John Mugarian's Dynamic Growth

The market has been undergoing some end of the quarter window dressing, and it痴 nice to see the buying pressure come in on many of the stocks in the IA portfolio.

Last week, the Fed raised key the lending rates, and said that inflationary pressures should be moderating but didn稚 rule out any future rate increases.

After a brief run up that could carry us into the middle of the month, the market will begin to focus on any weakness in the economy, and any possible future rate hikes. I have been preparing you for many months about the potential for a severe downturn in the market. My best guess is the August-October timeframe could create some wonderful bargains.

Today, North Korea test fired some missiles that basically failed the test. It痴 amazing how the news media jumps on every little thing to create fear and panic. If it isn't terrorists, it痴 the heat index or wind-chill factor. If North Korea were a serious threat to the U.S., we have the capability to completely destroy their nation without sending in a single serviceman. I wouldn't give this failed test another thought.

It does not appear obvious, but a rally that could potentially be the last in this cyclical bull seems to be building. Yes, I know everything looks pretty bleak, but rallies in a cyclical bull surprise on the upside, and with the fairly large build up in short positions, this market could force many of the shorts to run for cover.

As we examine the chart activity of the CRB Index and the 10 year Treasury, there is enough evidence there to assume one or both could provide the catalyst for another significant rally. Let's take a closer look.

CRB Index:

For many years there has been a historical inverse relationship between the CRB, or commodities index, and stocks. In other words, when commodities rise, stocks fall. In recent months we have witnessed a dramatic rise in commodity prices, and only a mild reaction to the downside in stocks.- See Chart

Jim Rogers believes that commodities have entered a new bull market after going through a bear market for better than 20 years. We have heard several cries from the crowd that commodities are now in a speculative bubble that could burst at any time.

Rogers believes that commodity have entered a new bull market which could last 10-20 years. He also said to expect nasty corrections along the way. It is the nasty correction in commodities that could lure investors into a false sense of security, and provide the catalyst for an 8-12% rally.

I say "lure" because I believe that any correction in commodities will be looked at as something permanent. Don't be fooled. Any decline in commodities and the CRB Index will be nothing more than a correction within a bull market. Any corrections in the days and weeks ahead could provide a nice springboard for stocks. In fact, we believe this will be one of two major factors that could carry the S&P back to 1300 or slightly higher.

Since we believe the bull market in commodities is just getting started, we would be buyers of commodity related stocks on sharp declines.

I recently received this question on Boston Scientific (BSX);

Dear John,

I bought BSX back when you noted the large insider buyer. Since than its down about $5.00/share to $16.30. What would be your thoughts at this point [ie., Hold, Sell, Buy more, etc.] I'm new to the investing/trading world and your blog and help are much appreciated.

Sorry about the 5 point decline, I was early on the stock as I was following the trail of the corporate insiders. Also, the stock was down 20 points from its 2004 high.

Basically, BSX got hit with news of a product recall associated with some implanted devices. This problem was inherited with the purchase of Guidant (GDT).

The company issued a letter addressing the problems related to the capacitors of its implanted devices. They further said they would replace the defective devices and take a 2Q charge.

Earnings season is here, and 3M, Alcoa, Lucent, EMC and Advanced Micro Devices have all issued profit warnings. Even Philips, the maker of flat-screen televisions showed a loss of $341 million for the quarter. So, what is so significant about these warnings? The economy is clearly beginning to contract.

Last quarter, Intel and Microsoft warned investors that second-quarter profits could come in a little lower than expected.

If AMD is warning, and they have taken business from Intel, then we should expect the same type of announcements from Dell, Hewlett Packard and maybe even Apple.

So, why are all of these companies issuing warnings? Higher oil prices are the main reason. And now that short term interest rates have risen from 1% in 2002 to 5.25% today, consumers are going from feeling a pinch to feeling pain.

Oil prices for the August contract closed just shy of $75/bbl, while the September and October contracts closed above $76/bbl.

These are good times in Houston with oil prices trading near their high's. And to pay their respects to one of their own, several oilmen attended the funeral of former Enron CEO, Ken Lay. Among the oil related guests were Former President George Bush, and former Secretary of State James Baker.

With gas prices around $3.00/ gallon, I still get irritated when I drive by an Exxon station. I can't help but think of the $400 million dollar pay package that its former CEO, Lee Raymond is receiving which includes his "pension, stock options, a $1 million consulting deal, two years of home security, personal security, a car and driver, and use of a corporate jet for professional purposes".

It seems to never end. The haves keep getting rich on the backs of the have nots, and the Wall Street system is rigged to ensure that corporate insiders profit at the expense of ordinary investors.

