I missed the boat on this one...

I had the opportunity to buy FRO at $29.50 about a month ago, but I didn't pull the trigger. Now Intertanko has reported that VLCC fixtures have just set an all-time record for the month of July: 115. Here is the chart:

FRO is now at almost $39.00.

Good news for PDC

Natural gas is up to $7.81. Who knew that a heat wave would drive up natural gas? High demand for electricity to run air conditioners is depleting stores of gas. However, there is a lot more gas production since a year or two ago. It remains to be seen what will happen to prices over the winter, but I think that PDC is in a good position to take advantage of any opportunities that come along.

Also, the senate is considering allowing deep-water drilling. That would make Seadrill and the drilling co's worth a lot more. Demand for rigs could skyrocket.

more info...

Jeannine Aversa of the AP had this bit of economic info: "spending on home building was cut by 6.3 percent in the second quarter, the deepest dip in nearly six years". The home industry is roughly 20% of the economy. 20% of 6.3 is 1.3.

Boy, was my prediction wrong!

"Stocks rise as weak GDP suggests Fed pause." The economy grew at a 2.5% annual rate, which means that the quarterly growth was --0.15%. I must admit, I didn't see the economy slowing this much. Part of the reason the number was so low was the rise in inflation.
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core personal consumption expenditures, a gauge of inflation, quickened 2.9 percent in the quarter, up from a 2.1 percent pace in the previous period
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Since inflation is subtracted from GDP, it should have come in at a 3.3% rate. This means that the economy is losing the battle with inflation. I was expecting a recession in the spring of 2007, but now I think we might be there in the fall.

I think I will use this rally to increase my short positions. Yesterday, I sold off my longs in ACAS and MCGC. I will move some of that over to ALD because they have a much lower debt to equity ranking and because their increased dividend tells me that their cash flow is strong.

numbers.....

I thought maybe I should try to spell out the reason for my GDP prediction. Here's my train of thought. (If I'm wrong, I'll want to look back at this to see where I went wrong.)

GDP growth for the first quarter was at a 5.6% annual rate, so it was 1.4% for the quarter. According to Shadowstats.com inflation rose at a 6.6% annual rate and a 1.6% rate for the quarter. GDP is adjusted for inflation, but the official rate of inflation is only 3.3%. This will boost GDP numbers. Wall Street's forcasted annual rate of GDP growth of 3% would require a quarterly rate of 0.1%. Corporate earnings were very strong, in large part thanks to passing inflation along to customers (oil companies, etc.). My forecast of 4% would require quarterly growth of 0.6%.

In conclusion, I am almost tempted to raise my forecast to 5% (quarterly growth of 0.9%). As long as GDP is keeping up with inflation, the costs can be passed along safely. However, the housing numbers were even worse today. That's 20% of the economy slowing down sharply.

So, I'll stick with my forecast of 4%.

missed opportunity?

I think I missed a prime opportunity to speculate on the 2nd quarter GDP numbers being released tomorrow. Analysts expect growth to slow to a 3% annual rate. I'm betting on 4%. Of course, its hard to bet on that because the stock market won't know whether that's good or bad. Bonds will probably take a big dive, though. The dollar should get a good boost. We'll see if the guess is right tomorrow.

Update on shorting tech co's on earnings announcements: the score is pretty even so far.

Frontline dividend chart

This chart suggests that Frontline will raise their dividend. Two out of the three peaks resulted in a dividend that was about 65% of the operating income. Taking that as a safe guess, the next dividend should be $180 million, which is $2.40 per share.

We also need to think about how high current tanker rates will stay for how long. Also, if the price goes high enough, should we sell before the dividend is announced? No, we should probably wait and see if the prediction is accurate.

No respect...

ConocoPhillips reports a 65% jump in yoy quarterly earnings and shares gain 3%. Most people don't realize that we are in the eye of the storm. Inflation has come full circle. High oil prices are now raising the price of getting more oil out of the ground, but profits are still ahead of inflation. The circle will keep going at least as long as it keeps pushing itself.

moves in practice account

In my practice account, I opened three positions today. Two are short, and the third is a small speculative option position.

