The Week in Review:

Investors are nervous, and growing more nervous by the day.

First, the year-end rally has begun. While many hope it has farther to go, no one knows how much strength is left, and at what level will the rally end.

If high flying stocks like Apple (AAPL), Research in Motion (RIMM) and Google (GOOG) are any indicator, it’s clear that momentum is beginning to slow. In addition, the Market Volatility Index (VIX) closed at 20.85 after hitting 25.61 two weeks ago. My best guess is we will see the VIX in the mid to high teens before the market signals it is time to take cover.

One problem that has investors nervous is the London Interbank Offered Rate, better known at the LIBOR Rate. The LIBOR rate is the interest rate that banks use when they loan money to other banks.

Oddly, the prime bank rate for most US banks is at 7.5%. The LIBOR rate closed at 5.14%, and has been moving steadily higher. Four weeks ago the LIBOR sat at 4.88%, last week it was 5.13%. This is a very odd occurrence since the LIBOR rate is used to calculate about 90% of the mortgage rates.

We need to watch this situation closely.

Don Kohn and Ben Bernanke basically said that an interest rate cut was on the way for December. The question that remains is which will occur, 25 basis points, or 50 basis points.
The odds of a 50 basis point cut have fallen dramatically.

Year-End Rally has Begun, but…

Over 4000 companies have reported their 3rd quarter earnings results thus far. When you compare the 3rd quarter 2006 earnings with results from the current quarter, earnings are down over -20% y/o/y. The key going forward will be the action in the financial stocks which are down over 20% for the year.

There is no doubt that more bad news is on the horizon for the financial sector. Just about every guru interviewed on the financial channels have told investors to wait until the next quarters earnings are released before buying the financials.

While these folks may be right, I have been around long enough to remember times when companies released terrible earnings, and the stocks rallied despite the news. Later I found out that analysts began issuing buy recommendations to their institutional clients with comments like "the worst is over"..

To prove my point, today it was announced that UBS has taken a $10 billion dollar write-down, and the stock was up 2 points in the pre-market.

This is one reason why I like to be a little early when buying an important sector that has been beaten down. The smart money (insiders) has already placed their bets. They started buying in September and August.

If the financials stall, or begin to sell-off in late December and January, look for another big downturn in the overall markets.

Economic News

U.S. Economic Events for this Week

US Economic Recap

-The Labor Department announced that 94,000 new jobs were added to payrolls in November, while the unemployment rate remained at 4.7%.

-The November ISM manufacturing index came in at 50.8 down from 50.9 in October. A number above 50 signals expansion, while a number below 50 signals contraction. It’s a toss up which way this number will go, but it looks as if the manufacturing index is continuing to weaken.

-The jobs report is signaling more layoffs are on the way. In November, layoffs jumped 15.9%. October showed a rise of 12%.

-Consumers continue to pile on more debt as credit expanded to $4.7 billion in October up from $3.7 billion in September.

According to the Stock Traders Almanac, “Since the Great Depression, the incumbent administration has presided over upbeat stock markets as the third year of their
term drew to a close. Pre-election year economic pump priming in combination with the “Best Six Months” has proved to be a powerful amalgamation."

The question now is will the stock market follow its seasonal tendencies. Since 1929, December is historically the second best month of the year for stocks with an average gain of 1.4%, while January is the best with a gain of 1.5%.

We will be using the months of December thru January to reduce our allocations to the stock market.

Last week:

-Gold closed at $800.00/oz up from $789.90 last week and down from $824.70 two weeks ago.

-The Commodities CRB Index closed at 342.92, up from 339.84 last week, and down from 354.29 two weeks ago. The index hit a high of 359.05 on November the 7th.

-Crude Oil closed at $88.28 /bbl down from $88.71 last week and down big from $98.18 two weeks ago.

-The U.S. Dollar close at 76.34 up from 76.15 last week and up from 75.04 two weeks ago.

This past summer we raised our allocation to the stock market by 5% when the Dow dropped below the 13,000-12,800 mark, and the SPX fell below 1400.

We are altering our sell strategy a bit to prepare for a tough year in 2008. At Dow 14,000, or S&P 1525, we will reduce our allocations by 5-10%

Our current asset allocation is as follows;

70% Equities: (Normally 95%) Aggressive
60% Equities: (Normally 80%) Moderately Aggressive
50% Equities: (Normally 60%) Moderate
30% Equities: (Normally 40%) Moderately Conservative
15% Equities: (Normally 20%) Conservative

At Dow 12,500, or 1400, we will raise our allocation to the stock market by 5% to;

75% Equities: (Normally 95%) Aggressive
65% Equities: (Normally 80%) Moderately Aggressive
50% Equities: (Normally 60%) Moderate
30% Equities: (Normally 40%) Moderately Conservative
15% Equities: (Normally 20%) Conservative

At Dow 14,000, S&P 1525, we will reduce our allocation models by 5-10% to;

55% Equities: (Normally 95%) Aggressive
45% Equities: (Normally 80%) Moderately Aggressive
35% Equities: (Normally 60%) Moderate
15% Equities: (Normally 40%) Moderately Conservative
10% Equities: (Normally 20%) Conservative