John Mugarian's Dynamic Growth

As I have said before, real reversals after a sizable sell-off usually occur intra-day, and close up big on heavy volume. Could this occur? Sure. Will it is the question for the day.

What could be the catalyst for a reversal?

1) Reduced tensions and a possible solution to the Iranian nuclear situation.
2) News from the Federal Reserve that they may be near the end of its interest rate hikes.
3) News that inflationary pressures have subsided, and that commodity and real estate prices have declined.

Unfortunately, tensions in Iran have not subsided, and frankly, why should they. The Iranians have the backing of the Chinese and Russian's, and if I had those two heavyweights on my side, I wouldn't backdown either.

On the interest rate front, the Fed funds futures are now pricing in over a 70% chance of a 1/4% rate hike in June. In its recent minutes, the FOMC stated that "given the risks to growth and inflation, committee members were uncertain about how much, if any, further tightening would be needed."

After that statement, I can tell you that an uncertain fed, and an uncertain market really don't mix.

I think the month of June will continue to be very volitile, and a reversal for a summer rally will probably get underway after the next fed announcement.

The precious metals and commodities have taken it on the chin lately, and sentiment growing to the point pessimism, our research for June still has gold at the top of the list.

Technically, it looks as if gold could hit the $600-$580 mark before rallying, but traders looking for a little excitement may want to play the Midas metal for a trade.

Given the weakness in the economic data this morning (jobs report & durable goods orders) the possibility of a fed pause after the June meeting is gaining momentum. If the metals markets suspect a pause is coming, you will probably see a reversal *and a rally) in the metals markets.

As you'll see below, gold is topping our list in both portfolios. We do not overweight any of the picks, but put equal dollar amounts in each of the Top 10.

Our top 10 Fidelity Select Funds for June in the Dynamic Growth Portfolio has only 2 changes from last month. The Dynamic Growth Newsletter will go public for subscribers in the next few months.

** Remember, the Dynamic Growth portfolio is for informational purposes only, and changes in the future will only be available to subscribers.

Here are the Top 10 Fidelity Select Funds for June;

FSAGX- Fidelity Select Gold Pf
FSLBX- Fidelity Select Brokerage & Investment Management Portfolio
FSAIX- Fidelity Select Air Trans Port
FSDPX- Fidelity Sel Indus Portfolio Materials
FNARX- Fidelity Select Natural Resources Portfolio
FSESX- Fidelity Select Energy Serv Port
FSRFX- Fidelity Select Transport Portfolio
FBSOX- Fidelity Select Portfolio Bus Services & Out
FSENX- Fidelity Select Portfolio Energy Fund
FPHAX- Fidelity Select Pharmaceuticals

Changes to the portfolio:

2 New Buys: FSENX- Fidelity Select Portfolio Energy Fund, FPHAX- Fidelity Select Pharmaceuticals
2 New Sells: FWRLX- Fidelity Select Wireless, FSTCX- Fidelity Select Telecom

Here are the top 10 ETF's;

Ever since April 25th, when I announced that Boston Scientific (BSX) insider/director Nick Nicholas had started buying shares of stock, several other insiders have stepped in and joined him. Mr. Nicholas has bought 3 blocks of 10,000 each and 2 blocks of 5,000 shares.

Four other insiders have bought shares in recent weeks;

2006-06-01 Director- Kristina Johnson- 12,000 @ $20.42
2006-05-19 Director- Ursula Burns- 3,000 @ $20.70
2006-05-17 SVP- Jeffrey Goodman- 5,000 @ $20.52
2006-05-11 Director - Mario Ernest- 50,000 @ $21.35

Boston Scientific (BSX) makes and markets medical devices a wide range of medical devices for less- invasive surgeries such as cardiology, vasular, urology, gynecology, neurovascular, oncology, endoscopy, which provide alternatives to surgery that are tramatic to the body.

The stock market woke up this morning in a bad mood, and the re-test of the lows I talked about last week is finally underway. I say finally because I find meaningless rallies as a waste of precious time. The rallies we witnessed last week were meaningless.

Today, the market came under pressure after Iran's leader, Ayatollah Khamenei, indicated that his country would not stop enriching uranium. In addition, he said that Iran would halt oil supplies if attacked. Here's what the Ayatollah said;

"if you make any wrong move regarding Iran, definitely the energy flow in this region will be seriously endangered."

