THE WORD,"INFLATION"

This week, the word INFLATION is going to be in the news. Investors should realize that inflation is a lagging economic indicator. The price increases in oil prices and commodities,that happened last year, have been showing up in government inflation numbers this year. It is very important for investors to realize that inflation is being well contained by the central bankers of the world. A sharp turn has been made in commodity prices. The evidence showed up first in the stock markets of the Middle East, Dubai and Saudi markets are down about 50%. Now that the move has taken hold, it is showing up in other emerging international stock funds, in the price of gold, oil and other commodities and in the "flight to quality" moves of the "safe havens".

The last few days of June and the first few days of July are going to be interesting. The FOMC meeting and the deadline for the Iran deal fall together. Just before the congress goes home for the Fourth of July Holiday. From then until November, a lot of campaigning is about all the congress will do. Pension reform, immigration reform and other bills are pending. One can never count on congress meeting a deadline but the house-senate leadership says votes will be taken before the recess.

After, the last of the "bad inflation numbers" are reported this month, there should be good news between now and the election. The 4 year presidential cycle suggest that stocks will sell off before the election. The market likes a dead locked congress. It is interesting that the current congress is dead locked because of disputes among the Republican majority. Some market forecasters fear the take over of the house by the Democrats. I think the Republicans, with the help of lower oil prices and progress in Iran/Iraq, will pull out a rabbit and retain control. What does all this have to do with investing?

The point is that in a period of negative sentiment, fear of every possible problem is in the news. These are the times to buy, buy and buy some more. The negative sentiment abounds and includes a very low popularity rating for the President and the Congress. However, the market traditionally does very well when the popularity ratings improve to 35% and continues to do well until it reaches 50 to 55%. I am confident that gains will be made by the President and the Congress between now and the election. Therefore, I discount the four year cycle. If I am wrong, valuation should keep the market from falling much and the big rally will start after the election. In any event, I want to be fully invested when the rally starts. The next move is going to be LARGE. I hope you are fully invested when the BULL stampedes. Send me a note if you want to talk about it, better yet join our group

THE STATE OF INTERNATIONAL STOCK

Friday, I received an interesting email from John Mauldin. John is the author of Bullseye Investing and Just One Thing he does a excellent job of pulling together the thoughts of professional money managers.

Friday, Mauldin included comments about the state of the worlds many stock markets. he put together a list of 64 markets and not a single one was sitting on new highs. The worst of the worst were Dubai and Saudi Arabia, down 58.5% and 43.3% respectively. The US market as measured by the Dow Jones Industrial Average is only down 6.4%.

For a couple of months, I have encouraged you to sell international stock mutual funds, including any you might own in your IRA's or 401-K's. These markets have fallen so hard that various advisors, including BCA Research and Ned Davis Research suggest that there might be a bounce ahead.

I have said it before and I will say it again, when a rotation comes, you should buy relative strength. In other words, the US market by being down only 6.4% is showing a lot of strength. Money that is scrambling to get out of international funds is flowing to the relative safety of the US markets. My Dad served 6 years in the Navy during WWII. He was fond of saying that it takes time to turn around a battleship and once it turns it will likely go a long way before it turns again. I would not play the bounce.

Also note the huge decline in the stock markets of oil producing countries. The markets are forecasting a decline in oil prices. The "bounce" ahead should be good news for your account. I hope you have fully adjusted your asset allocation to reflect the turn in the business cycle. Please write or call (336-778-0543) if you want to discuss actions you can take that will make money for you over the next few years.

Some of the folks on our list have not opened accounts. I invite you join me in making plans to buy Myrtle Beach Real Estate at depressed prices. If you know of someone who might be interested, forward this email to them. The list will occasionally be pruned of those who have not "shown us the money".

MARKET SENTIMENT

We welcome two new investors. Both of these investors recently spent a few nights at Kingston Plantation, Myrtle Beach. It is easy to recruit new members. after they spend a few free nights at the beach. The good news is that membership has great value even if you never go to Myrtle Beach.

Ned Davis Research.

Ned Davis offers high powered research at www.ndr.com. It is expensive stuff ($25,000 per year for the full version and $4,800 per year for the abridged version) but all prices are relative.

On June 7, 2006 he posted an Institutional Hotline report on "Sentiment at Fidelity". I am not allowed to send out copies but I can share some of the thoughts presented.

Fidelity operates 41 sector funds. The Ned Davis report is that an unusually large amount of money has been put into energy and energy related funds. A large amount has also been invested in Gold funds. At the same time, growth funds are sitting at record low relative ownership!

