John Mugarian's Dynamic Growth

"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey

Oil prices spiked this morning (and probably over the past few months as well) on rumors that Israel was planning an attack on Iran. How much of this is true is anyone's guess. Rumor mongers now control the markets without fear from regulation.

No one can be completely sure of Iran's nuclear intentions. Clearly if their purpose is to destroy others, the matter needs to be dealt with. Since China and Russia have close ties to Tehran, I can't believe they would turn the other cheek if Iran had intentions of nuking Israel.

Oddly, China and Israel have been defendants in the court of public opinion after news broke that both countries employed spies who were accused of stealing high level secrets from the US military- Israeli Spying in America/ Fox News. For some reason, we continue to traded with China, and continue defending Israel from Middle East Muslims. I just don't get it.

Chinese Spying in US/ USA Today

Geopolitical problems in the Middle East are responsible for some of the rise in oil prices. The original problem began with supply and demand, but the supply and demand issue alone does not warrant $100++ oil at this stage of the game.

As I have said many times before, the epicenter of many economic problems begins and end with Wall Street. They were at the center of the Dotcom bubble, they are at the center of the current financial crisis, and now they are in the middle of the speculative rise in oil. Just like undisciplined kids, they just jump from one thing to the next leaving a path of destruction in their wake.

The universal sentiment on oil has turned increasingly bullish. Oddly, oil stocks are not reacting to the bullish sentiment. Near term, I am an oil bear. The headwinds at $140++ oil are strong- reduced demand, global economic slowdown, and the loud cries for smaller cars and alternatives.

As a contrarian, "Too Many People Bullish on Oil" and....To Many People are Bearish on the Financials".

"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey

This morning the Energy Department said that oil supplies fell 1.98 million barrels in the week ended June 27, but Gasoline inventories rose 2.1 million barrels.

Despite this mornings report, we have plenty of oil, that's not the problem. The immediate problem is speculation by investment banks who created investments vehicles that buy oil futures, and convinced pension funds and hedge funds to invest heavily in these products as well.

The futures market has always been a place for speculation, but not to the massive scale we are seeing today. Originally, the futures market for any commodity was originally designed to help suppliers and users hedge their businesses from any upside or downside risks. That's okay with me.

The problem, which can be resolved rather quickly, is speculators with no interest in hedging a position, are buying oil contracts (with no intentions of taking physical delivery of the product), or shorting and are being forced to cover. As a result, oil prices continue to spike.

Eventually, speculators- like in real estate- will go running for the exits, and hedge funds and pension funds will lose millions.

Oil is not the only problem we have to deal with. As I stated in my December 4, 2006 "Journal" post, "It's the 1970's all over again". Many have tried to dispel this theory, but who cares what they think, we know what we see.

As was the case on the 1973-74 bear market;

1) Supply-side shocks (OPEC's two oil embargoes of the 1970's) caused energy prices to soar. Today demand for energy resources are high (China & developing nations) creating another supply-side shock. Add speculation and geopolitical tensions to the mix and we have essentially the same scenario.

2) In the 1970's, high gas prices crippled companies like GM, Ford and Chrysler and caused people to switch to smaller cars. Today's high gas prices are having the same effect. The "Little Three" have announced several plant closings, and thousands of workers will lose their jobs.

3) From 2000-present we entered the beginning of a new phase of commodity and price inflation. The last time this occurred was during the growth and low inflation period of the 1950's and 1960's which was followed by the commodity/price inflation and recession phase of the 1970's.

The CPI is no longer an accurate measure of inflation, and has undergone six revisions or adjustments since 1921. 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 and everything inflationary has been removed.

The Housing Bill

Frankly, I'm a bit surprised that the executive and legislative branches of our government haven't come to the rescue of the housing crisis yet. I think they will come up with something before the election which will help the financial sector immensely.

Conventional thinking is convinced the financial sector is dead, and will be for many years. Frankly, I'm not buying it. If it sounds like I'm the lone man in the room, I happen to like it that way.

During market extremes, (bullish & bearish) it is wildly unpopular and uncomfortable to take a contrarian view. Oh, well, I was criticized as an oil bull in 2004, and criticized as real estate bear in 2005, I guess I might as well be criticized on my stance in the financial's as well.

With tomorrow being the last trading day before the July 4th holiday, I am convinced the latest oil peak was no coincidence-"Rape Them Over the July 4th Holiday!"

My current position for investors remains- Bearish on oil, bullish on financials.

"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey

Whenever Wall Street begins to tout something as unbelievably bullish, or unbearably bearish, I begin to have serious doubts.

As an example, a few months ago CNBC's Erin Burnett was reporting- "Move over Goldilocks- here comes Economic Nirvana." Here are a few other media phrases that signal a market top;

- The Goldilocks Economy
- Soft Landing
- The Resilient Consumer
- "Points above new all-time high" on your TV screen.
- Valuation models suggest stocks are too cheap to pass up at these levels.

Now, either these people are hype masters, or stupid and dead wrong about the economy and the stock market.

This being said, is the Financial Crisis as Dire as They Say? I have serious doubts.

Sure, lenders did some stupid things. I heard about a 24 year old who was offered numerous credit cards by mail with credit limits of $5000-$7000 each. The guy had a part time job, partied every night, was irresponsible, and got bad grades. Any credit card company that issues credit to someone this irresponsible deserves to not get paid back. They are idiots!

When you consider mortgage loans, and the write downs taken by the banks, not every loan they wrote off was bad. In the months and years ahead watch for the banks to begin adding some of those written down assets back to their balance sheets.

