John Mugarian's Dynamic Growth

I have a feeling the Bush-Greenspan meeting will go something like this. "Hey Al Baby, given the disaster that have occurred in New Orleans and along the Gulf Coast, I think it would be in everyone's interest that you consider stop raising interest rates for a while. After all, you are going to retire pretty soon, and you don't want to people to blame you for tanking the economy."

So, expect an announcement soon that the Fed will temporarily halt its tightening of short term interest rates. We should see a psychological boost in the market as well as a nice rally in Financials and the Homebuilders.

Also, look for a pop in selected Gold stocks and the S&P 500 Index. If you want to speculate a little, look at Newmont Mining (NEM) for a potential pop.

Also, Wal-Mart (WMT) reported a 3.3 percent increase in sales for August. I have got to believe that WMT will be a big beneficiary as the economy softens. When times get tough, consumers do not shop at Saks 5th Avenue and Nordstrom's, they shop at Wal-Mart. Here in the south, WMT is an American icon. When people get bored, they go walk around Wal-Mart, and rarely do they leave empty handed even when they had no reason to go.

As is the case with many economic indicators, by time you get the official news, its too late. The main question is this. Do we have to wait for the "official" lagging indicators to tell us we are in a recession, or are we smart enough to see it for ourselves.

Energy prices around the globe are soaring, GM and Ford are in trouble, and short term interest rates are killing people with adjustable rate mortgages, lines of credit, and interest only loans. And now that more than a million people are displaced in New Orleans and the Gulf Coast, I would have to be totally brain dead to believe the economy is strong.

Personally, I don't have to wait for the official word before I begin to see the handwriting on the wall. In economic terms, what we are witnessing are "Exogenous Shocks".

In the aftermath of hurricane Katrina, it is becoming more clear that the Fed will put off any further rate hikes until November. The markets ho-hum attitude of the damages left by Katrina are somewhat characteristic of a market that loves to suck investors in before chewing them up and spitting them out.

I am happy to see the market rally despite the horrible events of last week. I am always excited when the markets follow the patterns that we attempt to lay out.

I am going to use this rally to sell some of our Consumer Discretionary positions. First on the list is the Walt Disney Company (DIS). I am of the opinion that consumers will begin to slow their discretionary spending on travel and tourism in 2006 if not now. Given the higher costs of fuel, and the possibility of shortages, going to the theme parks seems to be an unnecessary gamble. Corporations will begin to tighten their advertising budgets as consumer spending begins to contract.

Over the Labor Day weekend, almost every service station was out of gas. Very few cars were on the road, and the only people driving around were out looking for gas.

The stock market is rallying because investors think the Fed will not raise rates on September 20th. Even if the Fed pauses, I believe it will only be temporary. That being said, let's look at how investors might view a Fed pause.

1) If the Fed does pause its because they think the economy is weak and a recession is right around the corner- Market Sells Off.

2) If the Fed doesn't pause, it believe's that the effects from Katrina will not have a long-term economic effect on the economy- Market Sells Off.

3) Finally, the Fed has to continue raising rates to protect the dollar due to the massive federal debt, and feels they have no choice but to stay the course to prevent foreign investors from selling their US debt holdings.

Is the current rally the beginning of a new bull market ? Not in my opinion.

Since coming back from the Labor Day holiday, the Wall Street permabulls are acting as if the effects from Katrina are going to be a non-event. Corporate insiders are not that optimistic, they are selling.

Over the past three days corporate insiders have been lining up at the selling window. Insiders are Directors, Officers or 10% Owners of public companies. According to the SEC: "Many investors believe that reports of directors and executive officers transactions in company equity securities provide useful information as to management's views of the performance or prospects of the company."

