John Mugarian's Dynamic Growth

With all eyes on the Fed for a potential change in monetary policy, many so called experts have prematurely predicted a pause or an end to the rise in short term interest rates. What has become clear is the Fed will not reverse course until there are signs that higher interest rates have reined in credit and demand growth.

It is also clear that the Fed has the speculators in the housing market clearly in its crosshairs. The same problems that with existed with past rate increases, still exists today. There has always been a lag between Fed policy changes and their eventual impact. As in the past, the Fed will over tighten, profits will decline, and growth rates will decelerate.

Whether we get a slowdown or a recession, it is becoming increasingly clear that the stock market is headed for a fall in 2006. For now though, it looks like a sell off in oil could provide the catalyst for a strong 4th quarter rally.

Today, GM and Ford reported a big drop in vehicle sales despite the widely advertised "you pay what we pay" employee discount program. The executives at both companies still don't get it. Being from Detroit, I can tell you that they never have gotten it. The Japanese in contrast are eating their lunch. Toyota, Honda, and Nissan all reported double digit gains.

Even back in the 70's, the Little 3 was incredibly slow to wake up to the fact that fuel economy and reliability are what consumers want. The energy crisis of the 70's is much different than today. GM and F have to realize that the supply and demand issues they are facing are the real deal. In the 70's, the energy crisis was temporary; today they have to take China and India into consideration.

With all of these problems, why is billionaire investor Kirk Kerkorian so interested in GM? Could a merger with a Japanese automaker be in the works?

Now that oil prices are beginning to settle down some, many of you may be wondering why the equity markets aren't rallying. The reason is simple. In order to provide itself with a springboard to put on an impressive showing, the market is coiling like a spring. This coiling effect causes stocks to pullback to a level that allows the uncoiling effect to be much more impressive.

S&P 500 Index: The month of October is historically weak in the first half of the month, and then is famous for its dramatic reversals in the later half.

Currently, the initial support levels are at the 1210-1200 levels, with long term support coming in around the 1180 mark. If the S&P reverses itself as we anticipate, a powerful move above 1250 would confirm our year end rally call.

As I indicated in the last post, the end of October marks the beginning of the "Best 6 months of the year" for the markets. Ideally, a panic sell off usually makes the beginning of this 6 month period that much more impressive.

Crude Oil ended the yesterday down -$1.11 to $62.79/bbl. The "Big Boys" that I mentioned in the quarterly newsletter (Commercial Traders) are still expecting the price of oil to fall. How low?

As I had mentioned recently, a break below $62-63 would open the floodgates for a drop to the $55/bbl level. Of course, this would be good news for the stock market, and would represent a good buying opportunity in the oil patch.

On the NY Mercantile Exchange, COMMERCIAL TRADERS extended their net short positions in crude to 26,329 contracts. This represents a doubling of their shorts by 13,226 contracts. As far as gasoline futures are concerned, the COMMERCIAL TRADERS reduced the length of their contracts which leads us to believe that a drop in gasoline prices will occur, but will lag the drop in oil.

For you northerns out there, the news is not good. The "Big Boys" have extended their long contracts in heating oil.

Often, you will hear market technicians talk about an "oversold reflex bounce". This is a fancy term for the market is not finished on the downside.

In yesterday's market action, the S&P 500 briefly touched below the 1180 support line before rally before the close. Since the 1180 mark is also an important psychological area, it seems logical that a move below this level will create enough anxiety for some panic selling. We will be looking for a sharp break below the 1180 area before the market reverses itself. This should be enough of a springboard for the market to begin the year-end rally.

Where will the opportunities be? Probably not in oil. Oil stocks may bounce, but a break below the $63/bbl area looks to have activated a correction that will bring oil prices down to the $55/bbl mark. The sell off in oil will be the main catalyst for a potential year-end rally.

After coming off a week where the S&P 500 lost -2.7%, and the NASDAQ lost -2.9%, investors are spooked. Friday did little to calm investors fears, so we want to take a closer look at October and the next three months.

Oddly, the summer months were very kind to investors. Contrary to investor expectations, the S&P 500 gained 3.27% during the summer months of June, July and August. September is usually the worst month for the markets while October has the reputation of being the "Bear Killer". So why are investors so skeptical of October?

The month of October is historically known for its dramatic market crashes. The stock market crashes of 1929, 1932, 1987, 1989, and 1997 all occurred in October. This being said, the last half of the month begins to develop bullish trends that kick off the best three months of the year.

The title of this post sums up the next three weeks. This week will be filled with uncertainty, next week should bring a gradual improvement, and the last week of the month should start the reversal process.

Inflation: Its pretty much a given that the Fed will continue to raise interest rates into 2006. Of course, I would feel better with 1/2 point moves instead of the continuous dripping of 1/4 point increases.

As I have stated many times before, the inflation data that we were receiving was at best "false" information. Anytime you can "exclude" items of everyday use from inflation data, either someone is trying to hide something, or they're lying. In this case, it is probably a little bit of both.

The basic message here is that core inflation has been rising at a pace near the upper end of the Fed's comfort zone. In reality, it has been rising well above our comfort zone for quite some time. But, regardless of what warning signs you give investors (and sheep), some just will not listen.