I think that's pretty straight forward.

When reading news about the Middle East, or anything else for that matter, we need to keep in mind that there are always two sides to every story. Always. Being a natural born contrarian, I naturally have a tendency to want to look at the opposite side of every issue. This strategy has always served me well in the past.

When I think of our involvement in the Middle East, I can't help but think about the coincidence of the region having vasts amount of oil. The most powerful countries in the world are in a frenzy to secure their portion of the world's oil supply. This being said, why would the U.S. be any different?

Call it a critical eye, but the news we hear is important, but the news we don't hear is infinitely more important.

Today, after the news from Iran's supreme leader, oil prices rose sharply. Crude Oil closed up 42 cents at $72.75 after hitting $74 earlier in the day. News of higher oil prices and signs of price inflation sent the markets into a tailspin at the open.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan Administration.

Since we receive so many economic reports that exclude important items, I think it is important to cut to the chase and get the real scoop from someone who knows what they are talking about.

Here is Mr. Roberts latest article entitled: "Jobs Update: The Death of US Engineering."

Well, the re-test of the recent lows is happening. Now the market will probably attempt to scare you a little. That's right, the S&P will try to shakeout as many investors as it can (below 1250), and the Dow will emerge as the strongest of the three major indexes.

Whenever you participate in "edge of the cliff" investing, the markets have a tendency to become increasing volatile towards the tail end of a cyclical bull.

The correction we are experiencing is minor (5-10%). These type's of corrections are usually followed by one more attempt of the recent high's. The reversal of the current correction will probably coincide with speculation that the fed will pause later this month. Once this rally occurs, papa bear will emerge lead a further decline in the dollar. This event could mark the end of the cyclical bull market.

The market is bouncing a little higher this morning as investors begin to position themselves for the next move up. The ideal scenario would be a little more downside action to about 10,800 on the Dow and 1240 on the S&P. At these levels the market would have enough of a pullback to attract some volume, and provide a springboard for a re-test of the April high's.

This morning Alan Greenspan testified before Congress and said that "consumers are finally experiencing some impact of higher oil prices." I hate to tell Uncle Alan this, but consumers have been feeling the pinch for quite some time.

Yesterday, the market was able to shrug off a negative day, and staged a rally in the last 30 minutes to close down only 46 points. At mid-day, the Dow was down 98 points.

As I had mentioned in my Mid-day update;

The market is bouncing a little higher this morning as investors begin to position themselves for the next move up. The ideal scenario would be a little more downside action to about 10,800 on the Dow and 1240 on the S&P. At these levels the market would have enough of a pullback to attract some volume, and provide a springboard for a re-test of the April highs

The market was up about +55 points at mid-day, reversed, and closed down -71 points. Don't view these comments as rocket science, or a negative, instead look at it as a process the market needs to go through in order to reach a short term bottom.

Personally, I was glad to see the market give way to more selling, and not continue delaying the inevitable. On June 5th I referred to the snapback rallies as "meaningless rallies and a waste of precious time". The sooner we can get through the selling, the quicker we can play a summer rally.

Well, they finally got him. The U.S. Air Force dropped two 500-pound bombs on the home of Abu Musab al-Zarqawi, the terrorist believed to be responsible for the beheadings of two Americans. While this news is being celebrated by consumers of oil, the knee jerk reaction will probably be temporary.

The stock market is entering the attractive buy zone that we have been pointing out for the past few days. Investors looking for an attractive entry point in oil, gold, and commodities should considered doing so now.

Even with al-Zarqawi dead, the news does not change the demand issues of China and India, nor does it change the issues surrounding inflation.

Overnight, the European Central Bank (ECB) raised its lending rates by 25 basis points, sending the foreign markets down sharply. While some believe this morning痴 reaction in stock markets around the globe is the beginning of a new bear market, we are holding out for one more rally before the bear digs in his claws later this summer. Throwing in the towel right now would be way too obvious.

The S&P has hit our downside target of 1240, the Dow was within 53 points of our 10,750 target, and today has all the signs of being a good reversal day.

We have had several days of back and forth action, and every rally has been a meaningless rally, but if we can reverse today, and close higher, the short term correction could come to an end.

