Interest Rates Will Rise When Economy Begins to Rebound

The U.S. and European central banks have voiced their concerns about inflation which signals
a policy shift toward potentially higher short-term interest rates in the future. The problem of course is raising interest rates to fight inflation will put a damper on economic growth. Lowering rates to spur the economy adds further risks to inflation. The best medicine right now is do nothing, and hope that a few interventions help support the dollar, and drive energy prices lower.

Intervention was in full swing last week as;

- The House plans to vote Wednesday on a housing bill to rescue Fannie Mae and Freddie Mac.

- On Tuesday the SEC amended Regulating Short Sales (RegSHO) on 19 banks and financial companies for for 30 days.

- President Bush is pressuring Congress to open up offshore oil exploration and pass a bill to restore confidence in the housing finance industry.

-Crude oil prices backed off from their record highs after last weeks inventory report showed greater than expected builds in crude, and gasoline.

- Geopolitical tensions are easing as the U.S. and Iran are holding productive talks concerning Iran's nuclear program.

Clearly, stocks were overdue for an oversold bounce, but now with bank earnings coming in better than expected, we need to ask is there more to come?

The Market Volatility Index (VIX) rose above 30 for the first time since March. When this happened, the market abruptly turned and began to rally. Of course the news from Wells Fargo, CitiGroup, and today, Bank of America helped the cause.

Tomorrow, if Wachovia doesn't report a disastrous quarter, more strength will build in the financials.

For the week:

-Gold closed at $958.00/oz -2.60 for the week. Last week gold closed at $960.60, and was trading at $933.60 two weeks ago.

-The Commodities CRB Index closed at 427.17, down from 461.43 last week, and up from 472.36 two weeks ago.

-Crude Oil closed at $129.47/bbl down from $145.66 last week, and up from $145.29 two weeks ago..

We need to see $75-$85/ barrel oil in the weeks ahead to get the economy back on track. Oil has remained above $100 for seventeen consecutive weeks.

-The U.S. Dollar closed at 72.21 up from 71.94 last week, and down from 72.72 two weeks ago.

Some believe the rate cuts have come to an end, and the dollar is attempting to rally. A strong rally in the dollar will help drive energy prices lower.

We raised our allocations last week by 5% across the board when the DJIA dropped below our 11,300 target. Going forward, the next 5% increase will come at DJIA 10,600 for Aggressive, and Moderately Aggressive portfolios, but Moderate, Moderately Conservative, and Conservative investors are not advised to get fully invested unless the DJIA breaks below the 10000 mark.

Our current asset allocation is as follows;

75% Equities: (Normally 95%) Aggressive
65% Equities: (Normally 80%) Moderately Aggressive
55% Equities: (Normally 60%) Moderate
35% Equities: (Normally 40%) Moderately Conservative
15% Equities: (Normally 20%) Conservative