Consider this;

1) Most Foreclosed Properties will Eventually be Sold to Someone

Let's assume a bank writes off a $200,000 loan in foreclosure. In the weeks and months ahead, someone will buy the property, and the bank will recover 60, 70, 80, or maybe 100% of the loan. In other words, the $200,000 original loan is not a total loss.

2) Many Derivatives are Worth Something if held to Maturity

Derivatives are scaring the heck out of many investors, but losses or profits can occur if not held to maturity.

You may not believe this, but a Zero Coupon U.S. Treasury can be classified as a derivative. So can a CD (Certificate of Deposit), which explains why you will incur a penalty on a CD if you cash it in before maturity.

A derivative is defined as "a financial contract whose value derives from the value of underlying stocks, bonds, currencies, commodities, etc". You know what a CD or bond is worth when you bought it, you know how much it will be worth when it matures, but in the interim it will fluctuate in value (more or less than you paid for it) until maturity.

When you understand the definition above, you realize a Zero Coupon U.S. Treasury Bond and a CD's can be classified as a derivative.

This being said, a CMO's (Collateralized Mortgage Obligation), CDO's (Collateralized Debt Obligation), and SIV's (Structured Investment Vehicle) are also derivatives.

What has created havoc in the market place, and massive losses for banks is the market for trading these vehicles have all but shut down. This does not mean that the value of these products are worthless, but it does mean that at this point and time the values of these products (should one try and sell) have declined dramatically because there is no market.

In addition, banks and other financial institutions have to abide by the GAAP accounting laws, which calls for these products to be repriced at their current market values, and currently there is no market for these products. As a result, any bank or financial institution holding these products have had to write down or write off these products at a loss.

One day, the primary and secondary markets for these products will return. When they do, some of the CMO's (Collateralized Mortgage Obligation), CDO's (Collateralized Debt Obligation), and SIV's (Structured Investment Vehicle) that were written off as total losses will be worth something. As a result, banks and financial institutions that wrote these assets off as losses will be able to add the recoverable amounts back to their balance sheets.

I don't know if the financials have bottomed or not. What I do know is during periods of extreme pessimism and mass panic, the sector in question always over shoots on the downside. Now that most analysts are negative on the group, and the financial commentators are negative as well, we can assume the financial crisis may not be as dire as they say.

Wall Street has given every investor multiple reasons to be bearish. Oil prices are sky high, the housing market is in a depression, banks are in trouble, and consumers are broke. Guess what? Things are about to change!

That's right, the Wall Street spin doctors have got you right where they want you. Let me ask a simple question. If oil prices were to drop $50/ bbl over the next three months, what would that do for the economy? Don't you think we would have a massive rally in stocks?

Oh, I know, there is no way oil prices will drop because you have heard on the news that Israel is getting ready to attack Iran, right? I doubt very seriously that Israel would threaten their very existence, and start WWIII in the process.

My bet is Israels show of force is just that, a show. I believe oil prices are coming down sharply as we head into the 2008 presidential election. I believe financials and cyclicals will lead the market higher on prospects for a better economy as a result of lower energy prices.

For those of you who have followed my blog, you know I was bearish in 2006 when everyone else was bullish. I am not convinced that the rally I am calling for is the start of a new bull market, but I am convinced a rally of 10% or more could occur at any time, and without warning.

I call these election year moves, magic! It is amazing to watch what happens to the markets during the second half of a presidential election year. Over the past 100 years, the DJIA has gained an average of 9.7% during the second half of a presidential election year.

Let the magic begin !

Dynamic Growth: ETF Portfolio

NEW BUYS:

DDM: Ultra Dow 30 Proshares ETF

NEW SELLS:

ADRE: BLDRS Emerging Markets 50 ADS Index Fund- .264

Here are our Top 10 ETF's for the week of July 7th:

1) DBA: Powershares DB Agriculture Fund- .508
2) SLX: Market Vectors Steel Index Fund- .415
3) EWZ: Brazil Index- .411
4) FXF: Currency Shares Swiss Franc Trust- .355
5) EEB: Claymore ETF BNY BRIC- .331
6) DDM: Ultra Dow 30 Proshares ETF- Not Rated
7) DUG: Ultrashort Oil & Gas Proshares- Not Rated
8) PGJ: PS Golden Dragon China Fund- .116
9) KBE: KBW Bank ETF- Not Rated
10) IYF: iShares Dow Jones US Financial Sector- Not Rated

Here are our Top 10 Fidelity Sector Funds for July 2008

1) FSCHX: Chemicals
2) FSMEX: Medical Equipment
3) FSCGX: Industrial Equipment
4) FCYIX: Industrials
5) FSPTX: Technology Portfolio
6) FSCSX: Computers & Software
7) FSCPX: Consumer Discretionary
8) FWRLX- Wireless
9) FSRBX: Banking
10) FSVLX: Home Finance

NEW BUYS:

FSCPX: Consumer Discretionary

NEW SELLS:

FDFAX: Consumer Staples

Honorable Mention (Holds):

None

The Week in Review:

Can it really get ant worse? Sure it could, but calls for a market cease fire are being heard. The response should be a sharp rally in the stock market until warnings of Fed tightenings take hold after the election.

Last week, crude oil continued to hit record highs topping around $144 before Friday's pullback. Threats of an Israeli attack on Iran helped push the black greasy stuff to new heights.

The constantly wrong analysts on Wall Street began suggesting that General Motors could go bankrupt, and Ford said that their June sales tanked 28%.

Also hit on rising oil prices were the airlines. To counter the rising cost of jet fuel, the airlines began tacking on fuel charges to tickets. Oddly, when famed investor Jim Rogers was asked by Bloomberg what he was buying, he said "the airlines". How's that for a contrarian pick?

