John Mugarian's Dynamic Growth

Boy, I can't tell you how wonderful it is not to work a brokerage firm anymore. I can think straight, analyze the markets rationally, and be able to tune out the miss information without interference from bias sources.

Its really comforting to have a heavy cash position during stock market corrections.

Brokerage firms have a bias to keep you invested at all times. Now that the industry has moved from charging you fees insted of commisions, they must keep you in the market to justify their charges. If your portfolio was 70% in cash, charging fees for this type allocation may be frowned upon.

Yesterday I said;

Going forward, the market will attempt some kind of rally for a day or two. Typically, when markets close at or near the lows, a re-test of those lows usually occurs.

For those of you who are still hanging on to the market hedges; Rydex Tempest 500 Fund (RYTPX), or the ProFunds Ultra Short S&P 500, we may see 11,700 on the Dow before this correctional phase is complete.

Now, I am waiting for a move below 12,000 on the Dow. In this corrective phase, most investors will be looking for a 10% decline from the highs set last month. I will begin raising my asset allocation percentages when the market corrects by 8%, which is around 11,700 on the Dow.

The March 5th Newsletter Briefing was posted yesterday. To access the newsletter portion of the website, simply click on the "Subscribe Now" tab, establish a username and password, and you'll have full access to the Dynamic Growth newsletter and portfolio. This free trial will end on June 1, 2007.

By now, almost everyone has heard of the disastrous tornado that hit Enterprise, Alabama. Back in my college days, I spent one year in Enterprise and became close friends with the Dean of Students at the local Junior College, and the former Principal (of the High School) & Superintendent of the Enterprise school system.

In all of my travels, by far, Enterprise has the nicest people I have ever met. Enterprise is a city of about 23,000, and is located 75 miles south of Montgomery, Alabama. There is only one high school in Enterprise, and a lot of local functions revolved around high school.

The former Dean of Students had 3 grandchildren who were inside the high school when the tornado hit. Thankfully, they all escaped without harm. My heart goes out to the eight families who lost their children after a concrete slab ceiling collapsed on top of them. This is a very terrible thing. Please keep the families of these children in your prayers.

Enterprise City School System has confirmed that the following students were killed in Thursday's tornado:

Michael J. Bowen, 16, junior
Peter James Dunn II, 16, junior
Andrew Joel Jackson, 16, junior
Ryan Andrew Mohler, 17, junior
Kathryn Madora Strunk, 16, sophomore
Michael D. Tompkins, 17, senior
Jamie Ann Vidensek, 17, senior
Alice Michelle Wilson, 16, junior

March will be a volitle month. As it stands, I am looking for the following numbers to be reached on the major market indexes;

DJIA: 11,750-11,650
SPX: 1375-1325
NASDAQ: 2375-2350

I certainly hope the market hype didn't get you over extended in your portfolio asset allocations.

At 11,700 (8% correction) on the Dow, we will be raising our allocations as follows;

70% Equities: (Normally 95%) Aggressive
60% Equities: (Normally 80%) Moderately Aggressive
50% Equities: (Normally 60%) Moderate
25% Equities: (Normally 40%) Moderately Conservative
10% Equities: (Normally 20%) Conservative

I like to increase my exposure to the markets gradually. The reason is because no one really knows where the bottom or top of the market really is. At the beginning of every correction, you will see many experts begin to call the bottom at 10%. This is nothing more than a textbook analysis of what would be “normal”.

As anxious investors tremble in their shoes, Barron's tried to sooth those fears this week with a cover that most contrarian's see as an opportunity for the market to go lower.

The March 5th cover boldly states, "Stick with the Bull".

While I believe the market will rebound towards the later part of the month, history shows the best time to buy stocks is when it is most people are scared. Trading bottoms usually occur after high volume sell-offs, or they can unfold after several days of selling which discourages the majority of investors.

While this market has been notorious for not complying with historical trends, the latest Barron's cover does not reflect a traditional market bottom.

Jim Rogers founded the Quantum Fund along with George Soros. He is a regular guest on FOX News Cavuto on Business which airs every Saturday. In 1998 he founded the Rogers International Commodity Index, and it author of the book "Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market".

Here is a Bloomberg interview conducted with Jim in February 2007;

Bloomberg: What exactly was your take on the price action yesterday in China?