For now, be glad you own some energy stocks. It makes life a lot easier when you are silently standing by the gas pump thinking about how badly you池e getting screwed.

Oh, well, life goes on. While we may have one more rally (odds are lessoning) to the upside (after the August fed meeting?), we have to prepare ourselves for the eventual bear market.

I was reading an article this morning that pretty much sums up the infectious greed of human beings. As sad as it is, human psychology is probably a better indicator than P/E ratios, and mathematical calculations in valuing a company.

Keep in mind when I read the paper, I am just scanning to get a feel for what the masses are doing, thinking, and saying.

Yesterday, in Milwaukee, Allstate Insurance Company was giving away $30 worth of free gasoline as a reward to the city for its safe driving record. Like a herd of elephants, drivers began lining up at midnight, and the line was so long that it stretched into residential areas blocking driveways and creating havoc.

Before it was all said and done, fights broke out, two cars were involved in accidents, and four people were arrested. All of this mayhem occurred as greedy consumers were determined to get their share of one tanker truck of gasoline. - Read Article

Maybe it's just a coincidence, but after Ken Lay's death in Aspen, another person, a banker named Neil Coulbeck was found dead near his home near London. Coulbeck was questioned by the FBI in connection with three British men who were facing extradition to the US for questioning about their involvement with Enron.- Read Article

Now conspiracy theories like this one in the Aspen Daily News are beginning to surface. Unbelievable!

Like former New Orleans mafia boss, Carlos Marcello use to say, "three people can keep a secret if two are dead."

Do you remember my comments from June 09 on Disney?

Actually, I had to search to find them myself;

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

Anyway, you know how the games played.

Pumping stocks is nothing new, and the big hype over Disney's "Pirates of the Caribbean:Dead Man's Chest" was all over the airwaves. That's all well and good, but while consumers can afford to shell out $7.00 to see a movie, they may be reluctant to shell out $50/ day/person, not including hotel and travel expenses to visit the parks.

The economy is slowing, and this morning "CIBC World Markets downgraded its stock to sector underperformer from sector performer due to concerns over valuation and an expected slowdown in 2007."

Disney is clearly one of the cyclical stocks I would love to own once the economy bottoms out, but I don't think that will happen until 2007.

Take a look at the charts of these popular restuarant chains;

Outback (OSI)

Cheescake Factory (CAKE)

P.F. Chang's (PFCB)

Iran keeps getting headlines about their involvement with Hezbollah, the capture of Israeli soldiers, and how the country has provided the weapons being used against Israel.

A military strike by Israel on Iran could throw the financial markets into a tailspin, which could very well involve the Chinese, as well as the Russian痴.

If Israel does strike Iran, and China decides to come to the rescue, its first strike against the west may be financial, and not by the use of force. An unwinding of China痴 massive hoard of longer term U.S. debt would cause long term interest rates to rise, and further weaken a softening U.S. economy.

Keep in mind that many oil producing OPEC countries hold vast amounts of U.S. debt as well.

I find it odd given the sell-off in the stock market that there was to rush to reinvest the stock proceeds into Treasuries. Usually, when declines of any magnitude are seen in the stock market, Treasuries rally.

We are very close to releasing our Dynamic Growth (web only) Newsletter. We are also very excited about what this newsletter will bring to individual investors.

Our 59 month back-test as yielded impressive results. With help from the research team at Navellier & Associates, we have put together a simple to use investment approach that takes the guesswork out of investing, with market beating results.

If an investor had simply invested in our Top 10 Fund picks each and every month and equally weighted those picks from July 2001-May 2006 here are the **back-tested returns** (As Calculated by Navellier & Associates) that were achieved (not including trading costs, fees,etc.);

Top 10 Fidelity Select Sector Funds: +100.50% Total Cumulative/ 15.20% Annualized

Top 10 Exchange Traded Funds (ETF): +89.42% Total Cumulative/ 13.87% Annualized

We compared the results to the Russell 3000 which gained: +18.71% Total Cumulative/ 3.55% Annualized

As PC prices began to fall, Apple Computer's stock began to soar. Why? Because consumer痴 were fixated with the Ipod. Now that competitors are entering the market, Apple's market share may begin to dwindle.

So, what is the latest craze to garner consumer痴 attention? The answer is simple, GPS (Global Positioning Systems) devices that helps people get where the want to go without opening a map or asking for directions.

The lead sled dog in this latest craze is Garmin (GRMN- $99.02).

Garmin makes navigation products using GPS technology that allows drivers, hikers, and even cell phone users get from point A to point B with a touch of a button. Consumers are fascinated with the ability to know where they are and where they are going with the use of GPS electronic maps and navigational charts.-See Website

As I was watching CNBC this morning, some of the top market experts in the country were admitting what we have been screaming for months. The data we are receiving about inflation is highly flawed.

