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 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.

Continue reading "Dynamic Growth: July 7, 2008 Briefing" »

"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.

"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.