As we sit here gathering our thoughts about the elections, the economy, energy concerns, and the outlook for interest rates, John Kerry has officially conceded the race for president and "W" has retained his job for the next four years. Both houses of Congress have picked up additional seats and the world continues to turn in traditional terms. First, our thoughts on the election: President Bush has an opportunity to push ahead with his promised agenda which, if successful, will have favorable results at home. Job creation, solid economic growth without excessive inflation, a meaningful attempt to get the fiscal house in order, and health legislation are all within reach but not assured. We believe that job growth will continue on firm ground and inflation will not be a problem. The budget deficit and health reform are questionable and not likely to be resolved in the near term. The role of the U.S. as it relates to Iraq and the war on terrorism should have minimal affect on the economy as long as the battle is fought overseas. And, the financial markets will watch carefully and act cautiously until there is a sense that promises are being kept.

While markets will continue to focus on the high cost of oil, economic reports across the board are revealing healthy growth. Real GDP expanded in the third quarter at a 3.7% annualized rate, consumer spending advanced 4.6%, durable goods spending grew, and core inflation remained tame. Although inventory buildup has not gained momentum and the trade gap continues to widen, most forecasters suggest that the fourth quarter will not moderate from current levels. To be sure, we can expect positive economic developments and Federal Reserve monetary policy to take center stage between now and year end.

What about oil? Once again we are back below $50 per barrel as some of the tension in regard to labor problems in Nigeria have dissipated and reserves in the U.S. appear adequate. In sum, oil at a price above $50 per barrel starts to look a little heavy. A prolonged break below $50 per barrel could be a bell ringer that signals that the grab attack party is over. We'll see!

Finally, back to bonds and interest rates. Starting with bonds, we find the 10-year slightly above 4.00% at 4.10% and the 2-year stuck around 2.60%. While there is argument that bond yields will rise if the Fed goes to 2.00%, we see a short term problem that continues to persist on the longer end of the market. Remember the hedge funds that put on the wrong trade back in June when funds were at 1% and the 10-year was at 4.75%, just before the Fed raised rates on June 30th from 1% to 1.25%? Guess what? They are still short the bonds, cost of carry is up 75 basis points, and they are reaching the breaking point. Put another way, these funds are being cut by both sides of the knife and the pain is unbearable. Keep in mind that we are talking billions of dollars, and when they do throw in the towel and begin unwinding their positions, we could have the 10-year trade in yield below 3.75%. Hard to imagine this when the Fed is poised to hike the funds rate 25 basis points but the prospects for this to happen are high. Our prediction is that the 2-year will move up towards the 3.00% level after the Fed moves to 2.00% and the longer part of the curve will remain steady or improve.

All in all we think we are getting ready for some very positive moves in all markets between now and year end. Plain and simple: stocks a lot higher, bond yields move a little lower out past 5 years, and oil gaps down to test the low $40s per barrel. So, this is what makes markets. Some see adversity and others see nothing but opportunity.