John Mugarian's Dynamic Growth

Despite the recent rise in the market, insiders continue to sell at a rate of 3 sellers for every 1 buyer. In addition, many of the insider purchases are among "no name" stocks. While the tech stocks continue to be touted by guests on the financial channels, the technical rankings among the group has been moving lower. This indicates that stock prices have moved above earnings expectations.

Among the noticeable buyers and sellers, I have identified the following:

BUYERS: Fifth Third Bank (FITB), Bank of America (BAC), JP Morgan (JPM), Chesapeake Energy (CHK), Radio Shack (RSH), Midway Games (MWY).

SELLERS: Google (GOOG), Toll Brothers (TOL), Hewlett Packard (HPQ), Northwest Air (NWAC), Best Buy (BBY), Lennar (LEN), Ryland (RYL), Hovnanian (HOV), Monsanto (MON), Nike (NKE), Motorola (MOT), Intel (INTC), Oracle (ORCL).

In the late 1970's the movie, Animal House took the country by storm. College campus' were having toga parties, and who could forget the scene at the cafeteria when John Belushi began shoveling food into his face just prior to the famous food fight.

Well my friends, the John Belushi's of today are the American consumer. Today, economic reports showed that consumer spending jumped 0.8% in June while personal incomes rose 0.5%. Am I missing something here or are consumers spending more than they're making. The spending insanity is alive and well.

In addition, the Big Three automakers reported that car sale for July reached 20.8 million units, the highest level since October 2001 when 21.8 million units were sold. I told you recently that the "employee discount" promotion was nothing more than a classic textbook inventory reduction sale. I guess I was right since CSM Worldwide, an automotive forecasting company, said " the deals were good because they cleared out 2005 inventory".

These record sales occurred despite a rise in Oil prices which closed at $61.89 per barrel. I can still see the kid in the Dodge ad saying "its a Hemi". Soon these consumers will be saying, "why did I do this".

No doubt, a rising market creates bulls and removes skepticism. If the market continues to climb, you will probably want to join the crowd. I know this. That is why we are compiling a trading list of "hot stocks" if we get the anticipated selloff during the month of August.

I am not very good at putting my feet on the edge of a cliff, but I cannot ignore the recent trend. It is becoming painfully obvious that 2006 has all the makings of being a down year. In fact, corporate earnings will slow significantly as higher energy costs and interest rates begin to take their toll.

The 2000-2002 market drop of 50% (S&P) was eerily similar to the 1973-1974 bear market. The 1974-1976 bull market fueled a similar optimism that we are experiencing right now. However, the 1976-78 bear market sent prices down 28%.

One of my favor market indicators is insider buying and selling. In passing, I have mentioned insider activity, but now it seems that these insiders are running for the exits. Insiders are not like public investors. In fact, many are privy to information that the average investors is not.

The revolving door relationship between corporate insiders (Directors, CEO's, CFO's, etc) and Wall Street brokerages is not a topic of discussion by the financial press. And believe me, most brokerage firm analysts are only as good as the information they receive from their buddies inside the companies they cover.

Corporate insiders and Wall Street analysts do a great job of covering for one another. This "unspoken relationship" fills the pockets of analysts and bankers with investment banking fees, while insiders benefit from selling huge amounts of stock grants and options. I encourage you to get the book, "Wall Street Meat", written by Andy Kessler, a former analyst with some of Wall Street's largest investment banks. If you own a single stock, bond or mutual fund, this book is a must read.

Here is a random list of top insider buy/sells over the past 35 days:

Stocks continued their decline today as a stronger-than-expected economic report increased concerns the Federal Reserve will keep raising interest rates to contain inflation. The July non-farm payrolls rose to 207,000, many economists prediced a gain of only 180,000. I told you a few weeks ago the summer numbers for employment would be higher due to the fact that students seek employment during the summer months.

The Dow closed down 52.07 at 10558 as oil prices and interest rates continued to climb. Interest-sensitive stocks like utilities, homebuilders and REITS led the market lower. The yield on the 10-year Treasury note rose to 4.39%. Market players are begiining to worry that the Fed Funds rate may now reach 4.25% by year's end.

Corporate Insiders are continuing to be heavy sellers in the market. Today's reading showed only 68 buyers and 268 sellers. Google insiders continued to sell in what will one day be described as one of the greatest get rich scheme's since Amway.