I want to start out by saying that I hate politics. I am hesitant in bringing this topic up because so many people are blindly associated with one side or the other. In order to be a successful investor, you can never be blindly “bullish” nor “bearish”. So, to remain open-minded and neutral, I want to discuss how many people today are no longer Republicans or Democrats, they are instead, Republicrats. This inbred breed of new political and social beliefs has had a profound impact on our economy and society.

I will get to an important investment point here soon, but we need to realize that many of the social issues facing our country have had, and will have important economic consequences in the future.

My grandparents, on my father’s side were immigrants from Armenia. They were the most decent, moral, and unselfish people I’ve ever known. They were also Democrats.

Back in their day,

1) Democrats stood up for the poor and working class.
2) Republicans were for the rich.

Today, (if they were still alive) there is no way that my grandparents could identify with the belief system of either the Democrats nor the Republicans.

So much for the validity of the GDP (Gross Domestic Product), and the PPI (Producer Price Index). They are no longer reliable indicators. Why?

The GDP is the market value of goods and services produced by labor and property in the United States. It is made up of consumer and government purchases, and net exports of goods and services.

Now that many of our labor and production jobs have been shipped overseas, our trade deficit is so out of wack that we import more than we export. This morning we received data from the Labor Department that said that the prices of imported goods rose 2.3% in September. The main culprets were natural gas imports that rose 28.8%, and oil which rose 7.3%.

The PPI, which measures wholesale changes in commodities such as food, metals, lumber, oil & gas, as well as many others, has not been painting an accurate picture either.

As a result, gold has been soaring, and today, interest rates began to pop. As a result of today's data, the Fed will continue to push interest rates higher, and as a result the dollar is rallying, and gold is selling off.

30-Year T-Bond 4.656% +0.066% 10/12/05
10-Year T-Note 4.441% +0.057% 10/12/05
5-Year T-Note 4.310% +0.048% 10/12/05
2-Year Note 4.234% +0.034% 10/12/05

Ok, now that we have confirmation that the no inflation theory was a lie, the bad news continues to mount. The University of Michigan's Consumer Sentiment Index fell from 76.9 in September to 75.4 in October. In reality, we do not need economic data to confirm what we have been experiencing everyday as consumers. The more important question is; what is the market going to do about it ? Let's cut to the chase.

As far as the S&P is concerned, I told you that the 1180 area was the first line of support. Whether it happens or not, the market is attempting to scare investors with one of its nororious panic sell-offs. These sell-offs cause the less informed investor to give into their weaknesses and sell. These so called washouts (technically called:capitulation) are followed by dramatic reversals that begin new trading rallies.

As the Market Cycle and Economic Cycle meanders through the Sector Rotation Model, it is interesting to note that certain areas of the Energy Sector continues to weaken, while the Consumer Staples area is quitely being accumulated. If energy stocks do not begin to pick up momentum over the next few weeks, it will become crystal clear that the smart money is anticipating an economic slowdown soon.

While energy woes will be with us for sometime, sub-sectors within the energy sector will probably outperform the major integrated oils. Longer term, I do not have a problem owning the integrateds, but it looks if Natural Gas will steal the spotlight for the next several months.

Natural Gas stocks like Chesapeake Energy (CHK) should perform well in the months ahead. Oil refiners should continue to firm as refining capacity remains a problem, and rumors of continued consolidation remain strong.

Looking Forward

The Fed does not want the short term inflation scenario to get out of hand. The only way to bring down the high price of energy is to cool demand. Unfortunately, history shows that Supply Shocks can only be dealt with by decreasing demand. This usually results in slowing the economy.

Greenspan will continue to raise interest rates until they choke off economic growth, this lessoning demand for energy. The consumer is already feeling the effects of higher costs due to escalating energy prices. A slowdown in consumer spending will become evident during the Christmas selling season.

The question that remains is will Greenspan begin to reveal his hand. Given the effects of energy prices on the economy, Uncle Alan may pause after the next Fed meeting. As an observer, I would expect that Greenspan would like to get to 4% before upping the periscope to take a look around.

The “Well, Duh!” Comments for the Day:

1) Federal Reserve Vice Chairman Roger Ferguson indicated that higher energy costs will slow the economy.

2) Fed Chairman Greenspan said in a speech that "although the global economic expansion appears to have been on a reasonably firm path through the summer months, the recent surge in energy prices will undoubtedly be a drag from now on.''

I have to say it, “Well, Duh!” Oh, that feels so good. I do not claim to have all the answers, but I am amazed by the number of critics who have no answers.

I hate to be an “I told you so” type guy, but after reading the two comments above I couldn’t resist. Besides telling you about the phantom inflation that no one said existed, I have also been warning investors about Real Estate for some time. In 2004, I warned investors at the World Money Show in Orlando about the coming energy crisis and higher interest rates.

I guess if the events you mention don't happen the next day, some people tend to cast doubt. So be it.

Subject: housing stocks
Comments: It looks like the housing stocks are turning around with the market also. They made a huge reversal yesterday on big volume. You might have to live with those high prices in Florida because the economy and Joe Average needs it. Californians say it's too big to fail.

We will see if the R/E rally was for real, or just short covering. 2006 will reveal a clearer picture.

It seems whenever the "average joe" thinks he's got the world by the balls (ie- NASDAQ 2000, Interest Only Loans, Real Estate Expert), something usually comes up that proves him wrong. The logic conclusion would be higher interest rates. But what will cause LT rates to go higher?

