John Mugarian's Dynamic Growth

Boy, what a quarter! If September is the historically the worst month for the stock market, we certainly didn't see it this year. As a matter of fact, the stock market has been derailed from its seasonal tendencies for quite some time. Will this shift in trends mean that the seasonally strong periods for the market now become weak?

We are witnessing some strange shifts in market trends. "Sell in May and go away" hasn't really worked in a while. We had a mild correction in June, but nothing for the bears to really hang their hats on. The summer rally that everyone was waiting on never happened. The stock market did not begin rallying until after traders came back from their summer vacations making the month of September one the best on record.

So, what is causing the stock market to rally?

If you want to keep up with those who we have hired to represent us on Capital Hill, take a look at the Capital Hill Blue website. The CHB is a "non-partisan experiment" that prides themselves on not playing favorites to any political party.

Here are a few things I didn't know about some of the 535 members of the US congress;

I would like to think that the world has changed in 30 days, and that the energy and commodity bull market we have experienced the last five years was a mirage, but like I said in August when oil prices were nearing $80/bbl, a pullback in energy was expected going into the mid-term election. What we are experiencing right now is the full impact of the "Magic."

The demand side of the equation has not suddenly disappeared. The industrial revolution taking place in China and India has not come to a halt. As the old saying goes, "A thousand men can be swayed by their prejudices faster and easier than one man can be persuaded by reason".

The truth of the matter is investors are being whipsawed by the sudden decline in energy and commodities once again. We saw it in 2002, in August 2004, in May and October of 2005, and again in May of 2006.

As these past corrections took place, I watched momentum managers of mutual funds sell energy at the bottom, only to buy the stocks right back again at the top.

There are three area's that we would like to focus on; energy, gold, and commodities.

I, as well as many other market watchers, see no reason, beyond the obvious, (energy, interest rate and commodity price declines) for the Market to continue to rally.

We all know that;

1) Earnings estimates are coming down.
2) Companies will issue warnings.
3) Real Estate is in the first quarter of its decline.
4) Consumer borrowing from appreciated home values and equity lines have dried up.

So, what is left?

We are selling Verizon (VZ- price $37.57) from the IA portfolio.

Originally purchased in 2004, Verizon has given us a healthy 5% yield and only a dollar in capital gain.

Today we noticed that the company's CEO, Ivan Seidenberg sold 285,464 shares at $37.22 on October 2nd. Mr. Seidenberg has not been wrong in the past, and we do not think this time is any different.

Unlike AT&T, Verizon has not been growing their assets thru acquisitions. While we still like the 4.2% dividend, we feel it is time to say goodbye.

As I listened to parts of the speech by Fed Chairman Ben Bernanke, here are some of his comments along with my translation;

1) "Although there are critical public-policy reasons to get U.S. consumers to save more money, no easy way has been found for the federal government to increase private savings."

Translation: Our savings rate is an embarrassment. Obviously the public likes to spend more than it saves and eventually this will be a drain on our economy in the years to come. So, if you can't force yourselves to save, we are not going to provide you with more easy money so you can dig yourself a deeper hole.

Now that the media is screaming about the new bear market in energy, we need to address or confirm these myths, and understand what is really going on around us.

1) The war on terror has drawn a battle line in the sand. In order to effectively fight and defeat terror, you have to cut off the money supply to countries that support, and produce terrorists. Since the majority of the terrorists come from oil producing countries like Saudi Arabia, Iran, Iraq, Libya, and the Sudan, ending our dependency to their oil must be a priority. Oil profits earned from these countries go to other countries that carry out terrorist acts, and cutting off this source of funding seems to be a priority.

Never, and I mean never, underestimate the spending power of a woman. While there may be a few select stores that cater to men, women are the driving force behind retail sales. Marketing companies know this, and that is why women are the target of a lot of the advertising we see.

Of course there are young adults and teens too, but even the spending by these groups is driven by mom helping them pay for clothes at places like Abercrombie & Fitch (ANF), American Eagle (AEOS), and Aeropostale (ARO).

It seems as if the stock market has even some of the best market mavens baffled. Here are a few articles that will hopefully allow you to keep your perspective;

Jon Hilsenrath, The Wall Street Journal: Mr.Hilsenrath points out that today's jobs report shows that the decline in temp jobs, and the drop in help from retail were leading indicators before the economy caved in 2001. This is a good read.

Bill Cara at billcara.com, has also done a great jobs of shifting through the jobs numbers. Bill is an extremely good student of the markets, and today's article shows it.