The economy also showed weakness last week as employers cut jobs again in June, marking the sixth straight month payrolls have declined. The unemployment now stands at 5.5%, which means the U.S. has lost 438,000 jobs this year.

"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey

T. Boone Pickens was on CNBC this morning with an energy plan that calls for cars to be converted from burning gasoline to natural gas. Can you imagine the fireworks show we will see if two cars burning natural gas collide?

Once again, old solutions to the energy crisis keep appearing. During the energy crisis of the 1970's Alternative Fueled Vehicles (AFVs) came in vogue. Studies conducted in the 1970s promised alternatives to counteract soaring fuel costs and oil shortages. Magically, the drop of gasoline prices in the 1980s put an end to the alternative craze.

I say craze because energy scares are nothing new. Our business leaders, with the help of Wall Street bankers created the current energy shortage when they began to build up the economies of Chinese and India by shipping U.S. jobs overseas.

In short, electric, natural gas, and fuel cell vehicles are nothing new. Either are any of the solutions that call for alternatives such as wind, solar, and nuclear.

Our Fearless Leaders Created the Energy Crisis

Outsourcing labor to China and India has lead to a manufacturing boom in both countries. If we didn't send U.S. jobs to China and India, there would be no new found prosperity in either country. As a result, there would be no energy crisis, no commodity inflation, and no new demand for raw materials materials.

Our lost jobs have lead to a building boom in Asia, and as a result, the Chinese and Indians are demanding raw materials and commodities to grow their infrastructures. This outsourcing has lead to new found wealth which in turn demands more energy and raw materials.

"If Wall Street hates a stock, buy it"- Martin Sosnoff

CMO's (Collateralized Mortgage Obligation), CDO's (Collateralized Debt Obligation), and SIV's (Structured Investment Vehicle) has created havoc in the market place, and massive losses for the banks. Most of these losses have come as a result of the GAAP accounting laws, which calls for these products to be repriced at their current market values, and currently there is no market for these products.

As a result, any bank or financial institution holding these products have had to write down or write off these products at a loss. These real or artificial write downs are the reason banks are looking to raise new capital.

If the GAAP accounting laws are changed, and banks are allowed to value these securities at maturity, the financial crisis as we know it will end. In addition, banks will be allowed to add some of the written down assets back to their balance sheets.

Also in the works is the Senate Banking Committee plan which would provide relief to people who are at risk of losing their homes. Once the details are worked out, it is estimated that the foreclosure of 500,000 homes can be avoided.

"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey

You know the daily drill by now. Energy prices have come down, but they're still too high. The government still has done nothing to help the credit crisis. Consumers are hurting. Corporate earnings are declining. Israeli and Muslim issues continue to demand our undivided attention, and the list goes on and on.

Later this summer, and maybe into the fall, we may get the final washout in the stock market which can provide the necessary springboard for a new bull market. The first step in doing so will be a change in the accounting laws that demands that holders of mortgage to price those assets at their current market values. Since there is no market for these assets, banks are forced to write these down, and in turn are seeking new capital. Why something hasn't been done already is beyond my comprehension.

The housing problem has been well advertised, but no one is taking into account that approximately a third of homeowners don't have a mortgage, and the majority of consumers that were issued mortgages have them locked in at fixed-rates.

Clearly, energy prices have been manipulated, and speculators have gotten away with murder. The Cheney administration has done nothing to help the situation. And why should they, they are oil people.

Today, I received an e-mail from the airlines in which they said;

Speculators in these markets are increasingly buying and selling commodities such as oil to sell again, rather than to use. As largely unregulated speculators pocket billions of dollars at your expense, the price of commodities has increased out of proportion to marketplace demands.

Over the last 20 years, commodities markets have become increasingly less regulated. Today, as many as 90 percent of all commodities trades occur outside of the traditional marketplace exchanges. In these so-called “Swaps trades”, parties secretly buy and sell commodities with absolutely no one watching. This means speculators can manipulate oil prices and corner the market without anyone knowing.

As oil prices were reaching new highs, the executive branch of our government has done nothing to curb the immoral trading in energy. In fact, they have helped the price of oil rise by using tax dollars to purchase oil for the nations Strategic Petroleum Reserves (SPR).

Nothing positive will happen to the economy or the stock market until oil prices come down, and come down dramatically. I feel the decline has already begun, and will accelerate into the 2008 presidential election.

The free market has turned into a windfall for those who turn the screws on us, "the little people".

"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey

Like many, I have an occasional beer. One or maybe two a week is enough for me. When I heard the news that Anheuser-Busch was the target of takeover by a Belgian-Brazilian company named InBev, I thought "Who in the heck is InBev?".

As I looked into InBev, I had a hard time believing that the makers of this Belgian urine had enough muscle to even consider buying an American icon like Anheuser-Busch. Then it hit me, our currency has been debased so severely that converting Euros into U.S. dollars makes paying $70 per share for BUD cheap.

Consider this. A few years ago 1 Euro was worth about .93 cents U.S. Today, 1 Euro is worth $1.59 U.S. The Belgians know that the currency difference severely undervalues the Anheuser-Busch shares.

Folks, this is what happens when a bought-and-paid-for US government is allowed to debase our currency, and no one is held accountable. Our politicians have allowed greedy and unpatriotic corporate executives and Wall Streeters to export U.S. jobs to boost their bottom lines. As a result, the US economy is destroying the dollar’s role as the world's reserve currency.

Our once great currency has lost a great deal of its purchasing power against oil, gold, and other currencies. As a result, the prices we pay for everything here at home has gone through the roof.

If our politicians, corporate executives, and Wall Streeters were citizens of any other country, they would have been executed for treason.

Oil prices spiked again this morning on the prospects of an Israeli-U.S. attack on Iran. Our involvement in Israeli-Arab conflicts has turned the Arab world against us, and makes us prone to more terrorist attacks here at home.

