John Mugarian's Dynamic Growth

I want to take a look at three indexes, and their impact on the stock market. The three indexes are the Dollar, Commodities, and the Bond market.

Dollar: The dollar has been falling since 2002. On February 18th, 2004 the dollar fell to a 9 year low of $84.77. Since oil is priced in dollars, when the dollar declines, oil becomes more expensive to consumers. Recently, the dollar has rallied sharply from its oversold position which caught many investors who were short by surprise. Hedge funds and other professional traders went running to cover and hence the dollar put on an impressive performance to the upside. The renewed strength in the dollar has fueled optimism among foreign investors, and these investors began to put money back to work in US stocks.

If the rally in the dollar is truely an oversold reflex bounce, then foreign investors will take profits near the upper end of the S&P's trading range (around 1250). Many experienced investors believe the dollar is in a long term downtrend which could last another 5-10 years. If the dollar resumes its downtrend, this is what we could could expect.

1) Foreign investors will take profits. The stock market will sell off, and oil prices will continue to climb.

I recieved a good question from a viewer, and I wanted to pass long my comments for everyone's benefit. I couldn't respond and explain the entire macroeconomic picture because it would take forever to explain. In my journal, I try to be as concise and to the point as possible without boring you with a bunch of economic data. Don't get me wrong, I will try and bore you from time to time too, but I've found that most investors want to know the bottomline.

I realize that everyone has an opinion on just about every subject, and every subject can be debated until the cows come home. The opinions I render try and look beyond the obvious, and I try to predict events before they make headlines. I am guilty of being a contrarian, and I love a bargain.

Here's a comment from a reader:
John, I think your analysis of the housing market concerning valuation is correct, but sadly, housing has replaced manufacturing as the main wealth generator in this country, and like it or not, I think the Fed is targeting it and does not want this bubble popped or the whole thing is coming down, just like Japan. How else can we be "in the eighth inning of tightening" when the Fed funds rate is still negative and nominal long rates are lower than nominal gnp which is inflationary for things than can't be imported, ie, housing and land?

See my answer below:

The stock market stumbled today when the Labor Department's non-farm payroll report showed the economy only created 78,000 new jobs in May. The June report should be much rosie since high school and college students will be seeking employment for the summer. I've always look at the late spring, early summer jobs report as being misleading since jobs for students are temporary. So where are the real jobs? (manufacturing and textiles) Oh, they have been shipped to the cheap labor markets.

The spike in oil prices haven't help people who need real jobs either. General Motors and Ford are gearing up for "temporary" layoffs. These layoffs will not be temporary if oil prices remain high, and the "Big 2" continue their 1950's innovation mentality. To show you that innovation really works, Daimler Chrysler is building gas guzzlers that are actually selling. If GM and Ford continue their moronic approach to manufacturing, the new "Big 3" will be made up of Toyota, Honda, and Daimler. Huh, all foreign owned.

It won't be long and influential traders on Wall Street will be leaving their trading posts for summer. These influential traders will be heading for places like Marthas Vineyard and Jersey Shores for their usual summer vacations. While away, volume on Wall Street will be irractic, and heavily dominated by hedge funds who like to create havoc while they can. In other words, "While the cats away, the mouse will play". If you ever wondered where "sell in May and go away" came from, now you know.

Tech companies normally do poorly during the summer months because school is out, and administrators who make buying decisions are usually on vacation too. In years past, companies like Apple Computer faired poorly because their largest market were schools. Today, of course, its a different story. Tech has been rallying of late due to short covering.

An alert contrarian knows how to spot the top and bottoms in any market. Since most markets and sectors go higher and lower than one could imagine, there are no better contrarian indicators than the front covers than popular financial publications.

Our second confirmation of a top in real estate occurred on the latest cover of Time Magazine. The headline read, " HOME SWEET HOME: WHY WE坦E GOING GA-GA OVER REAL ESTATE". The may 30th issue of Fortune proclaimed, " REAL ESTATE GOLD RUSH".

Let's add another hot investment to the list, Hedge Funds. On the latest cover of Fortune the attention getter was "IS GREED STILL GOOD?" Let's see what Alan Greenspan had to say recently.

On Tuesday, the stock market rallied sharply during the first hour of trading after Alan Greenspan said that the recent decline in long-term interest rates was not necessarily a sign of looming economic trouble. In the afternoon however, the Dow gave back its triple digit gains to close up only 16 points. So what gives. How about General Motors announcement that they plan to close plants and cut at least 25,000 jobs over the next three years. Wall Street obviously disagrees with Greenspan's accessment of the economy since GM is one of the nations largest employers. The trickle down effect from GM's cutbacks will have a ripple effect on suppliers and other companies who rely on business from GM, not to mention the economy.