The market has some short term positives to focus on; oil prices are lower, the Fed and the ECB are acknowledging the inflation problem, pessimism is building, and put buying and short interest are up.

I don't know if I'm right, but today would be a good day for a reversal.

At mid-day, the Dow has gain back about half of what it lost this morning, and is currently down -68 points. The minor sell-off in oil was fractionally due to the Zarqawi news, but the see-saw action in the oil pits is due to a combination of events.

1) Traders believe a slowdown in global economic growth will lesson demand for energy.
2) And yesterday, the Energy Department said crude oil stockpiles increased and gasoline inventories rose for a sixth straight week.

Ok, so the fears are on the table. What about the approaching hurricane's in the weeks ahead? Oil traders are not stupid, I am confident they will be positioning themselves ahead of the inevitable.

I've noticed that oil has peaked above the $70/bbl mark on the ticker during lunch. Regardless of what happens today or tomorrow, energy will continue to be a problem for quite some time.

I really appreciate the kind words regarding our reversal call yesterday. I enjoyed the reversal as much as many of you did yesterday, but I was mildly disappointed in the final result.

Sure, we erased a 173 point decline to close up 7.92, but I was really hoping to see a dramatic reversal where the Dow would be down sharply, reverse, and close up sharply (+100 points). This did not occur.

Yesterday, even with the reversal, declining issues beat advancers by 9 to 7 on the NYSE, and by 3 to 2 on the NASDAQ. Volume was strong at around 2.56 billion shares.

This action tells me we may not be finished with the final capitulation phase of this correction, and we may see a re-test of yesterday's lows before the next Fed meeting. If yesterday was the final capitulation, it wasn't a great one. The only impressive part of yesterday's reversal was the volume. If I had it to do over again, I would like to have seen a larger recovery.

In any event, if yesterday was the final washout, I'll take it.

Thanks again for all of your kind comments.

Don't you just love the Wall Street gang? I love the way they promote or destroy stocks.

During the 2002 market debacle, Disney (DIS) stock bottomed out at $13.75/ share, and I was buying with both hands. That same day, an analyst came out and said, "But it could go to $7 or $8." I couldn't believe what I was hearing! How ludicrous!

Yesterday, with the stock around $30, CNBC was falling all over themselves touting the stock.

Anyway, you know how the games played.

Today, one of our IA portfolio stocks received an upgrade from Bear Stearns. They are finally beginning to see what we have known for quite some time. Here is the article-Read Article.

Former Chairman of the Board of Honeywell International, and CEO of Allied Signal, Larry Bossidy was on CNBC's Squawk Box this morning. He made a comment that I found to be pretty ignorant. He said, and I quote;

'There is no inflation out there. This inflation thing came up over the last two weeks."

No, Larry, you mean they finally admitted we have an inflation problem over the last two weeks.

Now we can all say that Larry's comment was pretty stupid, but in his defense, he just does not know any better.

See, Larry is not one of the "little people". He is rich, and among the elite. He lives in a rich neighborhood, and all of his friends are rich. The Rich are not impacted by inflation the same way the average working person is. When you have $100-$200 million in the bank, do you really care if gas is $2.90 a gallon? I don't think so.

I'll bet Larry is not running out to buy a Toyota Prius to cut his monthly gas expenses.

You will not find Larry or his wife walking up and down the isles of Wal-Mart trying to pinch a penny. So in Larry's eyes there is no inflation, and if you little people have a problem with that, it痴 your tough luck.

We all are not as fortunate as Larry Bossidy. We were not given millions in stock grants and options. We were not able to jump ship and retire after the company of which he was CEO (AlliedSignal) merged with Honeywell in December, 1999. We were not able to spend only 4 months as CEO of Honeywell after the merger and Para shoot out with millions.

Here's Larry's retirement benefits;-Source

"CEOs seem to have a hard time saying no to one another. In the case of Honeywell, the compensation committee, headed by a former CEO, paid out coming and going. First former CEO Lawrence Bossidy was entitled to a $4 million annual retirement benefit. Also Mr. Bossidy will be entitled to life-time access to or use of Honeywell facilities and services comparable to those provided to him prior to retirement, including limited use of company aircraft, use of car with driver, security services, financial and tax planning services, and office space, services and administrative support."

