2,500 in November 1999 and think of that as the starting point and ask what needs to happen in the economy, business, and technology to advance from there. The goal is not to try to repeat the boom (and crash), but to have a sensible stock market going forward.

For NASDAQ in 2007, I am thinking that a 5% to 15% gain is within the realm of reason. That translates into the 2,625 to 2,875 range. Nominally, a gain of 10% is fairly reasonable, which would be the 2,750 level.

-- Jack Krupansky

Fed to hold a steady course at 5.25% for all of 2007

This past week we saw a significant improvement in sentiment about the economic outlook for 2007.To be sure, there are still plenty of people in the doom and gloom crowd, but suddenly a noticeable percentage of people are now at least "guardedly" optimistic about the outlook for 2007.

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 this 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.

Update: Crude oil has fallen to within striking distance of $50 and wholesale gasoline has similarly fallen to within striking distance of the equivalent of $2.00 retail, but both are now sitting in a technically oversold position, so they could pop back up a bit in the near-term even if they do eventually resume their decline.

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 yields 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 note 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: 2% chance of a cut
• May: 12% chance of a cut
• June: 28% chance of a cut
• August: 54% chance of a cut
• December 2007: 100% chance of a cut and 18% chance of a second cut
• January 2008: 100% chance a cut and 46% chance of a second cut

I personally don't concur with these odds after May, 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 August FOMC meeting, but that is too far in the future for the market to give a reliable forecast.

My feeling is that if the housing retrenchment hasn't caused a Fed cut by the January FOMC meeting, it is unlikely that housing will be enough of a problem to cause a Fed cut for the rest of the year either.

I note that as of the December 20, 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 May, 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."

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

Is crude oil headed below $50?

Although crude oil has clearly fallen below its recent trading range of $55 to $65, and even below my threshold of $54, the trend is now even murkier. Although I do expect further selling by "investment" speculators over the coming year, it may be too soon to see that selling accelerate in the near term. Sometimes there is a lot of artificial selling that snowballs whenever some "technical" price "support" level such as $55 is breached, but that kind of selling never tells you about the real trend. In short, I do expect more selling by "investors" who are having ever-more difficulty holding speculative positions in such a volatile market, but predicting the precise timing of such selling is a fool's errand.

My primary suspicion for the coming months is that we will simply see a resetting of the range, shifting it down from the old range of $55 to $65 to a range of $45 to $60. The Bush administration seems quite committed to rattling sabers with Iran and OPEC will continue to nervously talk about maybe needing to cut production quotas, so traders and short-term speculators will have no difficulty getting the price of oil to swing $5 to $8 in either direction. Selling by "investment" speculators (speculators who had been counting on oil to rise over the long-term but hoping it would rise in the short-term as well) will put gradual downwards pressure on that range over the coming year.

Something truly dramatic happened to the price structure of longer-term crude oil futures this past week. For more than a year, prices were split, with prices in contango (rising as you go out in delivery date) through 2008, but then in backwardation (declining as you go out in delivery date) through 2012. But now, in just this past week alone, futures have reverted to a simple contango (gradual rising), from $52.99 for February to $60.94 for December 2012. This is more of a normal trading market. We will have to watch how this evolves further in the coming weeks, but it strongly suggests that some major players have skipped town. That bodes well for the theory that the speculative bubble truly has burst.

Crude oil futures prices are in contango (rising as you go out in delivery date) through December 2012, 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 $52.99 to $53.87 on January 23 as trading of the February contract ceases on January 22 and the March 2007 contract becomes the front month for trading. That's an $0.88 jump. Similarly, there is a $0.79 jump from March to April futures ($54.66). And so on up to a peak of $60.94 in December 2012. All of this is subject to dramatic change, even on a daily basis.

The other good news about this price structure is that it barely reflects inflation over the next five years, making speculation in oil futures that much less attractive compared to even ultra-safe Treasuries or TIPS.

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 dramatic 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.

Overall, I expect crude oil prices to remain in a relatively narrow trading range of $45 to $60 for the next few months, until we finally see a wholesale exit of the commodities speculators or some renewed economic strength.