On Thursday, Greenspan will testify before the Joint Economic Committee of Congress. He will probably try to sooth the markets by reiterating what he said to a group of bankers in Beijing on tuesday. In his comments to the bankers, Greenspan practically admitted that he did not know what was going on, and more importantly, that he did not know what to do about the drop in long term interest rates. Admitting that ("We've never run into anything like this before". "The economic and financial world is changing in ways that we still do not fully comprehend ") he doesn't understand what is going on does not provide much comfort to investors as to what going to happen in the future. In fact, one could take his comments as saying that our economic future is no longer being controlled by us. Well hello ! That's what happens when you sell your economic souls to China.

On Thursday, Federal Reserve Chairman Alan Greenspan did not give any clues as to when the Fed would stop raising rates. He only said, "we will probably know it when we are there because we will perceive a degree of balance we have not perceived before."Well, so far his perceptions have confused even him. (See yesterday's post).

On June 10-11, Treasury Secretary John Snow is going to play hardball with the Chinese at the Group of Eight meeting in London. Snow is expected to call the Chinese on the carpet about pegging their currency to the US dollar. This of course has been the main culprit of the soaring Trade Deficit.

If the Chinese remain defiant, then the US could take more drastic measures by labeling China as currency manipulators, and begin imposing trade tariffs on Chinese imports. How will the Chinese react ? How about halting their purchases of our Treasury bonds that have been financing our deficits and keeping a lid on long term interest rates.

Ford and GM debt continues to trade at a discount to par. I know you have heard all the horror stories surrounding both companies, but in the midst of disasters, bargains are born. Below, I have listed a few income idea's:

Ford Motor Credit Co., 7 3/8% Notes due 10/15/2031- FCZ
Ford Motor Credit Co., 7.60% Notes due 3/01/2032- FCJ
General Motors Acceptance Corp., 7.25% Notes due 2/7/2033-GKM
General Motors Acceptance Corp., 7.35% Notes due 8/8/2032-GJM
General Motors Acceptance Corp., 7.375% Notes due 12/16/2044-GOM
General Motors Corp., 7.25% QUIBS Quarterly Interest Bonds due 4/15/2041-GMW
General Motors Corp., 7.50% Senior Notes due 7/01/2044-GMS
General Motors, 5.25% Series B Convertible Senior Debentures due 3/5/2032-GBM
General Motors, 6.25% Series C Convertible Senior Debentures due 7/15/2033-GPM

As always you need to assess your own risk tolerance and individual asset allocation before investing.

No one likes a pessismist, but I have to admit there is not much to be bullish about. In fact, I think its more important to use the old adage "the return of your money is more important than the return on your money" right now.

Before I get started, I want to announce that I will be issuing my newsletter quarterly insted of monthly. The reason for this is very simple. #1- I am finding that by time I finish an issue, the news is old and the timing of idea's is too late. I will be able to give you more timely information by including the information in my Journal. That said, I will be discussing investment idea's more thoroughly in the Journal. And,as always, my investment blog is for informational purposes only.

The Dow Jones Industrials rebounded from a 52 points loss to close up 18 on volume of about 1.37 billion shares. The S&P 500 was up 2 points, and the Nasdaq closed up 5. Advancing issues beat decliners by 4-3 on the NYSE and by 6-5 on the Nasdaq. The 10-year Treasury note was unchanged to yield 4.11%.

Favorable economic data eventually lifted the markets inspite of higher oil prices. Crude oil finished up 57 cents at $55.57 per barrel in New York, its highest close since April 6. At mid-day Oil traded above $56 per barrel after a report revealed that U.S. stockpiles declined more than expected last week.

Oil barron, T. Boone Pickens was interviewed this morning on the financial channels, and he reiterated that oil prices would once again reach the $60/bbl mark over the next 3 months. Our 2 oil stocks (Chevron-CVX, and Schlumberger-SLB) in combination with a few I mentioned a few weeks ago have put on impressive performances.

As tempting as it may be to chase the market, do yourself a favor and don't. Be glad that you have a decent position in oil because the supply and demand issue says prices could go higher.

Barron's recently interviewed Ray Dalio, the Chief Investment Officer of Bridgewater Associates which manages around $100 billion in assets. Ray was the Director of Commodities at Dominick and Dominick, and graduated with an M.B.A. degree in finance from Harvard Business School in 1973.

