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

Market Update

After two losing sessions on Monday and Tuesday, Wall Street turned around and rallied sharply on Wednesday on reports showing the economy "strong but not too strong," the magic balance between solid growth but not so much as to keep the Fed from cutting rates next week. Economic news was mixed as conflicting data did not deter bulls from driving markets higher. One good example was Wednesday's ADP Report suggesting a jobs surge and the opposite sounding news that U.S. companies announced 15.9 percent layoffs in the previous month. All told, the market liked the news.

The Nasdaq 100 has consolidated its position above both its 50 and 200-day exponential moving averages (EMAs) and the S&P 500 has now regained both its EMAs as well. Only the Russell 2000 continues lagging, despite advancing the most of all U.S. indexes on the week (+2.31%), it still sits between its 50 and 200-day EMAs.

The World Index Ranking portfolio continued to lead by advancing 2.43% this week which is the fourth and last week of the current period.

Our current Buy signal remains in effect.

Trend Timing School

Inflation, past, present and future

With every monthly release of inflation figures, professional observers and individual investors are growing increasingly suspicious. Somehow, from personal daily living experience, most of us do not believe government numbers, including the most recent consumer price index (CPI) figures which puts year-over-year inflation at 3.5%. It seems that over the last 12 months a lot of the things we purchase have gone up substantially more than that. Everything from the gas at the pump, airplane tickets, a gallon of milk and even housing have all gone up more.

By living in the United States we are directly exposed to the insidious effects of inflation. According to the government's own CPI figures, the impact of inflation over the years is quite dramatic as evidenced by the fact that during the 23 years since 1984 inflation halved the value of the U.S. dollar (or doubled the price of everything). The success of our wealth building efforts depends on understanding what is coming and planning our investments accordingly.

Before going much further, let's start with the basics. Investopedia defines inflation as "The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling". There are two distinct types of inflation: commodity inflation and currency inflation. While everyone is aware of rising oil prices, few realize that is the least of it. Most commodities from copper, gold, natural gas, to uranium have been exploding with several doubling in price over the last year. Commodity inflation is primarily fueled by demand and supply, and can at least be partly attributed to the gigantic growing demand from countries like China and India. When demand growth outpaces supply, prices have nowhere to go but up. The prices of raw materials and energy ultimately ripple through the food chain and into the costs of manufacturers and ultimately into the prices consumers pay for every day goods.

Currency inflation is also expected by many economists to heat up in the foreseeable future, and they argue that one of the primary causes is excessive money supply growth. Economists also hold the view that politicians will invariably inflate their way out of insurmountable debt. By increasing the money supply, i.e. printing money, a government devalues its currency, thus lowering the effective debt.

The Bureau of Labor Statistics (BLS), a branch of the U.S. Department of Labor, is the official tracker of the Consumer Price Indexes (CPI). Their online resource at http://www.bls.gov/cpi/ provides a wealth of data and tools for those who love the facts. Government approved and improved facts that is. Astute observers will have caught the plural in the term Consumer Price Indexes. The official definition of "headline inflation" or CPI is the percentage monthly changes in the prices paid by urban consumers for a representative basket of goods and services. One of the powers of government is to define what is in the basket and what is not.

"Core inflation" is a more selective basket definition which the Federal Reserve is most interested in because it represents the component of inflation most closely linked to monetary policy. Core inflation conveniently excludes items such as food and energy from the basket of goods and services. The official rationale for the exclusions is that these items are historically highly volatile and tend to mask the underlying inflation trend. In reality, underreporting inflation helps government officials, especially in times of expansionary monetary policies as we currently have. Besides favorable economic news being always better to take credit for, there are strong financial incentives for underestimating CPI because it limits spending increases that are tied to inflation.

There have been years when the CPI was in double digits such as from 1917 to 1920 when it remained around 15% or higher, or 1979 to 1981 when it stayed above 10%. There have also been deflationary times such as the 1927 to 1933 Great Depression years. More recently, judging exclusively by the CPI, it seems inflation has been quite tame and subdued, remaining pegged in a narrow 2.3% to 3.4% range in the last 5 years. Looking at the chart below which represents different CPI inflation rates, we can see that the difference between headline inflation and core measures increases substantially in inflationary periods like the 1970s.