Rogers: Well, as I said to you earlier in the month, a little bit of a mania was developing in China. I guess I said I was not selling, but I certainly wasn't buying because the government is getting anxious about what's going on and it was out of control. Taxi drivers were borrowing money to buy stocks, shop assistants were doing the same thing. That's never a time to buy, that's a time of overheating.

Yes, I said steals! This is of course legalized stealing.

Here are a couple of examples how corporate executives, who are given (free lunch) huge amounts of stock, cash out. Sometimes their own company helps to boost the stock price by announcing a stock buyback.

Basically, it is the "Robinhood" theory in reverse. Rob from the poor, and give to the rich. Wall Street gets the little guy to buy while the insiders sell. What a racket!

AIG- American International Group

Stock Buyback Announcement: 3/1/07- $8 Billion- Expanded

Insider Selling:

Insiders Who Sold

SCHREIBER BRIAN T/ 3-7-07 3,500 shares@ $69.45

GREENBERG MAURICE R/ 3-6-07 400,000 shares@ $69.86

STARR INTERNATIONAL CO INC/GREENBERG MAURICE/ 1-4-07 to 3-6-07/ 4,221,710 shares @$69.68-$72.13

Check out the insider selling on Countrywide (Credit) Financial

In January, the National Association of Realtors said the Housing Slump is over. All I can say is "Liar, Liar, Pants on Fire". Actually, what else would we expect them to say? As they say down south, "we have a dog in this hunt". After several years of making a fortune in commissions, the National Association of Realtors is getting a little edgy with the current slowdown in real estate.

Would you buy CFC after seeing this kind of selling?

The March 12th Newsletter Briefing was posted to the newsletter portion of the website. To access the newsletter, simply click on the "Subscribe Now" tab, establish a username and password, and you'll have full access to the Dynamic Growth newsletter and portfolio. This free trial will end on June 1, 2007.

I have been saying this for years, and I am sticking to my guns on this; the average investor has no business in the stock market. There are exceptions. Investors following this blog are obviously more informed, and in tune, to what is going on.

Yesterday, my wife was at the park behind our house, and she ran into a lady in our neighborhood who said, "Isn’t the stock market awful?" If this person thinks a 500 point drop in the Dow is awful after a 2000 point rally since July, she and her husband do not have a clue of what they are doing.

The dumb investor believes the stock market should always go up. This is like playing a slot machine that is rigged, and believing that every time you put in a coin, you should win. They don't understand that a slot machine, like the markets, is pre-determined to win or lose based on what the house wants it to do.

In a rip roaring stock market, investors do not pay attention to asset allocation; they just stick everything on "red" and spin the wheel. When the house believes it is time to sell, the dumb investor takes a 25-50% hit in their investment portfolio.

After many years in this business, I can tell you that the 2000 market crash did not change most investors for the better. They were "sheep" in 2000, they were "sheep" during the real estate boom, and they continue to be "sheep" today. I am convinced they have no business being in the stock market.

"Ever wonder why fund managers can't beat the S&P 500? 'Cause they're sheep, and sheep get slaughtered"- Gordon Gekko, "Wall Street- 1987

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One of my favorite movies is "A Few Good Men" that starred Tom Cruise as Lieutenant Daniel Kaffee, Demi Moore as Lt. Commander Jo Ann Galloway, and Jack Nicholson as Colonel Nathan R. Jessep.

There are several great scene's in the movie, but the line that I feel that investors should focus on when taking advice from Wall Street is this one;

"Should we or should we not follow the advice of the galactically stupid."

Now don't get me wrong, I don't think Wall Street is stupid. In fact, they are the smartest people playing the game. I do believe that the uninformed investor who blindly follows the advice from individual investors who do not understand how the game is played can be characterized as "galactically stupid."

Cartoon from: www.cartoonstock.com.

Here is a confession from Jim Cramer on how stocks are manipulated, and misinformation is delivered by Wall Street to various media sources. Cramer admitted that he would not mention this on TV.

Frankly, I am surprised he even admitted this stuff.

Here is Cramer's Interview from You Tube.

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PPI- Producer Price Index:

Measures changes in wholesales prices. The PPI measures prices at the producer level before they are passed along to consumers.

PPI (February) +1.3% vs Consensus +0.5%
PPI (Core) +0.4% vs Consensus +0.2%

PPI Components:

Commodities
Industry Sectors
Stage of processing

PPI tracts prices of:

Food- +1.9 percent in February.
Metals
Lumber
Oil & Gas: +3.5 percent in February.
Various Commodities

Observations:

The only real, and accurate read on the PPI is the headline number that includes food and energy. Using the word "core" when reporting inflation data is a way to mask the truth, and gives investors with a false impression of what is really going on.