So there is no inflation huh, Larry?

Tell that to the dental hygienist with 2 kids who is fighting to pay the rent and her monthly gas bill. Tell that to the millions of Americans who have no health insurance. Tell that to the millions who are staying in their dead end jobs just to have health insurance. Tell that to the 4,500 people who lost their jobs after Honeywell bought AlliedSignal.-Read Article.

So, there's no inflation Larry? Give me a break!

This article appeared on the "Multinational Monitor" website.

Like my uncle use to say, "Don't pee on my leg, then tell me its raining."

NAFTA Runaway

CTC lists 21 other USA*NAFTA members who have also carried out NAFTA- related layoffs, including Xerox, Zenith, W.R. Grace, Sara Lee and Digital Equipment.

On Friday, I mentioned that the Thursday reversal was a little disappointing, but it was a reversal. Now the jury is out as to whether the market is satisfied with Thursday, or will it take another stab at Thursday's lows.

I think the truth will be known tomorrow and Wednesday. Tomorrow, the PPI numbers will be released, and on Wednesday, we will get the CPI numbers.

The jury is out as to whether the Fed will raise rates at its meeting later this month. As it stands right now, market rates have fallen, which suggests Mr. Bernanke can稚 raise rates unless he wants to invert the yield curve. The 10-year Treasury is now under 5%, and a quarter point rate hike would take short term rates to 5.25%.

A softer PPI and CPI number could be just the dose of medicine the market has been looking for. This would give the Fed reason to pause, and provide a spark for the beginning of a summer rally.

Last Thursday the IA portfolio was stopped out of Southern Peru Copper (PCU- Buy Limit $87, Stop Loss $79). We placed this stop the same day we bought the stock. On 6-8-06 the stock closed at $78.81. We were stopped out on the close.

The question now is will gold follow copper's decline. I don't think this will happen.

Like I had said in my Friday, June 09, 2006 post;

This action tells me we may not be finished with the final capitulation phase of this correction, and we may see a re-test of yesterday's lows before the next Fed meeting. If yesterday was the final capitulation, it wasn't a great one. The only impressive part of yesterday's reversal was the volume. If I had it to do over again, I would like to have seen a larger recovery.

In any event, if yesterday was the final washout, I'll take it.

In any event, a nasty close today, and good news from the PPI tomorrow, could bring a climax to the selling sometime this week.

This morning, the PPI report was released for May, and the numbers showed that wholesale prices rose 0.2%, while the infamous core rate rose 0.3%, slightly above the expectation of a 0.2%.- Read

Another sign showing that inflation may be cooling is the metals market. Gold is finally below $600/ oz, and copper is still getting whacked.-See Prices

My best guess is we have a good news, bad news scenario. The good news is the Fed will probably pause after the June meeting. The bad news is, they may hike rates just before the pause inverting the yield curve.

I had heard several Market gurus’ claim that last Thursday's intra-day reversal was the big "capitulation" day, and I grew very skeptical. Particularly since the reversal did not end with a big rally on the upside.

Now that most guru's are confused, we are probably closer to a bottom after today's successful re-test of the 1225 (+/- 5 points) area on the S&P. Any convincing break below the 1220 mark could result in a much steeper decline of 1200 or lower on the S&P. A convincing break below the 10,700 area on the Dow could lead to a further decline around the 10,300 level. Let's see if the market can hold in here.

If you have been wondering why we own the Rydex Tempest 500 (RYTPX), you don't have to wonder any longer.

I must warn you that a rally up to the 1300 level on the S&P, and a rally back to the 11,300 level must be watched closely. I do want to be heavily in cash by the end of July.

After dropping 86 points yesterday, the market successfully re-tested the lows of last Thursday. Since the market looks deeply oversold, and has given back all of its gains for 2006, we will probably see some backing and filling action to repair the damage that has been done.

This morning, the CPI data was released for May, and the core number came in slightly higher than most economists had forecasted. This data leads us to believe (as did yesterday's PPI) the Fed will adjust rates higher one more time, and then pause. What leads us to believe this will happen is Treasury's are falling and the yield on the two year note has hit a 5 year high yielding 5.09%.

We are beginning to get a lot of negative comments from the press. These were the same people who were the biggest cheerleaders for the market four weeks ago. What a difference four weeks make. No wonder we have a huge A.D.D. problem in our nation.