Sometimes it is hard to know when to run with a stampede and when to be a "contrarian". Once a bottom is made and momentum takes over, one should never stand in the way. Stocks can run a long way past fair valuation and they can drop a long way below fair valuation. One should remember that the public is always wrong at the "extremes".

Over that the SentimentTrader web site, Jeff's focus is on "smart" investors and "dumb" investors. Boy have his numbers recently changed. Suddenly, smart investors are very confident and dumb investors are scared. About a month ago, the numbers were inverted. As many of you know, I prefer to be in the market at almost all times. I may switch from being very heavy in stocks to very heavy in bonds but I seldom hold a lot of cash. The long term evidence is that those who ride the "bucking bronco" all the time, generally do better than those who try to jump in and out of the market. Indeed, I have seen individuals hold back from investing when stocks are low and then jump in time and again near a market top.

Mark Hulbert runs a service that tracks the results of investment advisors. I have read his work for many years and time and time again, he has shown that it is a mistake to try to time the market. Friday, Gary Shilling was a guest on Kudlow and Co. Shilling projects that the US will be in a recession by year end. The fact that Shilling's opinion is far from the "blue chip" consensus opinion does not make it wrong. Indeed, John Maynard Keynes accurately stated that in questions of Economics, the majority is always wrong.

The majority believe that energy is the place to invest; wrong. The White House Economic Forecast which is consistent with the "blue chip consensus" follows:

2006 Real GNP 3.6% Inflation rate 2.9% Unemployment 4.7%
2007 Real GNP 2.9% Inflation rate 2.3% Unemployment 4.8%

Since the majority is wrong, what is the right answer? My forecast is between that of Gary Shilling and the majority. I believe GNP is going to slow considerably over the next few months (we will soon find out that it has already slowed since last quarter). However, it is a long way from 2.9% GNP to negative GNP. For just one quarter, we might see real GNP of 1% or so. Big housing companies have already seen 30% declines. Big cars, trucks and SUV's are in a sales slump. The US economy is not going to show strong growth with housing and autos in the tank. My guesstimates follow:


2006 Real GNP 3.0% Inflation rate 2.4% Unemployment 4.9%
2007 Real GNP 3.5% Inflation rate 1.8% Unemployment 4.7%

The above guesstimates hide the idea that the slowdown will be sharp and short. The key question for investors is what will be the lowest quarterly GNP number. Should GNP drop to 1% and should inflation rates respond, long bonds would see a huge market rally. All projections go out the window if the Iran/Iraq situation were to improve dramatically. The resulting decline in oil would boost GNP and lower inflation at the same time! The above projection also hides the boom I see by the second half of 2007. If GNP gets knocked down to 1% in 2006, it will have to make impressive progress in 2007 to reach an average of 3.5%.

The numbers from Ned Davis suggest growth stocks are out of favor and ready to take off. The projections for the economy suggest that one should avoid growth stocks and hunker down for the long pull. The other way that the majority could be wrong would be if a deal is made with Iran soon. The real GNP could jump to well above projected rates.

Are we all confused now? Like I said, I don't believe in trying to play the short term moves. I know the public is avoiding growth stocks like the plague and is piling onto energy and other value style stocks. My stock of the week web site has enjoyed great performance by buying good value. We are staying fully invested. In our largest accounts we have purchased T-Bonds on margin but other wise we are fully loaded in big names.

Welcome again to the new members. Those members who have not been to Myrtle should invite their golfing buddies and take a trip. I hope you will all remember to share this information with your friends, family and associates. If you have questions, let's talk

FULL SPEED AHEAD

June 9, several other major airlines matched fare increases and a new round of increases were started by AMR and NWAC on international flights.

Folks, airline fares are going up by more than the increase in fuel costs. Five to ten dollars per seat is a lot of money when you multiply hundreds of seats times thousands of planes times two to four flights per day times 365 days per year. Debt is being paid down. Balance sheets are being restored to health. A couple of days ago, Fitch upgraded AMR debt. AMR raised 400 million by selling more stock. I hope CAL does not issue more stock. Cash flows are improving rapidly. Soon, airlines will find that they can refinance debt at lower rates; further lowering costs and improving cash flow more.

The BIG BOOM in traffic growth is now about two years old. Last June, CAL set a record load factor. The load factor is not likely to go up much year over year this year because all the planes were full last year. However, customers are now resigned to fare increases. The airlines are staggering $5 to $10 rate increases in different markets every few weeks. They check to see that planes are still flying full and then hit the next market.