The first move was to short IBT, the Dow Jones US Home Construction Index. I think housing stocks will continue to get pummeled, and though down 50% since last year, the news will only get worse. It's too bad to get better any time soon. Fundamentally, the fund trades at 1.3 time book value, and I believe we may see the fund trading at book value before its over. On top of that, book value is a trailing indicator which will probably erode as well. The position was opened at $34.38

The second move was to short Station Casinos (STN). Barron's described this as a play against the Las Vegas housing market. Since it's one of the most overvalued markets, (Barrons estimated by 43%) it has the most to fall. With a debt of almost six times equity, they will also be hurt by shrinking credit. The company is down over 20% this year, but despite the warnings, the company is opening new casinos at breakneck speed. This is a recipe for disaster.

The third position was an option play on Kinetic Concepts Inc. They have a lawsuit that will probably be won, but if it's lost, the stock is worthless. My play is a statistical one. There is a 25% chance that the stock will be worth $20. So I bought Aug. 25 puts for $0.45. If the statistics are right, it should be worth $1.25. If I win my bet, it's worth $5.00. If I lose, I lose $0.45.

In the near future, I will look for tech and growth stocks to short before earnings come out over this week and next. I should have shorted Amazon, but this strengthens my belief in this strategy.

deep-water oil... (click here)

As oil prices stay high, Seadrill's rigs will become more and more valuable. With cheaply drilled oil becoming scarcer, deep-water rigs will become more essential to the global supply chain. Those who say that we aren't about to run out of oil are right, but the future supply is in deep-water, oil sands, oil shale, etc. These are all capital and technology intensive projects.

BP posted record profits, along with costs. Lord Browne, BP's CEO said, "The highest inflation is the cost of drilling rigs. Dayrates for ultra-deepwater rigs has increased to $500,000." (And BP's still making money on them!)

Middle East

Yesterday, I read a shocking transcript of an Al-Jazeera interview of Hussan Nasrallah. I can't find the link today, but he said several very interesting things. What caught my attention most was the shock Nasrallah expressed at the Arab condemnation of Hezbollah. He said he would be happy if they just remained neutral. I guess he doesn't see any one helping him except Iran and Syria. I think Bush's tough stance has given Arab leaders the courage to tell the fundamentalists what they really think of them.

ALD milestone!

"Allied Capital is the first business development company to complete an investment grade, unsecured public debt offering." -- ALD Press Release.

Seadrill spreadsheet

Here's my analysis of Seadrill.

Poten & Partners

Poten and Partners' tanker outlook.

ALD update

ALD just announced that it completed its private offering at $27.45, or market value minus 4% for underwriting. ALD is also raising its dividend 6% to $0.61 for the third quarter.

I just can't do it...

This week's Barrons showcased lots of value in large caps. But I just can't bring myself to do it. I can't risk buying anything while the market punishes anything except accelerating growth.

Mergermania is out of control. Today marked the announcement of the largest LBO in history, along with AMD's $4.2 billion buyout of ATI. It looks like mergermania is now bigger than ARM's. Stock buybacks, LBO's, and mergers will add up to over $1,600 billion. That's 13% of GDP. With this much hysteria, we should be able to spot some bad marriages and remember to short them when there's a downturn in the economy. Also, this reminds me of the short I have on IDT. Instead of paying off their debt, they are buying back stock when they have negative cash flow.

trying to get my thoughts straight...

I was pretty sure that interest rates were going to keep going up. After taking a profit on 2-yr. treasuries, I was looking for an opportunity to go short again. I thought I might get it when Bernanke testified to congress.

However, Big Ben turned into "Gentle Ben" as Abelson from Barron's put it. Ben had plenty of ammo to go after inflation, but he didn't. Instead, what caught my ear was his assertion that "the downturn in the housing market so far appears to be orderly." If Big Ben is worried about housing, he won't raise rates. This year and next, $1.7 Trillion in ARM's will readjust, taking about $22 billion out of consumer spending according to numbers from this article.

Here's a Consumer Federation report from May 2006. I've analyzed its numbers below, and they are worse. Its analysis is telling:

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interest-only mortgages are not new; they were common in the 1920s. At that time, most mortgages were interest-only loans for their entire terms (usually less than 10 years), so borrowers did not amortize the loan at all and had to refinance the loan at the end of the term. Homeowners used their money to invest in the stock market prior to the 1929 market crash rather than paying down their debt. When real estate prices collapsed during the Great Depression, interest only foreclosures spiked and lenders stopped making interest-only loans for the next seven decades.