An attack on Iran would be pure madness. As I watched the video of Iran's missile test, I was reminded of Sadam's scud missiles which were basically ineffective. If Iran decided to launch a strike on Israel, Iran would be completely destroyed in less than 24 hours. But, as a result of the Iranian test, you and I have to pay more for energy, and watch the stock market continue to drop. It's madness.

As it currently stands, we still have not had a high volume capitulation in the stock market. We are extremely oversold, but I don't think we can rally until oil prices decline.

For now, "Who in the heck is InBev?"

The scare of the week was the rumors of Fannie (FNM) and Freddie's (FRE) demise, Indymac's (IMB) implosion, while the sad news of the week was the takeover of Anheuser-Busch (BUD) by a clearly inferior competitor.

The Anheuser-Busch takeover was more about a weak dollar being dominated by a stronger one (The Euro), and not a merger of equals. How sad.

Going forward the news continues to assume the Fed is out of bullets, they're pushing on a string, and all the negatives that come with this kind of talk. Yes, the Fed made be close to being out of conventional type bullets, but this is when bullets are replaced with intervention.

The biggest problem facing the economy and consumers is the high price of energy. Unless the powers in control want to drive the U.S. economy into the ground, the must use other means to turn the economy around. What can they do? Intervention!

Over the next few months, I believe intervention will include;

1) Supporting the dollar and forcing shorts to cover. I believe the G-8 will help the dollars woes, and countries with stronger currencies will begin helping the U.S. by aggressively buying the greenback. In turn, the dollar will rally, shorts will cover, and energy prices will fall.

2) The Energy bubble is subject to demand destruction, but traders have been reluctant to pull the trigger since this sector is one of the few profits remain.

Geopolitical risks (Iran) keep traders hoping for more, but unless my contrarian compass is way off, the bubble in oil is following the same path as the NASDAQ in 2000, and the real estate market in 2003-2004.

Sure, I understand supply and demand, and I understand (but am wary of) the growth in China and India, but I also understand demand destruction. According to the Federal Highway Administration, "Americans drove 22 billion fewer miles from November through April than during the same period in 2006-07, the biggest such drop since the Iranian revolution led to gasoline supply shortages in 1979-80."- USA Today.

Not only are Americans driving fewer miles, they are making other changes as well;

a) Trading in SUV's and lower milage vehicles for more fuel efficient ones.
b) Heating Oil users are finally making the move to alternatives- Associated Press/ Kiplinger.

In short, demand destruction has begun. In addition, a much awaited refinery in India is just now coming on-line- ABC News.

Last week I reported that over the past 100 years, the DJIA has gained an average of 9.7% during the second half of a presidential election year. Oil prices began falling sharply but quickly reversed course and soared higher after rumors of an Israeli-U.S. attack on Iran halted the the fall.

I believe the continuation of the sell-off will resume in the days and weeks ahead.

Dynamic Growth: ETF Portfolio

NEW BUYS:

None

NEW SELLS:

None

Here are our Top 10 ETF's for the week of July 14th:

1) SLX: Market Vectors Steel Index Fund- .437
2) DBA: Powershares DB Agriculture Fund- .418
3) EWZ: Brazil Index- .391
4) FXF: Currency Shares Swiss Franc Trust- .337
5) EEB: Claymore ETF BNY BRIC- .325
6) DDM: Ultra Dow 30 Proshares ETF- Not Rated
7) DUG: Ultrashort Oil & Gas Proshares- Not Rated
8) PGJ: PS Golden Dragon China Fund- .139
9) KBE: KBW Bank ETF- Not Rated
10) IYF: iShares Dow Jones US Financial Sector- Not Rated

Here are our Top 10 Fidelity Sector Funds for July 2008

1) FSCHX: Chemicals
2) FSMEX: Medical Equipment
3) FSCGX: Industrial Equipment
4) FCYIX: Industrials
5) FSPTX: Technology Portfolio
6) FSCSX: Computers & Software
7) FSCPX: Consumer Discretionary
8) FWRLX- Wireless
9) FSRBX: Banking
10) FSVLX: Home Finance

NEW BUYS:

None

NEW SELLS:

None

Honorable Mention (Holds):

None

The Week in Review:

Last week, T. Boone Pickens announced a plan to cut the nation's dependence on imported oil by -38% in 10 years, and add billions more to his pocketbook if the U.S. converts to his investments in wind and natural gas.

Pickens said "This is not about Republicans vs. Democrats, "This is about saving our country from the ruination of spending $700 billion a year on oil imports. Ninety days after the oil hits our shores, it's all burned up, and we've got nothing to show for it. But they (foreign oil producers) still have our money. It's killing our economy."

Like I have said in the past, Wind, Solar, Natural Gas, and Nuclear are not new solutions. They are old solutions that have been foiled in years past by dramatic declines in oil prices after an initial crisis. This time may be different, but history show it never is.

Last Week:

The DJIA dropped -1.67% to 11101, and the S&P 500 fell -1.85% to 1239.49. The biggest hit of the week came from the financials which fell -6.02% on fears of Fannie (FNM) and Freddie's (FRE) demise.

Even market expert Dennis Gartman called the sell-off in the financials ridiculously overdone. Gartman also said he is short crude oil.

Ladenburg Thalman analyst Dick Bove thinks that select bank stocks are once in a lifetime buys. He said, "While the banking and brokerage industries are in trouble and have made terrible mistakes, they are still functioning, it is unlikely that the investors and media who are pounding on these companies are about to take their money away from the banks and brokers and put it in a jar in the backyard."

