John Mugarian's Dynamic Growth

The bear market rally is underway, and the normal course of action is for the rally to overshoot on the upside. This being said, many market mavens have been on the airwaves in recent days, first saying the bear market is over (Abbey Joseph Cohen- Goldman Sachs), and as early as this morning (CNBC), three guests on TV were advising caution. So whose right?

Probably, both. What I mean by this is the S&P may overshoot to the upside 1100-1200 by the end of the year, but 2010 could be another train wreck.

The fiscal stimulus program will probably raise the GDP numbers in the short run. The "cash for clunkers" program has left many car dealers short of inventory, and manufacturers will eventually ramp up production to make up for the shortfall. This means some laid-off workers will be recalled, and the jobs numbers should show improvement over the next few months.

The big question remaining is what will happen after the "cash for clunkers" program has run its course. In addition, any temporary pent up demand for vehicles will diminish quickly. This leaves a huge gaping hole for 2010.

CNN, FOX and others are hinting that the economy is back on its feet- and that the rally in July-August means it's time to start investing again. I say, not so fast. The time to get aggressive in the markets was in March 09, not now.

My best guess is the positive economic period will end around the December 09-January 10 time frame. Once again, I would not put my feet on the edge of the cliff, but instead would be taking profits during the rise.

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

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) IYW: iShares DJ US Technology Sector Index Fund
9) IGF: iShares S&P Global Infrastructure Index Fund
10) CASH

Here are our Top 10 Fidelity Sector Funds for August 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

Before I get started, I would like to make some changes to the DG ETF and Fidelity Sector Fund portfolios. Hold the proceeds in cash for now.

DG ETF Portfolio

New Sells:

USO: U.S. Oil Fund@ $37.72/ Paid $33.27
PGJ: PS Golden Dragon China Fund@ $23.40/ Cost $21.31

Fidelity Sector Fund Portfolio

New Sells:

FSCHX: Chemicals- Cost $69.60
FSCPX: Consumer Discretionary- Cost $17.57

Yesterday, the Fed said it is policy statement that economic activity had improved from "slowing" to "leveling out". They also reiterated that inflation should remain "subdued" for some time.

No rate hikes are expected anytime soon, so savers will continue to suffer. The Committee also said they were gradually going to reduce their destruction of the U.S. dollar by completing their Treasury purchases by the end of October.

So, in short, the economy still sucks, it just doesn't suck as bad.

Given this great news, the S&P seems overvalued at around 16x's earnings, and as many bear market rallies do, it will probably overshoot to the upside before giving into reality.

The warning signs of a topping market are all over the place. First, the Investors’ Intelligence figures released yesterday showed that the number of bulls rose from 47.2% to 49.2% and bears falling to 21.3% from 25.8%. Corporate Insider selling in July almost hit a new high of sellers to buyers.

The VIX index is once again approaching euphoric levels while the CBOE Equity Put/Call ratio is at lowest its lowest level for the year.

This mornings economic data clearly shows the consumer is tapped out.

The Commerce Department said that retail sales fell 0.1 percent in July, versus economists expectations of a gain of 0.7 percent. Gas stations, department stores, electronics outlets and furniture stores reported declines.

Excluding cash for clunkers car sales and gasoline, retail sales fell 0.4 percent, following a 0.1 percent dip the prior month.

On the jobs front, the Labor Department said that 558,000 people filed first-time claims for jobless benefits last week, up from 554,000 the week before.

The consumer, many of whom are jobless or make enough just to make ends meet, can no longer get excessive amounts of credit to fuel their spending habits. Since the consumer is 70% of the economy, there is no way corporate profits will return to 2004-2007 levels anytime soon.

Given all of this information, how in the world can the media spin the economy favorably. Oh, I know, they have too.

Thanks to the changes of the mark-to-market accounting rules a few months ago, banks were allowed to adjust the values of their toxic assets. So, the word of the day when it comes to the markets and economy has got to be deception!

Despite the obvious deception, the stock market button pushers want investors to believe we are in a new bull market. We will play along for a little while, but clearly we have our finger on the sell button.