The stock market is not concerned with the childish actions from North Korea. Like a two year old, the country is just trying to get attention in hopes it could extort money from the US. Under the Clinton Administration this extortion worked. It will not work under the Bush Administration.

I can see why Japan and countries near Korea would be upset. The North Korean technology seems to be way behind the times, and their missiles are far from being accurate. In fact, the North Koreans have to be careful since their past missile tests have been unbelievable failures.

What the market will be focused on are interest rates, earnings, inflation, and the real estate market.

Here is this week's market comments by Jeff Saut (Raymond James). Among them;

1) "What’s behind this buying panic and will it last? We have suggested the recent rally was preordained when Goldman Sachs (GS/$175.65) reduced the gasoline weighting in its much followed Goldman Sachs Commodity Index (GSCI). By taking the weighting from 7.3% to 2.5%, Goldman literally forced the billions of institutional dollars “mirroring” the GSCI to sell gasoline futures. We find it interesting that Goldman chose to reduce the gasoline weighting in incremental stages right into the November elections, but that’s a discussion for another time."

2) "We also find it interesting that the Department of Energy has chosen not to buy any more crude oil for the Strategic Reserve, even though the reserve is below norms, but that too is a discussion for another time."

Warren Buffett is back again, and has purchased an additional 371,200 shares of USG at $46.10.

USG- Buyer: NATIONAL INDEMNITY CO (10% Owner)- Shares Bought 371,200@ $46.10 Shares Owned= 17,112,320

"Paul Craig Roberts is the John M. Olin Fellow at the Institute for Political Economy, Senior Research Fellow at the Hoover Institution, Stanford University, and Research Fellow at the Independent Institute. He was also "A former editor and columnist for The Wall Street Journal and columnist for Business Week and the Scripps Howard News Service, he is a nationally syndicated columnist for Creators Syndicate in Los Angeles and a columnist for Investor痴 Business Daily. In 1992 he received the Warren Brookes Award for Excellence in Journalism. In 1993 the Forbes Media Guide ranked him as one of the top seven journalists."

Dr. Roberts also served as Assistant Secretary of the Treasury for Economic Policy during 1981-1982 under Ronald Reagan and the President credited him with a major role in the Economic Recovery Tax Act of 1981, and he was awarded the Treasury Department痴 Meritorious Service Award for "his outstanding contributions to the formulation of United States economic policy."

Here is Dr. Roberts' unbiased take on last weeks jobs report.

No, he really didn't say T-Boned, that was my interpretation. Finally, T. Boone Pickens appeared on CNBC this morning, and he said we will see $75/bbl oil before we will see $50. I not only trust T. Boone's judgment, but he speaks with a straight forwardness we do not hear very (ever) often from Wall Street.

If oil prices do in fact run up right after the November elections, we will have confirmation that the oil cartel, among others, have the power to manipulate our daily lives and we can do very little about it. As an American, I hope oil prices remain low. As an investor, I am positioned to profit if oil prices rise.

I wrote an article entitled " Watch the Republicrats", on October 12, 2005. I really think it is worth reading the article again, particularly if you didn't see it last year.

The article will give you a perspective about our current culture, and hopefully show you how to profit from the publics mistakes.

Watch the Republicrats

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.

The stock market seems to be betting on a interest rate cut from the Fed. Some fed members are saying "no so fast." Here is an article by Bloomberg's Craig Torres.

If conventional wisdom was really an accurate indicator, then conventional wisdom would know that lower energy prices translates into more consumer spending.

According to the fed, "Members continued to see a substantial risk that inflation would not decline as anticipated by the committee.''

Also, "Policy makers discussed housing at length in September and saw no signs that the downturn had spilled over into broader consumption and investment."

Today, the market woke up to read about earnings disappointments from Alcoa, Legg Mason, and Monsanto. With the economy slowing, and an inflation picture that is still not completely under control, could conventional wisdom be wrong again ?

We have said in the past that the stock market's "Grand Finale" would end with a blow-off top. How far will the market go before it exhausts itself can only be determined by the degree of excessive bullishness.

What we are currently witnessing is a combination of short covering and some panic buying by institutions were heavily in cash, and now are afraid of underperforming their benchmark marks.

In times like these we need to keep our eye on the realities, and ignore the distorted enthusiasm of the media. Remember, the media痴 job is to attract eyeballs, and they only way to do this is to sensationalize something. In this case, they are sensationalizing the Dow's recent all time highs.