-- Jack Krupansky

PayPal money market fund yield falls slightly to 5.02% as of 1/13/2007

Here are some recent money market mutual fund yields as of Saturday, January 13, 2007:

• iMoneyNet average taxable money market fund 7-day yield rose from 4.72% to 4.73%
• PayPal Money Market Fund 7-day yield fell from 5.03% to 5.02%
• ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.46% to 4.45%
• Fidelity Money Market Fund (SPRXX) 7-day yield fell from 5.02% to 4.99% ($25,000 minimum)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield fell from 4.98% to 4.97%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield fell from 4.46% to 4.45%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield fell from 3.37% to 3.17% or tax equivalent yield of 4.88% (down from 5.18%) for the 35% marginal tax bracket and 4.40% (down from 4.68%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield fell from 3.35% to 3.10% or tax equivalent yield of 4.77% (down from 5.15%) for the 35% marginal tax bracket and 4.31% (down from 4.65%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate rose from 4.84% to 4.88%
• 13-week (3-month) T-bill investment rate rose from 5.06% to 5.07%
• 26-week (6-month) T-bill investment rate rose from 5.09% to 5.12%
• 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 4.99%
• Charles Schwab 6-month CD APY remains at 5.11%
• Charles Schwab 1-year CD APY rose from 4.10% to 5.20%

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 5.02% is equivalent to a bank APY of 5.14%.

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.

I would note that T-bill yields are rising, implying that their prices are declining, as people find more interesting places to invest, including the rising stock market. The implication is that as people become more confident that the economy is stronger than they thought, more money will flow out of Treasuries and into stocks, causing Treasury yields to rise. In theory.

Check Bankrate.com for the availability of high-rate CDs (5.00% APY to 5.50% 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

Are falling commodities prices a sign of economic weakness ahead?

Some commentators are suggesting that falling commodities prices are a leading indicator of economic weakness ahead. In the old days, yes, commodities prices indicated the health of the economy, but in the "new" economy that linkage is no longer true or at least no longer always true.

In fact, the linkage wasn't even always true in the old days. Price indicates the relative balance between supply and demand. Yes, lower emand will trigger a decline in prices, but rising supply can trigger declining prices as well. This is really, really, basic Econ 101, but some commentaters pretend that it isn't true.

There is also the distinction between real demand by end users of the commodities and speculative demand by speculators and other intermediaries who place themselves between the suppliers and the users. In other words, they create a "bubble" which distorts supply and demand and hence prices. That is the primary effect that we have been seeing over the past two years, with the big run-up of commodities prices as well as the current retracement of prices.

Sure, there are always speculators in any market, but two key differences in the current commodites speculation "bubble" are the vast amount of capital being thrown at commodities, especially by hedge funds and large "investment" banks and a mob of smaller "investors", and the willingness of these large players to actually take physical delivery of the commodities when the front-month futures contracts run out. They don't actually take real delivery, but simply become the owners electronically and begin to pay storage costs for the physical commodities. Taking delivery effectively has reduced supply, helping to push prices up. This accounts for why energy prices could be high even though inventory levels have also been high. Much of those inventories have been held off the market. Is this legal? Apparently. Whether it should be legal is a matter of debate, but the fact that so many Wall Street commentaters haven't given the American people a clear accounting of why energy costs have been so high is truly conconscionable, although oh-so typical of Wall Street. Essentially it is a conflict of interest because these firms that offer retail investors "advice" also have in-house trading desks which are heavily engaged in speculation. Be clear: Wall Street is not your friend; their goal is to take as much of your money as legally possible. And then some.

In a normal commodities market, speculators can still push prices up, but prices then fall back down as speculators sell the front-month futures contract and buy the next month contract. There are still speculative bubbles, but they are too small to be worth worying about. At some point we will (or may) revert to such a normal market, in which case real economic signals will work again, but we certainly aren't there yet.

So, the decline in commodities is primarily due to a decline in demand, but of speculative demand rather than real demand.

If we were to see oil fall below $15, that would be an indication of declining real demand indicating significant economic weakness, but even at $50 or even $40 or $30, there would be no hint of a significant decline in real demand for oil. Ditto for other commodities.

-- Jack Krupansky

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

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose sharply (+1.89% vs. +0.48% last week) and the six-month smoothed growth rate rose modestly (from +3.7% to +4.0%), and remains 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 ten 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 22 weeks past its summer low and the six-month smoothed growth rate is now 20 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 bit 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

Funding my rainy day fund

For the past few months my rainy day fund has been sufficient to cover only a little over three months of my living expenses. I recently had a modest windfall of money and now I am up to seven and a half months of expenses reserve. That is now more than enough to cover the minimal requirement of six months expenses, but is still well short of a full twelve months of expenses.

It may take me another year or two to get up to a full twleve months of expenses reserve. Part of the problem is an ongoing tension between my desire to accumulate this cash reserve and my intense desire to accelerate the paydown of my back taxes to the IRS. I am balancing the two, but the tension remains.