There were some signs of a mini panic last week as the Market Volatility Index (VIX) climbed a to 27.49 from 24.80. During the last trading bottom on March 14th, the VIX hit above 31.

The first week of the Q2-08 earnings season started last week, and a total of 422 companies reported earnings fell 22% versus Q2-07 results that showed an increase of 13%.

The National Association of Realtors reported that pending home sales fell 4.7% in May.

Import prices rose 2.6% as a falling dollar continues to add to inflationary pressures. Import oil prices have risen an average 8.5% annualized over the last four months.

"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey

Here are the issues of the day;

-Oil prices are tanking,

-the government (Bush, Paulsen & Bernanke) is coming up with solutions to the financial crisis,

-former major league pitcher and current US Senator Jim Bunning throws a high hard one under Fed Chariman Bernanke's chin,

-and Meridith Whitney needs to shut up.

Oil

Crude oil prices were down as much as $10/bbl in intra day trading today on fears of a weakening US economy. The truth of the matter is the economy was already weak, so the excuse for the sell-off is rather lame.

In reality, the demand destruction for oil has begun. The much awaited refinery in India is just now coming on-line, additions to the (SPR) Strategic Petroleum Reserves have been put on hold, and intervention to shore up the dollar, and get the shorts to cover oil and currencies seems to be underway.

I saw an ad for alternative energy investments by T. Boone Pickens. In most cases ads that promote crisis and panic, or euphoria and optimism usually occurs at the top or bottom of an investment cycle. T. Boone is not only drinking from the energy crisis punch bowl, but he stands to profit from a major shift to alternatives as well.

Government Solutions

On July 13th Treasury Secretary Henry Paulson asked Congress for authority to buy equity stakes in Fannie Mae and Freddie Mac. Today, President Bush asked lawmakers to quickly pass legislation to help both companies (not a bailout) weather the financial storm. And finally, SEC chairman Chris Cox is focusing on the nacked short selling in commodities, and oil.

The government plan would temporarily provide capital to both companies by way of Treasury credit lines, and buying stock. This is pissing off short sellers like Hedge fund manager William Ackman who appeared as a guest on CNBC this morning. I find it amazing that CNBC allows people like Ackman to come on CNBC to talk his book (investment positions that make him money), and sway viewers to act on his opinions when he clearly stands to profit from it.

Jim Bunning Throws a High Hard One

Former major league pitcher, hall of famer, and current US Senator Jim Bunning (KY) threw a high hard one under the chin of Fed chariman Bernanke on Capitol Hill today. I don't expect the media to cover this verbal brush back pitch, but they should. You know the drill when it comes to the media, they only focus on things they want you to know instead of the things you should know.

Bunning blasted Bernanke's monetary easing, and blamed him for the decline of the dollar, rising oil prices and rising inflation. Being a professional baseball player is one thing, but to be a star during his era (1955-1971) took toughness and guts. In my opinion, even at age 77, Bunning hasn't lost a thing.

Bunning never has been gutless. Senator Robert Byrd one day said Bunning "isn't really a Senator, he's just a baseball player". Bunning responded back by saying, "Oh, yeah, Robert Byrd? I guess I should have been a Klansman instead. And, you there, Ted Kennedy, well, I'll let you off since you're still sick. No need to drive off that bridge just now..."

As Bunning blasted Bernanke, other sissified senators on the committee made light of his criticism. I would have liked to use another word other than sissified to describe these other gutless senators, but I think you get the point.

Bunning has been an outspoken critic for quite sometime. Here is his statement to the Senate Banking Committee on the Federal Reserve Monetary Policy Report. You better read it here because I doubt if the press will ever let you see it.

Meridith Whitney Needs to Shut up

As I continue to listen to the remarks from Meridith Whitney on the banking and credit crisis I thought, "these issues are nothing new, and these CDO's, SIV's, have been on the books of banks for many years'. Where was Meridith during the real estate boom when banks were forced to make sub prime loans because of governmental pressure?

Anyone can see a problem when a problem exists, but exploiting a problem and the piling on after the fact makes you look smart in the short run, but an opportunist in the long run.

The cat is already out of the bag. If Meridith wants to look like a hero, she should begin focusing on the solutions not seen rather than the problems that are obvious to all. It's time to shut up and focus on a solution. Unless I am mistaken, wealth in the market is made by buying low and selling high.

In my opinion, the capitulation in the financials is well underway.

"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey

You heard it here first, and now it is official. Federal Reserve Chairman Ben Bernake said, and I quote, that "Dollar intervention may be justified in Disorderly Times."

In my Monday, July 14th "Journal" post, I said;

Going forward the news continues to assume the Fed is out of bullets, they're pushing on a string, and all the negatives that come with this kind of talk. Yes, the Fed made be close to being out of conventional type bullets, but this is when bullets are replaced with intervention.

1) Supporting the dollar and forcing shorts to cover. I believe the G-8 will help the dollars woes, and countries with stronger currencies will begin helping the U.S. by aggressively buying the greenback. In turn, the dollar will rally, shorts will cover, and energy prices will fall.

I don't claim to be a genius, but the only common sense move for the Fed at this point an time is to support the dollar through intrevention, force shorts to cover, and drive energy prices down.

Here are some of Bernanke's comments from MarketWatch.

Crude oil prices dropped as much as $6.00/bbl today on Bernanke's support for the dollar and after the government reported that U.S. crude and gasoline inventories rose much more than expected.

We have been saying for several weeks that all the pieces were in place to drive oil prices lower.

1) Supporting the dollar and forcing shorts to cover. I believe the G-8 will help the dollars woes, and countries with stronger currencies will begin helping the U.S. by aggressively buying the greenback.