Give me some Dramamine! Today's manic market finally got up off the mat, and closed up 110 points on volume of just shy of 2 billion shares. Today's rollercoaster ride was even nauseating for the bears who eventually threw in the towel around 2:45 EST.

While today was a good start, the market should begin working off its short term oversold position, and prepare itself for the upcoming Fed meeting on June 29th. If the Fed reacts as we suspect it will, the final rate hike for this cycle will probably be followed by the highly anticipated "pause".

Some are now saying the Fed Funds Futures are pointing to a potential rate hike in August. We have been saying for quite some time that "Cost Push" inflation (the increase in the prices of raw materials & price shocks-IE: energy) is our biggest problem.

After a nice oversold bounce off the 10,700 low, the Dow seems to be slowing down as it gets closer to the 11,000 mark. I would like to see the index break above 11,000 prior to the June 29th Fed meeting, but investors will need to hear some good inflation news in order for this to happen.

Over the past few weeks, several Fed officials have been talking the market down by focusing on inflation problems that past government reports were saying didn't exist. Wasn't it just a month or so ago we were being told that inflation was not a problem, and now, out of the blue, everyone is concerned about inflation. I have been heavily focused on this issue for the past six months.

Its nice to see that we were at least 6 months ahead of the Fed.

On January 31, 2006 (No Inflation Huh...), I wrote;

"The inflation data being released by the government is not worth the paper its written own. All one needs to do is look at how gold and the dollar are reacting to rumors that the fed may halt its rate hikes. These two indicators are telling us that real inflation is alive and well."

Heck, just last week, the NAFTA king and former Chairman of Honeywell , Larry Bossidy was a guest host on CNBC, and made this comment;

"There is no inflation out there. This inflation thing came up over the last two weeks."

I received a question about why I recommened MasterCard (MA- Buy Limit $45) since the company has yet to report any earnings.

hello John:

Shawn

Actually, the company does have earnings, but was a private company prior to the IPO. In fact, as it states in the article below, MA has increased revenues "at an average annual rate of 15% over the past five years".-Morningstar Report

If you are a trader, you can buy the stock under $45, and trade out of it around $48. This would be for a quick scalp. Investors may want to be a little more patient.

Uncle Ben Bernanke soothed the markets enough to allow the Dow to reach the 11,000 mark. He did this during a speech to the Economic Club of Chicago.- Read Article

Earlier today I said;

"After a nice oversold bounce off the 10,700 low, the Dow seems to be slowing down as it gets closer to the 11,000 mark. I would like to see the index break above 11,000 prior to the June 29th Fed meeting, but investors will need to hear some good inflation news in order for this to happen."

Well the market received some decent news since Bernanke was not as sharp tongued about the inflation problem as he was in a speech earlier in June. Investors were comforted by his words and tone.

The only question remaining now is, will he, or won't he, pause at the next fed meeting. The question for us is simple; How much are you willing to bet?

"No Man's Land is the term used by soldiers to describe the ground between the two opposing trenches." this term was widely used during WW I, and kept its name throughout many military operations since.

Wikipedia, says that "No man's land is a term for a land that is not occupied or more specifically land that is under dispute between parties that won't occupy it because of fear or uncertainty."

I think this term is applicable to the market, particularly around the 11,000 mark on the Dow.

During WWI, the distance between two opposing trenches (no man's land) was about 250 yards. Until we hear confirmation from the Fed on June 29th, the trading range on the Dow could be anywhere from 250 points north or south of the 11,000 mark. Hence, we believe we are in "No Man's Land."

Yesterday, Fed Chairman Bernanke's speech allowed the markets to recover from the 10,750 level, and today the market is mixed after St. Louis Fed President William Poole said;

"It's, I believe, certainly my view that if the inflation rate continues to be persistent like this the Federal Reserve will simply have to pursue persistently policies that will keep that inflation from increasing further."- Read Article

Until the market receives confirmation of a Fed pause, trading should remain around current levels until the final outcome is known.

Bruce bittles was our Chief Market Strategists while I was a Limited Partner at J.C. Bradford & Co. Bruce is a sharp guy, and "calls em' as he see's em".- Read Comments

Make no mistake, Wall Street run's Washington. It is amazing to see how much clout Goldman Sachs has with the inter-workings of Washington.