-- Jack Krupansky

Euro has lost all of its upwards momentum

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, all of that initial excitement has completely died off. The euro is now back below $1.31.

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

Fed to hold a steady course at 5.25% for all of 2007

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 this 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: 8% chance of a cut
• May: 34% chance of a cut
• June: 66% chance of a cut
• August: 100% chance of a cut and a 14% chance of a second cut
• December 2007: 100% chance of a cut and 92% chance of a second cut
• January 2008: 100% chance of two cuts and 10% chance of a third cut

I personally don't concur with these odds after March, 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.

My feeling is that if the housing retrenchment hasn't caused a Fed cut by the January FOMC meeting, it is unlikely that housing will be enough of a problem to cause a Fed cut for the rest of the year either.

I note that as of the December 20, 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 May, 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."

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

Crude oil prices remain in a trading range as of 1/5/2007

The price of crude oil remains 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. Crude oil will remain in this trading range until it rises either to $66 or falls to $54.

The recent decline was nominally due to warm weather, but I am not so sure about that.

At Friday's closing price of $56.31, February crude oil futures are poised to either begin backtracking upwards in the trading range or to in fact break below the trading range. The former seems more likely, but the timing is of course unclear. Crude could move down 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 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 $56.31 to $57.39 on January 23 as trading of the February contract ceases on January 22 and the March 2007 contract becomes the front month for trading. That's a $1.08 jump. Similarly, there is a $0.96 jump from March to April futures ($58.35). And so on up to a peak of $63.85 in September 2008. Then, futures go into backwardation (declining prices) all the way out to December 2012 ($61.92). 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

Where and how will I live when I retire?

I need to get back to thinking about retirement planning. A key component of any reasonable retirement planning process is setting up an estimated monthly budget. A big part of the monthly budget for most people is their housing costs. Housing costs depend on location as well as the quantity (size) of housing and the quality (comfort) of that housing. So, these are the three unknowns about housing that I need to grapple with:

1. Where will I live in retirement?
2. How much space will I need (want) to live?
3. How fancy a place will I need (want)?

There are three possible starting points for thinking about your overall housing needs way off in the future:

1. Live roughly as you do today.
2. Downsize and live more frugally.
3. Splurge and pursue the kinds of creature comforts that you denied yourself during your more frugal "working years."

I've been living in studio apartments for over 20 years now, so downsizing is not exactly an option for me, but I don't feel any urgent need for much fancier housing than I have been used to.

There are a variety of kinds of locations:

1. Urban
2. Suburban
3. Country
4. Resort
5. Retirement community
6. Mobile

If I had my choice, I'd prefer to have a number of homes and bounce between them as my mood suggested. Even so, a primary location is still warranted. For me, that would be urban.

I would rather live in Manhattan, near Washington, D.C., or near Disneyworld.

If I could afford it, I'd rather live in semi-decent hotels, staying as long as I liked and moving on whenever I liked. Hmmm... maybe that actually is possible. My recent trip to New York City cost me $116 per night, which works out to about $3,500 per month. That's not completely out of the question, but I suspect that my final housing budget will have to come in closer to $1,500 per month. That is moderately more than my current rent of $925 plus maybe $75 for utilities.

My ultimate dream location would be to own a nationwide or even international chain of semi-luxury hotels (ala Hyatt or Marriott) and be able to just check into any of "my" hotels at my own whim. Somehow, I don't see this as a practical option to consider, but it would be my preference.

I suspect that my final choice for location will be somewhat dependent on my budget, but I also suspect that I can always trade off location for size and quality. My personal preference would be to trade up to my most preferred location and give up size and possibly quality.

It is also quite possible that my retirement location might change every few years.

Owning is a possibility, but given my interest in moving around and lack of a "nesting" instinct, renting seems more appropriate for me, but I might consider owning if the economics makes sense.

I simply do not have a clear conception of my ultimate preferred (low-budget) location at this time. It is something I need to give more thought to, maybe as I get a better handle on what my housing budget can be.

My tentative housing location would be Manhattan or Washington, D.C. Three years ago I was paying $1,275 for a studio in Manhattan and $850 for a studio in Washington, D.C. I checked craigslist and it looks like a decent studio can be had for $1,800 in Manhattan, and it looks like about $1,500 for a decent studio in DC. I'm sure I can do better than those prices today, but in the interest of being conservative in my budgeting and to allow room for going a bit more upscale, I'll stick with those numbers.