These comments came from Warren Buffett's letter to shareholders, page 15;

If you have been wondering why so many companies have been buying back stock, here is one explanation from Mr. Buffett.

"Too often, executive compensation in the US is ridiculously out of line with performance. That won't change. Moreover, because the deck is stacked against investors when it comes to the CEO's pay. The upshot is that a mediocre-or-worse CEO- aided by his handpicked VP of human relations and consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo- all too often receives gobs of money from an ill-designed compensation agreement."

Take, for instance, ten year, fixed-price options (and who wouldn't?). If Fred Futile, CEO of Stagnant, Inc., receives a bundle of these- let's say enough to give him an option on 1% of the company- his self-interest is clear: He should skip the dividends entirely and instead use all of the company's earnings to repurchase stock."

The cheerleaders of the stock market are trying to get us to believe that the Market Cycle and Economic Cycle theory of sector rotation no longer exists. At least, this is my take.

Sector Rotation is the movement of money into various industry sectors as the stages of an economic cycle unfold. There is a normal and distinct pattern that the economy and stock market follows during periods of economic expansion and contraction.

For some reason, we are being lead to believe that the economy is going to sidestep the contraction phase, and go right back into expansion. I'll believe it when I see it.

Even the fed is saying that there is no evidence (other than a downturn in real estate) that we have experienced an economic slowdown. To believe we are just going to skip this phase of the economic cycle is at best naive.

It really doesn't get more boring than this. As the financial channels keep flashing "new all-time high" on the Dow, I can't help but think of the many ways a cap weighted index can influence the emotions of so many people.

Energy stocks continue to rebound from their lows set a week ago. News that OPEC will agree to cut production at a meeting this week continues to lite a fire under the group. We told you a few weeks ago that this would probably happen.

What this market needs to reveal its true colors is an end to the election "magic" that seems to be casting a spell on its daily upward gyrations.

Today, Goldman Sachs Downgraded Home Depot to neutral from buy, and UBS Downgraded GE to neutral from buy. Here are examples of two big bell weather stocks receiving downgrades, and the media is ignoring the future ramifications of these downgrades.

There are not many investment strategists better than Jeff Saut at Raymond James. He mixes in a good dose of common sense in with his analysis.

Here are his recent comments: Jeff Saut

One of my favorite books on investing is "The Book of Business Wisdom" edited by Peter Krass. On page 421, there is a chapter entitled "How to Make Money on Wall Street" by Henry Clews.

Some of the smartest investors of our time, in particular, Jim Rogers and Warren Buffett, seem to be following the advice of Henry Clews.

During the late nineteenth century, Clews saw firsthand, and understood how Wall Street worked. In his book, "How to Make Money on Wall Street", Clews revealed some shocking stories of political and economic manipulation.

The nuts and bolts lesson from Crews is that regardless of the investment, investor emotions often cause serious mistakes.

During the typically worst period for stocks, the market has successfully persuaded shorts to cover, pulled cash off of the sidelines, turn market sentiment from bearish to bullish, and has driven the Dow to new all time highs. So, what do we think will happen in November?

1) Oil prices will rebound ($65-$70), and oil stocks will rally. While the U.S. temporarily postponed adding to the Strategic Petroleum Reserves, China was aggressively adding to their reserves. During this rebound, profits should be taken in energy and commodity stocks.

2) The stock market will sell-off on renewed talks of inflation, higher oil prices, fears of further rate hikes, a possible recession in 2007, and geopolitical troubles that were put on the back burner prior to the election.

Today was another yawner in the market place as the three major market indexes straddled around the unchanged mark.

This morning the jobless claims data did little to impact the markets. Earnings however, are selctively rewarding or tearing apart various stocks.

The tech sector came under pressure as Advanced Micro Devices missed earnings. Shraes of AMD fell -$3.22 to close at $21.01. Hewlett-Packard passed Dell in the number one spot for shippers of PCs, and Honeywell issued a disappointing outlook.

Crude oil prices jumped after Saudi Arabia said they were going to join OPEC's call for production cuts. All of our favorite oil stocks rose on the news (MRO +$1.73, CHK +.48, VLO +.76, SUN +.58, BRG +$2.03)

An article on Bloomberg this morning said that Hugo Chavez, and the country of Venezuela plans take control of four oil-production joint ventures with some U.S. oil companies such as Exxon Mobil, ConocoPhillips, and Chevron before the end of the year. The other two companies involved are Total and Statoil.

