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As American investors sit down to the feasting table for Thanksgiving this year, they'll have plenty to be thankful for. Thanks to a month-long rally, all three major stock market indices are in the green for 2004. Despite 50% higher oil prices, four interest rate hikes by the

Federal Reserve

and a sharp drop in the dollar, equities are up.

On Wednesday, the markets ended a quiet day again on the upswing. The

Nasdaq Composite

led the way, up 0.9% to 2102.73, as Goldman's boffo report on


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helped numerous tech and Internet stocks. The

S&P 500

gained 0.4% to 1181.89. As it has all year, the

Dow Jones Industrial Average

lagged its peers, rising 0.3% to 10,520.75.

At the close, the Nasdaq was holding a gain of 5% for the year, the Dow 1%, and the S&P 500 6%. Among the top performers for the year are speculative issues like


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up almost 200%.

The question for the markets going forward has to be whether the economy will continue to do well even as Alan Greenspan proceeds with more interest rate hikes. Too much tightening and the economy will go south, taking the market with it. Not enough and runaway inflation will snuff out the rally. Can Greenspan keep it just right?

As Paul Kasriel, economist at Northern Trust, pointed out this week, the previous rate hikes by the Fed have been virtually "no brainers" since the fed funds rate was so far below the rate of inflation. Now with signs that both the economy may be slowing and inflation may be brewing, the choices become a lot harder.

"Perhaps it would be a good time for Greenspan to devote his full energies toward writing his memoirs and let

Columbia Business School Dean Glenn Hubbard wrestle with the upcoming tough monetary policy decisions," Kasriel wrote.

The task is complicated because Kasriel (among many others) sees the dollar falling further, pushing up inflation, at the same time that the domestic economy loses steam. On Wednesday, the Dollar Index traded at its lowest level since August 1995, as the euro hit its seventh record high of the month and the greenback slid to a new four-and-a-half year low vs. the yen.

The economic picture overall is looking mediocre in the most recent data, possibly foreshadowing weakening into 2005. Wednesday was a veritable hurricane of new data points as releases that come on Thursday were moved up for turkey day. Of course, the most important number for next month's Fed meeting will be the November payrolls report, to be released Dec. 3.

Durable goods orders for October came in well below expectations with a 0.4% drop overall and a 3.6% decline in capital goods excluding aircraft and defense. The latter figure gives the best snapshot of orders for the economy going forward because it excludes big-ticket aircraft purchases that swing wildly from month to month and government spending that doesn't reflect private sector demand.

Still, the weakness in October followed a very strong September that was even revised upward from the initial report last month. Orders rose 0.9% overall and 5.2% excluding aircraft and defense. So, net net, the durable goods picture looks OK. Further, the decline in the value of the dollar should help U.S.-based durable goods makers because it makes their products more competitive in export markets while simultaneously making their overseas competitors' products more expensive here.

Home for the Holidays

New-home sales for October came in slightly above expectations as did sales of existing homes in Tuesday's report. The long-term Treasury market has continued to stay strong despite the Fed's four interest rate hikes, which has kept mortgage rates at historically very low levels. The rate on 30-year fixed-rate mortgage was 4 basis points lower last week than a year earlier. The Fed's Open Market Committee has revealed in minutes of its deliberations that it's keeping a close eye on the real estate market as a gauge of the health of consumer demand.

New-home purchases, at the fourth-highest rate ever recorded in October, reflect strong consumer confidence. And ever increasing home prices -- the average sales price for new homes hit a record $286,700 in October -- provide a continued source of home equity loans to finance further spending.

As an aside, the fundamentals for real estate look as weak as they did

two months ago. Inventories of new homes, up 14%, or twice the increase in unit sales over the past year, are at the highest level since 1979. There is plenty of evidence that homes are being bought as speculative investments to flip. Bulls like to point out that the top for builders was erroneously called in 2001 and 2002, but inventories were much lower then and the Fed wasn't raising rates, it was cutting them.

That said, since my Sept. 16 piece pointing out fundamental problems in real estate, mortgage rates have not moved at all and the Philadelphia Stock Exchange's housing index is up 6%.

More recent data, while certainly subject to seasonal slowing, show that the market may be cooling. Mortgage applications declined for both new purchases and refinancings over the past week, the Mortgage Bankers Association reported on Wednesday. While the level of purchase activity is close to that of a year ago, it has declined for six of the past eight weeks. The volume of refinancings is way down. Even a modest further increase in rates will have a big negative impact on housing at this point.

"Housing market activity should cool noticeably by the beginning of next year: the lack of pent-up demand for housing will render households particularly sensitive to higher rates," writes Celia Chen, director of housing economics at

Mortgage rates were relatively stable on fixed-rate loans but jumped one-quarter of a percentage point for adjustable loans. With the rise in home prices squeezing affordability, more and more consumers have turned to adjustable rate loans to get a lower monthly payment -- at least in the short term.

Consumer confidence in the University of Michigan's revised November reading released on Wednesday was slightly below expectations, revised down to 92.8 from 95.5 in the preliminary read. Analysts had expected a slight upward revision. Again, though, the miss is less than meets the eye. The level is still above October and remains in about the same area where it has been all year.

All of this week's data followed releases showing that industrial production rose 0.7% in October and increasing business expansions in regional Fed surveys in Chicago, New York and Philadelphia. Inflation at both the consumer and producer levels came in above expectations for October. And the leading economic indicators have lost ground for five consecutive months.

All in all, there's no sign that the Fed will be pausing its campaign of measured interest rate increases anytime soon, but by early next year the situation will be a lot murkier. For now, full speed ahead and pass the sweet potatoes.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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