2) Demand destruction- According to the Federal Highway Administration, "Americans drove 22 billion fewer miles from November through April than during the same period in 2006-07, the biggest such drop since the Iranian revolution led to gasoline supply shortages in 1979-80."-

3) Americans are trading in SUV's and lower mileage vehicles for more fuel efficient ones.

4) Oil purchases for our nations Strategic Petroleum Reserves (SPR) have been temporarily halted.

5) Election year magic! Over the past 100 years, the DJIA has gained an average of 9.7% during the second half of a presidential election year.

Has the magic just begun?

"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey

Stocks rose sharply today as crude oil prices continued to drop, and the news coming out of the financial sector is not as dire as short sellers and stock manipulators want you to believe.

Yesterday's rally was ignited when Wells Fargo announced better-than-expected earnings, and increased its dividend to boot. Today, JP Morgan, Huntington Bank and Comerica also reported results that beat projections.

Initial jobless claims for the week ended July 12 were reported up 366,000 v. estimated 380,000 and last week's revised 348,000. June housing starts were reported up +11.5% v. expected 1.5% decline. On the other hand, the July Philly Fed index, a measure of mid-Atlantic factory activity, in lower than expected.

The summer and election year rally is now underway. As long as oil prices continue to fall (as I expect they will) stock prices will continue to climb. Lower oil prices are great for the economy, particularly consumer discretionary and financial stocks.

The Rest of the Story

Brokerage firms are at it again. This morning a team of 10 regulators raided the securities headquarters in of Wachovia in St. Louis (formerly A.G. Edwards) on the companies sales and marketing of auction-rate securities to clients.

Subpoenas were handed down after hundreds of investors complained they couldn't access their money.

Folks, lets make this simple. If you absolutely must deal with a brokerage firm, don't let them sell you anything other than a stock, (real) bond, mutual fund, or cd.

Lawmakers Want to Crush Short Sellers & Hedge Funds

On Wednesday, legislation was introduced by Rep. Gary Ackerman (D-NY) that would reinstate a depression -era rule on short selling that was changed in mid-2007. The old rule said that short sellers could only short on an uptick (the uptick rule). This prevented short sellers from selling as the price of a stock was falling.

By reinstating the old rule, short sellers can only short if a buyer order proceeds an order to short. Why the rule was changed in 2007 is another one of those strange occurrences that took place under the Bush appointed SEC.

SEC Launches Stock Manipulation Probe

All I have to say is, "what took so long?". Today, the SEC said it would "immediately" launch a probe into the spreading of false information to manipulate stock prices. Huh, I guess some popular investment TV shows will need to be shut down.

As Gene Simmons (KISS) said in his book;

"People will hold you up for money, but those same people, if they were loaded (rich), might not resort to holding a gun in front of your face".

I wonder if he was describing Wall Street?

"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey

It's really no secret if you stop and think about it. What greater tool can a small group of people have to control the masses than oil? There really isn't one, is there?

Magically, and almost on cue oil prices began to cave, and the closer we get to the election oil prices will probably continue to fall. Giving up this manipulative and powerful tool by way of alternative energy seems very remote. If the citizens of the U.S., and people around the globe had to no longer rely on oil for everyday use, total control of the masses would end. I just don't believe the powers behind the curtain will allow this to happen.

I believe the solutions to energy independence are quite simple. Assuming two cars per family- an electric car for in-town use, and a fuel efficient gas powered car for long trips, makes a lot of sense to me. Converting every coal, oil, and natural gas power plant to nuclear also makes a lot of sense. Unless I am way off base, I believe this would cut our nations oil consumption by 50-70%. Will it happen? I don't think so. We have had plenty of opportunities in the past, and oil prices "magically" decline prior to full implementation.

And, what about a high speed rail system? Why are some European nations light years ahead of us technologically? Since I believe I am wasting my breathe, I think I'll stop right here.

This morning I saw where Wachovia immediately gave it's new CEO, Robert Steel 1,990,090 shares of stock with the whopping cost basis of 0. This means at current prices Mr. Steel picks up around $25,871,170.

Sure, Steel has some great incentives to get the stock price back to its old highs. Even if the stock reaches $40/ share over the next 2-3 years, Steel will pocket around $79 million. Is this unbelievable or what?

Disclosure: I own some Wachovia stock

Yesterday, the DJIA jumped 207 points after Oil prices fell for a third straight day to close below $130 for the first time since June 5th. The Financials rebounded after JPMorgan reported better than expected earnings.

Today's action is a little more subdued after Google and Microsoft posted disappointing earnings.

On the positive side, Citigroup posted better-than-expected second quarter results, and the stock is trading just below $20, up $1.50 on the day.

For now, let's hope the behind the scenes guys keep adjusting the price oil on the downside. If they do, we will have a lot a fun in the weeks ahead.

Call it whatever you wish (Oversold bounce, short covering rally, or market bottom), but the rally in the financials and the sell-off in oil was quite impressive. With a tropical storm stirring around in the Caribbean, traders made take that as a opportunity to trade the oil markets higher for the week. If this happens, the stock market will digest last weeks gains, and traders will take some short term profits.

The storm every will be watching is TC Dolly which is expected to cross the Yucatan Peninsula, and enter the Gulf of Mexico over the next 24-36 hours. It is expected to gain strength, but steer clear of the U.S., and make landfall just south of the Texas border.
This week, our favorite financial ETF's and Funds had nice gains. In addition, our oil & gas short, the Ultra Dow 30 Proshares ETF (DUG) gained 16.2% for the week.

To take advantage of a potential market rebound, we added the Ultra Dow30 ProShares (DDM) double bull fund which also gained +8.81% for the week.