You know the rest, "Where the Buffalo roam", (new verse) "Because I cannot afford a house anymore". Today, Fannie Mae said that the price of homes financed by the mortgage giant rose to a 16.5% annualized rate in the second quarter and are now up 14.1% year-over-year. Even with low borrowing costs, consumers are finding it less expensive to rent than buy.

As is the case with most bubbles, there is a self correcting mechanism. Today, the homebuilder stocks continued to sell-off despite data that showed there is no slowdown in home sales or mortgage applications. The Housing Index (HGX) is down 2.15% today after a fall of 3.2% on Friday.

Oil prices continue to spike as refinery problems continue to cause concerns about refined supplies. The 10-year Treasury note was down 2/32 to yield 4.40%.

Despite the markets rise in recent days, a near term sell off is surely in the cards, and 2006 could be an awful year. Once again, insiders are selling like wild Indians. Yesterday's activity saw 67 buyers and 168 sellers. Today's insider results were continuing the selling trend with 69 buyers and 221 sellers.

As I have said before, I do not like to put my feet on the edge of a cliff. I feel much more comfortable waiting for stocks to come to me. Back in 1999, Warren Buffett was asked what he was doing in the current market environment, and he said, "Playing a lot of Bridge".

The homebuilding stocks showed signs of cracking the past few days. We might see a little recovery before they eventually break. Insider selling has been incredibly heavy in the sector.

Investors who do business with Wall Street firms are being bought and sold like a herd of cattle. Smaller, quaint, brokerage firms like Legg Mason are selling their clients to brokerage firms that were involved in the massive $1.4 billion dollar securities fraud settlement. Citigroup Global Markets Inc. (Salomon Smith Barney) just bought Legg Mason. If you have an account with Legg Mason, you, yes I do me YOU, have been sold to Smith Barney.

As is the case with most of these mergers (buyouts), the brokers of the acquired firm are coaxed into accepting a retaining bonus to stay with the new firm. These retention packages vary from 25%-50% of the brokers previous years fee's and commissions. As an example, if a broker produced (from you) $500,000 in commissions the prior year, they may receive a 40% retention or $200,000 to get you and the broker to stay with the firm.

Consumers continue to get raped at the pumps every time they fill up. We are all aware of the growing worldwide demand of oil, but prices have gotten way ahead of themselves. The EIA reported an unexpected build of crude oil and a larger than expected build up of distillates in its weekly inventory data.

Steve Forbes was recently quoted as saying that there is a $10-$15 premium in the price of crude, and that prices were unusually high due to speculation among traders. Despite all this news, consumers are continuing to get pick-pocketed at the pump. Oh, George (Bush), where are you ???

I have been alerting you for weeks that the recent revival in technology was due more to short covering rather than an evolving bullish trend. The facts just didn't add up. Insiders were selling, and the price of technology products were falling.

This morning Dell (DELL) failed to meet analysts expectations on the revenue side, and the stock is off a little more than 3 points or almost 8%. The facts begin to add up when you go back and look at the insider selling at Dell. Since June 1st, insiders have sold almost 1.25 million shares prior to today's earnings dissappointment. Did they know something ? We'll never know. Its one of those dark clouds on Wall Street that no one wants to investigate.

Based on the news coming out of Dell (DELL) last week, why should we think things are going to be any different at Hewlett Packard (HPQ). HP is going to release its earnings Tuesday after the close. Many of the shorts in the stock have already covered their positions, and its unlikely that the news coming out of HP is going to be any better than the news released from Dell.

We all know that HP is a turnaround story, but the fortunes of a company do not turn on a dime. PC makers are dropping prices to gain market share, and this cannot be good news for revenues or margins. Printer giant, Lexmark issued mix guidance in their latest conference call, and even mentioned price reductions were forthcoming.

With oil prices approaching $70/bbl, and gasoline prices ranging from $2.50-$3.50 a gallon, I have to ask, where is your pain threshold? Is it $3.50, $4.50, $5.00 ? Unless I am wrong, oil prices will not peak until Americans begin screaming bloody murder, and consumers begin demonstrating against high energy prices. I know you don't believe this will happen, after all, we are too civilized for this type of behavior. Oh, you think so ?