Here are the bullet points from Barron's interview with Ray:

1) The current dollar strength is ephemeral and it will fall relative to the Asian currencies over time as Korea, China, et. al. stop buying so many U.S. bonds.
2) The euro has peaked and economic stagnation on the snooty continent is the watch word.
3) Commodities will be the place to be as the developing nations are going to churn them up.
4) Oil is just resting and will be over $100 a barrel within a year – pure supply and demand.
5) The U.S. equity markets are over the hill. Go East, young man…as far as you can.

Just when I was beginning to think the Chinese had us by the short hairs, a potential move of desparation can prove me wrong. Of course, everything hindges on US politicians doing the right thing, and protecting our national interests over making a buck. I guess we'll see. I'm talking about the rumor of the Chinese oil giant CNOOC Ltd (CEO), making a competing bid for Unocal (UCL). Maybe we do have something we can finally hold over their heads.

I have serious doubts whether regulators will ever grant CNOOC approval to outbid Chevron (CVX). In reality, regulator approval is the only trump card the US has to keep the Chinese from declaring economic war on America.

Also announced today was China's interest in buying Maytag out from under a New York investment firm, Ripplewood Holdings. Hey, I have an idea... why don't we bundle up Enron, Worldcom, Aldelphia, Qwest and a host of corrupt CEO's and investment bankers and sell them to the Chinese. As far as oil is concerned, that is off limits.

Well the Chicken (John Snow) and the Hawk (Alan Greenspan)backed away from calling on tariffs against China. One use to be able to tell the difference between a chicken and a hawk, but not anymore.

Greenspan warned that imposing tariffs on China would hurt U.S. consumers and protect "few if any American jobs." That's right Al, but the jobs are gone and they are not coming back. Why don't you just go ahead and tell congress the real reason you are afraid of calling for tariffs. Could it be because the Chinese have control over our longer term interest rates ? You have to bite the bullet sooner or later. If something isn't done soon we will be trading in the 50 stars on our flag for 5 gold ones.

1) Treasury Secretary John Snow and Fed Chief Alan Greenspan backed down from protecting American interests against China. The Senate is set to vote on a 27.5% trade tariff against China, but the Bush administration said they would veto the measure. The markets reacted negatively on the news.

2) Oil prices leaped above the $60/bbl mark. This level has been a point of resistance. A rise from here could bring much higher oil prices.

3) World Bankers are looking for a way to control the problem of worldwide oil demand. The speculation is to lessen demand by creating a worldwide recession. Since interest rates continue to remain stubbornly low you may be asking how can a recession occur as long as interest rates remain low. How about $100/bbl oil ? That would probably do the trick.
For those of you who have been wondering how the Real Estate bubble can pop with low interest rates, now you have your answer. If energy prices drive the economy into recession, lower interest rates will not matter. Even Donald Trump is selling $1.8 billion of his New York real estate holdings.

4) June end's the NASDAQ's best 8 month's according to the Stock Traders Almanac. Technology stocks have been touted by guests on the financial channels for over a month. I think I'd wait.

I wasted 30 minutes this morning watching Treasury Secretary John Snow give us his standard line of everything's great, and the economy is strong. If you are one of the many corporate executives cashing in your stock grants and options, I'm sure everything is rosy posey. But, if you are part of the middle class on down, you are beginning to feel an economic pinch.

Higher oil prices are beginning to eat into consumers wallets, but not enough to cause real concern. As energy prices continue to climb, consumers will begin to pile on more debt to feed their insatiable appetites to keep up with the Joneses. To show you how blind the average consumer really is, the US Government gave big tax breaks to small businesses that purchased large gas guzzling SUV's before the end of December 2004. Of course, the politicians did this as a favor for the auto industry, but buyers of these vehicles were essentially suckered into purchasing these vehicles at top dollar, and are now paying $60 to fill them up. Since there is virtually no demand for gas guzzlers nowadays, if a buyer were to trade their newly acquired vehicle for a fuel efficient one, they would get creamed on the trade in.

We are quickly approaching the end of the positive seasonal cycle for stocks. As we do so, the question remaining is can the stock market find a tradable low this week and rally to higher reactionary highs in July? Since short interest remains elevated in technology, industrial services, energy, finance and minerals, so anything's possible.

The price of oil pulled back below $60 a barrel, and the traders who are not on vacation are hoping that Alan Greenspan will give the markets some encouragement on the interest rate front. If Greenspan does give a positive spin on interest rates and the economy, the markets will rally one more time before settling into a deeper correction that could take the market averages down 5-10% from their reactionary highs.

The first quarter GDP numbers were revised higher to 3.8 percent compared to the previous reading of 3.5 percent growth. Most economists were expecting a revision upward to 3.7%.