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

The stock market is a little skittish prior to the release of the "stress test" next week. When you take into account the still low levels of many blue chip stocks, insider selling has picked up dramatically, and a clear distribution is underway.

While the media continues pumping up the market, and telling you to ignore the "Sell in May, and go away" mantra, insiders are singing a different tune.

Warren Buffett was interviewed by Becky Quick this morning on CNBC, and he said the economic Pearl Harbor has passed, but "We're at a war now to some degree, but Pearl Harbor was September".

Being from Detroit, I am concerned about the Chrysler bankruptcy. In addition, I remember the days in Detroit when the nation use to believe "Is What’s Good for GM is Good for the Country". Does that include a possible bankruptcy for GM and the nation?

Clearly, a nation can only survive a short time without a balanced budget, and a massive debt. U.S. politicians are out of control with their spending habits as they continue to lace legislation with pork during one of the most tumultuous times in our financial history. They must be reined in, but we have a population whose major that doesn't pay attention or care about events happening around them.

This said, we must remember that the current rally could climb (after a brief pause) into the 900-1000 range, while still upholding the longer term bear trend. The best performing sectors & stocks in this recent rally have been the heavily shorted sectors (financials, consumer discretionary, and industrials).

With April behind us, investors will probably take some money off the table, and await the outcome of the release of the "stress test" results next week.

On the day, the Dow Industrials ended up 44.29 points or 0.54% at 8,212 and the S&P 500 Index rose 4.71 points or 0.54% to 877. The Nasdaq Composite managed a slight gain on the session closing up 1.90 points or 0.11% at 1,719.

In spite of the Chrysler's bankruptcy, investors have realized that the U.S. economy was not going into a depression. They also realized that too many stocks were priced for one, and this set off a buying spree driving stock prices higher.

The Dow climbed 7.3% for the month of April, the S&P 500 gained 9.4%, and the Nasdaq surged 12.3%.

Better than expected first-quarter earnings were the main drivers for the stock market’s gains in April. As of Friday, 68%, of the 375 S&P 500 stocks reporting announced earnings with upside surprises.

Investors are beginning to sense that China may lead the world out of the recession. They provide stimulus a little differently in China than in the U.S..The Chinese give their citizens vouchers to buy goods and services- like washing machines, etc. Here is the U.S., they pass out cash. That's all well and good, and some people will use the cash wisely, but idiots will blow it on stupid things.

Actually, we a staring at a good news/ bad news scenario. The good news is obvious- things aren't as bad as many had thought. The bad news is, well, maybe not so obvious.

Clearly, the markets have moved very quickly from a severe oversold condition. Stock prices are no longer cheap (exception-financials), and investor sentiment is getting too optimistic.

In this weeks Barron's Big Money Poll, 59% of the portfolio managers said they were bullish on the markets while only 13% said they are bearish. The recent sentiment indicators are also forecasting negative vibes as Insider Selling has escalated, volume has not been impressive considering the prices of some top blue chip stocks.

To take advantage of the markets new found life, we are going to pull a few chips off the table just in case we "Sinko in Mayo".

Here are our Top 10 ETF's for the week of May 4th:

New Sells:

VIS: Vanguard Industrials
IXP: iShares S&P Global Telecom

Let's hold the proceeds from the sales in a money market account for now. I have some sectors I would like to buy on the next pullback.

1) DBA: Powershares DB Agriculture Fund
2) EWZ: Brazil Index
3) DBE: PowerShares DB Energy
4) USO: U.S. Oil Fund
5) IYF: iShares Dow Jones US Financial Sector
6) DDM: Ultra Dow 30 Proshares ETF
7) PGJ: PS Golden Dragon China Fund
8) SSO: ProShares Ultra S&P500 Trust
9) CASH
10) CASH

Here are our Top 10 Fidelity Sector Funds for May 2009

New Sells:

FBIOX: Biotechnology

1) FSPTX: Technology Portfolio
2) FSRBX: Banking
3) FSCGX: Industrial Equipment
4) FCYIX: Industrials
5) FSCPX: Consumer Discretionary
6) FSCSX: Computers & Software
7) FSCHX: Chemicals
8) FNARX: Natural Resources
9) FSENX: Energy
10) CASH

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

As investors begin to get their hopes of a recovery, today is the 5th of May, marking a holiday in Mexico known as Cinco de Mayo. Given the warped sense of humor of the button pushers at the major Wall Street banks, the set up for investors could indeed be "Sinko in Mayo".