The "average joe" got suckered in to interest only/adjustable rate mortgages at a time they should have been locking in 20 or 30 year fixed mortgages. The Banks/Mortgage Lenders (Legalized Thievery Business), pretending to be on the side of the client, did what was in the best interest for themselves and sold adjustables/interest only loans ( As a side note, the credit card business is nothing more than legalized loan sharking. If you and I charged consumer those rates, we would be put in jail). Now, the "average joe's" are getting hammered every time short rates rise. These are the same people who have speculated on real estate that they have no intentions of closing on.

The only problem with the higher (longer term) interest rate argument is what will be the catalyst to cause the real rulers of our nation (China/Japan) to begin dumping their US Bonds. Venezuelan President, Hugo Chavez, recently ordered the sale of $14 billion dollars of US Bonds, and moved the money to Europe. Could this unwinding of US assets be pushing up LT rates? We won't know the real answer until its too late.

The problem I have with the real estate situation is the massive speculation by the " Republicrats" (see Oct 12th post). Would you hang your entire financial future out on a limb that is being controlled by foreign governments? Not me. Smart investors make the big bucks by shorting what the Republicrats are buying, then buy when they panic and sell.

Crude oil prices broke below the psychological $60/bbl mark. Let's see if it holds. I think it will. The new short term trading range should be $55-$60. This should create enough of a spake to get the stock market in a year-end rally mode.

Unleaded gasoline also hit $1.63/ gallon today. Don't complain about the oil companies if you are paying subtantial more in your area. Look to the polliticians. Any amount over $1.63 is approximately 33%-45% tax. How's that for taxing the hell out of you.

Energies
Crude Oil (CLZ5) Dec 05 59.60 -1.91 61.40 61.65 59.50 10:20
Q C O
Crude Oil (CLF6) Jan 06 59.60 -1.73 61.22 61.44 59.50 10:19
Q C O
Crude Oil (CLG6) Feb 06 59.90 -1.33 61.29 61.33 59.90 10:17
Q C O
Crude Oil (CLH6) Mar 06 60.15 -1.00 60.87 61.24 60.10 10:10
Q C O
Gasoline Unleaded (HUZ5) Dec 05 1.6300 -0.0637 1.6917 1.7100 1.6200 10:19
Q C O
Gasoline Unleaded (HUF6) Jan 06 1.6500 -0.0572 1.6957 1.7135 1.6450 10:19
Q C O
Gasoline Unleaded (HUG6) Feb 06 1.6975 -0.0167 1.7090 1.7133 1.6975 10:03
Q C O
Gasoline Unleaded (HUH6) Mar 06 1.6600 -0.0582 1.7125 1.7180 1.6600 10:10
Q C O
Heating Oil (HOZ5) Dec 05 1.8750 -0.0701 1.9375 1.9475 1.8730 10:19
Q C O
Heating Oil (HOF6) Jan 06 1.9145 -0.0601 1.9654 1.9735 1.9050 10:17
Q C O
Heating Oil (HOG6) Feb 06 1.9200 -0.0576 1.9700 1.9741 1.9100 10:19
Q C O
Heating Oil (HOH6) Mar 06 1.8985 -0.0501 1.9400 1.9440 1.8985 10:15
Q C O
Natural Gas (NGX5) Nov 05 12.810 -0.739 13.516 13.600 12.770 10:20
Q C O
Natural Gas (NGZ5) Dec 05 13.150 -0.710 13.806 13.913 13.150 10:20
Q C O
Natural Gas (NGF6) Jan 06 13.600 -0.643 14.254 14.292 13.500 10:18
Q C O
Natural Gas (NGG6) Feb 06 13.570 -0.543 14.150 14.174 13.550 10:14

Subject: house prices
Comments: And if the house prices go down, then what? Wages are down 2.5% this year and since GDP is 70% consumption in this country, what does the Fed do? Lower interest rates to prevent a Japanese style crash? Yes, of course, and does the dollar go down? Probably not much because foreign central bankers are propping up the dollar by buying our debt, not their corporations nor their citizens. And why? Because they have the cheap labor AND THEY WANT TO EXPORT TO THIS COUNTRY! So to keep this new paradigm going, we need higher and higher house prices, but after a rest here and at a lower rate of increase please.

Now you're getting the idea. The theme among the worlds influential players is to open the US borders and equalize the worlds wealth. To make others (Mexico, South America) more prosperous by export our jobs, bring down wages, and make us more like people in other countries.

The Unions in this country are being crushed. Look at what's happening in Detroit with the automakers and suppliers. There are no unions in China, India, South America and Mexico.

As far as housing is concerned, if prices remain high or go higher, while wages are falling, the average joe will not be able to afford to buy a house at current prices.

And what is President Bushes response to workers whose jobs have been exported? "Go back to school"

The wild gyrations in the market have many investors (particularly energy investors) very nervous. This is typical market action in October since the 2005 fiscal year ends for many mutual funds and institutions on October 31st.

I know, I know, you're probably saying "do I have to go through another week of this stuff?". Not necessarily. As early as tomorrow, and into next week many of these mutual funds will have finished taking profits and booking losses for the year. Once this has taken place, these institutions will begin reallocating funds back into the stock market.

The mood among investors is clearly bearish. According to last weeks AAII investors survey, the number of bulls have fallen to 38.9% from 50%, and the number of bears have increased to 48% from 27.5%.