Many of you have read this story from me more than once but many of you are still skeptical. A lot of money flowed into accounts when CAL hit $30 a couple of weeks back but now with the price at $25 little new money is arriving. It is hard to invest when prices are down, human nature; the smart investor moves in aggressively when stocks are down.

I am afraid CAL is going to get a take over offer before the stock hits $35. If it does, the company will go out at $45 or so. If it can stay independent for the rest of the year, I believe it will trade much higher.

Now that the terrorist have been infiltrated, it is possible that geo-political progress will move more quickly. If the market gets a sniff that a deal is done with Iran, all bets are off. Oil could come down $25 a barrel in a few weeks and legacy airlines could double.

STRONG MARKET AHEAD

Two more sentiment indicators have given buy signals; the ratio of AAII Bulls to Bears and the SPY Liquidity indicator (thanks for the info from Hays Advisory and the SentimentTrader). It is time to load the boat full of stocks. Short term you may lose but history shows the market should be up strong over the next 9 months to a year. The bond market "highway patrol" has just raised the speed limit! On May 13, the thirty year bond traded at 5.33%. Today it is trading at 5.03%. I understand that .3% does not sound like much but add in the decline in stocks in recent weeks and stock to bond relative value is climbing. At 5.3%, the "fair" P/E ratio for the S&P 500 is 18.8%. At 5.03% the fair value is 19.8%. The projected earnings for this year puts the S&P P/E at 13.9%. Divide 19.8% by 13.9% and you get 1.42 . The stock market is currently undervalued by 42%!!

If you have money to add to your account, you should do so as soon as you can and keep on adding. You can also be a friend by telling a friend that the market is cheap. Warn your friend not to buy the "old" market leaders. A rotation is well underway. Some of the stocks that have not done much in the past five years are going to be market leaders over the next five years! Email me, I would be happy to explain the current important market situation .

SIMPLE QUESTIONS: SIMPLE ANSWERS

In what ways does the death of the terrorist leader in Iraq help the prospects for international air travel?

Does it marginally lower the perceived risk of international travelers? Does it marginally lower the risk premium built into the price of oil? Does it potentially hasten the resumption of oil exploration and development in oil rich Iraq? Does it embolden the Iraq government or demoralize other terrorist?

Answer to all: Buy AMR and CAL!

Last week, CAL ordered 34 new Boeing planes. The 737's will be delivered in 2008 and the 787's will be delivered in 2009. CAL could use the planes now to help fill burgeoning demand. By 2008, these planes will be packed like sardines. However, CAL has won award after award for providing the best flying experience for the business traveler. The company is doing a great job in a difficult situation. No other industry has been put through the ringer as much as the airline industry. It will probably always be a highly cyclical business. The smart investor will ride the good times and there has never been a time of higher relative demand.

DING DONG: THE WICKED WITCHED IS DEAD

The life of Abu Musab Al-Zarqawi came to an abrupt end today. Good news for those who want to see an end to the killing of innocent civilians. When the Prime Minister of Iraq announced the news he also announced the appointment of the ministers of defense, interior and national security. Iraq is making progress toward the day when the local government can fully take over.

IMPORTANT NOTICE: The other Wicked Witch (inflation) is dying and investors should act now to make serious money.

The current market rotation is consistent with the death of inflation and those who position the bulk of their portfolio correctly will make a lot of money as the rotation progresses.

When it comes time to rotate out of one area and into another, the small investor has a huge advantage over institutional investors including high fee mutual funds. The big guys all try to get out the door at the same time! Who can they sell to if all are trying to get out?

A lot of bad information is distributed as the big institutions try to talk individual investors to buy what they are selling. The prices of the old hot groups get marked down but it is a mistake to buy what is falling hard during these times. One of the easy ways to get a read on the situation is to look at and buy relative strength. Yesterday, oil service stocks were down 4.77% in one day! The same day big pharma stocks were up .43% and airlines were up .46%. If oil service stocks had been even and big pharma had been up 5.2% pharma investors would be estatic. Being up .43% is hard to get excited about but strength during a rotation shows what the "big boys" are buying.

It is easy to dismiss the whole move as nothing but trading consistent with the decline in oil. However, it is much more than just oil. Headline inflation leads core inflation by 7 months and the correlation coefficient is .83% (info courtesy of Hayes Advisory). Seven months ago was peak momentum for headline inflation. For the past seven months, headline inflation has been in retreat. Next week, the numbers should show that core inflation has peaked. The numbers will be down-hill for several months thereafter. Look at what is happening to the price of gold! Look at what is happening to emerging nation stock funds! Even though I have warned readers time and again, I know some of you still have international small cap funds in your IRA's and 401-K's, IF YOU DO, SELL THEM NOW!