I'm not kidding! The evidence of another large advance is working against the markets. For example;

1) In recent weeks, insider selling has picked up dramatically- See Charts

The recent rally has been sparked by mutual funds and pensions funds buying in fear back of under-performing their respective benchmarks. When you couple this with constant opinions from financial entertainment TV, you have a couple of groups of investors who are usually wrong at important markets inflection points.

If you follow Relative Strength (RSI), you'll see that the momentum indicators of many stocks are very overbought, a condition that needs to be worked off before another advance can take place.

In basic terms, a stock qualifies as overbought/ overextended if its RSI is around 70. A stock that is oversold usually has a RSI of around 30. Here is a list of blue chip stocks and their current RSI values over the past 7 days, and 7 weeks;

BA= 75.86/ 64.83
AA= 77.35/67.45
AXP= 75.67/76.79
CAT= 83.62/69.08
DD= 70.60/75.24
DIS= 80.13/71.87
IBM= 73.51/72.34
HPQ= 69.73/68.31
INTC= 73.28/68.61
MMM= 76.25/67.54
T= 72.86/ 63.20
UTX= 73.45/70.82

How about these numbers on some hot tech names;

AAPL= 82.67/ 82.58
RIMM= 78.38/ 79.49
GOOG= 73.28/ 75.34

These numbers are clearly flashing caution. Traders may want to use the inflated RSI's to take profits and wait for a meaningful pullback.

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

Now that the financial news has got everyone excited about the recent rally, the big players on Wall Street welcomed your enthusiasm by taking profits. They like doing things like that. We call this enhanced media excitement, Stock Market Foreplay.

DJIA: 8,409.85, down -102.43 or -1.20%
Nasdaq: 1,716.24 down -42.86 or -2.44%
S&P 500: 907.39 down -12.14 or -1.32%

The big news of the day has to be the upgrade of Bank of America (BAC) to "outperform" at Robert W Baird. They raised their price target on the stock to $18 from $9.

Federal regulators will release the results of stress tests designed to mess with the minds of the CEO's of the 19 leading banks. Bank of America continues to get picked on after CEO Ken Lewis spilled the beans on Paulsen and Bernanke for using strong arm tactics to get the company to buy Merrill Lynch.

Federal Reserve Chairman Ben Bernanke gave a 15 minute speech this morning on the Feds role of monitoring bank liquidity. I tried to listen, but didn't understand a word of it.

The European Central Bank cut interest rates by 0.25% to bring rates to a record low of 1%. Despite the news, Treasury yields continue to climb as China is no longer buying our debt, and the Feds so called "quantitative easing" is slowing.

What is happening is the Chinese isn't funding our debt, and the Federal Reserve will have to step and take up the slack by purchasing up excess Treasury's. Right now you are seeing the effects of this as oil prices continue to rise. Gold and commodity prices are moving higher as well.

Cisco (CSCO) beat earnings and revenue estimates after the close yesterday. Cisco sees product demand stabilizing, and said July quarter sales would be up 2% to 5%.

Going forward, investors that don't get scared during periods of market panic have enjoyed some huge early gains. Given the still low levels of interest rates, consumer discretionary and
financials have historically outperformed the broader market. We have witnessed this over the past 40 days.

On the flip side, defensive sectors such as telecommunication services, utilities, and staples have been least likely to outperform the S&P 500 during the early months of a new bull phase.

Today's sell-off is more than likely a short term timeout rather than a new leg down. The market will not give up that easily, and we will probably go high in the summer months.

What could derail the whole thing is interest rates and inflation. The recent bump up in bond yields should serve as a short across the bow. Longer term, when the Fed and China combined stop funding our debt, interest rates could rise dramatically. High interest rates on government bonds will eventually compete with the returns on stocks. When this begins to happen, it's best to sell stocks, and wait.