For those of you who like to trade, you can view some of my trading picks on www.tipstraders.com. We will be getting more aggressive on Tipstraders, but like to use the Investor Alert blog for longer term investors who like to invest in value.

I also like to give timely economic and market commentary on this blog. It is tough to mix a value approach in with a momentum style, but we are going to give you two choices now rather than one. We will identify what stocks will be geared toward value investors, and stocks for investors who want quicker returns.

On Tipstraders, I picked Google (GOOG) a few days ago at $297.44. The stock is up 36 points this morning after releasing earnings. Since TT is a trading service, we may be taking profits quickly.

Excuse the pun, but there is another catalyst building that could propel the markets higher other than falling energy prices;Rising short interest.

Short interest has risen to record levels on the NYSE, and an unwinding of those positions can provide fuel for a strong rally. In the past few trading sessions we have seen a battle among the bulls and the bears, and with it, increased volatility.

Short covering does not mean we will be entering a new bull market (yet), but it does add to my opinion that the seasonally strong period of October-November will probably be another "bear killer".

I still believe we will enter a new bear market phase in 2006, but I do not think the market action we have witnessed the last few weeks was the start of that phase.

The NASDAQ looks strong here, and looks like it is building a strong short term pattern.

Given the elevated level of pessimism and fear in the market place, it looks like the table is set for a strong rally.

The stock market is acting pretty much as we had expected. Despite all the negative news, it looks as if the market is attempting to stabilize, and the year-end rally should begin to unfold soon.

Energy prices are coming down, and consumers should begin to feel some relief soon. On the spot market, gasoline is trading around $1.64/ gallon, and when you add in about .45 cents tax and another 15% profit of about .25 cents (depending on where you live), your looking at an average price of $2.34/ gallon.

Energies
Crude Oil (CLZ5) Dec 05 59.58 -1.05
Crude Oil (CLF6) Jan 06 59.79 -1.03
Crude Oil (CLG6) Feb 06 60.07 -0.95
Crude Oil (CLH6) Mar 06 60.12 -1.04
Gasoline Unleaded (HUZ5) Dec 05 1.6322 -0.0415
Gasoline Unleaded (HUF6) Jan 06 1.6547 -0.0385
Gasoline Unleaded (HUG6) Feb 06 1.6790 -0.0257
Gasoline Unleaded (HUH6) Mar 06 1.6865 -.0267
Heating Oil (HOZ5) Dec 05 1.8600 -0.0397
Heating Oil (HOF6) Jan 06 1.8910 -0.0392
Heating Oil (HOG6) Feb 06 1.9000 -0.0377
Heating Oil (HOH6) Mar 06 1.8885 -0.0252
Natural Gas (NGX5) Nov 05 12.700 -0.172
Natural Gas (NGZ5) Dec 05 12.962 -0.205
Natural Gas (NGF6) Jan 06 13.340 -0.214
Natural Gas (NGG6) Feb 06 13.229 -0.255

The oil "Big Boys" (See Oct 6.2005 Journal) are still adding to their short positions in crude and gasoline futures. Once I get today's latest data, I'll pass it along.

The stock market is acting pretty much as we had expected. Despite all the negative news, it looks as if the market is attempting to stabilize, and the year-end rally should begin to unfold soon.

Energy prices are coming down, and consumers should begin to feel some relief soon. On the spot market, gasoline is trading around $1.64/ gallon, and when you add in about .45 cents tax and another 15% profit of about .25 cents (depending on where you live), your looking at an average price of $2.34/ gallon.

Energies
Crude Oil (CLZ5) Dec 05 59.58 -1.05
Crude Oil (CLF6) Jan 06 59.79 -1.03
Crude Oil (CLG6) Feb 06 60.07 -0.95
Crude Oil (CLH6) Mar 06 60.12 -1.04
Gasoline Unleaded (HUZ5) Dec 05 1.6322 -0.0415
Gasoline Unleaded (HUF6) Jan 06 1.6547 -0.0385
Gasoline Unleaded (HUG6) Feb 06 1.6790 -0.0257
Gasoline Unleaded (HUH6) Mar 06 1.6865 -.0267
Heating Oil (HOZ5) Dec 05 1.8600 -0.0397
Heating Oil (HOF6) Jan 06 1.8910 -0.0392
Heating Oil (HOG6) Feb 06 1.9000 -0.0377
Heating Oil (HOH6) Mar 06 1.8885 -0.0252
Natural Gas (NGX5) Nov 05 12.700 -0.172
Natural Gas (NGZ5) Dec 05 12.962 -0.205
Natural Gas (NGF6) Jan 06 13.340 -0.214
Natural Gas (NGG6) Feb 06 13.229 -0.255

The oil "Big Boys" (See Oct 6.2005 Journal) are still adding to their short positions in crude and gasoline futures. Once I get today's latest data, I'll pass it along.

I updated the the IA portfolio to separate the (A) Aggressive positions and the (V) Value positions.

The Aggressive position have an (A)meaning we are more likely to trade these positions and have a shorter time horizon. The (V) means these are out of favor value plays that we hope to keep for at least a year.

Depending on what type of investor you are, these designations will help you keep your time horizon in prespective when owning these stocks.

Our picks (from now on) on tipstraders.com will only include stocks we will want to own for 180 days or less.