Borrowers who are basing their mortgage decision on the initial monthly payment level could face significant payment shock as soon as the mortgage adjusts. For a median-priced existing home with a 10% down payment at the current 5.32% interest rate for 5/1 ARMs, the monthly payment would be $1,069.71. If interest rates adjusted to 7.5%, the monthly payment would rise to $1,352.98, or a nearly $300 or 26.5% increase. In the late 1980s, interest rates rose to 10.25%. If interest rates adjusted to that high level, the monthly payment on a median-priced home would rise to $1,733.96 – a 62.1% increase. A March, 2006 survey by the Los Angeles Times/Bloomberg found that one quarter (26%) of homeowners with adjustable rate mortgages were not confident that they could continue to make their mortgage payments if rates adjusted upwards in the future.

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Here are some new numbers to play around with:

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For example, if a borrower took out a 3-year hybrid ARM in January 2003 at the prevailing rate of 4.26% on an average sized existing home with a 10% down payment ($215,000 home with a $193,500 mortgage) the payments would have been $954 a month for the past three years but would rise to $1,074 in January (if rates remain about where they were in November at 5.30%).

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But rates aren't what they were last November. 5/1 ARM's are at 7.24%. That would make payments equal to $1,342. A $400 per month jump on 8.5 million ARM loans will take $41 billion out of consumer pockets. These are the same people who couldn't afford a house in the first place.

Now that I've made the case that Big Ben will not raise rates, I will speculate on what the ramifications will be.

1. An immediate and precipitous decline in the dollar. Rate increases are the only thing propping up the dollar at this time. The Yen is the currency to bet on because the rising Yuan makes Japanese goods cheaper compared to Chinese. Soros says that export economies that import everything can keep a high exchange rate almost indefinitely.

2. If the dollar declines, then what? Commodities should stay high because as long as China's buying. This and higher relative rates with other currencies will fuel inflation. However, a lower dollar will help our exports abroad. The trade deficit should narrow.

3. Current rates of inflation without higher interest rates will result in a negative real rate of interest, driving away foreign investments in the dollar. This could easily become a vicious cycle that requires government intervention.

4.What does this mean for the economy? Stagflation or recession.

5. What does this mean for stocks and bonds? Corporate earnings will suffer, which will depress the stock market. Bonds will seem safer, but lose ground to inflation. When this is realized, they will fall out of favor.

We are in a transition period, which means that markets can and will make huge directional shifts suddenly and unexpectedly. The pulse of the market needs to be taken almost daily to keep on top of it. Also, there is a great danger in becoming married to one line of reasoning without being ready to reverse course immediately if new conditions warrant it.

ALD

Another sign of ALD's safety is this bond announcement. Prime rate is 8.25%. Medium grade corporate bonds are paying 7.25%. Allied is paying 6.625%. The best grade bonds are paying 6.13%. I think Allied's in pretty good company. The only question is who would buy the bond when the stock is yielding 8.7%. The bondholder's loss is the stockholder's gain.

"Bigger than the dot-com bust"

Yahoo dropped 21.8% today. The dot-com bust only produced a 20.9% hammering.

Looked at another way, Yahoo!'s P/E was cut from 26 to 19. This is a 39% drop.

What do we learn from this? We learn what the market currently thinks of growth (and how much faith they put in the foolish-looking analyst who lowered his 1 yr. target from $42 to $36).

PDC

PDC fell 8.5% on Monday when Jeffries and Co. downgraded them from buy to hold. The analyst cited "Excess Capacity." Funny, when I bought PDC a couple of weeks ago, the natural gas spot price was $5 and change. When PDC was downgraded, the price was over $6. I think PDC will make an absolute killing this winter.

ALD

What's up with Yahoo not posting sec filings immediately?

I guess I'm spoiled because Yahoo usually has the most valuable finance site on the web. The Yahoo message board prompted me to do some research on the ALD website. Under "Investor Resources" there is a link to "sec filings". It seems that the stock dropped because of a private offering of 4,500,000 shares. Page s-3 of the sec filing of 7/19 (the original was 7/17) says:

"We estimate that our net proceeds from the sale of the 4,500,000 shares of common stock we are offering will be approximately $118.1 million"

$118.1/4.5= $26.24
sales fees are $1.098/share (4% isn't that high)
So that puts the private offering at market price.

I think this is a strong vote of confidence in ALD by Merrill Lynch, Banc of America, and Citigroup.

Also today, ALD announced a $250,000,000 note offering but did not disclose the interest rate.

Put your head in the sand!

Wow. Lots of good stuff today.

Here's the Big Ben Bernanke report, which we were all waiting for. There's no news here, nothing's changed. Does this look like a man who's made up his mind?



