2) Interest rates (Fed Funds) will probably bottom around the 3.25-3.50% mark as the Fed will tackle the downside risk to economy over the upside risks to inflation. The psychology behind this thinking seems simple enough to me. The “lets fix the economy, then we’ll deal with inflation” mantra probably isn’t a bad one.

The 3-month Treasury bill currently sits around 3.1% while the Fed Funds rate is at 4.25%. The Fed does not like to fight market rates, and since it is already way out of line with market rates, the next cut many surprise the markets enough to ignite a huge short covering rally.

By 2009, the credit crunch should be well on the mend, and the Fed can begin raising rates again to tackle the inflation problem.

3) Well before interest rates begin to climb, oil prices will likely retreat from the elevated $90-100 per barrel mark. The reasons are fairly simple. First, as the economy slows further in 2008, so will energy the demand for energy. I wouldn’t be surprised to see an adjusted trading range of $75-$85/ barrel.

Secondly, in 2009, the Fed will begin raising interest rates which will in turn add strength and stability to the US dollar. As the dollar strengthens, oil prices priced in dollars will decline.

Even if we are wrong about a stronger dollar, oil stocks are facing stiff headwinds face stocks in the major integrated oils as a potential power shift in Washington is likely to bring about talks of a windfall profits tax.

4) If the Democrats seize power of the White House in 2009, look for technology stocks to begin a new cycle of growth. Look for sectors in wireless data networks, microprocessors for notebook PCs, Desktop PCs, 3G handsets, smart phones to outperform In addition, networking equipment and communications equipment should all do well.

Companies involved in alternative energy (solar, nuclear, etc) should be big winners as well as large-cap biotechnology companies.

5) 2008 will be the year the financials begin to recover. While a final washout may still happen, the bearish sentiment in the group sits at an extreme reading of 58.88% according to a survey by the American Association of Individual Investors (AAII).

According to AAII, the current sentiment readings are the fifth highest on record for the financials. What leads me to believe the sentiment could reach a capitulation point is the 1990 sentiment survey hit a bearish reading of 67% on October 19th of that year.

The question that remains is should I wait to buy when the reading hits 67% again, or do I dollar cost average along the way? Since no one knows if sentiment will get worse, dollar cost averaging makes the most sense.

For the week:

-Gold closed at $897.70/oz +32.00 for the week. Last week gold closed at $859.83, and was also up from the price of $842.70 two weeks ago.

-The Commodities CRB Index closed at 365.15, down from 366.22 last week, and up from 358.51 two weeks ago. The index hit a new high last week at 366.22. The previous high was 359.05 on November the 7th.

In my opinion, the CRB Index is overbought, and due for a pullback.

-Crude Oil closed at $92.16 /bbl up from $99.33 last week and up from $96.00 two weeks ago.

Like I had said earlier, I wouldn’t be surprised to see an adjusted trading range of $75-$85/ barrel. this is one reason I refuse to overweight oil in the ETF portfolio inspite of the current rankings.

Adjusted for inflation oil traded at $100/bbl two weeks ago for the first time in history. This includes the highs set in the 1970s.

-The U.S. Dollar close at 76.01 up from 75.82 last week, but down from 76.20 two weeks ago.

If the Dow rallies back to the 13,500 mark, we will reduce our asset allocation models by an additional 5%;

Our current asset allocation is as follows;

65% Equities: (Normally 95%) Aggressive
55% Equities: (Normally 80%) Moderately Aggressive
45% Equities: (Normally 60%) Moderate
25% Equities: (Normally 40%) Moderately Conservative
10% Equities: (Normally 20%) Conservative