Our financial picks gained nicely as well;

KBE: KBW Bank ETF- +26.1% for the week.
IYF: iShares Dow Jones US Financial Sector- +15.32% for the week.

FSRBX: Banking- +21.27% for the week.
FSVLX: Home Finance- + 20.41% for the week.

Please keep in mind that all our investments in the financials are longer term (2-3 years) contrarian plays, so we will be very patient with these investments.

Dynamic Growth: ETF Portfolio

NEW BUYS:

None

NEW SELLS:

None

Here are our Top 10 ETF's for the week of July 21st:

1) DBA: Powershares DB Agriculture Fund- .359
2) EWZ: Brazil Index- .347
3) SLX: Market Vectors Steel Index Fund- .343
4) FXF: Currency Shares Swiss Franc Trust- .330
5) EEB: Claymore ETF BNY BRIC- .289
6) DDM: Ultra Dow 30 Proshares ETF- Not Rated
7) DUG: Ultrashort Oil & Gas Proshares- Not Rated
8) PGJ: PS Golden Dragon China Fund- .148
9) KBE: KBW Bank ETF- Not Rated
10) IYF: iShares Dow Jones US Financial Sector- Not Rated

Here are our Top 10 Fidelity Sector Funds for July 2008

1) FSCHX: Chemicals
2) FSMEX: Medical Equipment
3) FSCGX: Industrial Equipment
4) FCYIX: Industrials
5) FSPTX: Technology Portfolio
6) FSCSX: Computers & Software
7) FSCPX: Consumer Discretionary
8) FWRLX- Wireless
9) FSRBX: Banking
10) FSVLX: Home Finance

NEW BUYS:

None

NEW SELLS:

None

Honorable Mention (Holds):

None

The Week in Review:

After dropping below 11,000 this week for the first time in two years, the DJIA rallied 764.61 points from Tuesday's low to close at 11.496.57. While the "final" low how may not have been reached for the overall market, it looks as if a panic bottom may have been made in the financials.

The bad news is lows like to be retested. So, sometime in the August-September time frame, I am expecting a re-test of last Tuesday's lows.

As the market re-tests its lows, I am expecting that momentum investors will get sliced and diced as the sector rotation model begins to shift its focus away from early contraction investments (energy and commodities), and into late contraction investments such as financials and consumer cyclicals.

"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey

If you haven't seen the movie, "My Big Fat Greek Wedding", do yourself a favor and go rent it. If you are of Mediterranean descent, you can probably relate. I grew up in a traditional Armenian family, so I particularly enjoyed many of the scenes depicting family exchanges.

One quote from the movie that I heard a lot growing up was, when the Greek father Gus said to his wife and daughter, nobody listen to me!

In my 20 years in the business, I am convinced the stock market isn't for everyone. When the markets are flying high, everyone wants a piece of the action. But, when times get tough, and the markets get volatile, the men are separated from the boys rather quickly.

Today, the financials were flying high on short covering, and oil prices resumed their decline. We have said several times that the solutions to our financial woes would eventually appear. They are not only appearing, they are appearing rapidly.

After several high-profile earnings disappointments in the financial sector, stocks bucked conventional wisdom and headed higher. Investors who get their advice from the TV set probably sold financials at the bottom only to watch them double in price in one week.

The solutions to the financial crisis were clearly coming. And despite the obvious, investors panicked anyway.

Treasury Secretary Paulson proposed a plan to rescue Fannie Mae and Freddie Mac. The SEC announced that short sellers of financial stocks would have to play by the rules and no longer be allowed to participate in "naked" or uncovered shorting. The obviousness in all of this is the financial sector is too important to the nation, and some kind of bailout or intervention was going to occur.

A government rescue has happened in the past, so why should we think this time would be any different?

Now that the government has stepped up to the plate, and tremendous amount of pressure will subside in the financial sector. In addition, we said the interventionists would do all they could to rescue the dollar and drive energy prices down. Well, low and behold, look whats happening.

As gas prices come down, consumers will have more of their income to spend on credit cards, lines of credit, and car payments. This will take even more pressure off the financial sector. In addition, lower energy prices will help deflate the inflation problem which will improve the numbers in the Consumer Price Index for August and September.

Going forward, the only concern I have is what energy prices will do after the 2008 presidential elections. The ploy of dropping oil prices before an important election is nothing new. Before the 2004 Presidential election, energy prices mysteriously declined (with help from the Saudis). After the election was over, energy prices reached new highs.

I call these election year moves, magic! It is amazing to watch what happens to the markets during the second half of a presidential election year. Over the past 100 years, the DJIA has gained an average of 9.7% during the second half of a presidential election year.

I will be watching the energy stocks very closely for clues of accumulation in September and October. If I see that falling oil prices were just an election year ploy, I will make some quick changes to the DG portfolios.

Today, Oil prices dropped by nearly $3 per barrel as Tropical Storm Dolly steered clear from oil refineries in the Gulf of Mexico. In addition, the dollar rallied again versus the Euro.

For now, let's enjoy the rally, and the election year magic. It looks as if the current crisis has taken a dramatic turn for the better.

"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey

Just a few minutes ago, Bank of America's board authorized buying back $3.75 billion over the next 12 to 18 months. In addition, the board declared its regular 64 cents per share quarterly dividend.

I'm not very smart, but this sure sounds like good news to me.

The other small tidbit on the table is the housing bill which is expected to be passed today, and be signed by President Bush next week. The bill will put the finishing touches on the bailout of Fannie Mae and Freddie Mac.

As I have been saying all a long, the government had to come to the rescue of the financials and housing market sooner rather than later. It was only a matter of time. Clearly, it will take time for the financials to regain their footing, but 2-3 years from now I expect this beaten down sector to lead the stock market higher.