What the market is really happy about are the "slower" inflation numbers. I find it hysterical that while CPI was up 0.2% for June, core CPI was actually up 0.3%. The last three months, core CPI has risen at an annual rate of 3.6%.

Stick your head in the sand, Wall Street.

The truth is much worse than that. Pre-Clinton era CPI numbers, which are much closer to the truth, are double core CPI numbers. The fed funds rate is in negative territory nominally.

The way I see it, (which is, unfortunately, blurry at the moment) is that there is a fundamental contradiction between what Bernanke is saying and what is happening.

The contradiction is this. Bernanke says on the one hand that inflation is feeding off high oil prices. On the other hand, he is saying that a slowing economy might rein in inflation. The problem with this reasoning is that the second proposition contradicts the first (and, I suspect, isn't true either, but more on that later). Let me explain what I mean in more detail. Both propositions cannot be true at the same time. If oil is causing inflation (I think it's more of a mechanism to spread inflation around), then inflationary pressure is coming from outside the U.S. If that is true, then a slowing economy won't necessarily lower inflation, because it won't lower oil costs.

That much is pretty clear, but here's where my insight gets blurrier. I think inflation is mostly an effect of the falling dollar, combined with huge budget and trade deficits. Because the dollar has been falling, even China has lately been slowing down its dollar purchases (in the form of Treasury Bonds). However, China still wants to keep its favorable exchange rate with the U.S. to increase exports. So China is printing money like crazy, with the result that their economy is accelerating rapidly. Soon it will overheat. I see the rise in commodity prices as an indirect result of the strength of the economy. We buy everything from China, and China needs commodities to supply us. Through borrowing our money back from China, we've been able to buy stuff very cheaply for a number of years now. We created a vicious circle that consisted of sending a lot of IOU and a little money to China for stuff. China used the money to make more stuff, so we sent them more IOU's. But now China has lots of money and has become a major consumer in its own right. At 3%, the debt service on China's $787+ billion in Treasury Bonds is over $2 billion per month. For 1Q06, the current account deficit was $218 billion, despite record inflows of foreign capital. When record foreign investment still doesn't bring money in, there have to be too many dollars out there, hence inflation.

The circle is still spinning, but starting to wobble. The problem with it is that as dangerous as the dollar becomes, it is still viewed as safe. So, what might happen? Here are my speculations, starting with the ones I'm most confident in.

• Commodities will remain strong until there is a global recession.
• Housing will be worse than Wall Street expects.
• The vicious circle will reverse when there is a U.S. recession.
• If China's economy overheats and collapses after a U.S. recession, their economy will implode.
• A global recession, preceded by a U.S. recession, might actually strengthen the dollar.

Lets move on to housing. Here are some quotes:

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Economists generally had been looking for a June 2006 starts rate of 1.9 million.The start rate for single-family homes was 1.468 million units in June, 6.5% below the May rate of 1.59 million. June starts on housing of five or more units were at an annual rate of 306,000, down 4.1% from May's rate of 319,000.
Issuance of building permits, an indicator of future housing construction, was down in June as well, falling to a seasonally adjusted annual rate of 1.862 million, 4.3% below the revised May rate of 1.946 million and 14.9% below the June 2005 rate of 2.188 million.Starts and permits are closely watched indicators, because housing and housing-related business account for about 20% of all U.S. economic activity. --Industry Week

Mortgage Demand Falls Despite Drop in Rates -- USA Today

Single-family housing starts in the Northeast plunged 32.8%... in June. -- USA Today

The National Association of Home Builders said sentiment among home builders was the lowest since December 1991 -- USA Today

The supply of previously-owned homes for sale rose to 6.5 months in May -- Bloomberg

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I think the USA Today headline says it all. So far, from worst to best, we have homebuilders' sentiment at the worst level in 15 years, housing stocks down about 40% from their highs, total home supplies at 5.5 months, home sales down about 17%, and sale prices still up 5% year over year. This is the last car on the roller coaster. The front car is completely over the edge.

The question is will housing gather enough downhill momentum to start a vicious cycle? When house values start to drop and people with ARM's are paying 50% more for a house that is losing value (and they put nothing down for) they will cut their losses and default. This will cause banks to tighten credit and raise mortgage rates. Higher rates will convince more people to dump the house-batross around their necks. And so on, etc., etc.

It might take until the middle of next year before it's clear, but I think it will.

Is the U.S. bankrupt?