The opportunity to sell stocks should come sometime this summer.

Investors managed to keep the rally alive last week despite several key banks being told they had to raise more capital. After the government’s stress test results, 10 of the nation’s 19 biggest banks were told to pony up.

Here's a summary of each bank and how much capital they need to raise;

American Express: none needed
Bank of America: $33.9 billion
BB&T Corporation: none needed
Bank of New York Mellon: none needed
Capital One Financial: none needed
Citigroup: $5.5 billion
Fifth Third Bancorp: $1.1 billion
GMAC: $11.5 billion
Goldman Sachs: none needed
JPMorgan: none needed
KeyCorp: $1.8 billion
MetLife: none needed
Morgan Stanley: $1.8 billion
PNC Financial: $0.6 billion
Regions Financial: $2.5 billion
State Street: none needed
SunTrust Banks: $2.2 billion
U.S. Bancorp: none needed
Wells Fargo: $13.7 billion

In addition to the stress test, the nations unemployment rate hit 8.9%, but the employment report came in better than many had expected.

The current rally is repricing stocks for a recession instead of a depression. The media pounded the airwaves with the dreaded "D" word to keep you from buying stocks. While many investors were running for the exits, I'm sure some very rich (in the know) people were buying at unbelievable prices.

Currently, the stock market is very overbought, and the momentum indicators defined in the Relative Strength (RSI) numbers warrants caution.

Relative Strength (RSI) measures a stock as overbought/ overextended if its RSI is around 70. A stock that is oversold usually has a RSI of around 30. Many stocks today have RSI numbers ranging from the mid 60's to the mid 80's. I am not interested in participating in the buying frenzy when these numbers reach such lofty levels.

Here is a list of on some hot tech names that have extreme overbought RSI numbers;

AAPL= 82.67/ 82.58
RIMM= 78.38/ 79.49
GOOG= 73.28/ 75.34

Traders that own positions in these stocks may want to consider selling or sell puts or covered calls on their positions.

Here are a few overextended Dow stocks;

BA= 75.86/ 64.83
AA= 77.35/67.45
AXP= 75.67/76.79
CAT= 83.62/69.08
DD= 70.60/75.24
DIS= 80.13/71.87
IBM= 73.51/72.34
HPQ= 69.73/68.31
INTC= 73.28/68.61
MMM= 76.25/67.54
T= 72.86/ 63.20
UTX= 73.45/70.82

We took some money off the table last week in preparation for a correction based on the extreme overbought condition. Oil prices continued to climb, and the jury is still out as to why.

Some believe the rally in oil was a direct result of the rally in the stock market. We need to consider other opinions as well. For example, interest rates have been rising, and Treasury auctions are not doing well at all.

Since the Chinese are no longer buying our debt, the Federal Reserve is stepping in to buy up the excess debt. The do this by printing more money which has a negative effect on the dollar, and will eventually be very inflationary.

As the dollar declines, oil prices rise because oil is priced in dollars. When there is less demand for our debt, yields rise. We need to watch this one very closely.

Since April 20th, the UltraShort 20+ Year Treasury ProShares (TBT) has jumped 17.6%. The TBT is a double bear short of the 20+ Year U.S. Treasury index.

Here are our Top 10 ETF's for the week of May 11th:

1) DBA: Powershares DB Agriculture Fund
2) EWZ: Brazil Index
3) DBE: PowerShares DB Energy
4) USO: U.S. Oil Fund
5) IYF: iShares Dow Jones US Financial Sector
6) DDM: Ultra Dow 30 Proshares ETF
7) PGJ: PS Golden Dragon China Fund
8) SSO: ProShares Ultra S&P500 Trust
9) CASH
10) CASH

Here are our Top 10 Fidelity Sector Funds for May 2009

1) FSPTX: Technology Portfolio
2) FSRBX: Banking
3) FSCGX: Industrial Equipment
4) FCYIX: Industrials
5) FSCPX: Consumer Discretionary
6) FSCSX: Computers & Software
7) FSCHX: Chemicals
8) FNARX: Natural Resources
9) FSENX: Energy
10) CASH

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

Did today's -100++ decline scare you? Get you to think a new leg down was beginning? Well, not so fast.