Today, Deputy Secretary of State Bob Zoellick resign to take a job with the investment bankers at Goldman Sachs. Zoellick was apparently upset that he was passed over for another Goldman Sachs executive, Henry Paulson for the job as treasury secretary.- Read Article

The other 2 Goldman executives that also have influence with Washington are of course;

Senator Jon Corzine from New Jersey- Read Article
Former Treasury Secretary, Robert Rubin- Read Article

Wasn't Goldman Sachs one of the 10 firms fined by the SEC for their conflicts of interest between their research arms and investment banking? Yes, I do remember reading that somewhere before.-Read SEC Press Release

I know its boring, but I have been aggressively locking in some yields on cd's and corporate bonds. Since I continue to believe we are at the end of this 44 month cyclical bull market, the summer rally that many are betting on may or may not happen.

The Dow is locked in a trading range of about 250 points north or south of the 11,000 mark. Until the market receives confirmation of a Fed pause, trading should remain around current levels until the final outcome is known. (See June 16, 2006 post -"Dow 11,000 : Welcome to "No Man's Land")

Here are a few short term bonds and cd's that look attractive;

BELLSOUTH CORP NT 5.000% 10/15/2006- Currently selling at a discount
DAIMLERCHRYSLER NA HLDG INT NT 5.700% 01/15/2007-selling at a discount
WASHINGTON MUT INC SR NT 5.625% 01/15/2007- selling around par.
GANNETT CO INC NT 5.500% 04/01/2007-selling at a discount
VIACOM INC SR NT 5.625% 05/01/2007-selling at a discount
MARATHON OIL CORP NT 5.375% 06/01/2007-selling at a discount

LEESPORT BANK 6 MO- Yldg 5.1%, Matures 12/22/2006
FIDELITY B 7 MO - Yldg 5.15%, Matures 01/30/2007
LASALLE BANK MIDW 9 MONTH- Yldg 5.255, Matures 03/28/2007
FIRST CITIZENS NATL BK 1 YR- Yldg 5.3%, Matures 06/28/2007
WASHINGTON MUTUAL 1 YR - Yldg 5.4%, Matures 06/29/2007

*** These Bonds and Cds are for informational purposes only. Use them as a comparison to what is currently available through your broker or financial advisor.

I always try to give investors some common sense analogies and conceptual ideas to get my point across. Why? Because no one likes to watch a techno geek pointing to lines on a chart, or sit and watch a financial commentator prognosticate what the next Fed move will be. To the average investor lines and squiggles mean very little, and commentary of what the Fed will or will not do border on a waste of time. While lines and squiggles may make sense for a few minutes, so do tarot cards from a fortune teller.

Unfortunately, most investors REACT to the "Surface Anatomy" of the markets, and fail to see the big picture of what痴 really going on.

"Surface Anatomy" is used in medicine, and is a "study of the configuration of the surface of the body" in an attempt to figure out what is going on with the internal parts.

Investors often use "Surface Anatomy" when dealing with the markets by reacting to the hot news item of the day, or the latest economic report. This can be a very dangerous strategy, and one that has proven to successfully pick-pocket investors through the years.

So, why do so many investors listen and respond to Surface Anatomy?

1) They don't have the time to accumulate all of the facts before making an investment decision.
2) They are impatient, and always feel like they must be doing something.
3) They approach investing with a gamblers mindset instead of the mindset of a prudent investor.

As Jim Rogers once told me; "Investors always feel like they must be doing something. They just can't sit still and wait"

With all of the talk about the economy possibly coming in for a soft landing, I can't help but think of an important component in skydiving; Like most jumps or falls, the severity of the impact depends on whether or not you "Bend You Knee's."

If what we have been experiencing the last 44 months is a cyclical bull rally, then eventually the next leg of the bear market will resume. When it does, the magnitude of the decline, and the severity of the damage in your portfolio will depend on whether or not you are prepared. In essence, will you Bend Your Knee痴?

Market declines, like skydiving, have a similar feel. Tell me if I am wrong, but not looking at the ground in skydiving, or not having a potential downside target may lead to disorientation. There is nothing more frustrating than being a disoriented investor.

