John Mugarian's Dynamic Growth

The May Fidelity Fund Portfolio has been 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.

Our Top 10 Fidelity Sector Fund portfolio for May was posted this morning. There are several changes this month as we see investors add more defensive issues to their portfolios.

As we speak, the stock market continues to set "new highs" as corporate earnings are blowing away reduced analyst expectations. Is this new leg up in the market warranted, or are investors being set up for fall ? Only time will tell.

Let's examine a few issues;

On the Bullish Side;

1) Short interest on the NYSE is at record levels, and the market is rallying as shorts covered their positions driving stock prices higher. Short interest can cause a short squeeze which adds fuel to market advances.

2) In the options pits, a high put-call ratio exists which is viewed as a contrarian indicator and a reason to go long.

3) Corporate earnings are beating lowered expectations.

On the Bearish Side;

1) During earnings season companies with the best earnings tend to be among the first to report, while companies that disappoint report last. The best reports issued have come from the home appliance area which has to be attributed to new appliance purchases by consumers who borrowed equity from the mortgage market, as well as consumers along the Gulf Coast who's homes were destroyed during hurricane's Ivan, Katrina, and Dennis.

2) Investors use of margin (money borrowed from brokerage firms to buy stocks) is higher now than it was prior to the tech bubble in 2000. In March, margin debt was at $293.2 billion in March, up $134.58 billion from 2002.

3) Hedge fund debt rose from $177 billion in 2002, to $1.46 trillion in 2006.

4) Corporate profits are better than expected for the quarter, but the quality of those earnings need to be examined. For example, many companies are issuing better than expected results because of stock buybacks and foreign exchange gains.

I really don't have a problem with stock buybacks, but foreign exchange gains (profits from a higher Euro being coverted into the lower dollar) are adding to the revenue gains which are translating into an earnings surprise. That's all well and good, but earnings surprises because of higher sales translates into a better economy. Without the added revenue from foreign exchange gains, would earnings this quarter be as robust? I don't think so.

5) Insider selling ratios are coming in at a rate of 17:1, 19:1, 28:1, 30:1 almost daily. Do you think these insiders know where the quality of their companies earnings are coming from? I'll bet that they do.

Going forward, my sense is the consumer is beginning to roll over, and the mortgage market that got homebuyers into so much trouble is affecting retail sales. While the market can continue to trend higher on short covering and a short squeeze, that will soon come to an end. When it does, what will we be left with to drive the markets higher?

The May Fidelity Fund Portfolio has been 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 is scheduled to end on June 1, 2007, but may be extended until July or August. Stay tuned.

Clearly the economy is slowing, and the stock market continues to climb. As I watched the S&P futures this morning, those "mysterious" buyers showed up right on time taking the S&P from negative territory to positive territory with a push of a button. I wish I could do that.

Yesterday, an UBS analyst turned bearish on the airline sector by, "citing a slowing economy, which could crimp demand, and stubbornly high jet-fuel prices.

Here's the part I don't get, if the economy is "slowing" there is no way this market should be rallying unless someone or something is tinkering with it. So much for supply and demand. You can throw that theory right out the window.

Here are a few well respected websites that agree that “mysterious buyers”, and "unnatural" buying continues to prop up this market.

Minyanville- Jeff Saut

Big Picture- "Unnatural"

Big Picture- Conspiracy Theories?

Seeking Alpha

The May 7th briefing has been 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 is scheduled to end on June 1, 2007, but may be extended until July or August. Stay tuned.

Here are some comments I made in this weeks newsletter breifing;

"New to the buy list is the XLV- Health Care Select SPDR Fund- .432. Healthcare and Pharmaceuticals have been steadily climbing in our risk/reward rankings."

Here's some interesting thoughts by Don Harrold. I have to admit he has a point;

1944 All Over Again?

The statistic of the day used to pump this market is that the Dow is up more days out of 24 than since 1944. Or, something like that. I can't remember the exact numbers. I heard more than one version of the story on CNBC today (I watched all of about an hour off and on).

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 is scheduled to end on June 1, 2007, but may be extended until July or August. Stay tuned.

Despite the massive inflation we are experiencing, we have a Fed that can't do anything about it. It kind of reminds me the the commercial showing an elderly person crying for help by saying, "Help, I've fallen and can't get up".

Today, the Fed ending its meeting by saying, "The committee's predominant policy concern remains the risk that inflation will fail to moderate as expected, and future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth.''