Evidence for the bears has not yet reached its crescendo. Optimism toward stocks does not evaporate that quickly. Positive (actually, less negative) news from the economy has investors moving cash off of the sidelines, and putting it to work in the stock market. Afterall, something has to be worth more than zero.

The weekly AAII and Investors Intelligence surveys now show a split between bulls and bears. As may continues to mature, the survey numbers may actually tilt more toward the bulls.

The latest AAII data shows bulls at 44% and bears at 33%, while the Investors Intelligence survey shows 40% bulls and 32% bears.

My guess is this pullback, any any pullback prior to S&P 950-1000 will be limited until investors over-commit to stocks. Any pullback off recent highs tells me that the likely next phase would be one of consolidation, not a reversal.

The market has the support of less bad news. When you combine this with China appearing to have a handle on its economic stimulus, a short term growth pattern seems to be re-emerging.

Stability appears to be emerging on the jobs front (less bad) as well as the housing market. New growth in housing will be light years away, but at least the decline shows signs of slowing.

Another sign of recovery is rising Treasury Yields and Commodity prices. This tells us that investors feel the crisis appears to have past, and investors are becoming less risk-averse.

As for now, I am not convinced we are "Done Yet".

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

Former NY Yankee great Yogi Berra is credited with the simply, yet precise observation; "This is like deja vu all over again."

In the stock market and the economy, events have a way of repeating themselves. If you have been around the markets long enough, you know what I mean.

How well do you remember the real estate bubble of the 1980's? How well do you remember the effects on the banking sector, credit, and the economy from 1980-1990?

While circumstances may not be identical, there are similarities.

Between 1980 and 1994 more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) were closed. The number of banks closed year to date is just a fraction of those during this 14 year time span, but what happened as a result may not be that different.

In the early 1980s, booming activity in commercial construction was supported by rapidly increased bank and thrift commercial mortgage lending.

The big difference, and this can't be ignored, is the total amount of credit extended to consumers to buy things they didn't need with money that they really didn't have. This extension of credit came by way of second mortgages/ lines of credit, and credit cards. The extraction of equity from perceived appreciation in home values created a vacuum when housing prices began to fall.

In the U.S., the total market value of housing, commercial real estate, and stocks was about $50 trillion at the peak and fell below $30 trillion at the low. The loss of $20-$23 trillion of wealth in the U.S. is still enough to deliver some life altering changes for millions of people in the years ahead. This is why I believe we have entered a period in the financial markets and economy that will be eerily similar to the 1980-1990 time-frame.

So, what does this mean for consumers, the economy, the stock market, and for credit?

1) Now that consumers are waking up to the fact that they are not as rich as they thought, we will enter into a period of less spending. In short, you can't spend if the banks don't extend discretionary credit.

2) Banks will become less likely to extend credit to marginal or even average consumers. As a result, consumers will spending less, live more frugally, saving more, and waste less.

After spending like drunken sailors, consumers will need several years to repair their credit, and payoff debts.

3) This readjustment period (5-10 years) will hurt corporate profits, which for 20 years had benefited from the out of control spending habits of consumers. The stock market, after an initial recovery, sell-off, flat line, and then take several years before making new all-time highs. During the third year of the Presidential Cycle, rallies will be numerous, particularly when massive stimulus programs are applied so the economy can be perceived as stronger prior to the election. The employment rate will magically improve as well.

4) A large rally in the stock market (2010-2011) will prove to be a huge selling opportunity. Shortly following this rally will be a long, drawn out period of substandard returns. Making g big money in stocks will be difficult with the exception of trades on the short side.As a result, investors will shift investments to safer investments (bonds & CD's) that provide steady gains. The game of extreme speculation will be over.

5) After waking up to the fact that profits will be muted for several years, lack of meaningful gains in the stock market will discourage many investors. Inflation will creep up over the next 3 years pushing bond yields higher which will make CD's and bonds an attractive alternative to stocks.