In the recent Commitment of Traders Report, Large Speculators have reduced their net short positions in Crude Oil, and increased their shorts in Heating Oil. So, it looks like crude prices will stabilize around the $60 mark, and heating oil prices will come down a bit.

As far as Gasoline is concerned, Large Speculators made no changes in their long positions. This tells us the gas prices will probably stabilize, or go a tad higher.

The report also revealed that Large Speculators increased their net short positions in Natural Gas futures. These Non-Commercial Traders held a net short position of 24,055 contracts, an increase of 6,600 contracts from the previous week.

What does all this mean? Energy prices are not on the brink of collapse. I do not think we will see another leg down in energy until the economy softens which will probably be sometime early next spring.

THOUGHTS ON BERNANKE NOMINATION

The DJIA average surged 169 points today after President Bush nominated of Ben Bernanke as the next Fed Chairman. Why the celebration. Was Alan Greenspan that much of a hindrance and disaster to the market place? If I have learned anything about our democratic system, its that every politician takes orders from someone. Whether its our local Congressman, or U.S. Senators, or even the President, politicians take orders from the big money people who put them in office.

One of reasons I really liked Alan Greenspan was the feeling I got when I saw him. I am probably wrong, but I really got the feeling that he was not beholden to anyone. I always got the feeling that Greenspan wasn't swayed by political pressure, and always relied on economic facts before making any decisions. I don't get that warm and fuzzy feeling with Fed Chairman elect, Ben Bernanke.

After the 1 p.m. eastern time announcement, the stock market went nuts. I view Bernanke as a political appointee since the President named him to the Fed board in 2002, and made him chairman of the president's Council of Economic Advisers this year.

If you have been reading this journal for the last 9 months, you know what my views are on the economic reports we receive from the Commerce Department. Could Wall Street have been celebrating because they finally got someone who could be molded to do what they want? I guess we will see.

I didn't expect the Democrats the cheer Bernanke's nomination since they hate any nomination a Republican makes, but I found it interesting that Hall of Fame pitcher, and Kentucky Senator, Jim Bunning said he would vote against the nomination.

One thing I really like about former star athletes like Bunning is their distaste for political manipulation and backstabbing. Since Bunning one of a handful of Senators who are not lawyers, I have to respect his reasons for not wanting Bernanke. The question that remains is will we ever know what those reasons are, or will Bunning be silenced.

Oil prices leaped over the $60/bbl mark this morning on comments from the chairman of Libya's National Oil Corporation. Abdullah Salem El-Badri said in a telephone interview with Dow Jones that " crude demand will bounce back in the next few weeks on the back of forecasts for a colder-than-normal winter in the northern hemisphere".

El-Badri also said that "oil prices are undoubtedly going to remain very strong for the foreseeable future with WTI remaining close to $60.00 a barrel."

Hum, I believe I said that oil would hover around the $60/bbl mark yesterday after seeing the most recent Commitment of Traders Report (see Oct 24th Journal- " The Oil "Big Boys").

Here is how the Energy Futures are currently trading:

Energies

Crude Oil (CLZ5)Dec 0561.90+1.5860 12:09

Crude Oil (CLF6)Jan 0662.25+1.7060 12:10

Crude Oil (CLG6)Feb 0662.35+1.5760 12:04

Crude Oil (CLH6)Mar 0662.20+1.2760 11:19

Gasoline Unleaded (HUZ5)Dec 051.6700+0.0372 12:08

Gasoline Unleaded (HUF6)Jan 061.6940+0.03371 12:10

Gasoline Unleaded (HUG6)Feb 061.7000+0.02271 11:30

Gasoline Unleaded (HUH6)Mar 061.7075+0.02021 10:39

Heating Oil (HOZ5)Dec 051.9150+0.06791 12:10

Heating Oil (HOF6)Jan 061.9475+0.06641 12:09

Heating Oil (HOG6)Feb 061.9620+0.07091 11:50

Heating Oil (HOH6)Mar 061.9440+0.07291 11:37

Natural Gas (NGX5)Nov 0513.900+0.89613 12:09

Natural Gas (NGZ5)Dec 0514.050+0.87313 12:09

Natural Gas (NGF6)Jan 0614.350+0.81513.53014.42013.515 12:07

Natural Gas (NGG6)Feb 0614.180+0.72013.45014.18013.430 11:36

The refiner's, oil services, and natural gas stocks are all trading higher while the integrated oils are the laggards: SLB + 2.69, MRO + .30, SUN + .66, CHK + 1.34, VLO + 2.70. I happen to be of the opinion that the refiners will continue to be acquisition candidates. After Unocal's purchase by Chevron, it is only logical to assume additional purchases will follow.

I really feeling that Marathon (MRO) is a very attractive choice for someone like Chevron or Conoco. Marathon only has 1 refinery along the Gulf Coast (Texas), with the majority of their operations away from the dangers of hurricanes.

Like most sources of information connected to our financial markets, before you hear the real story, it will be too late. By now I probably sound like a broker record, but if you are relying on Wall Street or timely government reports to tell you the truth, you are in for a rude awakening.

I am not sure who is responsible for our rising bond yields, but I find it odd that interest rates starting rising across the board right after Alan Greenspan met with bankers in China.

