John Mugarian's Dynamic Growth

Oil prices are finally beginning to bend as crude prices are showing signs of of a temporary pullback. The market has been reluctant to rally sharply because of one of two reasons. 1) It is waiting for confirmation that the oil decline is not a head fake. Or, 2) The market knows that any decline, even below $45/bbl is only temporary.

Now that the market has entered into its positive seasonal period, and short interest is high, it is important that the market attempt a meaningful rally. If not, we could be facing a very difficult market environment for the 3rd quarter.

I couldn't help being immediately alerted to a huge buying opportunity as I watched Jim Cramer's Mad Money on CNBC. Jim Cramer was asked a question about the opportunities GM and GM bonds. Cramer immediately responded with a sell everything answer which resembled the "ready, shoot, aim" approach to investing. Granted, GM and Ford both have some huge problems, but often in the midst of problems lie opportunity.

A few weeks ago I mentioned the value of buying GM's GMAC preferred stock. GMAC is very strong, and our country could not allow its parent company to go out of business. But, if you listen to all the negative news reports you would think GM was going out of business next week. Don't listen to them. The sell off in GM and its debt may be one of the best buying opportunities on the entire street.

We have heard rumblings in recent days about Chinese oil giant CNOOC, ticker symbol CEO, possibly trumping ChevronTexaco's (CVX) $16 billion bid for Unocal (UCL). Today, of course, there was talk of dispelling those rumors. But make no mistake, China is aggressively searching for oil and oil assets, because as the old saying goes, "he who controls the oil....".

It maybe a bit too risky (in the court of public opinion) for the Chinese to jump in and attempt to out bid CVX for UCL. I wouldn't put it past them however. The Chinese have become neurotic in their quest to own oil assets. In fact, not owning a significant stake in oil assets is China's missing link to overtaking the US as the superpower of the world. The Chinese already control our country's long term interest rates, if they can capture significant oil assets, the ballgame will be over.

Now all we need is a right cross, then an uppercut, and we'll be ready to move forward. Of course, I am using boxing lingo to describe what phase of the economic slowdown we are experiencing. Bellweather stocks like Ford (F) and General Motors (GM) have been knocked to the canvas and are slowly getting up to take another lick. WalMart (WMT), the nations biggest retailer/discounter, reported a 14 percent increase in first-quarter earnings, but warned that the second-quarter would not be very good.

After WalMart warned about Q2, oil prices sold off sharply. WalMart is now seen as the most accurate bellweather to consumer spending. Its hard to read whether WMT's warning was company specific, or really an accurate read on consumer spending. In WMT's report, the company cited higher energy prices as being one of the causes for the Q2 warning. If I had to guess, WMT's problems we're company specific, and not related to a pullback in spending by the consumer. When consumers begin to feel an economic pinch, they usually gravitate toward the discount retailers, not away from them.

If you liked the rally today, you're going to really like the rally to come when the Fed temporarily stops raising rates. As I had mentioned in the newsletter, that day is coming, but like I said, I feel it will only be temporary. The only problem is we may not get the offical word until August. If that's the case, we are in store for more of the same. Once we get the official word however, we will probably get a rally that will carry us into December.

We should get a real nice rally in the cyclical stocks as witnessed by the move in home improvement giant Lowes (Low) today. Tomorrow, Home Depot (HD)and Hewlett Packard (HPQ) will report. I do feel the rally in the cyclicals will be our final opportunity to reduce our exposure to the sector. Once the Fed resumes raising rates after its pause, it will be "bombs away" in the group.

The reason I think the Fed will pause is primarily due to the inflation drivers in the economy. Commodity and Raw material prices are pulling back, and they have been the big culprets in the inflation numbers. Oil prices dipped below $48/bbl and the dollar is showing new life after hitting a 7 month high against the euro. We do not have to wait for an official governmental report to be released to take action, we can see what is happening right before our eyes.

Its become obvious that Kmart and Sears no longer fit into today's world of retail. In fact, Eddie Lampert's Sears Holdings Corp (SHLD) is on the fast track to becoming the next Berkshire Hathaway. In 1989, Lampert was fortunate enough to be granted a 90 minute meeting with Warren Buffett. It was at this meeting that Lampert was able to question Buffett on his investment philosophy. Since then the 42 year old star has built a net worth that is estimated to be around $2 billion.

Make no mistake, Edward Lampert is no lightweight, and no one should under estimate his potential to make money. It has become very clear that Lampert's strategy for Kmart and Sears is not to own and operate "has been" retailers. Lampert has put Kmart and Sears into full liquidation mode, and the face of retail is about to enter a whole new realm. In fact, I believe the next major retailer to be gobbled up and liquidated will be J.C. Penny (JCP). Why? It just fits the definition.