6) While real estate prices have declined, the reduction from peak prices doesn't necessarily make it a bargain. Given the unfriendly nature of the state and local taxing authorities, combined with the higher cost of insurance, many investors will realize that real estate still is not a bargain even at current prices. Like the NASDAQ, real estate will remain in a bear market for 5-10 years.

The last bubble to severely punished investors was the "NASDAQ Bubble". Nine years after the bubble burst, the Over-the Counter (NASDAQ) index is still 50% below it's 2000 peak. This latest bubble in real estate is just as bad, but has even more negatives.

a) Real Estate is not a liquid investment.

b) After so many people have been burned, it may take 5-10 years for wounds to heal, and courage to return.

c) During the waiting period, investors have to cope with a significant capital outlay (taxes, insurance, and upkeep) which could serve as a cash drain for many years.

What investment moves do we make after the big rally in 2010-2011?

1) Reduce predetermined asset allocation to stocks by 50%.

2) Any cash collected by selling stocks should be held in a money-market account or short term CD's until interest rates rise.

3) As rates climb, slowly allocate cash to longer term bonds.

Sorry about the late start today. I was waiting on some important economic and political information to come in before I wrote this weeks briefing. Like it or not, I will report my findings.

As a guest speaker at the 2004 World Money in Orlando, I was the only speaker among a distinguished panel of advisors to warn investors that an impending "Oil Crisis" was at hand, and that short term interest rates were definitely going to rise. My speech was not well received by some of the other guests on the panel, in fact, one told me I was dead wrong.

I was right.

In 2005, I began warning investors about Real Estate bubble at hand. This time I did so as a blogger, and again, my thoughts met resistance.

This time I have another warning. And I'm sure not many will heed this call, but here it goes.

The current rally could be one of the biggest sucker rallies known to man. While the evidence of a steeper and more dramatic decline is not yet evident, I believe the odds of a continued and more painful decline are better than 50%.

The economic and stock market events over the past two years were nothing short of bizarre. Even the best market gurus in the world had little explanation for the events that took place. Even more bizarre were the events that took place leading up to the eventual slaughter.

Here are the sequence of events;

1) Someone thought deregulating the financial services industry was a great idea. Once this sequence of events was implemented, even the dumbest guy on the planet had to know the idea was going to be a colossal failure. This being said, I am not so sure the ideas below were done without knowing the outcome in advance.

2) As interest rates were kept artificially low, consumers borrowed more money that they could payback. The debt trap was set, and the Pied Piper's on Wall Street had the childlike consumer following closely behind.

3) In 1994, a bill called the Community Reinvestment Act (CRA) was rewritten by Congress providing loans to people who couldn't pay it back. All it took was no ability to make a down payment, no income to make the payment, and a bad credit record. Questioning the borrower was seen as discriminatory.

4) In 1999, Congress repealed the Glass-Steagall Act which previously kept commercial banks out of the securities business. When it was repealed, banks began speculating in financial markets with securities. Commercial banks merged with investment banks, which allowed these new financial institutions to package up the sub-prime mortgages with prime loans which were eventually sold as mortgage-backed securities.

5) In 2004, the top five investment banks met with the Securities and Exchange Commission (SEC) to get them to waive a rule that required the banks to maintain a certain level of reserves. These investment banks sold and marketed mortgage-backed securities and the many offshoots that came with them.

6) By 2007, the stock market reached new highs, and the real estate bubble was showing signs of an enormous leak.

7) In 2008, the bubble burst, and sub-prime slime began shooting on the walls of every piece of real estate in the world.

8) The stock market which reached a high of 14,164 on October 9, 2007, dropped to a low of 6,547 in March 2009, while the S&P 500 hit a devilish 666.

9) Houses worth $400,000 in 2006 were now selling for $250,000-$300,000, and negative equity caused a rash of foreclosures nationwide.

10) As a result, mortgage lending hit a brick wall, credit lines were canceled, and credit card limits were reduced or eliminated.

And, here we are.

Now we are being told the economy is on the mend, and many believe the story because the stock market is recovering. From where I sit, something doesn't pass the smell test.