By identifying a downside target, and reinvesting at pre-determined price levels, investors can enjoy the rush of a free fall, and enjoy the scenery on the way down. Eventually, a bear market will end, and a new bull market will take its place.

Here are some thoughts on how we can do this;

All the talk about ethanol being our savior from higher energy prices down the road is a little misleading. As the U.S. tries to become more energy independent with alternatives like turning corn into ethanol, they are missing a very important result of that process.

While ethanol can be used as a gasoline additive (10%), using ethanol in any greater capacity can create a snowball effect on the prices of the other products made from corn.

Obviously, as the demand for corn rises, so will the price for corn. Ethanol is nothing new, in fact it has been made from grain for thousands of years. Only in the last 20 years or so has Ethanol achieved popularity as an alternative for fuel.

So, if ethanol demand increases, and corn prices rise, it is natural to assume that the other derivatives from corn will do the same. So, what are the other products derived from corn?

As I mentioned on June 15th (see "Slowing Down as we Approach Dow 11,000"), and reiterated on June 16th (Dow 11,000: Welcome to "No Man's Land") the Dow is staying around the 11,000 mark until it gets further information on the Feds next move.

In recent days there has been speculation that the Fed will raise its key lending rate 50 basis points, and then call it quits (for now anyway). Whether that happens or not remains to be seen.

A fed funds rate of 5.75% would push the key lending rate in the "restrictive" territory for the first time since the 2000-2001 time frame, cash strapped consumers will be paying more for credit lines and adjustable rate mortgages. Currently banks are charging 7.75%-8.00% on prime, and another .25 or.50% would ratchet up the prime rate accordingly.

Needless to say, these higher short term rates will take a lot of steam out of the economy. In 2001, the fed funds rate hit 6.25%-6.50% bringing the economy to a crawl just before the terrorist attacks of September 11th. An already stagnant economy in 2001 had a very difficult time shaking off the damages caused by the New York disaster.

Well, this is the week that many investors have been waiting for. The Federal Reserve will meet this week, and raising short-term rates to 5.25% is a given. The wildcard out there is will the Fed pause after a .25bps move, wait until August to pause after raising rates another .25bps, or have the guts (or stupidity) to raise rates .50bps and stop.

The first scenario is a lock because market rates have already risen, and the Fed never fights market rates.

The economic numbers are mixed. Durable orders fell, but when you remove the volatile transportation component, there was still a healthy gain of .7%. Transportation accounted for the biggest decline in orders falling 18%.

The Leading Economic Indicator fell 0.6%, but housing starts rebounded for the first time this year.

The Economic Cycle Research Institute (ECRI), which designs indexes that help predict inflationary pressures in the economy, said that the future inflation gauge (FIG) for the U.S. fell slightly in May. The May reading came in at 121.8 down slightly from April痴 122.0 reading, but this number is significantly below the peak numbers of October.

That's enough of the economic "shell game". Now, let痴 get to the index that we all can relate to. The BAHI (Back At Home Index).

Of course I made this up, but there is no better indicator of future events than what is going on around you, and what other people are doing. This is my favorite index. This is how we were able to accurately predict the current inflation problem that many on the financial channels were saying didn't exist 6 months ago.

As many of us battle over who we ultimately choose to be the successor trustees of our estate, you need to keep in mind how many bank trust departments operate.

Through the years, I have told clients that banks have their own agenda's when it comes to your assets. This article on Wachovia is an example of what I am talking about.

Please Read This

Once again, the Dow continues to battle with the 11,000 mark. I have not been posting multiple journal posts for a few simple reasons;

1) If you have been keeping up with my journal, you know what I think, and you know where I stand.
2) I only post my journal when I have something to say. In the blogging world, I am told that the more times you write you post blog entry, the more people you attract. Since my goal is to provide the best information possible, I am not going to post a journal entry just to attract eyeballs.
3) And finally, why should I comment on the obvious. Anyone who watches the financial channels, or reads financial commentary from Yahoo Finance knows what the obvious is. I like to bring you some thoughts that are not so obvious.

A good example is the wave of merger activity in the oil sector. This is obviously an example of something that is obvious. Everyone is reporting these mergers as companies scramble to secure assets. The obvious is we have an energy problem that is not going to go away anytime soon. And lastly, the cyclical bull market is coming to an end, and sitting around hoping wishing for a different result is a waste of time.

