The bulls continued to prevail in the fourth quarter and as such, most major stock market indexes continued their ascent that began in early summer of 2006.

Investors continued to bet that the U.S. economy would slow ahead but not go into a freefall. A slowing but still vibrant economy is called the “Goldilocks Economy” (an economic term coined by economists).

Investors theorize that if the U.S. economy slows from its fast growing pace in the past few years to a more moderate pace (Goldilocks pace), then the Federal reserve (Fed) would not continue to raise interest rates to slow a fast growing economy to avoid the inflationary forces kindled by a robustly growing economy.

The Fed started to reign in the U.S. economy in June 2004. At that time the short-term interest rate (Federal Funds Rate) was 1%. The Fed has raised short-term interest rates seventeen times since June of 2004, bringing the Federal

Funds Rate to 5.25%. Then in June of 2006, under the leadership of the new Fed Chairman Mr. Ben Bernancke, the Fed stayed on hold leaving the Fed Funds rate at 5.25%.

The Fed sighted the slowing housing market and the collapse of the U.S. manufacturing sector as its rationale for leaving interest rates alone in June 2006.

However, Mr. Bernancke expressed concern of the potential for inflation to rise even if the U.S. economy did slow. This phenomena, a stagnate economy and rising inflation, happened in the early 1980s in the U.S., a was called “Stagflation.”

The Fed remained on hold during the fourth Quarter and kept the Federal Funds rate at 5.25% at its regular meeting on October 25 and at its last meeting in 2006 on December 12th.

The bulls maintained their appetite for stocks throughout the last three months of 2006. Most major stock market

indexes finished 2006 with double digit returns.

In the last quarter of 2006 the bond markets traded in a range, albeit with short-term interest rates higher than long-term interest rates (inverted yield curve) which usually predicts a recession ahead.

The stock market in 2007 is unlikely to perform as well as it did in 2006, as it would mean that corporate profits would continue to rise significantly, the Fed will lower interest rates, the housing collapse will reverse itself and the geo-political turmoil in the world will subside.

At the end of 2006 I have sold off the commodity holdings in the portfolios that I manage for my clients as their prices were in a free-fall.

I remain committed to the energy, and precious metal sectors in 2007 as a hedge against the perilous financial markets ahead.