This morning, Euro Pacific Capital President Peter Schiff, Schwab's Liz Ann Sonders, MKM Partners Chief Economist Michael Darda, and Banc of America Securities Chief Investment Strategist Tom McManus were all guests on CNBC.

I am not sure who started the discussion, but when either Schiff or Darda mentioned that the governments inflation data was flawed, Tom McManus began to shake his head in agreement, and Becky Quick called on McManus to comment.

McManus agreed that the data released by the government does not give an accurate read on inflation, and Schwab's Liz Ann Sonders basically concurred.

My question is simple; why haven't these two high profile market celebrities been yelling this information from the top of the mountain all along? These two are constantly on the "big stage" and could have warned investors like we did several months ago.

Now you池e beginning to see the value in what we do. We try to tell you what we think may happen, rather than tell you what has happened. I have got to think there is "real value" in the information we provide.

I was beginning to think the markets were going to side step its usual summer rally. Who knows, they still might.

Given the geopolitical issues around the globe, a real estate market on the brink of collapse, and consumers getting creamed by a 8.25% prime rate, why shouldn't we expect the worst.

This morning Federal Reserve Chairman Ben Bernanke came to the markets rescue after stating, "We think inflation is going to moderate." Thanks Ben, I think that has become painfully obvious in light of the recent action of the homebuilding and restaurant stocks.

Of course "Uncle Ben" had to hedge himself a little, he went on to talk about inflation risks that could keep prices high.

I was drilling readers almost daily about the bubble that existed in the real estate markets in 2005. Now that that prediction is coming true, don't expect this sector turn on a dime and improve immediately. After multiple years of excesses, it will take an equal amount of time to adjust itself.

What I find amusing is, wherever the masses show the most amount of greed (NASDAQ 2000, Real Estate), it is those areas that seem to experience the maximum amount of pain. Whenever you hear the slogan, "It痴 different this time", don't walk away, run!

Everyone has a pain threshold, and in 2004-2005, I made mention of this issue. Now Business Week is saying what we said over a year ago.-Read Business Week

In the past, we mentioned everyone has a pain threshold. As far as gas prices are concerned, what price will eventually bring consumers to their knees? My bet is $4-$5.00/ gallon.

Here is my August 16, 2005 journal post: Where's Your Pain Threshold?

I am glad to see the serious financial publications are finally catching up to us.

Almost two day's after Chairman Bernanke's testimony before the House Financial Services Committee, the markets are getting back to the economic realities that face us.

After Wednesday's oversold rally, the Dow closed down 83 points, and the NASDAQ Composite closed down 41 points.

So what are the realities? If you have been keeping up with my journal, you are well aware of what the realities are. Forget about putting a microscope on the day to day economic releases, and begin focusing on the big picture.

Here is a big picture comment that many won't make. In light of the recent news about the back dating of stock options you need to know this;

Many corporate executives are more interested in enriching themselves with options and stock grants, than having a passion for what they do, and earning their money like normal people.

Personally, I believe ALL stock grants and options should be abolished. The only pay a corporate executive should receive is salary, and a cash bonus based on performance. If they want to own company stock, they should reach into their pockets like the rest of us and buy in the open market.

Many, big name, high quality stocks are down significantly off of their 52 week highs. If the recent guests on the financial channels are correct, then why are insiders NOT buying?

No one knows the prospects of a company’s future earnings better than the insiders. This being said, I take offense to someone trying to “tell” me the market is a great buy. Instead, I want someone to “show” me the market is a great buy.

In other words, “show me the money”.

So, what is the real story?

We need to focus on an important component of the June CPI. On July 19th, the CPI rose 0.2%, while the core rose 0.3%.

The blame for the core being higher was the increase in “owner’s equivalent rents”. Many have speculated that the rents number overstates the core inflation rate.

Given the rise in energy prices, the rise in prices for consumer services (due to higher energy prices), and the escalated prices investors paid for real estate, I don’t know how anyone could say that the core rate was overstated.

If I could exclude Oil from the title above, you would swear today痴 article was about a 1970痴 rock concert.

When the economy begins to hit the skids, Tobacco, Alcohol, and Drugs do very well. You may ask why; but when people are worried, they smoke, they drink, and the take medications.

Of course this is an over simplification, in reality, Tobacco, Alcohol, and Drugs have a steady stream of earnings, and are not really dependant on the economy for profits.

This morning we received even more evidence that the economy was beginning to crater.

United Parcel Service (UPS) is down over 10 points this morning after reporting lower profit margins. It is obvious that the company痴 profits were greatly affected by higher fuel prices.