Unless I am very wrong, consumers are beginning to get irritated as we speak. But, not irritated enough to begin protesting. They are however irritated enough to bring the President's approval ratings down. Sure, Iraq has something to do with this, but oil prices are also a huge factor.

Crude oil rebounded $2.00 today as news of a refinery fire and protests in South America halted production. The price of oil is extremely sensitive to news events it use to shrug off in years past. The price of crude is also very sensitive to the activities of terrorists. Today, U.S. Navy ship docked in a Jordanian port was attacked by three missiles.

Texas oilman, Boone Pickens, said he expected crude prices to rise to $75/bbl over the next 12 months. I don't care what speculative market guru's say, at these levels and higher, high energy prices will have a profound impact on the US economy.

Some traders believe that the rebound in oil today may signal the end of the market correction of the last few days.

The Chinese are back on an oil buying binge as China's CNPC made a $4.18 bln bid for PetroKazakhstan. Fuel shortages in China have been causing havoc as the Chinese government began implementing price caps on retail prices. In fact, the Chinese government sent thousands of police to retail gas stations to maintain order as drivers fought to fill up their tanks. The current worldwide oil situation is much more serious than what is being reported.

The DJIA was up 82 points earlier in the day before gradually selling off to close up 10 points. The Standard & Poor's 500 index gained 2 points while the NASDAQ rose 5 points. Oil prices inched up .10 to close at $65.45. Crude oil was higher after a power failure across Iraq forced the suspension of exports from the country's southern terminals.

The DJIA was off 50 points today as news of a slowdown in existing home sales dropped 2.6% in July. As I have told you in the past, misleading data and hype are music to alert contrarian's. Some housing experts want you to believe that rising interest rates are the cause for the recent slowdown in existing home sales. Nothing could be farther from the truth.

In fact, the real cause for the slowdown in housing is soaring housing and energy prices. As far as interest rates are concerned, the only rates that are going up are short term rates. So, if home buyers are stupid enough to invest in short term or adjustable rate mortgages when interest rates are at 40 year lows, they deserve to get whacked. Smart buyers would have locked in longer term rates at these levels.

Here are the facts: The only rates that have risen dramatically are the Fed Funds Rate and the Discount Rate which have risen 200 basis points or 2.00% since August of 2004. The Prime Rate, that is tied to adjustable rate mortgages and lines of credit have risen in lock step with the FF Rate and Discount Rate.

As far as intermediate and long term rates are concerned, they are about the same or lower than they were a year ago. The 10 year Treasury was at 4.25% a year ago, and is now 4.29%. The long bond (30 year) was at 5.2% a year ago and currently stands at 4.5%. This being said, what do I think is going to happen next? This is an easy one.

The stock market is finally showing signs that a decent price correction may be under way. Of course, the news of the day continues to be the oil saga. Today, the "black gold" closed at $67.40/bbl as fears of Tropical Storm Katrina entering the Gulf of Mexico drove prices higher. The DJIA fell 85 points today to close at 10,434.

Today, Morgan Stanley increased their price targets for COP (PT-$72), MRO (PT-$68), XOM (PT-$72), CVX (PT-$70), and SUN (PT-$70). They also resuming coverage of CVX with an Equal-weight rating and $70 price target.

In a research note, Morgan Stanley said that the Integrated Oils and Refining stocks appear to be 15% undervalued based on mid-cycle returns. Refining continues to be a huge problem, and the company increased their projections for refining margins for Q3 2005, and FY 2005.

There is a situation looming that could temporarily bring the price of crude back down to the $60 level.

The month of August began with a bang, and is going out with a whimper. Rising energy prices are slowly increasing investors bearish sentiment. As bearish builds we need to keep in mind that the markets weekly and monthly technicals look fairly strong.

Also keep in mind that crude oil seems overbought and very extended at these levels. This overbought condition is usually a precursor to a stiff correction. In addition, the dollar has firmed up and the interest rate environment is still very favorable.

As another hurricane enters the Gulf of Mexico, I can't help but think back at the destruction that is left in the path of a devastating storm. As is the case with most Hurricanes, warnings are posted and a predicted path is constantly being monitored and adjusted. These constant updates help the public to take steps to protect property, minimize financial loss, and get out of harms way.

Unfortunately, the stock market does not work that way. The monitoring devices available to investors to minimize financial loss are at best crude, and highly manipulated. To get the real facts, and to decipher the markets direction, one needs to look at the probabilities with the tools available.