That being said, let's take a look at the 3 day transactions of the insiders (Source: Insiderscoop.com)

Tuesday, Sept 6th: 60 Buyers, 277 Sellers
Wednesday, Sept 7th: 73 Buyers, 211 SellersThursday, Sept 8th: 60 Buyers, 206 Sellers

I have scene consistent in Google (GOOG). Who will eventually be right, the Wall Street pump and dump crowd (Jim Cramer included), or the Google insiders?

Are you beginning to get the picture?

As the Katrina bounce rolls on, I've identified a sector that seems poised to decline as consumers wallets get pinched by inflation and high energy prices. I am particularly interested in shorting the Retail Sector.

The best way to short the sector is to use Exchanged Traded Funds like the Consumer Descretionary Sector Fund (XLY). I do not know how long the party will last, but dollar cost averaging into this short position makes lots of sense.

There is a lot insanity and euphoria among the retailers. In fact, I have not seen such obscene spending habits since the 1970's. Get this, last year Abercrombie & Fitch (ANF), was selling blue jeans at prices ranging from $60 to $70 a pair. This year they are fetching between $70 to a $120 a pair. Unbelievable!

American Eagle Outfitters (AEOS) have also raised their prices from $60 to $70 a pair to $70 and $120 a pair. The more money than sense crowd is not effected by economic downturns, and these showboats are paying $1,000 for a designer pair of women's jeans.

Since most consumers are average income earners, I have got to believe their wallets are being pinched as we speak.

It seems that everyone, including the news media, is hoping that the Federal Reserve will not raise interest rates. I think they, as well as the stock market will be very disappointed with the outcome. On news of the next rate increase, stocks should sell off.

Inflation has been rearing its ugly head because of higher energy prices. Since the job of the Fed is to kill inflation, rates must go higher. The talk of rebuilding the Gulf Coast is also creating fears of inflation. At the moment, the CRB Index has been soft which confirms that a slowdown in economic activity is imminent. When we begin to see signs of a slowdown, look for some bottoming action in the Basic Materials Sector. This will be our cue to jump in and buy commodity related securities.

The new claims for unemployment figure will soar due to the thousands of people putting in claims because of hurricane Katrina. Last week, only 10,000 new jobless claims were reported from the hurricane. Its going to be interesting to see the markets reaction to the expected high number.

The full effects of the energy crisis and Katrina have yet to be felt, and today the nation's largest consumer-electronics retailer, Best Buy (BBY), said higher costs caused second-quarter profit to fall short of Wall Street's expectations. In addition, the company said that upcoming earnings would be hurt as well.

Retailers have been selling off over the last month, and it will be interesting to see what effect higher energy prices, especially home heating costs, will have in the month's ahead.

We are moving forward with our call on Natural Gas stocks. We are adding Chesapeake Energy (CHK)to the IA portfolio today with a buy limit of $33.

We are adding two new stocks to the IA portfolio. They are as follows:

BUYS:
Oracle (ORCL- BL $14, PT $18): Oracle has used the downturn in technology as an opportunity to wipe out its competition. Sure they still have competition, but now they have the upper hand.

The Company's principal activities are to develop, manufacture, market, distribute and service computer software. The Group operates in five business segments: Software Licenses, License Updates, Consulting, Advanced Product Services and Education. Software Licenses include the licensing of database technology software and applications software. Software License Updates provide customers with rights to unspecified software product upgrades, maintenance releases and patches released during the term of the support period. Advanced Product Services assist customers in configuration & performance analysis, personalized support & annual on-site technical services. Education segment provides media-based, instructor-led & Internet-based training to customers in use of the products.

Cemex (CX- BL $51, PT $60): The company's principal activities are the production and marketing of cement, ready-mix concrete, aggregates and clinker and the provision of services to the construction industry. Products include ordinary Portland cement, composite Portland cement, pozzolanic Portland cement, white composite Portland cement, sulfate resistant composite Portland cement and mortar. It markets its products in Mexico, the United States of America, Spain, the Caribbean (including Barbados, Costa Rica, Chile, the Dominican Republic, Jamaica, Nicaragua, Panama, Puerto Rico and Trinidad and Tobago) and Central America, Venezuela, Colombia, Egypt, the Philippines, Indonesia and Thailand. Brands include Tolteca, Gallo, Guadalajara, Monterrey, Centenario, Anahuac, Campana, Maya, California, Cempa, Sanson, Titan, and Construlisto Vencemos.