Don't expect Big Ben to address this issue. I just love it when the government pays good taxpayer money for a study, and then when they don't like it, they shove it under the rug.

Here are some highlights from the article in the British Telegraph.

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Among other things, Professor Kotlikoff of Boston University says "The US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds."

The U.S. budget deficit is not massive by European standards.

however, "The total fiscal gap could be an almost incomprehensible $65.9 trillion, according to a study by Professors Gokhale and Smetters."

Prof Kotlikoff said: "This figure is more than five times US GDP and almost twice the size of national wealth. One way to wrap one's head around $65.9trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143pc."

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May I suggest freezing Social Security, eliminating Medicare, and cutting spending by at least 143%.

Unfortunately, George Bush won't go on Fox News with this report to call for an overhaul of Social Security because then he would have to end his prescription drug handouts.

Monday, Monday

Here's my view for the week.

First, the Middle East. Israel has made it pretty clear that their objective is to clean Hezbollah out of Lebanon. Bush has given Israel a green light, and even Lebanon hinted that they might attack Hezbollah themselves. As soon as everyone gets used to the idea that it will take a while to neutralize Hezbollah, the market will forget about it and worry about something else.

Second, manufacturing production numbers came in very strong this morning (0.8% instead of 0.4% expected). There are many earnings reports this week, and anyone missing their numbers by even a penny will be slammed. (Citigroup was down 2.2%.) The market will be concerned with earnings and what Bernanke says on Wednesday in his mid-year report on the economy. Also, just before he speaks, CPI comes out.

This probably won't be a good week for the market, unless most of the earnings reports come in above expectations.

follow up

This is to follow up on the "dominoes" post of earlier this week.

The Australian Dollar gained 2.27% against the Yen this week. Not so sure on this, but there's been a downward trend in the AU since last December. I guess this strategy came to late to be anything but counterproductive.

escalation indeed...

"oooh, oooooh, there's a fight. Let's go over there and yell at them."

If that doesn't make it worse, nothing will. Every time someone spouts the meaningless cliche "stop the violence" they are escalating the situation by getting themselves involved.

Does anyone think Switzerland is adding more tension to the mix?

good news for oil tankers...

The Baku-Tbilisi-Ceyhan pipeline.

Oil.....

Oil is front page news again. Usually, I'd say something on the front page was overhyped.

Not today.

Here are a few of the things I'm considering:

• Instability is accelerating, and the only sane country in the U.N. is the U.S. Even Great Britain is cowardly running away. With all this support, the Arabs will have great hope that something will go their way. Unfortunately for the cowards of the world, they don't realize that evil men will never be happy unless they're oppressing or killing someone.
• Instability is multiplying: Iraq, Iran, Venezuela, Nigeria...
• The boom in commodities starts and ends with the economic boom in the United States. There are two components to this trend:
• Demand goes through China.
• The dollar is weak (high trade deficit and budget deficit the most likely culprits)

the seeds of war.....

have been sown for the past two years (the latest crop now blossoming in Israel and Lebanon). I see the latest attacks on Israel as a result of the West's refusal to get tough with Iran. The escalation can only continue. It's just getting started.

In world war two, the surprise attack on Pearl Harbor awakened a sleeping giant. Unfortunately, after 9/11 we've only hit the snooze and now with the latest concessions Bush seems to be making (giving Geneva Convention pow status to spies and sabateurs) it looks like we're going back to sleep.

I'm now convinced that we have not learned our lesson.

God have mercy on the Arabs if we or Israel ever play by their rules.

miscellania...

I just got a few points to make for today.

First, I saw the latest issue of the Contrarian Chronicle. Normally, I think Bill has some great points. He can tell when things are undervalued, but his timing's off. He was screaming about housing being overvalued a year and a half ago. But he's off his rocker today.

"The Fed wants to be loved. It doesn't want to be the tough cop. "

Yeeeeeaaaah. Right. What if the Fed wants to be feared? Bernanke hasn't wanted to be loved so far. To the contrary, he caused a $2 TRILLION meltdown in global stock markets and commodity markets simultaneously, and he still raised rates again last month. Tell me again that he wants to be loved.

Next point.

Everyone wants to be a contrarian today. It's like being a nonconformist. Nowadays, half the younger generation wears the nonconformist uniform: tatoos, piercings, and shirts that say "I'm a degenerate with no morals." The contrarian uniform is not as subtle: it just goes on and on about how contrarian it is.