Here is a snapshot of how U.S. Bond yields closed today:

30-Year T-Bond 4.713% +0.053% 10/25/05
10-Year T-Note 4.508% +0.062% 10/25/05
5-Year T-Note 4.379% +0.064% 10/25/05
2-Year Note 4.331% +0.086% 10/25/05

To get a comparison of how dramatic the move has been, here are the yields around the 1st of September:

30-Year T-Bond 4.23%
10-Year T-Note 3.93%
5-Year T-Note 3.77%
2-Year Note 3.63%

So, what's happening here. Are foreign governments in fact selling U.S. debt, and allocating those assets to other countries? At this point, anything I say is pure speculation. But, I have been warning investors for quite sometime that countries like China and Japan hold our financial futures in the palm of their hands.

On October 20th I wrote:

"Venezuelan President, Hugo Chavez, recently ordered the sale of $14 billion dollars of US Bonds, and moved the money to Europe. Could this unwinding of US assets be pushing up LT rates? We won't know the real answer until its too late".

Regardless of what others think of Hugo Chavez, at least he had the guts to say what he was doing upfront and in the open. We will never know what Greenspan and the central bankers of China discussed, but I find it odd that our bond market began selling off right after their visit.

Mind you, we were not caught off guard by the move in the bond market. I don't know if the sell-off is the start of something big, but I have been of the opinion for the past two years that interest rates were entirely too low and they would eventually move back to their historical mean.

In January of 2004, I wrote:

The rise in interest rates from historically low levels is a good a sign that the economy is recovering. I think interest rates will continue to rise over the next year or so with the shorter maturities seeing the biggest jump in yields. Historically, the long bond (30 yr. treasury) should settle in at 5.5-6.0% over the next 18- 24 months. Unfortunately, as the economy begins to heat up, there will be a lot of talk on the financial channels about inflation and the Fed having to raise rates. Alan Greenspan and company do not want to make the same mistakes they made in 1999-00. Greenspan thought he saw inflation when in reality he saw “pink elephants”. The rise in interest rates began the gut wrenching decline that we all experienced since the year 2000.

I still am of the opinion we will see a 5.5-6.0% long bond before rates stop rising. This is one reason why I think 2006 will be a rough year for the stock market.

One of the best pieces of advice I ever received was "Right or wrong sometimes you have to make a decision." Despite a great earnings report from ConocoPhillips (COP), most of the major integrated oil stocks closed well off their highs for the day.

The last time I saw this type of price action after a super quarter was back in early 2000 when Cisco (CSCO- trading at $60 then)released phenomenal earnings and the stock stood still. This told me that the smart money was selling, while the dumb money was buying. Believe it or not, I could only get a handful of clients to sell because others did not want to pay capital gains, and others thought it was going higher.

At 10:30 ET the Department of Energy released its weekly storage numbers. The report said that stockpiles of crude increased more than expected in the latest reporting week. Crude oil began immediately selling off closing down $1.79 to $60.65 a barrel.

Energies

Crude Oil (CLZ5) Dec 05 60.61 -0.05
Crude Oil (CLF6) Jan 06 61.18 -0.02
Crude Oil (CLG6) Feb 06 61.60 +0.01
Crude Oil (CLH6) Mar 06 61.82 -1.46
Gasoline Unleaded (HUZ5) Dec 05 1.6220 +0.0009
Gasoline Unleaded (HUF6) Jan 06 1.6530 +0.0014
Gasoline Unleaded (HUG6) Feb 06 1.6770 +0.0074
Gasoline Unleaded (HUH6) Mar 06 1.6811 -0.0654

As I had stated this morning, If the $58/bbl mark is broken, we could see a much larger move to the downside.

A QUESTION FROM A READER:

Do you feel MRO is a good purchase at these levels, even if it is not acquired? I ask, b/c there is no telling if/when such an acquisition will take place.

RESPONSE:

If you are an investor with at least a 2-4 year time horizon, and don't own the stock, there is nothing wrong with taking an initial position at these levels. Keep in mind, as an investor, you plan to hold the shares, and add to your position on weakness to complete your pre-determined allocation.

If you are a trader, I have not been impressed with the energy sectors manic response to $60/bbl oil prices. The selling has been vicious, and is acting more like oil had move from $70 to $40 rather than $70 to $60.

This reaction tells me that a much larger move to the downside could be in the works. In 2006, I would not be surprised to see crude trade down to $50 or below. When you take into consideration that the U.S. economy is hugging the border of a market top and an early recession, this is about the time that energy sector begins to go out of favor.

The only ray of hope hanging on the energy sector is world demand. In past market cycles we did not have this issue. So, the bottom-line is this; despite world demand, oil and energy stocks can still correct sharply. This correction would obviously be a major buying opportunity.

As far as the takeover prospects of Marathon (MRO) is concerned, I agree, no one knows when it will happen. It could be tomorrow, or two years from now. But, given the refining problems facing our nation, MRO is an extremely attractive acquisition. Given the time and expense involved in building a new refinery, it would be cheaper for a major oil to buy, rather than build.

Marathon recently purchased all of Ashland Oil's refineries, and has very little exposure to the Gulf Coast. If I owned a major integrated oil company, this purchase would be an easy decision.

If MRO happens to fall to $50 or lower from current levels, I feel that a takeover price of $70-$75 is still possible.

BACK TO DECISION TIME

A few weeks ago, we sold Chevron (CVX). We still own XOM,SLB,MRO and CHK. Since the winter months are right around the corner, I do not think the next big sell off will come until mid-late winter. When you add in the fact that the Republicans are trying to get off the mat after taking a beating in the polls, I think they will be able to engineer a drop in the price of oil well ahead of the mid-term elections.