As we end this trading week, I think its important to give a "Birdseye View" of the picture before us. We will try and summarizes the impact of a variety of subjects as well as their economic and market impacts.

Katrina: The longer term impact on the economy will probably be higher energy costs. This effects from this could be pressure on corporate earnings, and a slowdown in consumer spending. Energy equipment and services should benefit, and this is the reason the IA portfolio has a position in Schlumberger (SLB). In addition, the IA portfolio is short the Consumer Descretionary Sector (XLY), and also has a position in the Rydex Tempest Fund (RYTPX).

The rise in energy prices, and a boost in growth to rebuild the Gulf Coast may further increase inflation. Further negative effects will continue to be felt in the airline, retail, alcoholic beverage, and insurance sectors. The IA portfolio has 2 integrated oil stocks Exxon (XOM) and Chevron (CVX).

You have to admit, trying to figure out the market's intermediate and longer term moves is like a lot like playing a game of chess. As far as the markets short term swings are concerned, that is like trying to hold a conversation with a drunk. It is the short term swings however, that make longer term investors second guess their strategies.

Today's $4 move up in oil looks very suspect to me (but I'll take it). Traders are paranoid since Katrina, and feel that tropical storm Rita will wipe out what is left of the Gulf Coasts oil complex. In reality, no one knows what Rita will do once it hits the Gulf, but anything is possible.

When I went for my noon time jog today, it was a blistering 95 degrees, and the Gulf of Mexico has got to be a virtual sauna by now. Obviously, the boiling waters will intensify Rita once it hits the Gulf.

The IA energy stocks went nuts on the news of Rita, but stopped short of their highs for the day (Exxon-XOM $64.63, +.93/ Chevron-CVX $64.31, +.93/ Schlumberger-SLB $85.37, +2.21/ Chesapeake Energy-CHK $35.77, +1.91). If it had not been for the news of Rita, it looked as if the oil complex was in the beginning stages of a pullback.

Well, there has been no change in the trends among insiders. My last update on this influential group was on September 8th. Let's take a look at what thet are up to now.

9-9-05 B48 S 229 No Meaningful Purchases
Big Sellers- GOOG, DELL

9-12-05 B44 S 194
Buying- CNP- Centerpoint Energy
Big Sellers- GOOG

9-13-05 B47 S 202 Buying- AHC- Amerada Hess
Big Sellers- GOOG, GE, SO, GME

9-14-05 B62 S 198 Buying- AHC- Amerada Hess (again), JOSB- Joseph A. Banks
Big Sellers- COO- Cooper Cos, TWX- Time Warner

As camera's followed Senators around Capital Hill, many were asked what programs were going to be delayed or cut to help pay the $200 billion dollar tab from Katrina. Everyone danced around the question, and finally Senator Bill Frist had the guts to admit the answer. He said, "I guess we'll have to borrow it".

I don't like to play the "what if" game, but... what if Rita adds to the $200 billion we have to borrow because of Katrina?

As I watched the so called market experts second guess Alan Greenspan yesterday, I was amazed that they were not intelligent enough to realize that Greenspan had no choice but to raise rates. If he didn't, the dollar would crater, and oil prices would go even higher.

In addition, the CPI, and other magically manipulated economic numbers are showing that inflation is remarkably contained. My reaction is simple..BS..BS..BS. You and I are well aware that the inflation rate is well above what the government is reporting.

Short term interest rates have gone from 1% to 3.75%, and the news media is over emphasizing the "11 times" mantra. Would they have felt better if the Fed had raise rates 5 times at a half a point, and 1 time at a quarter?