The fairly simple truth sometimes is not so obvious. So, let's make this as simple as possible. If lenders are going to make it tougher for for marginal or even average consumers to get credit, where are they going to get the money to spend, and where is economic growth going to come from?

During the real estate and stock market boom of 2003-2007, economic growth came by way of an extension of credit that came by way of second mortgages/ lines of credit, and credit cards. Credit was also issued by the extraction of equity from the appreciation in home values.

This credit is gone. Its done! Its cooked! Stick a fork in it!

All of this leads me to believe that we have entered a period in the financial markets and economy that will be eerily similar to the 1980-1990 time-frame. I believe some financial altering changes are in store for millions of people in the years ahead.

The new 1980's-1990 period is now 2008-2018.

Here's what I think will happen;

1) If the banks don't extend discretionary credit, consumers will spending less and live more frugally.

2) This readjustment period (5-10 years) will hurt corporate profits. The stock market, after an initial recovery, sell-off, flat line, and then take several years before making new all-time highs.

3) After several rallies and sell-offs, the stock market will reach its Presidential Cycle prior to the election. The employment rate will magically improve as well.

4) The big stock market (2010-2011) will prove to be a huge selling opportunity. Shortly following this rally will be a long, drawn out period of substandard returns. Making g big money in stocks will be difficult with the exception of trades on the short side.As a result, investors will shift investments to safer investments (bonds & CD's) that provide steady gains. The game of extreme speculation will be over.

5) After waking up to the fact that profits will be muted for several years, lack of meaningful gains in the stock market will discourage many investors. Inflation will creep up over the next 3 years pushing bond yields higher which will make CD's and bonds an attractive alternative to stocks.

6) While real estate prices have declined, the reduction from peak prices doesn't necessarily make it a bargain. Given the unfriendly nature of the state and local taxing authorities, combined with the higher cost of insurance, many investors will realize that real estate still is not a bargain even at current prices. Like the NASDAQ, real estate will remain in a bear market for 5-10 years.

The last bubble to severely punished investors was the "NASDAQ Bubble". Nine years after the bubble burst, the Over-the Counter (NASDAQ) index is still 50% below it's 2000 peak.

Make no mistake, the stock market will be, and is, a traders market. Long term investors need to alter their thinking.

What investment moves do we make after the big rally were are currently in, and the one that will occur in 2010-2011?

1) Reduce predetermined asset allocation to stocks by 50%.

2) Any cash collected by selling stocks should be held in a money-market account or short term CD's until the stock market retests the lows.

3) Sell into the current rally as the S&P approaches the 900-1000 range. When the stock market hits another panic low, buy stocks for the 2010-2011 rally.

4) As rates climb, slowly allocate cash to longer term bonds.

Here are our Top 10 ETF's for the week of May 18th:

1) DBA: Powershares DB Agriculture Fund
2) EWZ: Brazil Index
3) DBE: PowerShares DB Energy
4) USO: U.S. Oil Fund
5) IYF: iShares Dow Jones US Financial Sector
6) DDM: Ultra Dow 30 Proshares ETF
7) PGJ: PS Golden Dragon China Fund
8) SSO: ProShares Ultra S&P500 Trust
9) CASH
10) CASH

Here are our Top 10 Fidelity Sector Funds for May 2009

1) FSPTX: Technology Portfolio
2) FSRBX: Banking
3) FSCGX: Industrial Equipment
4) FCYIX: Industrials
5) FSCPX: Consumer Discretionary
6) FSCSX: Computers & Software
7) FSCHX: Chemicals
8) FNARX: Natural Resources
9) FSENX: Energy
10) CASH

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

CNBC's Erin Burnett was reporting from Africa today, and was reading from the teleprompter about the investment prospects available. Clearly, U.S. business interests in Nigeria are all about oil. One segment was promoting investment prospects in a Nigerian Bank- Not for my money, but you go right ahead.

Nigeria...What's with that!

