On Tuesday, Federal Reserve Bank of St. Louis President William Poole's  statement that the central bank's interest-rate stance is "about right,''  moved the S&P500 higher mid day despite the continued decline in core producer prices (see the chart above) which came out in the morning.  PPI declined 1.6% in October which follows the 1.3% slide in September.  This suggests to me that corporate pricing power has  peaked and probably is in decline.   That said, investors appear to be shrugging off this concerning trend and are focussed on the prospect of lower interest rates in 2007.

Yesterday, market bulls recieved more validation when the  November NY Empire State manufacturing index surprised to the upside, rising to 26.7 from 22.9 in October.    This, along with US Airways proposed $8 bln merger with Delta Air Lines, led to further strength in the S&P500 driven by healthy industrial sector performance.   In contrast to this index reading, prior regional surveys I reviewed suggested significant industrial sector deceleration nationally.  Some of the Empire index's strength can be explained by seasonal factors, but it does raise the possibility that I may need to send the bear part of my brain back into hibernation for a while.

In summary, I agree with the market's apparent assement that interest rates will move lower in 2006 and that equities are attractively valued.  However, the depth and length of the housing market decline is still unknown and the industrial outlook remains mixed.  I still think it makes sense to be net long equities given valuations, but would not be taking any big bets here.