I received this report this morning from a very good analyst.

MORGAN STANLEY EQUITY RESEARCH

CONOCOPHILLIPS (COP.N): POSITIVE EARNINGS SURPRISE; RAISING ESTIMATES

What's Changed
2005E EPS: From $8.55 To $8.70

Conclusion: COP痴 Q3 2005 EPS of $2.69/share exceeded consensus expectations of $2.57/share. We are raising our 2005 EPS from $8.55/share to $8.70/share.

E&P & R&M Drove The Positive Surprise: E&P results were strong as high prices for petroleum offset increased operating costs, lower production volume and higher taxes on production. Refining profits were strong despite hurricane related costs.

Maintain Overweight: COP, MRO, XOM Favorites: Using our mid-cycle forecast of $5.65/share and an 80% relative earnings multiple we attain our $80/share price target. Integrated Oils MRO (O, PT $75) and XOM (O, PT $76) represent our top picks in the sector.

Maintain Attractive View on Integrated Oils and R&M Integrated Oils appear 15% undervalued based on normalized returns on capital. Independent R&M represents the best value per unit of return in Energy.

My Take:

Its obvious that the major oils are blowing away their numbers. This week marks the end of Mutual Fund selling pressure, and it will be interesting to watch what happens next week. Will the instituions buy the oils back, or will they move on to another sector.

The shares of many integrated oils dropped sharply on the sell-off in crude. Next week will see if this selling pressure was a knee jerk reaction, or the real deal.

The woes in the bond market continued today with the market falling once again. In the past two trading sessions, there was no economic news to cause the weakness. I told you a few days ago that foreign governments may be finding a viable alternative in China. Below is a lists of how the important bond components closed today.

30-Year T-Bond 4.796% +0.083% 10/26/05
10-Year T-Note 4.591% +0.083% 10/26/05
5-Year T-Note 4.460% +0.081% 10/26/05
2-Year Note 4.366% +0.035% 10/26/05

Bond investors continue to worry about inflation, the Fed and oil. I'm surprised no one factored in, or made comments about the China bond alternative.

For those of you who have been wondering what could possibly bring down a resilient real estate market, now you know. Like most bubbles, its the unforeseen events that cause all the havoc.

Oh, and how about all those hot shot investors out there that allowed crooks like banks and mortgage companies to sucker them into interest only adjustable loans? They have got to be feeling a little tight in the shorts about now. Just wait.Today, the two-year note hit the highest level since mid-2201, and the ten-year yield is at the highest yield since March. Ouch!

We have been alerting you about this possibility all year. I hope it helped.

I just received the latest research report on MRO after yesterday's earnings announcement. I did not think the earnings miss yesterday was a big deal, and there was an over-reaction on the sell side.

MORGAN STANLEY EQUITY RESEARCH

MARATHON OIL CORPORATION (MRO.N): EARNINGS DISAPPOINT; MAINTAIN OVERWEIGHT - 27 Oct 2005

Marathon痴 Q3 2005 operating EPS were $2.16/share, which compares to consensus estimates of $2.75/share. Results were below projections in E&P and R&M, with non-operating expenses similar to projections.

E&P & R&M Results Disappoint: In E&P, results were below projections, especially overseas. In International E&P, an unfavorable lifting variance and higher costs penalized profits. R&M also represented an area of weakness, although recovery is underway in Q4 2005 and profits are set to improve considerably.

Maintaining Estimates For 2005-2005: We are maintaining our earnings estimates for 2005 and 2006 at $8.25/share and $8.45/share respectively. Prices and volumes for crude oil and natural gas are likely to be significantly higher in the current period. Spreads in R&M remain strong as well, with normalized relationships throughout the value-chain likely.

Maintain Overweight: MRO, COP, XOM Favorites: Using our mid-cycle forecast of $5.20/share and a 75% relative earnings multiple we attain our $75/share price target. Integrated Oils COP (O, PT $80) and XOM (O, PT $76) represent our top picks in the sector.

Maintain Attractive View on Integrated Oils and R&M Integrated Oils appear 15% undervalued based on normalized returns on capital. Independent R&M represents the best value per unit of return in Energy.

Current Stock Rating: Overweight
Current Industry View: Attractive
ModelWare EPS actual (FY Ending): USD 3.72 (Dec 2004)
ModelWare EPS estimate (FY Ending): USD 8.25 (Dec 2005)
ModelWare EPS estimate (FY Ending): USD 8.45 (Dec 2006)
ModelWare EPS estimate (FY Ending): USD 8.50 (Dec 2007)
Current Price: USD 57.28 (Oct 27, 2005)
Target Price: USD 75.00
Market Cap (mm): USD 19,971

As we begin the final quarter for the year, the markets and the economy is going to face many challenges. Even with the challenges, I feel that investors will be rewarded now that intuitional selling pressure is subsiding, and the market is entering its seasonally strong period.

S&P 500 Index: I believe the S&P can reach the 1230-1250 mark before running into some resistance. If the index breaks above the 1250 mark, it has the ability to reach the 1325-1350.

The question we have to ask ourselves is whether staying in for the grand finale worth it. I think not. When the S&P broke below 1200 recently, it weakened the longer term trend. Since or economy is facing a potential recession square in the eye, I would rather be cautious at the 1250 level on the S&P.

