I had a slow trigger finger when considering signal changes this week and I hope the restraint will pay off. After looking over the charts and reading through a lot of research articles, I decided to rely on the Hedgefolios Timing Indicator (See ANALYZE MARKET STATISTICS) and stick with a generally pessimistic view of the market. However, as I have been hinting lately, I see some improvement in the technicals but I also see a lot of price increases that don’t look sustainable. Overall, last week’s action was rather constructive and I considered changing about 600 Down signals despite only pulling the trigger on 143. The market is looking like a house that is being rebuilt after sustaining some damage - things are coming together but still not safe enough to move back in. Regardless, the moves were pretty good but the volume was extremely unconvincing.

In light of the upcoming Fed action, I really like cash. Hedgefolios has an UP or DOWN signal on each stock I cover and those still apply. However, at times like this I would much rather be in the audience of a boxing match rather than one of the two combatants. It’s the classic “I’d rather be out, wishing I was in - than in, wishing I was out.” Good luck this week. I think it’s highly likely we will retest the S&P 500 lows from June 13th and 14th. I am not optimistic they will hold.

Mark Cuban is not afraid to say what’s on his mind or to tell it like it is and for that, he is taking a lot of criticism. From me, he gets admiration. Bluntness is a trait that I have also been accused of and without a doubt, I am guilty as charged. To many people, it seems that politically correct spin is preferred to brutal honesty. When it comes to stocks, I know which one will help you make money and avoid losing it. I also recognize which style plays well to the masses and suspect that is why we get far too much of it on financial TV. With the growing popularity of Hedgefolios, I am evaluating some offers for media appearances and have wondered whether my commentary will be received like Mark’s. I probably won’t answer a reporter’s question with a Cubanesque “You know what, that was a really stupid question” response or get bleeped for hurling the f-bomb, but you can count on blunt answers.

One important thing to remember about the public’s reaction to Cuban is that it’s much more salacious to give ink and airtime to his critics. The press is so hypocritical of Cuban it’s almost funny. He just got fined for swearing at a reporter and I wonder, why are so many reporters wanting to ask him so many questions? If the language and behavior was so offensive, maybe it should not have been publicized so we can save the masses from being permanently damaged. Maybe they should have played the interview with the Heat owner instead of giving airtime to Mark. Hmmm? I doubt the Heat owner was being hounded for interviews and who would really care what he says anyway. So - no fines for other owners in the NBA. Good for them - I guess it helps to stay in the luxury boxes, wear fancy suits (not blue jeans and team jerseys) and generally, stay out of the limelight. By the way, other than Mark Cuban and the owner of your favorite team, how many NBA team owners can you name?

You may not like Mark because you don’t like what he stands for. But at least you know what he stands for and that’s good. He hates to lose, he has fun, he supports his employees, he is a patriot -(check out fallenpatriotfund.org and have you ever noticed the hands over the hearts of Mavericks during the national anthem?), he donates to charity, etc. etc. Oh yeah, I forgot to mention that he has some bad points too but don’t we all?

Above all else, Cuban is a winner and his good AND bad personality characteristics make him that way. The Mavericks had a regular season franchise record of 608 wins and 1440 losses before he bought the team (42% winning.) Their regular season record since his purchase is 371 wins and 171 losses (68% winning.) Enough said. For the past 10 years, the NBA was losing fans year after year and for some reason, this season the finals had a 12% ratings improvement. I believe Cuban had something to do with it and I KNOW he had a lot to do with my desire to watch for the first time in years.

Now Mark is pushing a new site called sharesleuth.com and guess what? The press, investors, regulators, pundits, and some nervous execs are being a bit critical. His financing of sharesleuth is going to try to expose unethical and illegal activity in stocks that you invest in. He’s trying to do something good for investors and take a new approach to solve a problem that despite all other efforts, is still around. His sole mistake in this new venture is blatant honesty that he intends to trade on what sharesleuth discovers. I laughed when I heard a critic suggest this would be akin to insider trading. I think that would make him the first person accused of publicly preannouncing that he is going to trade ethically about unethical behavior exposed by ethical methods. Doesn’t sound like a crime to me.

There are times during all the chart watching that I do when I see trading patterns that look like someone is accumulating shares in a way that might suggest an acquisition is on the way. Usually it turns out that I am wrong and nothing ever materializes. It’s a fun pursuit but not worth speculating about. As I have previously written, betting on merger and acquisition activity is not something that I recommend. And as you can see from the current signals in Hedgefolios (DOWN on APC, KMG, WGR and 80% of the sector), I was caught offguard by this move.