A plot of Exxon Mobile for the past 2 months shows that Exxon Mobileis down about 5.75%. During the same two months, GSK is up 8%. Those who are piling onto energy "because the price of gas is going to $4" are making a big mistake. The rumour is out that oil tankers are leaving the oil producing countries without knowing for sure who can take the oil. World wide, oil in storage is at record levels! Yesterday, the US numbers were incredible. Refinery production went up but capacity utilization went down! We have more production coming back on line than what we can use in the short term. Gasoline inventories are being misstated to fool the innocent. Last year, Gasoline in storage included the additives but this year, because the ethanol is mixed late in the cycle, it is not being counted as part of the gasoline supply. Adding the additives in means that gas in storage has gone up year over year. The law of supply and demand says that when supplies go up and demand goes down the price has to go down!

Another major discovery of oil was made in India this week. The funny thing is the way the news was reported. Much was made about the fact that it will take about 2 years to build the facilities to pump and transport the oil. What is news about that? Whenever a major field is found, it takes time to build the facilities. The big find by Chevron made a few months ago will come on faster than usual because it is close to infrastructure nearby. The bottom line is that more and more production is due to come on line because the industry has been drilling like crazy for the past couple of years. Why not? At $70 per barrel, there are huge profits to be made.

Market mavens try to explain the recent decline in the market as a "flight to quality"; treasury bond rates are in decline. The idea being that big money is hunkering down to survive the coming recession. My guesstimated date for the next recession was revised yesterday from 2009-2011 to 2011 to 2013. I project a much slower GNP this quarter and next but we have a lot of room for a slow down without having a recession. After the slow down, there will be time and room for another good economic run before capacity restraints hit again.

Last quarter the overall economy was on fire. Real GNP was about 5%. Adding on inflation of more than 2% and we get a nominal GNP of better than 7%!! No wonder gold was going up in price; nominal GNP was more than 2% higher than the long bond rate!

The slow down in GNP will allow the pressure to come off commodity prices and interest rates. An ideal environment is developing for technology stocks. Businesses have hired all the employable workers there are in the US. For the rest of the business cycle, businesses must invest in technology if they want to expand.

No doubt the economy was "too hot". The governments of the world have been working together to cool things off. Many a central bank has increased short rates (the European Central Bank is projected to raise rates again today). India and China have done their part recently by raising the lid on fuel prices to billions of citizens. These billions of consumers have been somewhat sheltered from the pain of higher oil prices. The combination of higher oil and higher interest throws a lot of cold water on the world economy.

Again, the US economy can experience a significant slow-down without a recession. The talking heads have recently brought up the word stagflation; what a joke! Even at this intermediate term peak, inflation is low and productivity is high. America is producing more and more goods with less and less labor. The wealth effect is still a very strong force and Americans today are more wealthy than ever before. Again, the talking heads weigh-in with comments about how the consumer can no longer use his house as an ATM machine. The rate of gain in house prices has cooled off to a normal pace. In "the old days" consumers would have been tickled to death if the value of their home went up 4% last year. Twelve percent gains were more fun but the big gains were in hot markets and were obviously unsustainable.

THE BOTTOM LINE IS: BUY THE BULL! STOCKS ARE THE BEST VALUE IN TOWN! SELL GOLD AND OTHER HARD ASSETS AND STOCKS THAT CORRELATE HIGHLY SUCH AS EMERGING MARKETS. BUY THE BIG CAPS AND TECHNOLOGY!

Many thanks for the great referral yesterday. The new member is excited about the plan. He visited Kingston Plantation last week and enjoyed the use of the beach front condo. He hopes to get make great buys on Myrtle Beach Real Estate when the time comes.

Several of you have the resources but not the will to add to your account right now. I understand that it is hard to buy when the market is down but common sense tells you that the time to buy is when the market is down. Use your common sense and add to the market now! Don't put so much money into 401-K mutual funds. The tax benefits do not make up for the under-performance. A 1% clip in performance compounded over the life time of a 401-K account gets to be a huge number. Besides, tax benefits are available in taxable accounts and in real estate investments. The flexibility that the individual investor has is a major advantage over high fee mutual fund accounts. Happy Thursday to all!