CPI- Consumer Price Index

Measures the average price level of a fixed basket of goods and services purchased by consumers.

CPI (February) +0.4 percent vs Consensus of + 0.3%
CPI (Core) +0.2 percent in-line with Consensus of +0.2 percent

CPI Components- Tracks prices of;

Energy +0.9 percent
Food +0.8 percent
Transportation
Shelter
Utilities
Clothing
Medical Care +0.5 percent
Entertainment
Other- Bobble Heads made in India

Observations

The CPI is used as the cost of living benchmark to adjust Social Security payments to retiree's
and the salaries of government and union employees as well. The CPI is the most unreliable inflation indicator known to man. Since the CPI is used to determine salary increases for a government employee (COLA- Cost of Living Adjustment), the CPI has been massaged in a way to make sure the Government does not have to shell out big bucks during highly inflationary periods.

In fact, since its inception in 1921, the CPI has undergone six revisions or adjustments. Prior to these adjustments the stock market would react negatively to huge jumps in the CPI. So, as a solution, the CPI has continually been a work in progress and revised.

As an example, the components of inflation have been adjusted, revised (through trial and error), and watered down so much that inflation has been in a range of 1-5% since 1991. This makes it easier on the government to manage the COLAs for employees, not to mention being easier on the country's massive financial debt.

This being said, it is obvious that the government has big stake in controlling what is reported in the CPI since a larger inflation rate means larger COLAs for employees.

This is one of the reasons we keep saying the CPI is not an accurate indicator of inflation, nor does it reflect what is happening in the real world. At best it is a convenient measure, convenient only for the government and their pocketbook.

So, the next time you listen to the financial channels and get excited about the inflation rate, remember it has been within a 4% range for 15 years. Since everything inflationary has already been removed, you know it is not an accurate measure of what is affecting us.

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I finally shipped off my tax information to the accountant, you know the drill, find all of your receipts, get your records straight, and then pray you don't have to ante-up anymore than you already have.

Today, I am staring at my property tax bill for 2007. As I glanced at the enormous amount of taxes I have to pay for services I don't use, I am having the same revelation that I normally do this time of year.

See, unlike many of you, we pay higher taxes to live in a nice home, but we don't have the luxury of sending our kids to a quality school for the dollars we pay. In fact, the public schools are so bad that we have had to send our son to a private school for 10 years.

How bad are the public schools? Here's an answer that requires no futher description. 26 years ago, I worked at a boys prison for two months. The school, children, and faculty at the prison were head over heals above the schools in our area. Nuff said.

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The bogus "no inflation" mantra that we keep hearing makes me sick. Ag commodities such as corn (you know, the ethanol craze) are driving food prices higher.

Going forward, I would think that Bio-ag companies like Monsanto (MON) will do very well. If ethanol is truly the holy grail for our energy issues, Monsanto will engineer their seeds to get greater yields out of an acre of land.

As you are well aware, the "core" inflation numbers always come with the disclaimer, "ex-food & energy". They must think we're stupid. Last week, the CPI rose 0.4% and PPI (ex-food & energy) rose the same amount.

Corn prices have risen about 70% in the past six months. I believe there is a correction on the horizon, but we cannot ignore that higher prices will be passed on to consumers.

To access the newsletter, simply click on the "Subscribe Now" tab, establish a username and password, and you'll have full access to the Dynamic Growth newsletter and portfolio. This free trial will end on June 1, 2007.

Spotting a market top or bottom is not always easy. The reason is because investors get caught up in the euphoria or hype of the moment, or get depressed during periods of hysteria.

For example, a few years ago (and I hate to admit this), my wife and I would watch the cooking show, "Emeril Live". As the show became more and more popular, I noticed "Emeril Cookware" in the department stores. After seeing the cookware in the stores, I told my wife, "If Emeril was a stock; I would sell it right now".

Another example of euphoria is Jim Cramer's "Mad Money". When Cramer (and CNBC) began to take "Mad Money" on the road to college campuses nationwide, I knew the show, and maybe the market, was approaching an important top.

In short, if Cramer's Mad Money was a stock, I would have sold it when they began taking the show on the road to college campuses.