I have had my gut full of third world financial disasters- IE- Lehman Brothers, Bear Stearns, Merrill Lynch, AIG, and Wachovia. Looking at these colossal screw ups, maybe the Nigerian Bank wouldn't be that bad. Surely, the management cannot be more corrupt than what we have witnessed over the past year.

Today, the market heading south right out of the gates. After the Fed released the minutes of its April meeting, the index futures began to tank. The Fed is skeptical of the economy sudden stabilization, and they don't believe a meaningful recovery is underway just yet. They're now projecting a deeper recession and a sluggish recovery.

The bit of news speak volumes to how irresponsible the idiots are in Washington.

Standard & Poor's just lowered its outlook on Britain to "negative" from "stable," and may eventually cut the nation's top AAA rating. Since the U.S. has a budget deficit that is higher than Britain's, the U.S. is at risk of losing its AAA credit rating.

In reality, the U.S. a AAA credit rating should have been cut many years ago. With a national debt that is $11.3 trillion, the country is basically broke. As a result, the U.S. Dollar has cratered, while anything with real value has risen sharply.

A year ago, Oil was near $150 per barrel, gasoline cost $4 a gallon, copper hit $4 a pound, silver reached $21 an ounce.

The U.S. dollar has further to fall as the idiots in Washington try to spend the country's way out of a recession and banking crisis. All this spending will add to the $11.3 trillion debt as next years budget deficit of $2 trillion is four times larger than any previous deficit.

Eventually, when the Fed stops buying our debt with newly printed dollars, inflation will be much, much higher. For the time being, consumer price inflation is being hidden, but there is no doubt that food and energy costs are now rising due to the fact that the U.S. dollar is getting more worthless by the day.

Smart nations like China are no longer supporting the dollar. China is tired of watching their trade surpluses deteriorate as the U.S. dollar declines. At this stage of the game, China is more interested in buying copper and other commodities rather than U.S. debt.

Not so fast says the Fed as the FOMC released the minutes this week from its last meeting. Now why would the Fed want to throw cold water on a stock market recovery that would eventually be followed by the overall economy?

This is a simple one. It's politics. If the economy recovered too rapidly, the power brokers behind the new President would have a tough time explaining how things got so good so fast. In fact, to ensure Obama gets full credit for the recovery, things may have to get bad again to guarantee he gets full credit.

The jury is still out, but we may be looking at a scenario where the market works off its over bought condition, and then resumes its uptrend into the summer. If the S&P can break briefly above the 1000 mark, I would expect this would be a great time to sell and take profits.

There is still a very high degree of skepticism in the markets, enough so to keep many on the sidelines and very frustrated. If the markets never break significantly lower, sideline cash will pile into the market in fear of missing a "new bull", and greater fears of under-performing the indexes. This piling on effect may be the catalyst to drive the S&P above 1000, at which time the small investor will join in just at the wrong time. This is when we will probably pull the plug and head for the sidelines.

After the Summer Rally

After the summer rally we will sit back and wait. After a meaningful sell-off, we will want to re-enter the market to position ourselves for the manufactured bull period that should begin in 2010.

The 2010-2011 bull market has to be viewed as a major selling opportunity for investors. You really don't want to be invested in the stock market when massive inflation begins to hit the economy. Higher interest rates will eventually lead to another collapse in the real estate market, followed by higher oil and commodity prices.

The key to investing success during periods of high inflation is to have enough cash to take advantage of unique opportunities. Here is what I would do to protect yourself, and eventually profit.

1) Right Now/ 2009- Sell enough stock to maintain a comfortable cash position. Look for a 7-10% correction, with the possibility of a sideways correction. There is an outside chance of a retest of the March 2009 lows, but only if unemployment rate shoots into double digits. Some are already projecting the unemployment rate could hit 14% by year end.

2) Fall of 2009: Buy into the dip/retest, and ride the market up into the 2010-2011 rally. Favorite sectors include Oil, Commodities- Raw Materials, Precious Metals, and Inverse interest rate and U.S. Dollar ETF's.

Investors have waited before piling in to these sectors. The big run up has not proven itself yet, so momentum traders are waiting for a confirmed uptrend.

