The manufacturing sector has been correcting throughout most of 2006. One culprit was the high cost of production, particularly crude oil, and industrial metals such as nickel, copper, and aluminum.

Commodity hedge funds lost over 13 percent so far this year. The drop in the price of commodities can also be attributed to the deceleration in China's mainland production growth earlier this year.

A slowdown in U.S. production proved ineffective in discouraging consumer spending. The recent massive drop in gas prices at the pump provided consumers extra cash (needless to say, cash doesn't stay in the pockets of Americans very long).

Dollar value is dropping, which means imports will drop a little in price or remain stable. Moreover, the drop/stabilization in import prices will positively affect the Consumer Price Index (CPI). The money flow yield curve recently started flattening out. However, it must move upwards another 65-70 basis points before it turns negative. This also represents another positive for the economy and, more importantly, the consumer.

Consumer spending moves in accordance with GDP (or vice versa). When GDP increases, so does consumer spending (or vice versa). That is because consumer spending accounts for approximately 75 percent of U.S. GDP (or the economy).

At this point, some of you may be wondering how it is possible for the money flow yield curve to remain positive while the nominal yield has turned negative by as much as 55-60 basis points. The reason is this: the nominal yield curve has only one component-interest rates. Money flow yield curves have three components-interest rates, the inflation rate, and a trade-weighted dollar value.

Currently (as I write), the former is inverted while the latter remains positive by approximately 60 basis points (or 0.60 percent of one percent). In order to gauge the bullishness of this figure, consider the fact that when money flow yield curve is very positive (or bullish), its Fed Funds Rate is 400-500 basis points below the 10-year note's nominal interest rate (which was the case 3 years ago).

For example, if, after factoring in the three components of a money flow interest rate, the result is a positive 4.17 percent Fed Funds Rate, a 4.0 percent 3-year note, and a 4.97 percent 10-year note, then the yield curve is positive (or bullish). This is not a blazing hot economy, but it is still bullish, and pressure on the economy is positive.

One reason the media misjudged and underestimated the strength of the economy is because the media does not utilize the money flow yield curve. Instead, the media depends on the nominal yield curve, which, back in August and September, indicated slow growth in the near-term future of the economy. As money flow subscribers would suspect, just the opposite was true.

The Dow Jones closed above 12000 for the first time in history on October 19, 2007. Although the market seems a bit tired (or overbought), it is making small steps upward. These small steps are much more positive for the economy than large spikes. The current market surpassed its old high set in 2000, and then moved to make a new high above 12000. It can be said that the Dow gained momentum.

According to the laws of physics, an object in motion stays in motion unless it is countered by a force of equal or greater strength. Corporate tax breaks devised in 2002 and subsequently in 2005, provided the current economy with much of its momentum. Thus, it would require a force of equal or greater magnitude to counter and/or halt the economy's current momentum.

If Democrats reclaim control of the House and Senate, it represents a threat to the economy's forward momentum. It is highly likely they will impose new tax measures on corporations and on individuals, whose joint income exceeds $100,000 a year. There are even talks of abolishing the tax credit provided to homeowners whose homes are valued over $350,000.

Enacting tax policies such as these would be a stake through the hearts of both U.S. corporations and homeowners. Furthermore, the only reason U.S. corporations are making profits in unfair market conditions (competition from abroad) is tax subsidies. This is also true in regards to home ownership. A significant number of homeowners would be forced to sell their homes if it were not for homeowner tax breaks.

Another opposing factor, which would not only negatively affect our economy, but could very well bring about a new Cold War, is the continuance and/or proliferation of Iran and North Korea's nuclear arms race. Although North Korean leader Kim Jong Il made a formal apology to China and stated he would no longer conduct nuclear arms tests, let us not underestimate this former playboy turned dictator's ambition for power.

Since the odds are in our favor (except if the Democrats take the House and Senate), the stock market should remain bullish going into 2007. Keep in mind that the Dow discounts the future. Currently, the Dow is telling us the economy will become bullish up until at least early 2007. The following sectors and stocks led the U.S. economy out of what many thought was a coming recession. As a result, they gained momentum and should be expected to continue to prosper at least for the next several months.

The Current Stock Market Engine
(Gains: August 31-September 29)

Data Source: Business Week and Bloomberg Financial Markets

Kenneth Coleman