I wanted to post a few comments and respond. One viewer wrote:

Can you please explain how this would hurt alcoholic beverages? I feel like alcohol is recession proof. Even if people living on the cusps of poverty with no discretionary income are bumped down, and can no longer afford alcohol[this is a big if, they may neglect other areas],
isn't it feasible that other classes will consume more alcohol in anger and frustration of their lost wealth/income?

RC

Response:

I agree more people will drink alcohol when angry or frustrated, but in Southern Louisiana, its a way of life. This is not my reasoning however. When you talk about 90,000 square miles being affected because of the storm, many businesses (bars, restuarants, grocery, and liquor stores) have been put out of commission. This of course interrupts beer sales in the region. As far as the population goes, many of these people have been displaced from their homes and have very little income to buy even food.

The sales that would be affected the most would probably be beer. I do feel companies like Anheuser Busch (BUD) are wonderful opportunities at current levels. Longer term, you're right, alcohol is recession proof, but the problem here is businesses are closed and there is no distribution to the area.

As a side note, I have been hearing stories about some displaced individuals using their debit cards from FEMA to purchase lap dances, and high priced purses in Houston. Who knows, maybe they figured out a way to buy a few beers too.

I am getting the itch to buy a few stocks for a trade, but I feel that the downside target for this market is 10,200 on the Dow. If we can get under 10,300, I am going to go fishing in retail, consumer non-cyclicals, and financial sectors. Specifically: BBY, WMT, BUD, and BAC.

I realize that WMT & BAC are in the IA portfolio (Longer Term Investments), but as a short term trade I am willing to go out on a limb for a bounce.

Hurricane Rita seems to like her hot tub (The Gulf Waters), and may eventually reach the catagory 5 level. Yikes! We went through Ivan, and that was scary enough. I cannot imagine what a Cat 5 will do, and hope that it weakens before land.

Oh, one more thought. It looks like oil demand will continue to be a problem for a lot longer than I had anticipated. The more oil released from the SPR, the longer its going to take to refill it. So, for now, "higher for longer"

Yesterday, I mentioned 4 stocks that I was willing to buy for a quick snap back rally: BBY, WMT, BUD, and BAC. I am only willing to do this on a sharp and sudden pullback in reaction to the hurricane. If the stocks do not reach my buy prices, I will hold off.

Here are some price targets (for traders only) a long with some stop losses:

Best Buy (BBY)- Entry Price $39.50, Stop Loss $35.00- BBY at $39.50 is a great entry point for investors. Be prepared however to see a downside below $35 in a bad economy.

Wal-Mart (WMT)- Entry Price $41.00, Stop Loss $38.00- WMT is trading at multi-year lows, and even at current prices, the shares look attractive for long term investors.

Anheuser Busch (BUD)- Entry Price $41.00, Stop Loss $38.00- BUD would also be a very attactive purchase at $41. Warren Buffett is buying under $45.

Bank of America (BAC)- Entry Price $40.00, Stop Loss $37.00- At $40 a share, BAC would have a dividend yield of 5%.

If you are a longer term investor, I would begin to dollar cost average in at these prices, ignore the stop losses, and build your positions.

We have been living on the Gulf Coast since 1989. Almost every hurricane we have experienced has turned farther east than forecasters initially anticipated. Wall Street traders are betting the same way. Should Hurricane Rita hit along the Texas/Louisiana border, the 5.1 million residents of Houston will only take a minimal blow. This is good for retailers like WMT and BBY.

Oil stocks are soft today due to refinery shutdowns. Its very simple, you don't make money when you don't have the product. Traders are also worried about potential damages to refineries and equipment.

