Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500

Market Update

This week was marked by the Fed's decision on Wednesday to lower the funds rate by 25 basis points to 4.5%. Up to that point, markets had not moved much since the beginning of the week, as investors were simply waiting for the announcement by the Central Bank. The interest rate cut had been widely anticipated and a sizable rally ensued right after the decision was made public, sending the Nasdaq Composite to its highest level since January 2001. Stocks were also helped by the latest GDP report, which showed a better-than-expected 3.9% gain for the third quarter while inflation remained tame. The high number portrays an economy that has been quite resilient to the housing slowdown and credit crisis. Worries resurfaced no later than Thursday, however, after an analyst report raised concerns about Citigroup's exposure to the subprime mortgage fallout. The news sent stocks falling all day, with the Dow Jones Industrial Average losing 362 points during the session. Positive economic news helped stocks stop the bleeding Friday, as the Labor Department reported that nonfarm payroll rose by 166,000 in October, a number that was much higher than the expected 80,000, while the unemployment rate held steady at 4.7%. Here again, the data points to an economy that is doing quite well despite ongoing trouble in the financial sector.

For the week, the Nasdaq 100 gained 0.88%. The S&P 500 and Russell 2000 did not do as well as they respectively lost 1.67% and 2.87%. The Nasdaq 100 remains located above both its 50-day and 200-day exponential moving averages (EMAs), while the S&P 500 is situated just under its 50-day EMA. Faring worse, the Russell 2000 has crossed back below both its 50-day and 200-day EMAs.

For its part, our World Index Ranking portfolio gained 0.38% during the week. The portfolio consists of the 5 top-ranked world indexes as of October 12, which marked the beginning of the current 4-week holding period.

Our current Buy signal remains in effect.

Trend Timing School

Bubble makers

No, we are not talking about soap bubble toys here, but about the central bankers of the world and their monetary policy mistakes which have been blamed throughout history for the fate of the economy and the markets. There is an economic theory enjoying a fairly broad base of support which argues that all bubbles in history, and the recessions that inevitably ensue, were caused or at least amplified by the actions of governments and the monetary policies implemented by their central banks.

The most recent former Federal Reserve chairman and economic wizard Alan Greenspan has been seen doing the interview circuit to promote the release of his memoirs "The Age of Turbulence: Adventures in a New World". Many have been struck by the irony of his now constant warnings about the housing and mortgage-based securities bubbles, because many economists blame Alan himself for the excess liquidity we are now experiencing. Since our mention helps publicize his book, it is only fair that we also reference a couple of books which question the octagenarian's contribution to past and present bubbles:

• "Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics (Agora Series)" by William Bonner and Lila Rajiva
• "Greenspan's Fraud: How Two Decades of His Policies Have Undermined the Global Economy" by Ravi Batra

Poor Alan is blamed for everything from the 1990-91 recession he is said to have caused by raising interest rates too much for too long (to 10% in 1989), to what some call the "Greenspan bubble" of the 1990s for his role in furthering the dot.com mania. After "his" stock market bubble burst in 2000-2001, he led the Fed on a rate slashing campaign which brought short-term interest rates to 1% and in turn forced other economies such as Europe to reciprocate with low rates of their own. Although the Fed began to increase short-term rates in June of 2004 (they would raise them 17 times to ultimately reach 5.25% in June of 2006), many believe they kept the rates too low for too long, thus creating the current housing and mortgage-based securities situations. Alan Greenspan has admitted much of his role in various speeches. Wikipedia publishes a good Alan Greenspan biography which includes extensive research and references to his contributions to bubbles and recessions, and his own admissions to such contributions.

But enough Greenspan bashing. The point of this story is far different. However much we in the U.S. focus on the actions of our central bank, the Federal Reserve, and maybe those of other rich economies such as Europe and Japan, the truth is that a full three-fifths of the world's broad money supply growth comes from emerging economies. The illustration below depicts the staggering growth in M3, the measure of broad money supply, amongst various nations. Russia's money supply growth was a massive 51% year-over-year, and India's was 24%. The Fed ceased publication of M3 numbers in March 2006 and many suspect big increases in liquidity since then, but it cannot compare with emerging countries which average 21% as compared to single digits for rich economies.



While the central banks in rich economies are independent from politicians, at least from the strictest legal perspective, those of emerging economies do not share the same luxury. More often than not, central banks do the bidding of the politicians which usually call for pumping up money supplies and heavy foreign-exchange interventions. The Bank of Japan is notorious for its long standing cheap money policy which has created a tide of international liquidity, known as the carry trade. An important aspect of this data is that the central banks of rich or developed economies do not determine global monetary conditions anymore. Ten years ago such liquidity would have simply caused massive currency inflation in the local economy, now the excess liquidity flows out and into global financial markets creating bubbles around the world.

Next week we will review some of the direct consequences of this exploding global liquidity, including how it works to perpetuate the current worldwide bull in equity markets.

FAQ of the Week

Question: Can I use short international ETFs with the World Index Ranking?

With the announcement late last week of short international ETFs, ProShares became the first to offer funds designed to go up when a foreign market goes down. The funds currently target EAFE (an index which includes stocks from Europe, Australia and the Far East), Emerging markets, Japan and China. Two funds are short (inverse) and 4 are so-called "ultrashort", or double inverse. Only the first two on the list below have started trading, with the rest expected to appear later this month.

New short international ETFs from ProShares

ProShares ETF Name	Daily Returns Objective	Ticker Symbol	Trading since
Short MSCI EAFE	Equal to the inverse of the daily return of the MSCI EAFE Index	EFZ	October 25, 2007
UltraShort MSCI EAFE	Equal to two times the inverse of the daily return of the MSCI EAFE Index	EFU	October 25, 2007
Short MSCI Emerging Markets	Equal to the inverse of the daily return of the MSCI Emerging Markets Index	EUM	TBA
UltraShort MSCI Emerging Markets	Equal to two times the inverse of the daily return of the MSCI Emerging Markets Index	EEV	TBA
UltraShort MSCI Japan	Equal to two times the inverse of the daily return of the MSCI Japan Index	EWV	TBA
UltraShort FTSE/Xinhua China 25	Equal to two times the inverse of the daily return of the FTSE/Xinhua China 25 Index	FXP	TBA

Now, getting back to the question at hand, the answer is no, we do not recommend to use these ETFs with the World Index Ranking. The momentum model and strategy is exclusively intended to spot the strongest indexes, not the weakest. There is plenty of evidence from our own extensive research and development that the top 5 indexes in our momentum ranking have a statistically better chance of continuing to advance faster than average. The same cannot be said from the bottom of the list. Just because an index is at the bottom of the ranking does not mean that they will fall further. You can find a more complete explanation of what to short in a "Long and Short" strategy in "Why not short indexes in the World Index Ranking?" in the August 17, 2007 FAQ of the Week.

Warm wishes and until next week.

The TimingCube Staff