I would like to be able to have a place in both Manhattan and DC. That would run $3,300, almost as much as staying in hotels every night.

If my overall retirement budget fits only $1,800, Manhattan would be my choice. If I could have a $3,500 budget, I would go the hotel route.

There is still plenty to think about here, but at least I have my starting point: budget $1,800 for a studio in Manhattan.

I also need to determine an estimated annual housing inflation rate. For now, I'll assume housing and inflation at about 2.5% a year.

I'll budget $100 per month for utilities, although my last apartment in Manhattan included all utilities in the rent.

-- Jack Krupansky

Risk of recession

Although quite a number of commentators are talking about the possibility of a recession or maybe a significant growth slowdown in 2007, the odds of a recession are so low as to not be worth worrying about. A lot of their thinking comes from a belief that the bulk of the housing retrenchment is yet to come. I do not agree with that thinking at all. I am not so positive that all of the housing retrenchment is behind us, but I do believe that the bulk of it is and that the rest of any remaining minor retrenchment will have subsided within one to four months. Meanwhile, there is a lot of reasonable strength in the rest of the economy. Even airlines and vehicle manufacturers are gradually beginning to recover from being drags on the economy in past years.

Overall GDP growth in 2007 may be a bit on the anemic side compared to "boom" times, somewhere in a range from 2.25% to 3.25% real growth, averaging about 2.75%. I am trying to be conservative there, so that actual economic performance is likely to be better than I am forecasting.

One wildcard is the rate of inflation. The headline GDP number is real growth, which is nominal growth minus inflation, so real growth could perk up if inflation comes in lower, even if nominal growth is somewhat weak.

In short: Do not expect a recession or significant growth slowdown in 2007.

-- Jack Krupansky

PayPal money market fund yield holds steady at 5.03% as of 1/6/2007

Here are some recent money market mutual fund yields as of Saturday, January 6, 2007:

• iMoneyNet average taxable money market fund 7-day yield fell from 4.74% to 4.72%
• PayPal Money Market Fund 7-day yield remains at 5.03%
• ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.47% to 4.46%
• Fidelity Money Market Fund (SPRXX) 7-day fell from 5.05% 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 fell from 3.49% to 3.37% or tax equivalent yield of 5.18% (down from 5.37%) for the 35% marginal tax bracket and 4.68% (down from 4.85%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield fell from 3.46% to 3.35% or tax equivalent yield of 5.15% (down from 5.32%) for the 35% marginal tax bracket and 4.65% (down from 4.81%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate rose from 4.74% to 4.84%
• 13-week (3-month) T-bill investment rate rose from 5.00% to 5.06%
• 26-week (6-month) T-bill investment rate remains at 5.09%
• 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 4.99%
• Charles Schwab 6-month CD APY rose from 4.45% to 5.11%
• Charles Schwab 1-year CD APY rose from 4.50% to 5.10%

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 up modestly and continues to point to a relatively healthy economy ahead

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose modestly (+0.40% vs. -0.87% last week), although the six-month smoothed growth rate fell slightly (from +3.8% to +3.7%), and remains 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 nine 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 21 weeks past its summer low and the six-month smoothed growth rate is now 19 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

PayPal money market fund yield holds steady at 5.03% as of 12/30/2006

Here are some recent money market mutual fund yields as of Saturday, December 30, 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 4.47%
• Fidelity Money Market Fund (SPRXX) 7-day rose from 5.02% to 5.05% ($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 3.32% to 3.49% or tax equivalent yield of 5.37% (up from 5.11%) for the 35% marginal tax bracket and 4.85% (up from 4.61%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield rose from 3.26% to 3.46% or tax equivalent yield of 5.32% (up from 5.03%) for the 35% marginal tax bracket and 4.81% (up from 4.54%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate fell from 4.82% to 4.74%
• 13-week (3-month) T-bill investment rate rose from 4.95% to 5.00%
• 26-week (6-month) T-bill investment rate rose from 5.08% to 5.09%
• 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 fell from 5.09% to 4.99%
• Charles Schwab 6-month CD APY fell from 5.11% to 4.45%
• Charles Schwab 1-year CD APY fell from 5.05% to 4.50%

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.

It is unclear what caused the Schwab rates to fall so sharply so suddenly.

It is also unclear what caused the Fidelity tax-free rates to rise so sharply so quickly.

Possiby both events were caused by a dramatic shift of money fund assets from tax-free to taxable due to end-of-tax-year considerations. A rise in demand (or fall in supply) causes rates to go down and a fall in demand (or a rise in supply) causes rates to go up.

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