Dow Jones Industrials: Our initial target on the Dow is 10,750. A breakout above this level could carry the index to a euphoric high in the mid 11,000 range. Early next year, the indexes could begin a period of weakness which could carry the market to the 9000-9200 level.

NASDAQ: Since investors have hated this index for so long, it may actually put on a better performance that the S&P and Dow. Near term, I wouldn't be surprised to see a move to the 2200 level, then breakout to 2300-2500.

INTEREST RATES, GOLD, and COMMODITIES: The Fed will continue to raise rates to kill off any inflation remaining from higher energy prices. As energy prices come down, and higher interest rates slow growth, commodity prices will pull back. Since gold is a hedge against inflation, as inflation fears cool, so will the price of gold.

Politics:

Its clear that the Democrtas are trying to stir up some Watergate-like scandals before the mid-term elections. The market really didn't care because it didn't look at the potential indictments with as much fan fair as the news media.

The resignation of Ms. Myers didn't take me by surprise. The day she was picked by President Bush, I looked at my wife and said, "they don't really want her. They are going to use her as a lead in to get who they really want. she doesn't stand a chance".

If you stop and think about it, the Myers nomination was brilliant move by the administration. If the Democrats try and railroad the President's next choice, they will look like the bad guys. Face it, they need to pick someone really conservative to offset the ACLU laywer, Ruth Ginsberg.

Here is my latest Investor Alert prediction; The President's poll numbers have bottomed. They will be much higher by the mid term elections.

The Markets:

Dow: Closed at 10,402.77
S&P 500: 1198.41
NASDAQ: 2089.88

I am happy to see the markets reacting as we had expected. While some were calling for the end of the Bull Market, I was convince the market had one more race to run before giving in to what we hope will be the final phase of the Bear in 2006.

It looks as if all the mutual fund selling has finally dried up, and these institutions started putting their money back to work on Friday.We are going to enter the seasonally strong time of year for the stock market.There is a lot of cash on the sidelines, and fund managers cannot beat the market averages by being in cash. Now, through the end of the year should be a lot of fun. Hang on to your hats and enjoy the ride.

MARKET SENTIMENT:

Bull/ Bear Ratio: Bulls: 44.8%, Bears: 29.2%

This is wonderful news for contrarians. Bears hit a high of 30% in May, just before the market reversed and rallied.

President Bush did not waste any time picking another high court nominee. As I had mentioned last night, I thought the Bush Administration would eventually nominate the Supreme Court candidate that they wanted all along. It was obvious from the beginning that Harriet Miers didn't stand a chance. Pretty smart, Huh.

One of those most important pieces of advice I ever recieved from Wall Street was to try and think like those around you think. In this, any many other situations, it has paid off nicely.

Strangely, the new draft pick, Samuel Alito, was a Yale graduate like President Bush I &II, as well as John Kerry. Since all three are also "Bonesman" from the elite Yale secret society, "Skull & Bones", I wonder if Mr. Alito is too.

Why is this of interest? Several high level positions in both Bush Administration's were occupied by "Bonesman". A Kerry administration would have been no different. This elite society has been very influential in shaping many aspects of our society, as well as Wall Street.

If you invest along with this powerful group, you'll do very well. For example, Eddie Lampert of Sears Holdings (SHLD) and Fred Smith, CEO of Fed Ex (FDX) are Bonesman alumni. Mr. Alito may, or may not be. Let's wait and see.

On November the 1st, the FOMC is expected to raise the Fed Funds Rate another 25 basis points (to 4%), and probably issue a statement that was similar to its last.

Now that energy prices are being to subside, many investors are becoming more optimistic about the economy. So, if energy prices continue to pull back, some are wondering what will be the next event that slows the economy.

Energy prices will probably remain fairly high until the economy cools. Rates on longer term bonds have been ticking up steadily for the past few weeks. Higher borrowing rates will continue to cool an overheated real estate market.

Bonds are holding pretty firm in the wake of this morning's stronger than expected GDP number. Last week, the 10-year yield rose to 4.60%.Bonds paused this morning after the release of the Employment Cost Index which rose in line with expectations. Over the past 12 months, employment costs have risen 3.1%, the smallest such gain in the last six years.

The Chicago Purchasing Managers index rose unexpectedly to 62.9 in October. Most analysts had expected a small decline in the index, which measures Midwest manufacturing activity.

30-Year T-Bond 4.774% +0.004% 10/28/05
10-Year T-Note 4.567% +0.009% 10/28/05
5-Year T-Note 4.450% +0.020% 10/28/05
2-Year Note 4.382% +0.041% 10/28/05

THE MARKET

At Midday, Crude oil was down over a dollar trading below $60 a barrel, and the Dow and the Nasdaq are adding to Friday's gains.

Energies

Crude Oil (CLZ5) Dec 05 59.90 -1.32
Crude Oil (CLF6) Jan 06 60.35 -1.18
Crude Oil (CLG6) Feb 06 60.75 -1.07
Crude Oil (CLH6) Mar 06 61.15 -0.86

Exxon (XOM) was the subject of a takeover rumor this morning by a Chinese company. The details were of the unsolicited offer were not provided.

Wal-Mart (WMT) raised its guidance for same store sales in October to +4.3%. The stock is trading higher.