That's why I'm not a contrarian. It's not contrarian anymore.

A man with a radical view will say something like "I start with the assumption that current prices are always wrong." -- George Soros.

Why are gasoline prices high? Because we don't make our own gas any more. Thank you liberals for not letting Big Oil build a refinery since the '70's. See Intertanko.

One last thing. Media bias. I saw this story about Fallujah today. My favorite part:

"an estimated 50,000 people out of a population of about
300,000 still have not returned 18 months after Fallujah
was destroyed."

It's official: Fallujah is recovering better than New Orleans, and the liberal AP is complaining.

investment ideas 2: dominoes.....

In Barron's Marketplace, Konrad Kuhn say "the dominoes are falling". What Konrad means is that the coming end of the yen carry trade has claimed its first two victims: Iceland and New Zealand.

Here's how the carry trade works. You borrow (sell short) yen at 100:1 leverage and pay 0% interest. Then you take the yen and buy high yield Icelandic thingamjigs or New Zealand bonds.

The Icelandic Krona and New Zealand Dollar have fallen 19% and 12% respectively since Jan. first. Pretty good at 100:1 leverage.

If the pattern continues, we need to find a first world country with a high interest rate.

When the Japan Central Bank raises rates, the carry trade will end. Borrowers will sell these currencies to buy back yen.

So where are the good rates nowadays? Australia's paying 5.75%.

investment logic 1: wave pattern

Observations:

• Oil doubled in about two years leading up to last year, and prices are extremely strong
• The price of oil has affected (impacted for those of you in public scrools) the price of corn.
• The futures market has corn priced at $2.41/bu for July and $2.935/bu for next July.

Hypothesis:

• Do cows eat corn?
• If so, the wave should continue on down the line of commodities.

Actually, cows do eat corn. But when corn gets expensive, they'll just eat something else.

Conclusion:

• good idea, but no practical application

this is the kind of article I like.....

http://articles.moneycentral.msn.com/SavingandDebt/SaveonaCar/WhyNowsTheTimeToBuyAnSUV.aspx

This is good contrarian thinking with the math to back it up. If cars were stocks, I would be buying Escalade and selling short Prius. There's a $6000 price swing between these two vehicles in the last year. If you traded your Prius for the Escalade now, you'd be getting 32,500 miles worth of free gas for your Escalade at $3.50 per gallon. Last I checked, 32,500 beats 40.

first what I say, now what I do.....

Notwithstanding the bounce I see, I still have a lot of defensive stocks and short positions.

It looks something like this:

Short: 25%

• stock 15%
• dow 10%

Long: 35%

• stock 25%
• gold etf 10%

Short 2yr. Treasury future: 40%

The long positions are mostly in high-yield dividend stocks with a couple of not too well followed commodity plays.

The short positions are all in companies losing money hand over fist or suffering criminal scandals.

This week's Barron's got me excited about Newmont Mining until I saw the p/e is over 50. Forget it.

I love to analyze stocks from the point of political correctness. For example, I keep my eyes out for an overhyped politically correct company that's losing money and short it to hedge against a downturn in the economy or the market. The greatest play on the long end was to buy the cigarette companies soon after they made their multi-billion dollar settlement with the government.

What's the most vilified thing now? Adult stem-cell research. Now that the hype has died down I believe it's time to look for companies that are bringing treatments for heart disease, bone repair, osteoporosis, disc and cartilege repair, etc. to clinical trials.

Now that everyone hates growth stocks, this is also a great growth play.

second half outlook 2006

I think the market will do fairly well for the third quarter, and slide in the fourth.

Here's what I see: The economy is stronger than everyone thinks, so earnings will be strong. Commodities will remain at or above their current strength, especially metals. The housing market will hold steady or post a small decline over last years' price levels, but the cracks in the foundation will continue to widen.

This is the third week in a row that Barron's has had bearish articles to the detriment of the bulls. My favorite is this week's title "A Bear Market Expert Sees the Bottom-in 2014." Even if that's true, I'd bet on a nice bounce, at least through the third quarter.

This being said, if the economy shows more strength than Wall Street and the Fed give it credit for (don't forget 5.6% GDP growth last quarter!!) then we should see 6% fed funds rates by year end. In other words, don't buy bonds yet.

6% will make for a sticky 2007, when the economy starts to run out of momentum. Also, look for the liberal media to run daily stories on people losing their houses to ARM raises and blame it all on George "W" Bush.

What kind of negativity or panic will that create?