Its been all over the news, but Iran seized 15 British sailors and marines who were suppossedly conducting "routine boarding operations" in Iraqi waters. These sailors and marines were blindfolded, and paraded on Iran's television network.

I have one simple question. With as many military personnel and Navy ships we have in the sea's off of Iraq, why didn't the Brits just call in for back-up, and blow the crap out of the Iranian vessels. That's what I would have done. Its as simple as that, game over!

Maybe its not that simple. Maybe we want an excuse to begin military operations against Iran's nuclear facilities. I don't think there is any maybe about it. After all, you do need a good excuse.

Don't you find it odd that oil began to climb just a few short weeks ago? Always remember to follow the money.

Heck, look at what has happened in Afghanistan. Prior to the invasion of Afghanistan, oil giant, UNOCAL, had plans to build an oil and gas pipeline on Afghan soil. When the Taliban objected, bombs began to fly with the excuse that we were going after Bin Laden and the terrorists.

After the US invasion, Hamid Karzai, who had been on UNOCAL’s payroll, with appointed prime minister. Remember, it's all about money!

Oh, one more thing. We don't hear a lot about what is happening with all of that Iraqi oil. You can bet that US oil companies are in control of those operations. The US ambassador to Iraq is a guy named Zalmay Khalilzad. Oddly, Mr Khalilzad had also been on Unocal's payroll.

Whoever said, "money never sleeps" is right!

The March 26th Newsletter Briefing is posted to the newsletter portion of the website. To access the newsletter, simply click on the "Subscribe Now" tab, establish a username and password, and you'll have full access to the Dynamic Growth newsletter and portfolio. This free trial will end on June 1, 2007.

After being down as much as 112 points intraday, the mysterious forces once again showed that they are not ready for the market to go down.

If you have been following this blog for some time, you know that we have reported on the mysterious forces in the stock market on numerous occasions. In fact, you don't have to take our word for it, Jeff Saut at Raymond James has been all over these mysterious movements for quite some time.

In 2006, Saut said;

"As for the “here and now,” we have deemed the recent performance by the major market indices to be somewhat “unnatural.” Markets typically go up, correct by 25%, and then re-rally if they are going to trade higher. This, ladies and gentlemen, has not been the case recently as the averages have “unnaturally” vaulted higher without so much as ANY correction."

Other strange occurances Saut listed as "unnatural" were;

1) "The Department of Energy mysteriously said it would not add to the Strategic Petroleum Reserve (SPR) until after the winter months, even though the SPR was below prudent norms."

3) " Also mystical is why every time the equity markets look like they are set up for a downside correction, do “buyers from Mars” appear in the futures markets to prevent a decline? We have documented such occurrences in past missives where those “mysterious buyers” have shown up at 6:30 at night and “bid” the S&P 500 futures from 1375 to 1397 (or +22 points) in a mere two minutes, but that is a discussion for another time."

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My guess is he will.

This morning investors woke up to news that Beazer Homes (BZH) is being investigated for predatory lending practices on borrowers who wouldn't normally qualify for a loan. Our nation has adopted one big "American Idol" attitude.

For those that watch American Idol, you know what I am talking about. Some contestants, who have no talent what so ever, are telling three industry experts that they are full of S***, and don't know what their talking about when they are rejected by the panel. They same attitude is taking place in the mortgage business, athletics, and just about everything else.

This is the reason I really like Simon Cowell. He tells it like it is, and doesn't pull any punches. At the same time, you can tell Simon is a really good guy. He has the ability to spot someone who has worked hard, and had to overcome adversity.

If you want to know the truth, many lenders, and homebuilders are afraid to turn someone away in fear of being sued for discrimination, or whatever else an attorney can come up with.

I have been seeing the same attitude in youth sports for many years. Instead of cutting a sub-par athlete, coaches are forced to keep players on a team in fear of parental retribution. Sometimes saying "no" is the best thing you can do for a person.

Former Notre Dame Coach Lou Holtz said that being fired forces a person to look within themselves, and provides the necessary motivation to do better. Rejecting someone for a loan forces a person to get their financial house in order. Instead of trying to act like a big shot, and spend money like a drunken sailor, these people will be forced to focus on being frugal.

Will this financial disciplining process ever happen? I seriously doubt it. Most people are more interested in showing off, and giving others the impression that they are wealthy rather than actually being wealthy- See Lending Tree Video. In this "I want it now" society, actually accumulating wealth takes too much effort, sacrifice, and discipline.