3) In 2010- 2011, while other investors are getting increasingly optimistic over the new bull market, sell into the rally. Get your portfolio positioned to a point where you are "under invested" in stocks and bonds, and over invested in money markets, CD's, and cash.

4) In 2012, you may have to be patient and wait. Invest in short term CD's until the news gets bad- IE- higher inflation, higher interest rates, and a tanking stock market.

5) In 2013, buy bonds across the board locking in higher yields. Ladder your maturities from 1-30 years out. Hold these bonds through 2014, and only sell if you can lock in gains of 20% or more.

6) By 2014, take any profits/ proceeds from selling bonds, and redeploy the cash back into the stock market. Invest in interest sensitive stocks first, with the highest yields and best quality.

Consider buying high quality Utilities, REITs, and Banks.

7) By 2015, you should have a 50/50 mix of interest sensitive stocks and bonds. Continue selling bonds, but retirees, or those approaching retirement should keep the proper allocation of bonds for their "golden years".

8) In 2016, consumers/voters will be looking for another change. The economic environment will be similar to 1988-89 where investors will be reluctant to giving up bond yields for stocks. This will be the exact reason you should begin looking for a renewed bull market that will last 10 years.

9) 2016-2026, IMO, will be the next great wealth building opportunity in the stock market. Until then, it is a traders market. Long term investors may have to get use to buying and selling volatility until a sustained uptrend presents itself.

Here are our Top 10 ETF's for the week of May 26th:

1) DBA: Powershares DB Agriculture Fund
2) EWZ: Brazil Index
3) DBE: PowerShares DB Energy
4) USO: U.S. Oil Fund
5) IYF: iShares Dow Jones US Financial Sector
6) DDM: Ultra Dow 30 Proshares ETF
7) PGJ: PS Golden Dragon China Fund
8) SSO: ProShares Ultra S&P500 Trust
9) CASH
10) CASH

Here are our Top 10 Fidelity Sector Funds for May 2009

1) FSPTX: Technology Portfolio
2) FSRBX: Banking
3) FSCGX: Industrial Equipment
4) FCYIX: Industrials
5) FSCPX: Consumer Discretionary
6) FSCSX: Computers & Software
7) FSCHX: Chemicals
8) FNARX: Natural Resources
9) FSENX: Energy
10) CASH

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

The dollar is falling, and as a result, oil prices, precious metals, and commodities are spiking. The Fed has been holding interest rates down by printing more dollars to buy our own debt which has many countries questioning the longer term solvency of the U.S. financial system.

Chart of the U.S. Dollar

Gold Chart

Commodity Chart

10 Year Treasury Chart

30 Year Treasury Yield

Recently, Russian President Medvedev has joined calls by China, Brazil, and other Nations, to prepare for the collapse of the US Dollar. As foreign nations continue to halt their purchases of U.S. debt, the result has been U.S. Treasury bonds plummeting, and Treasury yields jumping.

In September, $1-trillion of US Treasuries is going to be offered to the market. What if there are no takers? Well, that's an easy one. The Federal Reserve would be forced to print massive quantities of US-dollars to pay the principal and interest on the national debt. As a result, the dollar will continue falling, and interest rates will continue climbing.

In reality, it seems the Fed already knows what the outcome is going to be for the economy, stock market, and interest rates down the road. Last week, they tried to temper investors enthusiasm when they released the minutes from their April meeting.

The Fed basically said that they don't believe a meaningful recovery is underway, and were skeptical of the sudden stabilization that many are calling for. In short, the Fed is still projecting a deeper recession and a sluggish recovery.

Is anybody listening? To me, this is a major warning shot across the bow.

We are going to use the current rally to scale back on our current asset allocation recommendations. Since I believe the markets will trade higher into late summer, I will not drastically reduce the percentages just yet. But for now, I am reducing equity positions by 10% across the board.

Our new asset allocation are as follows;

85% Equities: (Normally 95%) Aggressive
72% Equities: (Normally 80%) Moderately Aggressive
56% Equities: (Normally 60%) Moderate
36% Equities: (Normally 40%) Moderately Conservative
18% Equities: (Normally 20%) Conservative