Last week, we made some changes to the DG ETF and Fidelity Sector Fund portfolios. We sold two ETF's and two Fidelity Select Funds. We will hold the proceeds in cash for now.

Here are the sells from last week;

DG ETF Portfolio

New Sells:

USO: U.S. Oil Fund@ $37.72/ Paid $33.27
PGJ: PS Golden Dragon China Fund@ $23.40/ Cost $21.31

Fidelity Sector Fund Portfolio

New Sells:

FSCHX: Chemicals- Cost $69.60
FSCPX: Consumer Discretionary- Cost $17.57

We have been closely monitoring the warning signs for a topping market. This being said, there are many out there.

First, the Investors’ Intelligence figures released yesterday showed that the number of bulls rose from 47.2% to 49.2% and bears falling to 21.3% from 25.8%.

Corporate Insider selling for July came close to hitting a new high of sellers to buyers.

Some market gurus are calling for a a business-led recovery, but if the consumers don't join in (70% of GDP), we may see the economy fall into a double-dip recession.

The consumer, many of whom are jobless or make enough just to make ends meet, can no longer get excessive amounts of credit to fuel their spending habits. Since the consumer is 70% of the economy, there is no way corporate profits will return to 2004-2007 levels anytime soon.

The VIX index is once again approaching euphoric levels while the CBOE Equity Put/Call ratio is at lowest its lowest level for the year.

Here are our Top 10 ETF's for the week of August 17th:

1) DBA: Powershares DB Agriculture Fund
2) IGF: iShares S&P Global Infrastructure Index Fund
3) DBE: PowerShares DB Energy
4) IYW: iShares DJ US Technology Sector Index Fund
5) IYF: iShares Dow Jones US Financial Sector
6) DDM: Ultra Dow 30 Proshares ETF
7) EWZ: Brazil Index
8) CASH
9) CASH
10) CASH

Here are our Top 10 Fidelity Sector Funds for August 2009

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

When tough economic times begin, history tells us a lot about what may happen in the future. I had to go back to the 1970's to find similarities.

Now no two economic situations are exactly alike, but I would like to point out a few things I've seen lately.

A Recent Visit to a Gold and Silver Coin Store: As an educational exercise, I took my 17 year old son to a gold and silver coin store. I was amazed at what I was told.

When I asked about gold coins (Maple Leafs, Krugerrands, etc), the store owner told me that there were no gold coins available. I said, "what?". The owner went on to say that every time they get gold coins in the store, people rush in everyday and buy them up.

Being the natural contrarian that I am, the little "run, don't walk" alarm went off in my head.

Now we can all argue that this time is different. We can all probably agree that our nation is deeply in debt, and the fiat currency that we own is basically worthless. But the real question we must have the answer too is this; is this the end? Are we absolutely convinced that the U.S. is or will be bankrupt? ; Are we absolutely convinced that the U.S. currency will one day be worthless? Apparently to those who are buying gold at $950/ oz the answer is yes!

I don't know the answer. What I do know is economic uncertainty, stock market crashes, currency debasing, inflation, and a corrupt government always creates a frenzy of interest in gold and silver.

In the 1970s, gold prices increased eightfold in just three years. In the 1980s, the price came crashing down. See chart below.

Given the evidence above, must say I am as skeptical of the doom and gloom crowd as much as I am the self promoting, overly euphoric Wall Street crowd.

Whenever I hear comments like;

"We’ve never seen this kind of demand before,” or "people are taking anything they can get,” I am reminded of... Well, the NASDAQ bubble, the Real Estate Bubble, and the current Bond Market Bubble.

I may be wrong, but if I am, let me make a bold prediction. If the U.S. dollar one day became worthless, and the citizens of our nation lost their conservative cash savings, then huge angry groups of Americans would march to Washington, build gallows, and hang every elected politician.

I can't say that I would blame them.

Town Hall Meetings and Angry Citizens

I have to admit that I have really enjoyed watching the politicians get their asses chewed by everyday citizens. Both parties have screwed us, they have given away the engine of the U.S. economy to foreigners, and we can no longer rely on the two major parties to do what is right for their citizens.