The American Idol consumer's attitude is "I want it now", or "I can sue someone to get it". This is the main reason for the sub-prime debacle, and the massive consumer debt plaguing the country.

I can't blame Beazer Homes for their predatory lending practices. They are just complying with a nation that will sue you if you say no. I think the whole country has gone mad.

To access the newsletter, simply click on the "Subscribe Now" tab, establish a username and password, and you'll have full access to the Dynamic Growth newsletter and portfolio. This free trial will end on June 1, 2007.

A Catch 22 situation is one in which (def; Wikipedia) "a situation an individual has to accomplish two actions which are mutually dependent on the other action being completed first. Catch 22 situations are sometimes called the chicken or the egg problems."

As far as the Market, Economy and Bernake are concerned, how the current problems are handled will have dramatic implications for the stock market.

For example;

Yesterday, Bernanke said that the US economy is "slowing", and "inflation" is "rising". Whoa! This sounds like the 1970's all over again. Here's the way I see it;

1) If the fed cuts rates, inflation will rise, and the dollar will fall.

2) If the fed raises rates, home borrowers with Adjustable Rate Mortgages will be injected with a fatal dose of financial lethal injections to their ARM's.

Yesterday, Bernanke said that consumers with Adjustable Rate Mortgages "could refinance". But, can they really? The problem is that many home-borrowers are saddled with debt, and could not come up with the minimum down payment for a conventional mortgage. Also, over the past two years, new home purchases were made at the top of the market.

When a new appraisal is ordered by the lender, housing values will be lower than they were 1-2 years ago. This means that in addition to the down payment, the borrower has to bring to closing the difference between the amount owed (original purchase price), and the new appraised price (if any).

In 2005, I began warning investors about the eventual collapse of the real estate market. In an article entitled "It's a Left Hook!" I said;

The uppercut (not expected until 2006-2007), and final knockout punch, will happen when real estate speculators begin to run for the exits, and attempt to unload their speculative real estate before their properties come up for closing. This running for the exits may be due to a spike up in longer term interest rates and a simultaneous unwinding of leveraged Treasury Bond positions held by hedge funds.

Here are a some more warnings that I issued before the real estate situation got worse;

The Commerce Department reported today that the "can't say no" consumer spent more money last month. The report also indicated that wages went up as well. I think it is safe to say that the consumer will continue to spend until their borrowing power is completely exhausted.

I come from the old school that a product or service is only worth what one is willing to pay for it. As long as consumers continue to spend money on "stuff" (things they don't really need), the American savings rate will continue to hover a very low levels.

As investors we need to watch what consumers are fascinated with since that is where the money will continue to flow. A few days ago, I said;

The attitudes and habits of the spending public drives corporate profits. This is why many market legends study philosopy and investor psychology. If you know what is going on with the" little people", you can make tons of money. All you have to do is pay attention.

If you have any teenagers or college age kids, you know that this generation is being bombarded with sex. Sex sells. Sex is being glamorized on MTV, VH1, as well as many prime time TV shows. Sex sells clothing for companies like Abercrombie & Fitch (ANF) and American Eagle (AEOS).

Unless you are blind, you cannot ignore what is happening. These are investment themes that are rarely reversable, or talked about. No one in the financial media wants to talk about why this trend is so profitable.

There is very little you can do to change the public's fascination with something, but there are a lot of investors making money off of it.

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Dell announced it was delaying its 10-K for fiscal year 2007 until April 18th. The original filing was due on April 3rd.

The audit committee said they have identified numerous accounting errors, while saying "there may have been evidence of misconduct & deficiencies in financial controls".

Clearly, something has gone seriously wrong. Dell has frozen its 401k plans for employees, and that is very unfortunate.

Below is a list of how analysts had rated the stock prior to today's annoucement. Its clear that taking the advice from analysts who you rarely hear about is better than those you are familar with.

I wish they would just cut the crap. They should issue just 3 ratings: Buy, Sell, and RUN...

If an analyst issues a "neutral" rating, its clear they do not have a clue of what is going on.

Ned Davis Research- March 12, 2007: Buy
Goldman Sachs- March 26,2007: Buy
JP Morgan- February 1, 2007: Neutral
UBS- January 22, 2007: Neutral
Columbine Capital Services, Inc.- March 11, 2007: Sell
Thomas White- February 2, 2007: Underperform