If nothing else, this is proof that I have no inside info here. Then again, if I had magically changed all the signals to UP last week, that would not be proof of inside info. Regardless, I have no such information. And since I am on that topic, I doubt that Pequot had any inside info when they placed trades on GE and Heller. I am confident that a thorough investigation will get all the facts, but based upon the limited data that is out so far, their trading activities seem inconsistent with prior knowledge of a transaction. Being long and short an M&A pair is great but it is not evidence of inside info. For experts like Pequot who are long and short just about everything on any given day, there are many fundamental and technical reasons why they would have placed those trades. Regarding the allegation that John Mack’s friendship with Pequot management is evidence of trading on inside information - that is scary. If it is now illegal to have friends in business, most of us are guilty.

Today, we are once again heading down this path of bidding up an entire sector based upon one M&A transaction (APC / KMG / WGR) and then hearing endless analyst commentaries on who is a likely target for future deals. I agree that the energy sector selloff has resulted in several underpricings of stocks relative to asset values and the huge premiums of today’s deals support that theory. However, I am amazed that the majority of investors were selling these stocks since the beginning of May and all the way through yesterday. This must be one of the great exceptions to the Efficient Market Hypothesis because the market (and me) were mostly negative about this sector until one market participant (APC) decided to tell all the rest of us that our fundamental and technical analysis was so wrong. Unless more deals get announced to validate this speculative effort, I expect yesterday’s outlook and pricing will come back into play.

As a final note of caution, if you have a business friend that recommends you buy one of the names that are being speculated as the next great energy sector acquisition target, you might be investigated for inside information!!

A few of you have asked why I don’t write a post every day to give my thoughts on why the market is going one direction or another. At some point in their lives, most people have been told - “If you don’t have anything nice to say, don’t say anything at all.” I keep trying to come up with something worth saying about the market, but I am at a loss for words. I don’t have anything really bad to say about it, but I am not bursting with enthusiasm either. So I just listen to the commentary of people that seem to have an endless supply of words and try to find some wisdom in it all. I know I should write something every day to try and keep up with the Joneses but when you don’t see a post from me for a few days, just assume I am watching and trying to figure out what is going on. Right now, the best I can do is write about why I am not writing.

The report of North Korea’s fueling / launch preparation of its long range missile is the most serious threat to the markets, at least in my opinion. While North Korea denies that it is readying a launch, the UN members are apparently meeting to figure out what to do about the actions that North Korea is “not taking.” The rhetoric is ramping up and Secretary Rice’s comments that the US would consider a test to be a “provocative act” suggests to me that until this is resolved, the global markets are going to be held hostage. The only solution I see that doesn’t make things worse involves China and excludes the United States. The markets actually responded well the last time we committed an act of war, but I don’t think that will be the case if the US takes out the North Korean missile. Let’s hope this is handled quickly and correctly.

There’s a lot of happy feelings toward ethanol and a renewed sense of anger towards big oil over high gas prices - hopefully not caused by huffing the respective fumes. I guess it must be fear over the summer driving and hurricane seasons, but whatever the cause, I think both sentiments are exaggerated. Big oil isn’t as bad as it is made out to be and conversely, ethanol isn’t as great as people like to believe. The average U.S. gasoline prices rose 34% over the past year and while that’s not going to bring a smile to anyone, I am curious where is the anger about ethanol prices? They have gone up over 160% over the same time period and the pace is accelerating. Are the politicians going to call for an investigation into ethanol price gouging? What about a windfall profits tax on ethanol companies? For those people that complained about favorable tax breaks for big oil, how do you feel about the $0.51 per gallon subsidy for ethanol producers? When MTBE was thrown out for its effects on health and environment, it traded for about about $1.99 per gallon. Now we have ethanol taking its place at almost twice that price. Is someone taking advantage of a government mandated monopoly?

I understand the desire to reduce our dependence on foreign oil and to protect our environment, but I thought the main motivation and source of the anger was the price at the pump. Ethanol is getting more than a free pass despite that it is increasing the cost of filling our tanks - not to mention that it reduces our mpg(15 percent to 25 percent less engine performance than gasoline).