Bank of America's bold move today may very well market the beginning of the healing process for the financials. The move may not be straight up, and there will be bumps along the way, but I am convinced that BAC will be buying stock at bargain prices when we look back two years from now.

"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey

Oil prices are dropping, the financials are stabilizing, and the market is rallying. All things considered, traders should have a lot of fun in the short term.

Having lived through the 1970's, and been an investor since 1974, I can tell you my gut is saying this is not a buy and hold market.

The recovery we are witnessing marks the half way point of a "W" shaped recovery. The first leg down came as a result of an over leveraged consumer, bad debt, bad loans, and a credit crisis caused by an enormous real estate bubble.

Now that the GSE bill has been passed, and is ready for the President to sign, the bleeding in the financial sector will finally come to an end.

The next, and final leg down for the economy and the stock market will happen when the Fed raises interest rates to fight inflation. This tightening cycle will help shore up the dollar, and bring energy and commodities prices down sharply. The big question is how high will rates have to go before the Fed achieves its goal of reigning in inflation.

After the November elections (mid 2009), the Fed will probably begin raising interest rates. Before they do, I would suggest holding a decent amount of cash on the sidelines to buy stocks and bonds during the final stage of this market downturn.

So, do I believe the bear market is over? No, and as Yogi Berra said, "It Ain't Over Til It's Over".

Last week marked an important inflection point for the financials (Maybe oil too). There will be many bumps on the road to recovery, even a few more scary moments. But, starting now, and over the next few years, the healing process will finally begin.

There are many reasons for the rally in the financials. First, the Securities and Exchange Commission (SEC) declared war on some big security firms and the hedge fund industry by limiting “naked” short selling of select financials. Secondly, the SEC announced plans to investigate individuals who may be spreading rumors to manipulate stock prices. Thirdly, a government rescue of Fannie, Freddie, and millions of sub par mortgages. And finally, Wells Fargo announced better-than-expected earnings, hiked their dividend by 10%, and Bank of America maintained their dividend and is buying back $3.75 billion in stock.

Last week, the economy began to receive some good news from falling oil prices, but the stock market still does not believe the sell-off is for real. If the oil bubble truly broke its uptrend, and continues to aggressively adjust the prices consumers are paying at the pump, then hold on to your seat belts for a dramatic blast-off in the stock market.

Oil demand in China is slowing as the Chinese government prepares for the 2008 Olympics in Beijing, the provinces surrounding the city were ordered to cut the smog caused by industrial pollution by 70%. They are taking drastic steps to get the problem under control by ordering 40 factories to shut down from July 25 to Sept. 20.

In addition, the government in Beijing took 300,000 high-emission cars off its roads on July 1, banning them until Sept 20. On July 20th, private cars can only be driven on alternate days according to odd or even license plate numbers. The Chinese government hopes to take 45 percent of the city's 3.29 million cars off the roads to cure the pollution problem.

When you couple China's drop in oil demand with the demand destruction that has taken place here in the U.S., oil prices can drop pretty dramatically over the next 7-8 weeks.

Dynamic Growth: ETF Portfolio

NEW BUYS:

None

NEW SELLS:

None

Here are our Top 10 ETF's for the week of July 28th:

1) DBA: Powershares DB Agriculture Fund- .359
2) EWZ: Brazil Index- .338
3) SLX: Market Vectors Steel Index Fund- .335
4) FXF: Currency Shares Swiss Franc Trust- .342
5) EEB: Claymore ETF BNY BRIC- .289
6) DDM: Ultra Dow 30 Proshares ETF- Not Rated
7) DUG: Ultrashort Oil & Gas Proshares- Not Rated
8) PGJ: PS Golden Dragon China Fund- .112
9) KBE: KBW Bank ETF- Not Rated
10) IYF: iShares Dow Jones US Financial Sector- Not Rated

Here are our Top 10 Fidelity Sector Funds for August 2008

1) FSCHX: Chemicals
2) FSMEX: Medical Equipment
3) FSCGX: Industrial Equipment
4) FCYIX: Industrials
5) FSPTX: Technology Portfolio
6) FSCSX: Computers & Software
7) FSCPX: Consumer Discretionary
8) FWRLX- Wireless
9) FSRBX: Banking
10) FSVLX: Home Finance

NEW BUYS:

None

NEW SELLS:

None

Honorable Mention (Holds):

None

For the Week:

-Gold closed at $936.90/oz -21.10 for the week. Last week gold closed at $958.00, and was trading at $960.60 two weeks ago.

-The Commodities CRB Index closed at 412.22, down from 427.17 last week, and down from 461.43 two weeks ago.

-Crude Oil closed at $123.26/bbl down from $129.47 last week, and down from $145.66 two weeks ago..

We need to see $75-$85/ barrel oil in the weeks ahead to get the economy back on track. Oil has remained above $100 for eighteen consecutive weeks.

-The U.S. Dollar closed at 72.85 up from 72.21 last week, and up from 71.94 two weeks ago.

Some believe the rate cuts have come to an end, and the dollar is attempting to rally. A strong rally in the dollar will help drive energy prices lower.

We raised our allocations last week by 5% across the board when the DJIA dropped below our 11,300 target. Going forward, the next 5% increase will come at DJIA 10,600 for Aggressive, and Moderately Aggressive portfolios, but Moderate, Moderately Conservative, and Conservative investors are not advised to get fully invested unless the DJIA breaks below the 10,000 mark.

Our current asset allocation is as follows;

75% Equities: (Normally 95%) Aggressive
65% Equities: (Normally 80%) Moderately Aggressive
55% Equities: (Normally 60%) Moderate
35% Equities: (Normally 40%) Moderately Conservative
15% Equities: (Normally 20%) Conservative