Chavez is sure to draw some attention with this move. I don't know if this guy is really smart, or really stupid, but you have to admit, he's got guts.

Here is an article from the Associated Press on the massive debt loads of some troops in the Navy, Air Force and Marines.

Apparently, military personnel with high debt levels cannot get the necessary security clearances to serve overseas. This is just a small example of how our nation has become a society spend thrifts. In an address last week, Fed Chairman Ben Bernanke spoke about this very same issue.

We have said that the recent market advance made no sense. Now one of our favorite "common sense" investment strategists agrees.

Here is this week's investment comments from Jeff Saut at Raymond James.

Once again, I am inclined to go against conventional wisdom. We have heard so many oil bears come out of the wood-work over the past 30 days, that I can't help but bet against them.

After the November mid-term elections, I think you'll see the oil "magic" end, and with it, the stock market "magic" also.

I was born and raised in Detroit (Go Tigers!), and one thing we were taught at an early age is not to believe "shuck and jive". Since I believe what we are witnessing in the stock and oil market's are nothing but "shuck and jive", I don't believe a trend unless it is sustainable.

By the way, the definition of "shuck and jive" in the urban dictionary is "Not the whole truth; or manipulating something to get it your way". I do believe there is a lot of "shucking and jiving"going on.

Here are a some recent comments by T. Boone Pickens;

October 12, 2006

Boone Pickens says don't rest on your laurels today with inexpensive oil, it is going to $100/brl

Boone Pickens says oil will reach $70 before 2007Billionaire Dallas hedge fund manager Boone Pickens said crude oil will reach $70 a barrel before the start of 2007. He said oil would reach $100 a barrel by July 2007, reiterating a forecast he made in a July 25 interview that oil would rise to $100 sometime within the next year. Pickens said it will take a geopolitical event to cause it to happen but he said "weve got a lot of opportunities for those.

Insider buying is no where to be found. I don't see any large cap stock that is being is being accumulated, and among the names that do have some light purchases, I am not familar with the company.

In addition, now that the market cheerleaders have gained momentum, the latest AAII Sentiment Survey has turned bullish;

Results as of October 19, 2006:

Bullish: 54.20%
Neutral: 16.03%
Bearish: 29.77%

This week's survey results saw bullish sentiment rise to 54.20%, above its long-term average of 39.2%. Neutral sentiment rose to 16.03%, below the long-term average of 32.6%. And bearish sentiment fell to 29.77%, slightly above the long-term average of 28.3%.

As expected, the Fed left the fed funds rate unchanged at 5.25%. Here is the latest from MarketWatch;

FOMC holds rates steady at 5.25%, keeps tightening bias

WASHINGTON (MarketWatch) - The Federal Open Market Committee on Wednesday held its benchmark federal funds rate unchanged at 5.25% and made little changes to its policy statement. The decision to hold rates steady was expected by traders and economists on Wall Street. Economists said the Fed wants to wait and see whether the weakness in housing and auto production in the third quarter widens into other sectors or whether the economy rebounds. The FOMC maintained its informal tightening bias, saying more rate hikes may be needed. In its statement, the Fed said that the economy is likely to expand at a "moderate pace" going forward. It repeated that inflation pressures should moderate. The vote was not unanimous. Jeffrey Lacker, president of the Richmond Fed, dissented for the third straight meeting in favor of a rate hike.

As many hedge funds continue to unwind their short positions, the market marches higher. All of the talk about the "goldilocks" economy is getting a little old. So old, that I actually went back and read the story of "Goldilocks and the Three Bears."

As I keep hearing the name "Goldilocks" whenever the economy is mentioned, I couldn't remember what happened to "Goldilocks" at the end of the story.

"Goldilocks", if you remember, went for a walk in the forest and entered a home that was owned by three bears. Being hungry, she noticed there were bowls of porridge on the kitchen table. After tasting all three she found one that was too cold, one that was too hot, and one that was just right.

After she ate, she got comfortable and fell asleep (like investors now). As she was sleeping, the three bears came home.” Goldilocks woke up and saw the three bears. She screamed, "Help!" And she jumped up and ran out of the room. Goldilocks ran down the stairs, opened the door, and ran away into the forest. And she never returned to the home of the three bears."

With hedge funds running for cover, and oil stocks rallying in advance of a potential rebound in energy prices, I am wondering if investors are actually in the home of the bears.

Along the Gulf Coast, many homeowners can no longer afford insurance on their homes. The Pensacola News Journal reported this morning that homeowners must "either move or cut household spending to make ends meet."