Protest Videos- looks like fun!

Congressman Tim Bishop

This being said, I think the citizens of our nation have had enough, and they are simply exercising what little rights they have left. They are fearful of their government, but have reached a boiling point where they no longer care.

Thomas Jefferson said

“When the people fear their government, there is tyranny: when the government fears the people, there is liberty.”

Jefferson also said;

"A government big enough to give you everything you want, is strong enough to take everything you have".

Clearly, the stock market is beginning to overshoot on the upside, and with many of the big Wall Street movers and shakers on vacation (Martha's Vineyard, Jersey Shores) until Labor day, it's going to be interesting to see what happens in September.

Sidenote: Isn't President Obama in Martha's Vineyard too? Interesting, isn't it?

In this brave new world of "30% of GDP can sustain the economy", I must tell you that I have serious doubts. In fact, the movie "Wall Street" (staring Michael Douglas) comes to mind as I watch the current market rally.

Here are a few quotes from the movie that still hold true today. If your wondering why you lost your fortunes in the market from the year 2000 to today, remember the quotes below. It's us against them...Don't ever forget it.

-Money itself isn't lost or made, it's simply transferred...from one perception to another, like magic.

-We make the rules, pal. The news, war, peace, famine, upheaval,the price of a paperclip. We pick that rabbit out of the hat while everybody wonders how the hell we did it. You're not naive enough to think we're living in a democracy, are you, Buddy? It's the free market, and you're part of it.

Then sometimes you have the rich guys fighting one another. Here is quote from Sir Larry Wildman as he hangs Gordon Gekko out to dry Blue Star Airlines purchase. I think the same saying goes for what is happening to the small investor in today's "New Bull Market".

Wildman: I guess I'll have to carry him a few rounds before he drops.

I believe Wall Street is carrying the small investor "a few rounds before he drops".

Here are our Top 10 ETF's for the week of August 24th:

1) DBA: Powershares DB Agriculture Fund
2) IGF: iShares S&P Global Infrastructure Index Fund
3) DBE: PowerShares DB Energy
4) IYW: iShares DJ US Technology Sector Index Fund
5) IYF: iShares Dow Jones US Financial Sector
6) DDM: Ultra Dow 30 Proshares ETF
7) EWZ: Brazil Index
8) CASH
9) CASH
10) CASH

Here are our Top 10 Fidelity Sector Funds for August 2009

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

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

Here is a list of the 5 drug makers that stand to benefit from the latest scare; the Swine Flu:

A total of $1,816,989,920 has been doled out to these companies, and the percentages they have received.

Novartis- 46%
Sanofi Pasteur- 26%
CSL (Melbourne, Australia)- 19%
Med-Immune- 6%
GlaskoSmithKline- 3%

1976 was the last swine Flu scare. In October of that year President Gerald Ford urged that every person in the U.S. be vaccinated. By December, the the National Immunization Program was halted after several deaths occurred, and some young people became crippled after being vaccinated. From October when the immunizations began, through December (when it was halted), only 22% of the population took the vaccine, leaving 78% that didn't.

After the program was halted, the Swine Flu scare never became a pandemic.

President Obama Doesn't Care

If there really is a threat of a potential pandemic, Presiednt Obama apparently doesn't care. Here's why.

In April, President Obama was in Guadalajara, Mexico, meeting with Mexican President Felipe Calderon and Canadian Prime Minister Stephen Harper. They agreed publicly that the fear surrounding the spread of this flu must not allow cross-border trade and tourism to suffer.

They made no plans to fully secure the U.S. border with Mexico, or made any effort to keep illegal aliens out of the U.S. during this outbreak.

So, in short;

Damn the People of the U.S., NAFTA Full Speed Ahead!

Obama, like Bush, Clinton, and Bush Sr, are all owned by the same master.

Here is Obama with Stephen Harper and Felipe Calderón.

And, here's Bush with Stephen Harper and Vicente Fox.