This morning I was speaking to a client who is highly successful and very intelligent. No, he does not have a college degree, but when it comes to making money, I値l put him up against anyone.

Oddly, I am not one who believes having a college degree translates into success. Sure, it will open a lot of doors that would otherwise be closed, but it痴 not an automatic ticket for success. Of course, I did not want to enter the world without one, so I did my time, and came back with three.

My client built his fortune (without inheritance) through hard work, guts, and a boatload of common sense.

We were discussing the topic of Abraham Cherrix, the 16-year-old cancer patient who was ordered by a Virginia judge to receive court-ordered chemo treatments. - Read Article

With continued turmoil in the world that includes escalating energy prices, rising interest rates, higher inflation, and geopolitical risks around the globe, we believe assuming a defensive stance is the prudent thing to do.

A defensive stance is nothing more than reallocating assets within investment portfolios by reducing equity positions, and increasing exposure to income investments like bonds, certificates of deposit, and cash.

There will come a time when these conservative assets will be reduced, and reallocated back to the stock market, but this will not take place until the stock market corrects, and creates attractive bargains.

As we look at the recent earnings reports for the top sectors in the S&P 500, we find that the best earnings are within a very narrow group of sectors. Investors only reward stocks within the sectors with the best earnings. This is why you will see some stocks rise substantially while others languish.

Conoco CEO, Jim Mulva says inflation is a big problem. The government reports have yet to acknowledge the severity of the problrm.

The government should take the CPI data and throw it in the trash can.

Here are Jim Mulva's comments from Dow Jones Real-Time News at 12:12 p.m. on 07/26/2006;

By Bob Sechler
Of DOW JONES NEWSWIRES

ConocoPhillips (COP) Chief Executive Jim Mulva said the company is experiencing "pretty severe inflation and cost pressure" but hasn't changed its plans to spend $18 billion on capital projects this year.

One by one company's are announcing that higher energy prices, rising inflation and higher interest rates are having an impact on their bottom-line.

I can't but help quote one of my favorite TV characters, Gomer Pile; "Well Gollie, would you look at that."

The Wall Street pundits want us to believe that P/E ratios are historically low on forward looking basis, but they don't tell you what happens when P/E multiples become compressed due to higher costs. I'll tell you what happens when P/E ratio's are compressed, the stocks get hit.

We knew the day was coming when inflationary pressures would eventually impact earnings. Stay tuned, earnings for Q3 could get real interesting

Here is a partial list of the stocks I want to buy down the road;

CAKE, PFCB, ERTS, LOW, VAR, SYK, OSI, PHM, DIS, INTC, MSFT, PNRA, NVR, MMM, UPS, DELL, QCOM.

British Petroleum (BP)- Profits jumped 30% to $7.3 billion.

Royal Dutch Shell (RDS)- Earnings jumped 40 on a net profit of $7.32 billion.

ConocoPhillips (COP)- On Wednesday, quarterly profits rose 65% on higher oil prices, and refining margins. Net income rose to $5.19 billion for the quarter.

4 Insiders sold 116,475 shares over the last 6 months, while 1 insider purchased 1,000 shares.

Exxon-Mobil (XOM)- quarterly profits jumped 36% to $10.36 billion, or $1.72/ share. Former CEO, Lee Raymond probably appreciates your contribution.

11 Insiders sold 178,448 shares over the last 6 months, and no insiders bought.

Chevron (CVX)- releases its results tomorrow.

Thus far, 4 of these companies reported profits totaling $30.17 billion for the quarter.

When it comes to oil, if it wasn稚 the Mid-East situation, it would be something else. Oil traders have conveniently always found a reason to drive prices higher.

When you look at the over 2000 year old fight in the holy land, why don稚 the news commentators just say it; it all boils down to a difference of religious belief痴. It always has, it always will.

In fact, the continued violence is nothing more than a big family feud. In fact, if you care to look it up, the world痴 three most popular religions all come from the same father.

By the way, this is not a Sunday school lesson, it is just an explanation.

The Dow rallied 119 points to 11,219, and the S&P rose 15.35 points to 1278, bumping up against stiff resistance at the 1280 level.

The government said the Q2 GDP grew by 2.5%, as consumers begin to get slammed by higher interest rates and energy costs. This is the lowest reading on GDP since the 4th quarter of 2005 which was impacted by the hurricanes along the Gulf Coast.

So, where do we go from here?

Investors seem to be betting that the Federal Reserve is poised to do a quick "about face" soon after the rate hikes cease. As long as energy prices remain elevated, inflation pressures will continue.

Given that the consumer has already signaled that they are pulling back, the next shoe to drop will be company earnings. As earnings estimates begin to be revised, the market will continue to punish individual stocks that are tied to the purse strings of the consumer.