Interest rates will continue to fall. While the dollar is a victim of this process, the Fed can't risk sending the economy into a recession because it's too restrictive. Part of the Fed's job is to keep employment up and promote measured economic growth. Interest rates need to go lower to make those happen, even if the dollar hits new lows against the yen and the euro and every other currency.

The housing market may bottom out by late spring. Two major events need to happen. First, buyers have to believe the bottom for home prices has been hit. That would require fire sale prices are no longer given by builders on new houses, just to move them off the balance sheet. Also, builders have to keep their inventories at a minimum, to let supply and demand reach equilibrium. Second, lenders need to loosen up on credit requirements. Right now, some home lenders require 40% to 50% as a down payment. That's up from none for some of them earlier this year. While the banks have money to lend, they're focusing on alternatives such as RV's, autos, business, commercial, anything but housing. They'll be back in the housing market in a big way, once they feel comfortable their underwriting standards won't allow a repeat of this year's mess. Investors will do well to buy some of the higher capitalized builders now with an eye to make larger commitments after the January numbers are released.

The economy is actually doing OK and will continue to improve but at a very marginal rate. The best indicator of that is employment in the service sector. While manufacturing jobs continue to decline, service jobs are growing. That's why even with all the layoffs of carpenters and anyone associated with housing, employment is still fairly healthy. Most economists believe we will skip a recession, have a slowdown, then start seeing economic recovery in 2008. As always, the timing of it is impossible to predict. One major indicator will be home sales. If those start firming, expect the economy to grow commensurately. Staying in defensive stocks like drugs and consumables would make sense for at least the first quarter of 2008.

The stock market may finish the year with a bang, if houses are moving in the spring and credit loosens. The first part of the year should be more of what we've seen recently as anxious investors wait for earnings to give guidance as to how bad or good things really are as well as managements' comments on the future. Fear is running the market now, and greed won't reappear until there seems to be a much safer market in which to play. That comes from lower interest rates, strong housing and car sales, as well as high employment. While inflation may come with those, investors feel more greed when things are going well and the track seems clear ahead.

The key to next year will be the housing market, not the dollar or interest rates or any other factor that usually has a strong influence. When the housing market starts to firm, you'll want to be in stocks because the economy will definitely improve as will the market.