As a side note, I was watching the confirmation hearings of Judge John Roberts. Boy, do we have some self serving bozo's running our government. I have always like Patrick Leahy (D-Conn) because he his hardnosed and fair. He always asks the tough questions, but is not blindly one sided. On the other hand, Charles Schumer (D-NY) had to run to Los Angeles to take orders from Hollywood big shot, Norman Lear. Go figure. That is almost as ridiculous as the wife of a former President and Arkansas Governor becoming a Senator in the state of New York. Things are really screwed up. No wonder the rest of the world laughs at us.

The pessimists are piling on as hurricane Rita approaches land, and it is becoming clear that a snap back rally is in the works. The put/call ratio came in at 1.41 yesterday, only a hair below the 1.42 ratio of April which marked the bottom the correction.

Oil prices are declining because of anticipation that Houston, and 13% of the U.S. refining capacity, will not take the brunt of the storm. Oddly, the most recent Commitment of Traders Report showed that large Commercial Traders increased their short positions just before the decline in oil prices. They were still long Gasoline Futures. Boy these guys are good (See the most recent Investor Alert Newsletter- Fall Quarter, 2005).

It seems that everyone today is an oil bull. As alert contrarian's, we should look at this overly bullish view as an obvious signal for a sharp sell off. The Bush Administration is being blamed for high energy costs, and a sharp sell off would very beneficial to the President's upcoming approval ratings. In fact, there are some behind the scene measures in place that lead us to believe that oil prices may drop to $55/bbl soon.

1) An emergency delivery of gasoline from Venezuela was due in the US this past weekend. In addition to this 240,000 bbls an additional three are due to arrive between now and the end of October.

2) Japanese refiners are currently considering sending a second gasoline cargo to the US.

3) China's oil imports growth slowed, importing only 3.95% more crude from Jan to Aug 2005 than it did during the same period last year.

4) Large Speculators in the most recent Commitment of Traders Report increased their net short positions in crude contracts.

By now you have probably read that September's consumer confidence dropped to 86.6 from 105.5 in August. Come on now, did anyone in their right minds really think that consumers were going to be optimistic after 5 days of getting pounded by the media about hurricanes and the price of oil?

Oh, the power of the media... Sure a CAT 5 hurricane can really ruin someone's day, but we along the Gulf Coast have seen CAT 4's and 5's eventually come ashore as CAT 1's, 2's, and 3's. The media's mantra is scaring the hell out of folks to attract eyeballs for ratings. While doing so, they cause mass panic, and yes, sometimes unnecessary deaths.

Also released today were new home sales which fell to a 1.237 million annual rate in August from a 1.373 million rate in July. Is this really a shock? I have been warning you for months that a real estate bubble was creating a NASDAQ II mentality right in front of our noses. Despite all of this extreme pessimism, why hasn't the market completely collapsed? Does the market know something we don't? I think it does.

I was watching Bill O'Reilly last night bash Exxon for tripling their profits while consumers suffer. On the other side of the interview was former GE chief and pampered retiree, Jack Welch. Now that big energy companies are in the spotlight, the pressure to bring down prices are enormous in order to deflect criticism.

While this criticism will probably be successful in bring the price of oil and gasoline down, not much can be done to control the price of natural gas as we head into the winter months. In any event, it looks like oil prices are at a technically critical point.

The price of crude has been stuck in a trading range of roughly $71 to $63. Within this range the price of oil continues to narrow. A break above $68 will signal higher prices, while a break below $63 could mark the beginning of a bearish pattern. Our first target on a break below $63 would bring the price of crude down to $55.

I received a few questions on refining and a few other issues we are facing. I wanted to share my answers with everyone:

Comments: John, why has the president of Exxon repeatedly say that there is no shortage of oil, only refineries?

It's true. Our nation痴 short term problems are not the availability of oil; it痴 the availability of its refined product, gasoline. During the 8 years of the Clinton Administration, environmentalists forced several refineries to close their doors because stringent environmental regulations made refining an unprofitable business. The results, of course, are what we are going through right now, and there are no quick fixes.