CPI Inflation Rates: Headline, Core Measures, and Energy (5-year moving averages of annualized % change)



Source: Bureau of Labor Statistics; Federal Reserve Bank of Cleveland

The chart shows that the energy component of CPI (CPI-E minus CPI on the graph) is increasing at almost 20% more than the CPI itself on its 5-year average, and that the items left out of the core inflation (CPI minus CPI-XFE on the graph) are increasing at 12% more. This is an inadvertent admission by the government that there is an increasing disconnect between CPI numbers and real inflation. For the complete article on the site of the Federal Reserve Bank of St. Louis go to "Inflation Disconnect?".

So we know the difference between real life inflation and the published core CPI numbers is growing. If inflation is not 3.5%, how much is it? We read estimates anywhere from 5% to 10% and more. We don't know the exact number, but we know that all the data is pointing to double digit inflation levels in the not too distant future. In order to keep the economy from slipping into a recession from the weight of the housing and financial sectors crisis Fed Chairman Ben Bernanke has little choice but to turn the money supply spigots wide open. By embarking on a series of interest rate cuts the Fed clearly showed its hand and sided with interventions to strengthen the economy versus fighting inflation and supporting the dollar. The massive national debt and spiraling deficit spending are making higher inflation and a weaker dollar a certainty.

The unavoidable consequence of higher inflation is that each of us must establish a plan and adapt to the new circumstances. The first place to start is to keep investing in the strongest markets in the world, where returns are well above inflation. A future Trend Timing School article will focus on basic preservation techniques and investing know-how for inflationary times.

FAQ of the Week

Question: With the World Index Ranking, do I need ETFTide?

The strategies resulting from the combination of TimingCube's Trend Timing signals with the momentum driven World Index Ranking fund selections deliver great value by themselves, but they can benefit from the strategy diversification ETFTide can supply.

The TimingCube system is entirely stock market centric, trending with and investing in the broad stock market indexes exclusively. Since world stock markets are generally correlated, the Trend Timing signals are critical in protecting against and/or benefiting from the strong downturns that impact all stock markets from time to time. The World Index Buy and Rebalance strategy, which is always fully invested and entirely ignores the signals, softens downturn effects by remaining invested in the strongest stock markets (which at times can be the ones losing the least).

In contrast, the ETFTide system encompasses not only broad world equity markets but also ETFs investing in specific industry segments as well as non-stock asset classes such as bonds, commodities, currencies and real estate. During prolonged stock market weakness, ETFTide will rotate into the non-equity classes which outperform at such times.

The table below presents a quick comparison of the respective systems and strategies against buying and holding the S&P 500 .

Performance comparison of World Index Ranking, ETFTide and buy and hold strategies

	World Index Ranking			ETFTide	S&P 500
Year	Long Only	Long and Short	Buy and Rebalance	Buy and Rebalance	Buy and Hold
2007 YTD*	12.97%	4.92%	23.03%	40.20%	4.40%
2006	35.60%	50.95%	24.34%	24.32%	13.62%
2005	38.40%	50.62%	32.93%	27.58%	3.00%
2004	29.47%	34.69%	23.03%	25.22%	10.59%
2003	59.18%	61.59%	45.98%	49.44%	20.61%
2002	2.62%	34.84%	-12.05%	1.90%	-21.74%
2001	20.73%	102.26%	-1.29%	-5.57%	-12.06%
* Through November 30, 2007

Clearly, when broad stock markets are the strongest as they have been for a few years, the World Index Ranking and ETFTide portfolios and returns will be similar. 2007 may prove the value of strategy diversification as we see ETFTide edging ahead substantially with a 40.2% gain through November 30, 2007. The World Index Ranking strategies were clearly hurt by a couple of ill fated Sell signals, reminding us that no strategy can be perfect all the time. The ETFTide system further benefited from staying fully invested throughout, from the weakness of the U.S. dollar, and its ability to invest in China. It is also worth pointing out that during the bear market years of 2001 and 2002, most defensive ETFs such as commodities, currencies and real estate did not exist and one can therefore expect ETFTide to perform even better during future downturns.

You will have to decide if the strategy diversification provided justifies paying the fees for two services for yourself. Should you decide in the affirmative, we can help soften the financial burden with a Special Year-End Invitation (and great savings!) .

Warm wishes and until next week.

The TimingCube Staff