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

The temporary improvement in earnings has investors (some anyway) believing that the U.S. economy has turned the corner, and is out of recession. Remember the keyword here is, temporary.

The recent bump up in earnings is due to huge amount of monetary and fiscal stimulus thrown at the economy. This euphoric period will end as the stimulus money expires, and the remaining money to stimulate the economy will have to come from the consumer. Yeah ... right!

With the unemployment rate around 10%, I don't see how Americans without jobs, or those who are scared of losing their jobs will be convinced to spend money they don't have on things they don't need.

Unless you were are seller, this weeks market action was very dull. Most of the first team, and many of the second team, announcers on the financial channels were away on vacation this week. Oh, but this didn't stop the rookies or third teamer's from embracing the cheerleading mantra surrounding the phantom bull market.

If I were a mind reader, and could look through the eyes of the market manipulators and button pushers on Wall Street, here is what I believe they would do over the next 3-4 weeks;

I believe they will continue to feed the media a load of crap about the so-called "new bull market", pump it up, and suck in as many people as possible. Once they get investors to believe that every profit-taking opportunity is going to be met by a wave of new buying, they will have the unsuspecting investors eating right out of their hands.

The final bump up in the DJIA will bring a new surge of buying that could run the major market average above 10,000, and the S&P to the 1050-1100. Once this happens, the rug will be pulled out from under those gullible enough to believe the hype.

News You May Have Missed

Fed urges secrecy on banks in bailout programs- Reuters

FDIC List of Problem Banks Surges, Putting Reserve Fund at Risk- Bloomberg

Geithner: Auditing the Fed is a "line that we don't want to cross"- Corbett Report

On July 21 before the House Committee on Financial Services, Fed Chairman Ben Bernanke admitted he did not know who the recipients were of the $550 billion loaned to foreign financial institutions.

Here is a portion of the official transcript relating the exchange between Bernanke and Rep. Alan Grayson (D-Fla.), who is a sponsor of the “Audit the Fed” legislation (H.R. 1207).

Grayson: “What’s that [the $553 billion amount]?”

Grayson: “Half a trillion dollars, and you don’t know who got the money?”

Sooner of later, the media, and Wall Street will be on the same page as us. The current rally is not a new bull, and in the months ahead, everyone will characterize the markets recent rise as the Bear Market Rally of 2009.

This being said, I am not ruling out one more push to the upside before the dam gives way to the pressure of massive sell programs. In the months ahead, the phrase "Cash for Clunkers' will be replaced with "Cash for Trash Stocks". The trash stocks I am talking about are AIG, Fannie Mae and Freddie Mac.

The August gains of the "Good, Bad, and the Ugly" are part of one of the greatest short-squeezes stories in modern history.

Freddie Mac +287.1%
AIG +282.3%
Fannie Mae +251.7%

Even the recently DJ fired CitiGroup managed to gain +65.0% in the month of August.

The major problem in the years ahead is the massive amount of debt being piled on the U.S.. Last Tuesday, the White House said that the national debt would grow by $9 trillion over the next ten years, up from its previous forecast of $7 trillion. The nations debt will hurt the Fed's ability to stimulate the economy, and prevent it from providing any further monetary stimulus unless interest rates rise. In short, the Fed is out of bullets, and the gun is rusted and corroded.

Interest rates must rise to protect the U.S. dollar. If this happens, more holders of real estate loans will be forced into foreclosure, more banks will fail, and the economy will give way to a double-dip recession (their words, not mine).

Since I don't believe we are out of recession, the current recession will get deeper, almost to the point where the "D" word will be discussed once more.

Here are our Top 10 ETF's for the week of August 31st:

1) DBA: Powershares DB Agriculture Fund
2) IGF: iShares S&P Global Infrastructure Index Fund
3) DBE: PowerShares DB Energy
4) IYW: iShares DJ US Technology Sector Index Fund
5) IYF: iShares Dow Jones US Financial Sector
6) DDM: Ultra Dow 30 Proshares ETF
7) EWZ: Brazil Index
8) CASH
9) CASH
10) CASH

Here are our Top 10 Fidelity Sector Funds for September 2009

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