Once we get beyond the remnants of the final phase of the bear market, we can focus on what to purchase for our portfolios.

So, this being said, what is not so obvious?

The pessimism is so thick you could cut it with a knife. If we could put our contrarian hats on for a few minutes, you will quickly come to the conclusion that the stock market does not go when the majority sees something being obvious. In fact, the market is probably at its best when it frustrates the majority of the people playing a particular direction.

Phillip Erlanger, at Erlanger Squeeze Play (www.erlangersqueezeplay.com), reported this today;

"Short interest rose 11.42% on the NASDAQ in its report released after the close yesterday. Overall no sectors saw a drop in short intensity from last month, and short intensity rose in 16 out of 18 sectors. For the month, large jumps occurred in electronic technology, technology services, health services, health technology, utilities, retail, consumer durables, consumer non-durables and producer manufacturing."

"Short interest in all NASDAQ securities totaled 7,188,384,593 shares for June, compared with 6,451,337,395 shares in May — an 11.42% rise. Last week the NYSE reported a 5.50% jump in short interest. Is the market about to rally against these short sellers?"

Phil does a great job predicting market swings with his short data, but in the short run, this week’s FOMC meeting could create some short term uncertainty.

I have followed insider trading for over 17 years. I wanted to report some of this weeks transactions that look interesting.

BUYS

SOVEREIGN BANCORP (SOV)- 950,000 shares bought by BANCO SANTANDER CENTRAL HISPANO SA (10% Owner)@ $20.56 for $19,536,318. Shares Owned 8,430,100.

SIX FLAGS (SIX)- 500,000 shares bought by Washington Redskins owner SNYDER DANIEL M @ $ 5.92. Shares Owned 11,421,300.

FOSSIL (FOSL)- 70,000 shares bought by Chairman KARTSOTIS TOM@ $16.93. Shares Owned 4,779,596.

We are going to sell 2 of our oil stocks in the IA portfolio. The first is Exxon (XOM $62.09), and the second is Conoco (COP $65.63).

Exxon has clearly been the laggard of the group, and unless I am very wrong, they will never be a buyout target for anyone.

Conoco, has traded in a fairly tight range (buy under $60, sell above $65). During periods of extreme optimism, the stock occasionally pops above $70.

Our cost basis on Exxon is $59.73 (bought 2-8-06), and Conoco $59.73 (bought 2-8-06). I like the idea of using both of these companies as trading vehicles, but only during times of extreme weakness in the sector.

If the fed decides it isn't finished with its tightening cycle, fears of the economy slowing may temporarily curb oil demand. In the U.S., higher prices have a way of doing that on their own.

Lightening up in the oil sector will not hurt our exposure since we still own MRO, CHK, SUN, SLB and VLO.

Many market mavens are expecting the Federal Reserve to raise its benchmark interest rate by 25 basis points. A lot has been made about this being the 17th time the fed has raised rates. I wonder if they would be less dramatic if the fed had raised rates 8 times in half point increments.

In any event, a 50 basis point increase followed by a pause would thicken the plot. I don't think a 50 basis point hike will happen, but it sure would be a lot of fun to watch.

The GDP numbers released this morning revealed that the U.S. economy grew "at an annual rate of 5.6 percent in the first quarter," higher than the 5.3% estimate. The good news in the GDP was the improvement in the trade deficit. In addition, the GDP price deflator rose at a lower annual rate than the government predicted last month.

I guess this news, in combination of hopes of a fed pause, and end of the quarter window dressing is adding to today's gains.

For now, we are waiting to hear from the Wizard at 2:15 EST.

Let's mix in a little "bull".

Yesterday, the Federal Open Market Committee raised interest rates a quarter of a point to 5.25%. Many were worried that the release of its statement might contain verbiage that several more rate hikes were to come. That didn't happen and the markets celebrated. Great!

After the 2:15 EST announcement, the Dow added an additional +133 points to its midday gains of +83, to close up 217 points on the day. The S&P closed up 26.87 to 1272.87, and the NASDAQ jumped 62 points to 2174.40.

The market is following the scenario that we laid out for you a few days ago. We are happy that the market is cooperating with our projections.

So, what do we think is going to happen next?