Now for the real story;

Here is a truthful article about the economy, the stock market, and previews of events to come by Henry C K Liu from the Asia Times.

Liu does a great job of explaining everything from a slowing economy, a looming debt-driven financial crisis, all the way to a stock market financed by a liquidity boom that allows "certain investors" to leveraged short-term borrowing of low-interest currencies to buy US stocks.

In addition, a falling dollar has artificially inflated offshore earnings of multinational corporations which has allowed many companies to match or exceed analyst expectations for the quarter

Yesterday investors saw yet another shot across the bow as Wal-Mart, J.C. Penney, and Federated Department Stores all said that business in April was worse than expected. The real keys to consumer spending are women, and when Liz Claiborne reported missed earnings and warned about the next quarter, this tells me consumers are beginning to pullback.

Retailers that sell to women and teens will be the first ones on my shopping list. My logic here is very simple; women love to shop and look attractive, and teens are trying to look "sexy" to attract one another. I realize this is a generalization, but the buying habits of these two groups have driven retail sales through the roof over the past 10 years. If we had to rely on men to drive sales, clothing retailers would be incredible shorts.

Click on the links below to see the various charts on retailers for women and teens;

Retailers for Women

Retailers for Teens & College Kids

While we would all like to know where the bottom is in any stock, I think accumulating positions in some of these key retailers on pullbacks of 20% is a smart move. If they happen to go lower, dollar cost average your way in.

The thing I really like about these retailers is the high profit margins of their products. Many of these products are made overseas at a very low cost, and then sold to U.S. consumers at a very high price. How can you beat that?

The May 14th briefing has been 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 is scheduled to end on June 1, 2007, but may be extended until July or August. Stay tuned.

Here are some comments I made in this weeks newsletter briefing;

Last week, I received the annual report from Weatherford International (WFT). Weatherford is a fairly large oil driller. As I was thumbing through all of the things that most people don’t read, I found some items that jumped off the page at me.

Wal-Mart announced it’s worst monthly same store sales decline in 28 years, and several retailers announced slowing sales as well.

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 is scheduled to end on June 1, 2007, but may be extended until July or August. Stay tuned.

A lie obviously is when someone deliberately makes a false statement in order to deceive someone, or keep from telling the truth. I can say with some degree of certainty that the inflation numbers being reported to us is a lie.

Sure, T-shirts imported from Malaysia or China cost less, but what about the important items that we use and need on a daily basis? The cost of those items are conveniently left out of the inflation data.

All you have to do is look at commodities, gold, energy and real estate. Amazingly enough, these items are real, and something we use everyday. Don't buy the arguement, "excluding food and energy", because it is nothing more than a cover up.

The higher costs of "stuff" has fueled price hikes in the service sector as well. Have you called a plumber, electrician, contractor, or someone to do manual labor for you recently? Heck, even a
sandwich at your local sub shop has increased 20-25% over the past 3 years.

Here are the prices increases of some important commodities from January 2007-May 12, 2007 (source: Econbrowser);

Aluminum: +36.3

Everyday uses: Kitchen pots, frying pans, cookie sheets, dishes, vacuum cleaners, sewing m achines, picture frames, refrigerator trim, lawn chairs, lawnmowers, ladders, gas grills, components in your home computer and other electronic gear.

Other uses: Transportation, Packaging, Building/Construction, Industrial.

Copper: + 83.0%

Everyday uses: electrical, communications, plumbing, heating, cooling, lighting, healthcare, cookware, architecture, coins, drinking water.

Other Commodities:

Government's Inflation Rate: "excluding energy and food, core inflation is up at an annual rate of 2.2 percent."

If you want to know why retail sales have taken a nose drive recently, its because prices for items of necessities have risen sharply. The "necessities" are a small part of the "excluding food and energy" crap we keep hearing.

Now that US construction has slowed, Goldman Sachs (the rulers of Wall Street, Washington,and the Universe) has made a negative call on China. Why? The obvious reason is market speculation, the not so obvious reason is the Chinese government will not follow Treasury Secretary Hank Paulen's (formerly of Goldman) instructions to un-peg their currency.

As the euphoria continues, the Dow and the S&P could go higher in a final blowoff. A brief overbought selloff could set the stage for;

S&P: 1550-1560
Dow: 13,600-13,800

If we hit these targets without a correction, these numbers could be the markets final top.

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 is scheduled to end on June 1, 2007, but may be extended until July or August. Stay tuned.

It is amazing isn't it? I'm talking about the close ties between corporate America, Washington and Wall Street. The sales of Chrysler to Cerberus Capital is just another example of how the "elite" in this country work.

The picture below is former Treasury Secretary John Snow, now Chairman of Cerberus Capital, a private equity firm. Snow is shown with Daimler-Benz CEO, Juergen Schrempp.

How many examples do we have to see before we realize that Wall Street is their ballpark, and we are just paying customers? They can make the markets rally to their advantage, and they can pull the plug anytime they wish. I just sit back and watch in amazement.

An interesting quote on Yahoo Finance yesterday was the early rally driving the Dow up 100 points was due to program trading. Push a button, rally the market. Push another button, and take the money from the little guy. What a racket!

I've often said that the best place to measure the pulse of anything is on the street. By that I mean every day people will tell you all you need to know about the economy; one does not need to rely on doctored up government numbers to figure out what is going on.

For example, a few years ago I had this client who was the ultimate contrarian indicator. The night before the NASDAQ collapsed in March of 2000, he called to say he had bought a bottle of Dom Perignon. He said he was going to pop the cork the next day when his investment account went over $1 million. Needless to say, he's still got the cork in the bottle.

Two years ago, the same fellow called me to say that he was transferring his IRA into a real estate IRA, and was going to buy a condo on the water with the proceeds. I immediately called my realtor, and told her to dump my condo, which we did at a very nice profit. In addition, I sold some office space too.

Yesterday, I spoke to two people. The first guy was in really bad shape. He was a ground maintenace guy at a local Junior College, and he said that he had bought two waterfront investments that has sucked his retirement plan dry. He said that he was hoping to retire after the purchases, but now he says he may never have the money to retire.

The second guy is a realtor whose phone is ringing off the hook with bankers trying to unload foreclosed properties. He recently sold a waterfront home for $475,000 that was listed by the owner last year at $875,000.

You can see how my street economic system works. And believe me, it really does! If I had an infomericial selling this "system", I would have made a fortune.

We have extended the free service for another month or so. I will let you know in my “Journal" posts when we will be set up as a paid service. 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 is scheduled to end in July or August. Stay tuned.

Its amazing isn't it? A few short months ago some very well respected market experts were right about the economy, corporate earnings, and the negative effects on the consumer, but were wrong about the market.

Under "normal or historical" measures, they would have been right. But, when you have outside influences driving the markets higher, one tends to become disappointed in what was once the free market.

Never before in our history have we seen the law of supply and demand interrupted so blatantly with the exception of periods of market turmoil.

We are seeing some very strange things taking place today. For example;

1) Henry Paulsen takes office as Treasury Secretary in July of 2006 and the markets took off and never looked back. Market Mavens like Jeff Saut at Raymond James said;

October 2006:

"Almost on cue those mysterious buyers showed-up early last week, at 6:30 p.m., to be specific, and drove the S&P 500 emini-futures contract from 1375 to 1397 in only two minutes."

"While we have no idea who those mysterious buyers have been, the October 13th edition of the Wall Street Journal had an article titled "Paulson Pulls for U.S. Markets", which implies it just may be the Plunge Protection Team (PPT) . . . aka the President's Working Group on Financial Markets that was created in 1988 by President Reagan under Executive Order 12631. Whoever those buyers are, there has been an unnatural bid to the equity markets ever since Goldman Sachs (GS/$188.67) unexpectedly re-weighted its much institutionally indexed commodity index in late July, dropping the gasoline weighting from 7.3% to 2.5% in staged increments right into November. We have repeatedly argued THAT has been the major reason for the DJIA痴 explosive rally, for obvious reasons, and the 87.8% correlation between the two (the decline in gasoline and concurrent rise in the DJIA) implies the same correlation."

2) Oddly, many former cabinet members in both the Democratic and Republican administrations have joined Hedge Funds or Private Equity firms. Just recently, Paulsen's former employer (and Jim Cramer's too), Goldman Sachs was involved in a private equity transaction when they purchased Alltel (AT).

Here are a few former Cabinet members, and other Executive Branch employees who are now involved with Hedge Funds or Private Equity;

-Richard Breeden, former chairman of the Securities and Exchange Commission, is now a hedge-fund manager.

-Former Secretary of State Madeleine Albright (Clinton Administration) started an emerging-markets hedge fund called- Albright Capital Management. Albright has no prior investing experience.

-Former Treasury Secretary Lawrence Summers (Clinton Administration) took a job as managing director at the private-equity firm D.E. Shaw.

-Former Treasury Secretary John Snow (Bush Administration) was appointed chairman at the hedge-fund/private-equity firm, Cerberus Capital.

-Former Vice President Dan Quale (Bush Sr.) also took a job with Cerberus Capital.

-Former Secretary of State Henry Kissinger is said to have a roll advising hedge funds "on how geopolitical events affect their investments."

- Even though he wasn't a cabinet member, Democratic Presidential hopeful, John Edwards (D) said "that he worked for a hedge fund between presidential campaigns to learn about financial markets and their relationship to poverty—and to make money too."

We have extended the free service for another month or so. I will let you know in my “Journal" posts when we will be set up as a paid service. 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 is scheduled to end in July or August. Stay tuned.

I spent most of yesterday writing up my analysis of the markets for my clients. My firm has many clients, and our assets have grown significantly since leaving the "controlled" brokerage business. Its amazing what happens when clients realize their advisor is actually working for them and not the firm.

I use the word "controlled" when describing the brokerages houses because that's exactly what today's brokers are. They are told what to think, what to say, and what to sell. Pretty scary isn't it?

Our investment strategies have worked extremely well. We use an asset allocation process that includes index stock funds, sector funds, bonds, cd's, and cash. Individual stocks are used for some investors, but they must be able to handle some potential negatives. What are they? Where do you want me to start?

How about potential outcomes like Enron, Worldcom, Qwest, etc... I don't think we got the full list of companies that were cheating on their earnings in 2000, and based on what happened in the past, anything is possible.

In reality, many in our society today are cheaters. If you want to read a good book on the subject, read a book written by David Callahan called "The Cheating Culture". In the book, Callahan documents how American values have changed, and how people have become more selfish and cutthroat in their quest to get ahead.

One of the saddest cases of cheating is the steroid scandals in baseball. It amazes me that the media has basically given Barry Bonds a free pass while the attacks on others have escalated. If Mark McGuire was in the process of breaking Hank Aaron's homerun record, the media would be on him daily calling him all kinds of names. Barry Bonds is getting off lightly which makes me think we have a different standard for different people.

In the stock market, I am convinced we have a different standard for different people. All you have to do is look and see what Hedge Funds & Private Equity is getting away with. Don't you find it strange that the Federal Reserve can raise interest rates for the average American, forcing their monthly mortgage and home equity payments to rise, but Private Equity can go to Japan and borrow money at 1/2 or .50%, and buy stocks or entire companies with the cash?

There is also a different standard for corporate executives who are issued hundreds of thousands of shares of stock, and get rich quick by simply selling those shares. That's how the boys at Google, Cisco, and Microsoft made their fortunes. While you and I have to save money each month from our pay, corporate executives get a salary to live on, and get rich buy selling issued stock.

What is really sad is many companies still do not expense stock grants or options on their quarterly reports, so we really do not know what their true earnings are.

Yesterday, Former Fed Chairman Alan Greenspan said he was concerned Chinese stocks might undergo a ``dramatic contraction''. For those who do not know what this means, this was
Greenspan's warning shot across the bow.

China has been increasing interest rates in an effort to handle a runaway stock market. Its amazing how the brotherhood at Goldman Sachs said the same thing last week. To think this will not have ramifications here in our markets is a naive assumption.

For now, I will take Mr. Greenspan at his word. The last time he issued a warning shot was in 1999-2000.

The last three trading sessons have rallied in the morning, and sold off in the afternoon. Next week, we have three trading days left in the month of May. For those who have been overweighted in the stock market, you have had some wonderful opportunities to book some profits.

The S&P will probably close at a new high next week before profit taking kicks in next month. The stock market is clearly overbought and do for a sharp pullback. This pullback will be the set up for a summer rally that will probably begin around the 4th of July.

The TV set has been telling you that;

-Consumers would keep on spending
-Gas prices would come down
-Inflation was not a problem
-Jobs growth would rise
-Corporate profits would soar
-The dollar would strengthen
-And, housing has bottomed

Remember, the TV set is nothing more than a soap opera with 300 channels.

I am going to Atlanta today to coach a 15-16 year old baseball team. Enjoy your Memorial Day weekend, and I'll report back in on Tuesday. Be safe (on the roads, and in the market).

We have extended the free service for another month or so. I will let you know in my “Journal" posts when we will be set up as a paid service. 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 is scheduled to end in July or August. Stay tuned.

Here are some comments I made in this weeks newsletter breifing;

Our top 10 ETf's continue to be dominated by bonds, utilities, telecom, dividends, healthcare, and outsourced countries. This is hardly a case for growth funds/stocks, despite what we are being told by the market guru's.

With gas prices at an all time high, and 3.2 million manufacturing jobs lost since 2000, American's are finding themselves with less disposable income. Amazingly enough, 84% of American workers are now employed in the service sector which includes jobs like waiters, waitresses, and people working at Wal-Mart or Target.

We have extended the free service for another month or so. I will let you know in my “Journal" posts when we will be set up as a paid service. 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 is scheduled to end in July or August. Stay tuned.

I, and many other market watchers have said that the stock markets rise since July 2006 was strange. Jeff Saut at Raymond James has said it, as has Barry Ritholtz, Larry McDonald on Seeking Alpha, and a host of others.

This morning, Bill Cara (www.billcara.com) did a great job of outlining how former employees of Goldman Sachs have "taken control of the US Treasury, the Fed, the New York Stock Exchange and now the World Bank – all since March 7, 2006."

Do yourself a favor and read what Mr. Cara said this morning about the "Gambino Goldman" gang. Here is the link: Bill Cara

What bothers me the most about the stock market is it is no longer based on supply and demand. The little guy doesn't have the time to research and understand what is happening. All the investor sees is a market that is going up, but doesn't know why.

Some will say this is conspiracy stuff, but this is what people in control want you to believe when they what you to ignore what is really going on. Once they can get the masses to believe something as fact, you can take their money. This is nothing more than a high stakes game of poker. If you can keep a straight face and bluff, you can win.

We have extended the free service for another month or so. I will let you know in my “Journal" posts when we will be set up as a paid service. 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 is scheduled to end in July or August. Stay tuned.

Its clear the economy is weakening. Retail activity has slowed, and the consumer is "suppose" to be 70% of GDP. The economic numbers are being spun like the words in the Bible. You know the drill, people are always saying that you can't take the Bible literally. I guess if decency were left up to the liberals they would change the name of the "10 Commandments" to the "10 Suggestions". Okay, whatever.

Yesterday we saw a prime example of how the Republican's and Democrats basically serve the same master. The Democrats caved on the funding for the Iraq war, and mother of a fallen soldier, Cindy Sheehan stepped down as the Democrats poster child after she realized that she was being used.

Yesterday, I read a column by Charley Reese. I really like Charley since he has the guts to tell it the way it is. In a recent article, "What Goes Up, Must Come Down-Way Down"- Reese said;

"The core problem with most American corporations is that they are viewed as simply cash cows to be milked. A company making profits can do one of two things. It can invest its profits back into the company, especially in research and development, or it can tout its stock and try to drive the prices up.

Since the advent of stock options, which give the chosen few a chance to buy at a low price, the tendency is to tout the stock and then, when the price goes up, execise the options at a big profit.The outrageous salaries and perks for CEO's, the stock options, bonuses and golden parachutes all attest to the cash-cow model.

During a conversation with Edward Ball, Reese asked;

"why so many corporate executives were liberals". He said, "Because they don't own it. They do not care what happens after they leave".

That is the diiference between many of today's corporate executives and American's in the past like Henry Ford, who did own his company and did care what happened to it even after his death. Ownership is what is missing in so many corporations today.

Speaking of telling it the way it is, have you watched Google stock lately? The Google insiders continue to get rich selling their shares while googly-eyed investors provide the means by which these insiders get rich.

Here is what former internet analyst Henry Blodget had to say about GOOG's valuation recently;

April 20, 2007
Google: Strong Quarter, Still Expensive

At $490, Google's market cap is just north of $150 billion. This is 60X run-rate free cash flow of $2.5 billion and 50X a generous $3 billion FCF estimate for 2007. If the global economy stays strong and the company can haul back on its CAPEX in future years, perhaps FCF could hit $4 billion or $4.5 billion in 2008. At that level, the FCF multiple starts to look more comfortable (33X-38X), but it would still be far from cheap. And banking on $4-$4.5 billion in FCF in 2008 at this point requires some serious faith.

And here is an example of the constant selling by Google insiders- Google Insider Sales- Notice also how none of these guys bought a single share of stock.

Investors don't realize it, but insiders get rich on the backs of the investors buying their stock. Its simple math, you buy, they sell.