The Dow and Nasdaq extended their biggest rally in six months as crude oil prices slipped below $47 per barrel. I have been predicting a pullback in oil for quite some time now, and oil has finally cracked the $50/bbl mark. So, what does this mean for oil stocks? You guessed it. A good opportunity to start buying.

Chevron (CVX) is a really good buy right now. If you combine the selloff that occurred when the merger with Unocal (UCL) was announced with the natural selloff in oil, CVX may be one of the best buys among the integrated oils. If the Fed announces a pause in the rate increases, oil prices and commodity prices will rebound in anticipation of continued growth in the economy.

Almost on cue, Fed Chairman Alan Greenspan said there appears to be "a little froth" in the U.S. housing market. As I had mentioned a few days ago, I felt that Greenspan would try to cool the red hot housing market with words, rather than over tightening. Of course, if "words" do not do the trick, Greenspan will possibily over tighten, and drive the US economy into a recession. Make no mistake, the speculation taking place in real estate today is a very serious problem. Homebuilding stocks sunk after "Uncle Alan" made his comments.

Crude oil fell 12 cents to close at $46.80 per barrel in New York. I thinks you will see oil prices bottom out around $42/bbl before begin its next upward trend. There continues to be rumblings at OPEC about possibily cutting production in June. In addition, Comments by Saudi Oil Minister suggest that oil prices will remain higher for a longer in 2005-2006. I wouldn't put it past OPEC to begin announcing that $40/bbl oil is now OPEC's new target price.

For this reason, I believe we should not attempt to wait for the bottom in oil to begin buying. On Thursday, oil stocks headed higher even as oil prices fell. I would be a buyer of the following oil stocks.

Just as we were beginning to get good news on the inflation front, prospects of a pause from higher rates are dimming as we speak. Last week, we began to get some good news about inflation. The CPI's core inflation rate came in at an unbelievable of 0.0%. The month before the core rate was up 0.4%. On the surface, it looked as though inflationary pressures were non-existant. Of course, you and I knew better.

Today, we are seeing an entirely different ballgame. Real Estate, as measured by the homebuilding stocks are rallying sharply as the benchmark 10-year note (+18/32) down to yield 4.05%. Rates this low will not cool inflation in the housing sector, but only add fuel to the flames. In addition, just as investors thought oil prices were down for the count, oil prices surged as crude oil rose 51 cents to $49.16 in New York.

Now you know what the Investor Alert is all about. We expose tripwires. And believe me, Wall Street is covered with tripwires. For example, a few days ago Wall Street demolition teams have been stretching wire near ground level to get you to believe the Fed was going to halt its rate increases sooner, rather than later.

We have been telling you that the Fed will raise rates at least 1 or 2 more times before even considering a pause. Now, that being said, the Fed has to be very careful not to raise rates beyond current market rates. So what does that mean? The Fed Funds rate is at 3% and the three-month Treasury bill is currently around 2.8%. The Fed rarely exceeds market rates, so we know that a pause is coming unless the yield on the 3 month T-bill begins to rise.

Technically, the month of May begins the worst 6 months of the year for the market indexes. This being said, I have come up with a few reasons why we should not anticipate a pause by the Fed any time soon.

1) Everyone is talking about it. Anytime the crowd or the majority begins to anticipate something, rarely does the event happen.
2) Experts have been coming out in droves saying there is no way the Fed will raise rates enough to invert the yield curve. Oh yeah, how about the "Tow Truck" approach. Raise short term rates close to yields on the 3, 5, and 10 year Treasury's. The thoery here is the short term rates will nudge rates up along the yield curve.

Now, how can this be done? The Fed funds rate is currently at 3%, while market rates as measured by the 3 month T-Bill is 2.8%. Greenspan is already ahead of market rates, and because of this occurrence, everyone is anticipating a pause in Fed action. Maybe Uncle Alan has a different idea.

The "Sell in May, and go Away" strategy is great for investors who follow seasonality, and are not willing to put their feet on the edge of a cliff. That being said, the market will probably put on a decent performance going into the 3rd quarter. The question for investors and traders is this: 1) Do they continue to bet on a final rally that could fizzle out by mid August, or 2) Do they play defense now and not worry about it.

What could cause the next leg up? How about a pullback in oil prices? The Fed has made it clear that rates will continue to march higher at least 1 or 2 more times. My guess is oil will once again bounce below the $50/bbl mark, and may even go below $45/bbl which will fuel optimism among traders.