To lower prices on ethanol, we need more production capacity and lower input costs. Congress got in the game by passing the Energy Policy Act of 2005, which expects us to use 7.5 billion gallons of renewable fuel (like ethanol) in America’s fuel supply by 2012 — compared to 4 billion gallons used in 2005. 43 new ethanol plants opened last year and combined with this year’s new construction, supply will likely exceed 8 billion gallons by the end of 2008, well ahead of the government’s schedule. As for lowering input costs, corn prices are skyrocketing and unless we can convert all the current US farmland to solely corn and guarantee perfect growing conditions, I expect that will continue. Switching away from corn to other feedstocks will take time and will face similar issues. In summary, future ethanol prices will be extremely tough to predict and if we switch to the panacea of being like Brazil, we will have to suffer through a tremendous amount of commodity volatility (just substitute oil for corn, sugar, and weather factors.)

All of this has me concerned about the valuations of ethanol companies. Currently, PEIX is trading at 5 times sales and the newest entry, VSE is trading at 11 times sales. I’d like to discuss PEs but they are either nonexistent or not worth quoting. What does a 500 or 1,000 PE mean anyway? Like most alternative energy stocks, these companies seem like nothing other than momentum-based plays that trade purely on technicals. To buy them, you apparently have to ignore fundamental disciplines and use huge growth assumptions over a very long time period. Sounds like 1999 to me. These companies are debt heavy and to achieve growth, they have to build plants based upon ridiculously high ethanol prices for years into the future. I don’t think that’s realistic and expect that a dose of reality will hit. Besides, if ethanol companies are going to solely be used as a subsitute for big oil companies, then the valuation multiples should apply. After all, if people are so angry with XOM, COP, CVX at 10 times earnings and 1 times sales, sooner or later they are going to be angry with ethanol companies.

It’s past midnight and I am watching Bloomberg’s coverage of the Asian markets which are doing quite well by the way (Nikkei is up 3% as I write this). They just had an analyst/technician on who said that the market is looking really good on a technical basis. That’s his perspective and I respect his opinion or at least his right to have an opinion. However, saying that the market as a whole could go from being really bad two days ago to really good now is tough for me to accept. Maybe the difference comes from the contrast in my methods and the approach of many analysts who opine on the market. Typically, they are looking at technical indicators of a singular market composite or index such as charting the Dow or the S&P 500. I do that too, but it’s a minor component of my analysis. When I discuss the strength or weakness of the market, it is based upon a composite of all the technicals on each of the 3,000+ stocks I cover. To me, the market isn’t a singular picture - it’s a composite image of 3,000 small dots. Right now, those dots are mostly weak and until that changes, I won’t be saying the market is looking really good on a technical basis.

It’s been said that we see what we want to see. Some of you are probably familiar with the Young Girl - Old Woman perceptual illusion where your brain alternates between seeing a beautiful young girl or an ugly old hag. The market is like this image right now and it’s critical that your focus is 20/20 without being biased by what you want to see. After the past two days of substantial upward moves in the indices, I can understand the desire to visualize the pretty market. After all, it feels much better than the reality we have been witnessing the past 5 weeks. I was actually becoming more optimistic over the past week and saw glimpses of the pretty chick myself. I was so motivated to try to get behind this rally that I decided to look over the charts to confirm what I was expecting - a significant improvement in the technicals.

One of the great things about HedgeFolios for me is that I don’t “want to see” bullish or bearish views of stocks, sectors or the market. I just focus in on what I am seeing and try to report it, not predict it. After looking at all the charts, I wasn’t impressed and I still see a lot more of the “old woman” than I had expected. Maybe tomorrow’s action will change the picture but I am very skeptical of this rally.

The Hedgefolios Timing Indicator found in the ANALYZE - MARKET STATISTICS section is worth a look. Given that I designed it, I am biased and think you should look at it every week - but please humor me and do it today. The HF Bearish (Red) line is above .5000 and the HF Bullish (Green) line is approaching .1000. In the past, these levels have indicated a slowdown to the current trends. This is not the same as a reversal of a trend, but more representative of a point where bullish and bearish moves start to run out of steam. This is not the only reason, but a signficant factor in the more positive (less negative) tones to my posts over the past few days. I won’t feel optimistic about a true bottom until the HF Bearish (Red) line starts to level off, heads lower and finally crosses over the HF Bullish (Green) line. It takes time to do that.

Yesterday I asked for a bad CPI that didn’t have huge selling as a result. It’s nice to get what you ask for every once in a while. I’d like to see some follow through tomorrow and Friday before I am willing to comment much more, but I am not going to downplay today’s action. Take small wins when you can get them.