After the area was hit by Hurricane Ivan on Sept. 16, 2004, many along the coast have seen their insurance increase to $8,000 a year. Many insurance companies have fled the Gulf Coast, and consumers are lucky if they find anyone to insure them at all.

Personally, I don't live anywhere near the coast, and my homeowners insurance is $2400/ year.

Here are some findings from Gannett newspapers in Florida;

1) One-third of Florida voters say they cannot afford their home insurance bills and either must move or cut household spending to make ends meet.

5) But Gov. Jeb Bush and industry executives want to wait until after the election to consider changes. They hope voter fervor will subside and they can pursue more market-friendly, long-term solutions in the Capitol.

Yes, I'll bet they want to wait until after the election to do....nothing?

The 2006 hurricane season in Florida was a quite one. If hurricanes continue their cycle of the past 10 years, the State of Florida may be witnessing a deja致u of the Florida Land Bust of 1926.

As reported by "The Big Picture" (www.bigpicture.com), Treasury Secretary Hank Paulson "said he hoped declines in housing prices had been largely offset for Americans by higher stock prices:"

Oh really, Hank? So, is your "Plunge Protection Team" at work driving the markets higher?

Here are Paulson's comments courtsey of the Big Picture;

"We had a retail housing market in this country that was growing at an unsustainable rate for a number of years, so we had to make that transition from...unsustainable growth to a more sustainable rate," he said in a radio interview by WTMJ Milwaukee.

In May of 2005, I wrote an article on GM and Ford entitled "Opportunities Abound". I specifically said;

I couldn't help being immediately alerted to a huge buying opportunity as I watched Jim Cramer's Mad Money on CNBC. Jim Cramer was asked a question about the opportunities GM and GM bonds. Cramer immediately responded with a sell everything answer which resembled the "ready, shoot, aim" approach to investing. Granted, GM and Ford both have some huge problems, but often in the midst of problems lie opportunity.

A few weeks ago I mentioned the value of buying GM's GMAC preferred stock. GMAC is very strong, and our country could not allow its parent company to go out of business. But, if you listen to all the negative news reports you would think GM was going out of business next week. Don't listen to them. The sell off in GM and its debt may be one of the best buying opportunities on the entire street.

Now Jim Cramer is saying from his 10-25-06 show, and I quote;

"GM - We recommended it at $18; it goes to $36. We say take a little schnitzel. It's now pulled back to $34. It's going to get to $40, but it's going to meander. I like F. I like GM."

I said "the sell-off in GM its debt may be one of the best buying opportunities on the entire street" in 2005 while he was screaming sell, sell, sell. Now he's saying he's been on the stock since $18? Go figure.

Here is a good question about following the lead of the Plunge Protection Team, and it is worth addressing;

Since this market looks like driven up by the Plunge Protection Team I have a simple question: Why go against the Big Boys?

John: I remember that you recommended/wrote about some Short Funds last summer, but you must be deep in the red with them. Do you think the time has finally come to buy some protection, e.g. Short Funds?

The stock market is in some ways is as much laughable as it is sad. It kind of reminds me of "A Drunken Death Row Inmate", one that makes no sense as it babbles on, and while you know its days are numbered, it continues to receive numerous stays of execution.

I suppose the Plunge Protection Team could prove us wrong and prop up the stock market throughout the bursting of the real estate bubble. But, I can assure you the liquidity being added to the stock market is not from investors who sold real estate to buy stocks. What we are witnessing is short covering, hedge fund covering, and cash from the sidelines of investors who are afraid they missed the boat.

The boys at the Big Picture (www.bigpicture.com) did a good job of dissecting the GDP numbers released last Friday. As you get to the website, scroll down to the article entitled "Actual GDP: ~0%."

I encourage you to read Jeff Saut's column for the week. Like us, he believe's patience will not only be rewarded, but may save you a lot of pain and agony down the road.

In this week's comments, Sait quotes Gary Bielfeldt痴 analogy between trading and poker. Bielfeldt said;

的f you apply the same principles of poker strategy to trading, it increases your odds of winning significantly. I have always tried to keep the concept of patience in mind by waiting for the right trade, just like you wait for the percentage hand in poker."

He also quoted Laszlo Birinyi and Dr. Robert McHugh.

Just show you that we are not making this stuff up, check out this article on Paulsen and his stock market manipulators.

New York Post

Since the PPT is suppose to be a defensive measure to prevent financial meltdowns, is it now being used for something else?