It seems that most market guru's agree that a year end rally will begin sometime this fall. The only way I see that happening is if energy prices correct sharply. I still believe this will happen.

I wanted to give you an update tonight (10:20 cst) since we may lose power due to Hurricane Katrina. In overnight trading oil prices spiked up $4.67/bbl, and gasoline prices rose .30 cents.

I'm sure you have been glued to the TV coverage on Hurricane Katrina. A catagory 5 storm hitting Mississippi,Louisiana, and particularly New Orleans will potentially have very serious consequences on our economy. If oil prices and refining take a serious hit, we could see $3.50-$4.00 a gallon gasoline prices.

We are positioned fairly well with our market hedge, the Rydex Tempest 500 Fund (RYTPX), as well as our positions in select oil stocks. That being said, I hate that anyone would have to go through what the people along the Gulf Coast will incur over the next 24-48 hours.

Our sincere prayers are with the thousands of families who live in the path of Katrina. I hope you will also include your prayers along with ours.

The news reports coming out of New Orleans and the coast of Mississippi are horrifying. We live within the cone of destruction (Pensacola), and even though we were 150-170 miles from the eye of the storm, we still had strong winds, rain, and damage. Unless I am way off base, I think Katrina will be blamed for many of the economic events that are getting ready to unfold (Pop,Prick, and Burst).

THE POP: Let's be honest. The recovery of the stock market that began after 2002 was nothing more than a rally in a Bear Market. Had it not been for the big jump in energy stocks, the rally in the stock market would have been less impressive. The news of a huge infusion of cash into the economy from insurance proceeds and Gonernment aid will have a positive psychological effect on the economy and the stock market.

Could the news of an infusion of cash be enough to rally the DJIA up to the 10,900 level by yearend ? Maybe. Yesterday, you saw some of those psychological effects as Home Depot (HD) and Lowe's (LOW) rallied. Today, both stocks are giving back their gains.

The talk that will dominate the financial channels after Katrina will be about the massive inflow capital to rebuild New Orleans and the Mississippi Gulf Coast. Its not that simple. Here are a few things to keep in mind:

1) Having lived through Hurricane Ivan, I will tell you that insurance companies will do everything in their power to pay out the least amount they can to customers , and these companies will be constantly referring to the fine print on every policy. Also keep in mind that many of the homeowners in the damaged area's do not have flood insurance because insurance company's no longer write flood policies in flood zones.

2) Governmental assistance will also be limited also. FEMA will provide grants to those with lower incomes, but rarely will they pay the entire tab. Those without insurance, or who cannot collect on their policies will have to apply for low interest loans, or make up the difference with the savings that they probably do not have.

3) Middle and higher income individuals will be eligible for grants and loans on a prorated scale. The higher the income, the less they will receive.

As I was combing through the Bureau of Labor Statistics job report for July, I couldn't help but to begin adding up the hundreds of thousands of potential job losses caused by Hurricane Katrina. I'll get to that in a minute, but first let us break down the 207,000 jobs created in July. I think you'll see a lot of manure in the numbers.

207,000 New Jobs

50,000 Jobs in Retail: How many of these jobs were students seeking summer employment, and how many retail jobs are going to be lost in the hurricane damaged area's.

26,000 Tax Supported Government Jobs: With who ? FEMA and Homeland Security?

30,000 Jobs for Bartenders and Food Servers: Again, many of these are summer jobs, and many of these jobs have disappeared in and around New Orleans with the hurricane.

28,000 Jobs in Healthcare and Social Work: The Healthcare Industry is fast becoming the largest employer in the nation now that we have shipped many of our manufacturing jobs overseas. We are going to need Social Workers to talk with to keep from going nuts after paying sky high prices for healthcare, and any goods and services that have increased due to high energy prices.

12,000 Real Estate Jobs: Low interest rates aside, I'm confident that waterfront condo speculation will begin to fall off a cliff after Hurricane Katrina. If not, the Forest Gump expression of "Stupid is as stupid does" will apply.

8,000 Jobs for Transit Service Workers

8,000 Jobs for Wholesale Workers

7,000 Jobs in Construction: Employment in this field should continue to climb. In our area, we are seeing a massive number of Mexican workers being hired by contractors.

6,000 Jobs in Credit Card Services: