John Mugarian's Dynamic Growth

The Weekly Briefing has been posted to the "newsletter" portion of the website. We have extended the free service until August 1st. The Dynamic Growth Newsletter will be a paid service with a one year subscription price of $129.00. To access the newsletter, simply click on the "Subscribe Now" tab, establish a username and password, and you'll have full access to the newsletter and portfolio. This free trial is scheduled to end August 1st.

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

-This week the utilities sector continues to weaken. Both of our utility ETF's have dropped down to the honorable mention list, but are still solid holds in our research.

-The Democrats have gained power in congress, and the approval ratings in the executive branch are near historic lows. If this trend continues into the 2008 elections, the democrats will gain majority power in the legislative and executive branches of our government. As such, the Healthcare and Insurance sectors will come under severe scrutiny.

I will be out of town for the rest of the week, but we suspect that the markets would attempt a push toward new high territory heading into the July 4th holiday. After July 4th, senior traders will be leaving their posts for the summer, and the July-September time frame will prove to be challenging for investors.

I returned from Atlanta on Sunday, and it’s clear that the US consumer is fading quickly. Higher gas prices and falling home prices are slamming the door shut on consumer spending. The evidence is clear that growth in consumption was actually less than many had expected.

I walked around two very nice malls while in Atlanta, and the busiest by far was the Apple Computer store. One might assume the floor traffic was mainly I-Phone related, but this assumption is not accurate. Apple's computer business is red hot, and I have to admit, I was impressed.

One consumer area that has slowed dramatically is the restaurant business. Cheesecake Factory (CAKE) was the busiest, but our wait during the restaurants peak period was only 5-10 minutes (versus 45 min-1 hour a year ago). PF Chang's (PFCB) was not busy.

My observations are telling me that we haven’t seen the full impact from the housing recession on the consumer. In addition, consumer debt has skyrocketed as credit-card debt has passed $2.44 trillion. The risks to the economy and the stock market are clearly increasing.

Other areas likely to be affected by a weak housing market are sales of furniture, home appliances, and building materials which account for about 14% of retail sales. As sales continue to slow, and inventories build, the labor market will weaken and GDP growth will continue to disappoint.

What continues to amaze me is how some corporations are masking their slowing growth with debt induced buybacks. As an example Home Depot (HD) and Sears Holdings (SHLD) come out and lower estimates, and then announce huge buybacks (with debt) in hopes that investors will ignore the fact that sales are slowing.

On the flip side, Conoco-Phillips (COP) is virtually printing money, and using its excess cash to buyback $15 billion of the company's shares. The program would consume 10-11% of shares outstanding, and the price target for the stock has been raised to $100/ share. See, this is a "real" stock buyback with cash on hand. In the case of HD and others, they are using cash on hand and issuing debt to fund their buybacks.

Despite a sharp rise in bond yields, rising oil prices, a weak housing market and further troubles in the sub-prime mortgage market, the stock market managed to muster its biggest rally of the year. It now appears that the S&P 500 is headed for a retest of its record high of 1,552.87 set on March 24, 2000. A failure to break out convincing above this level may confirm a double top and signal the start of a major correction back to 1,250-1,300 level. A convincing break out could clear the way to the 1600-1650 level.

The 2003-2006 bull market has enjoyed a long run of solid returns and low volatility, aided by an economic a friendly economic environment of strong growth and moderate inflation. The Goldilocks scenario is now being called into question as inflationary pressures have added additional risks into the equation.

The stock market is never a one way street, and for the first time in several years the market is becoming increasingly volatile. As inflationary pressures call into question the current growth phase, the summer-fall time frame should see increased volatility on the downside. Like I said, it's never a one way street.

Since July 2006, the market has seen an unprecedented amount of liquidity injected as wave after wave of share buybacks, mergers, acquisitions, and private equity deals have shrinkage the trading float of public companies. The big question of course is when will this end?

We have extended the free service until August 1st. The Dynamic Growth Newsletter will be a paid service with a one year subscription price of $129.00. To access the newsletter, simply click on the "Subscribe Now" tab, establish a username and password, and you'll have full access to the newsletter and portfolio. This free trial is scheduled to end August 1st. The "Journal" portion of the website will remain a free service.

Yesterday's rally began after Wal-Mart (WMT) reported better than expected retail sales numbers. Wal-Mart reported that same store sales (excluding gasoline sales) rose 2.4% (forecast +1-2%), but what they failed to mention was the sales gains from food were not reported.

In fact, most wholesale clubs like Sam's sell both food and gasoline. The sales of other items sold were actually within the 1-2% estimates. This brings into question how much of Wal-Mart's sales gains were due to inflationary pressures from food and energy? By misinformation I mean the numbers we received from Wal-Mart were not an accurate indicator of what is going on with the consumer. This morning’s retail sales numbers are.

Today, the Commerce Department said that Retail sales in June fell 0.9 percent, the bigeest drop in almost two years. Read Bloomberg-U.S. Retail Sales Fell More Than Forecast in June

Based on today's retail sales numbers, the stock market should be giving back all of yesterday's gains. Tell me this market isn't being manipulated.

I just received yet another notice from Blue Cross/ Blue Shield that my premium for health insurance has been raised again. This is the third or fourth time that my premium has raised since 2004. To say that I am seeing red or raving mad would be an understatement.

A for profit healthcare system is just about as ridicules an idea as a for profit police or fire department would be.

When the Clinton Administration proposed Universal Health Coverage in the early 1990's, I bought into the media campaign that was bought and paid for by the healthcare lobby, and the corporations that make massive profits off the backs of the sick.

Why does the United States remain one of the few nations in world that allows a for profit system of healthcare? Healthcare executives continue to get rich by cashing in their massive stock options/grants, and while most doctors hold true to their Hippocratic oaths, many others are only in the profession for the money. If you don't believe me, open any newspaper and you'll see a huge number of ads from doctors advertising their business.

The weekly newsletter briefing was posted to the website yesterday. The DJIA continues to break into new high territory, and is closing in on the 14,000 level. A combination of better-than-expected profits from Coca-Cola and Merrill Lynch, and questionable inflation data are helping to drive the markets higher.

Source: Stockcharts.com

We are expecting the Dow to re-test the 13,800-13,600 level sometime soon. A break below these levels could carry the Dow to 13,400-13,200.

It appears that the SPX is headed for a retest of its respective record high of 1,552.87 set on March 3, 2000. We would not be surprised to see a blow-off rally carry the index to even more euphoric levels (1600-1650??).

In a blow-off rally anything is possible. The markets continue to climb a wall of worry. Even with a rapid deceleration in earnings growth, consumer credit card debt of $2.44 trillion, slowing retail sales, foreclosures mounting, and hedge funds at risk with collateral debt obligation (CDO) bonds, the markets continue to rally.

Energy Markets

Crude oil futures were trading up this morning on continued supply concerns.

According to Bloomberg, consensus estimates for inventories for the week ending 07/13/07 indicate a significant draw in crude and significant builds in gasoline and heating oil stocks.

The International Energy Agency said Friday that tightness in the global oil market could ease marginally in 2008 as new supply capacity and refining upgrades come on stream. They also said that demand for oil through the second half of 2007 could see the market "oscillate uncomfortably" given the sharp draws in consumer inventories, and restrain production from OPEC.

On Monday, OPEC said that world oil demand will grow moderately in 2008, and the crude supply is enough to meet current demand.

Geopolitical problems could cause energy prices to spike as tensions continue to excalate over Iran's nuclear development program.

According to the IRNA news agency, Iran has asked Japan to make payments for oil purchases in yen instead of US dollars to avoid a possible seizure of its assets by the US government amid tensions over Iran's nuclear development program.

The latest CFTC Futures & Options Report showed that large speculators increased their net long positions in crude and RBOB gasoline. On the flip side, large speculators increased their net short positions for natural gas.

For those of you who are football fans, surely you have heard about the three primary defensive positions...also know as "playing containment". I would venture to say that the same thing is being done in the financial markets.

Given the enormous amount of negatives in the economy, its clear that outside forces are working day and night to prevent a mini-panic in the stock, bond, and gold markets. Just Google the words...Presidents Working Group on Financial Markets - and you'll see what I mean;

RECOMMENDATIONS BY THE PRESIDENT'S WORKING GROUP ON FINANCIAL MARKETS

From Wikipedia

In football, playing containment works by repositioning your defense to stop the run, protect against the deep pass, etc...

Here is an example of playing containment in football;

If you're anticipating a run to the left, can move a lineman in front of a tight-end to and open a space for a blitzing linebacker.

Here is an example of playing containment in the stock market;

If you're anticipating a run on the stock market after learning that two Bear Stearns funds have lost 91%, and 100% of their clients assets, the Presidents Working Group can ensure stability of the financial markets by buying stock index futures to prevent a sudden drop in stock prices.

Don't you love the "free" markets?

The Weekly Briefing has been posted to the "newsletter" portion of the website. We have extended the free service until September 1st. The Dynamic Growth Newsletter will be a paid service with a one year subscription price of $129.00. To access the newsletter, simply click on the "Subscribe Now" tab, establish a username and password, and you'll have full access to the newsletter and portfolio. This free trial is scheduled to end September 1st.

The summer is a busy time for most, so we have extended the free service until September 1st. There is a lot of behind the scene work that goes into a financial newsletter. I want to make sure that all of the pieces are in place before offering a paid service to investors.

As far as the financial markets are concerned, it's more of the same. You know the drill, private equity and hedge funds continue to rule the roost. But...for how much longer?

The financial shysters on TV want us to believe what we are seeing in the financial markets is perfectly normal. Since I believe that most Bull Markets are built on falling bond yields, rising profits, stable or falling energy prices, a strong housing market, and increased consumer spending, I do not believe a word of what they are saying.

We keep hearing "market experts" tell us that stocks are still cheap. If they are basing their opinions on a continuation of double digit earnings growth, I might agree.

Since I do not drive my car backwards on the highway (looking through the rear view mirror), the cheap market arguement doesn't make much sense. In the rear view mirror (or looking back), the S&P had 19 consecutive quarters of double digit earnings growth. Going forward, earnings growth is now in the single digits. How can lower earnings make stocks cheaper?

With the consumer in trouble (credit card debt of $2.44 trillion, slowing retail sales, foreclosures mounting, housing market collapsing), I don't see any way that the stock market can be defined as cheap.

Last weeks wild ride on Wall Street took most neofite investors by surprise. I am happy to say the current sell-off was no surprise to us. So, where do we go from here?

Below are some comments I made in the weekly newsletter briefing;

The correction that started last week could carry the DJIA to the 12,800 level. If this level does not hold, we could see the index bottom around the 12,500 mark.

These private equity guys have friends in high places who have an interest in seeing the deals on the table get done. Until most of the big buy-outs are funded and closed, I believe the markets will have enough liquidity to carry them for a few more rounds before a major correction takes place.

I am currently in Maple City, Michigan, a small farming community outside of Traverse City. The weather is terrific, a far cry from the steam bath I left in Pensacola, Florida. I really don't want to go back until the end of October, but my son starts school on August 14th. Isn't that ridiculous?

I'll be back in the office Friday morning, but as always, my radar on the markets are always on.