Any day that Exxon Mobil reports earnings inevitably turns into a bad day for capitalism. Or if not a bad day for capitalism, maybe a good day for the growing socialist tone that seems to be infecting our country. $10.4 Billion in profit this quarter - how terrible. It used to be said, “What’s good for General Motors is good for America.” Did they sell their cars at a profit??? I think things have changed and it’s more likely to hear the refrain, “What’s good for Exxon is bad for America.” Boohoo!!

The last time I checked, companies were in business to pursue profits. However, when it comes to the major oil companies, profit becomes painted as an uncaring and unAmerican ideal. I knew it was only a matter of time before Senator Dorgan got some airtime to complain, but that’s to be expected. What really bugs me is the repetitive interview with the “guy on the street” or better yet, the “guy at the gas pump.” Hearing an American say that oil company profits “make me sick ” and “how much do they need anyway?” is a sign of the times. And then come the inevitable appeals for mercy on how bad we “gas guzzlers” have it. Forget about the obligation to shareholders, these whiners have a great need to talk about oil companies’ obligations to sell gas at breakeven.

Whenever I hear these comments I wonder …… “What company do these people work for?” I am hoping they are not hypocrites and that their company tries to optimize performance for a $1 quarterly profit so that someone in this country can actually pay income taxes (even though it would only be about 25 cents.) If they actually work for profit-seeking companies, I really do hope they get a raise equivalent to their incremental cost of annual gasoline consumption. Just for fun - what would that annual raise be? According to the US EPA, the average American whiner drives 11,700 miles per year in a car that averages 21 mpg, that’s 557 gallons per year. I suggest that most Americans would not complain about $2 per gallon gas anymore. So, if the incremental “gouging” is $1 per gallon ($3 (current) minus $2 (desired) - that means that I am hoping anyone that complains about excess oil profits would get a raise of $557 per year. Any raise higher than that would really cause me to whine about their excess profits and that would also be a bad day for capitalism.

“One day in a row” - that’s an obviously stupid phrase that I unfortunately hear too often about the stock market. It’s often said that “one day does not make a trend” and since we finally managed to get two up days in a row, I think it’s worth saying that two days doesn’t cut it either. I have liked the action for the past 3 weeks but that’s another story. As I have written in the past few posts, I am becoming less pessimistic and yet, I hesitated to change many signals to UP this weekend. The Hedgefolios Timing Indicator is becoming more positive and that’s good, but there’s a lot of work that still needs to be done. Earnings season and guidance has been good ( not great,) and I am still optimistic that the Israel / Hezbollah conflict can end with a positive result for the markets (and the affected citizens.) However, I am reluctant to get entirely behind this move. Maybe if we get “one week in a row”, followed by another week in a row - just maybe I’ll be less skeptical.

The other day I decided to look at the Israeli-based stocks covered by HedgeFolios to see whether there was any info in the charts. I determined that of the 6 stocks that I could identify (ALDN, ALVR, AUDC, CHKP, ELOS, TEVA) there was almost no measurable impact from the war with Hezbollah (even though the stocks declined.) So - I decided to not comment on it since it appeared to be a non-issue. Then I saw Maria and numerous other members of the financial media (tv and print) reporting that Israeli stocks were being whacked because of the conflict. HMMMM!?! I decided to check again and found the same thing as before.

At this point, I have to comment. I like Maria, but it bugs me when financial media exaggerates a hot story to make it even more newsworthy than it already is. If you pull up these stocks, I think you will find that the declines STARTED in January, February and May, not two weeks ago. While I agree that most of these have declined since the attacks began, I think it’s tough to say that the downward moves were solely due to the conflict. I am confident it hasn’t helped, but given that most of these stocks were sliding for several months, I cannot assign the blame to the past two weeks of military action. By the way, my performance with the signals on these 6 stocks sucks. I wish I was DOWN on all of them for the past 6 months, but not the past 6 days.

I hope you are skeptical of market commentary and do your own homework. And that applies to my posts as well. It’s way too easy to say two things happen at the same time and suggest that means that they are a highly correlated cause and effect. Sometimes, it just isn’t true. In this case and despite the media reports to the contrary, I am not seeing a direct relationship that says these stocks are only going down because of the fighting. Something else was the cause months ago. The Israeli markets for these companies is a miniscule component of their global revenues and earnings. Unless you believe that this conflict will materially impact their production or that Iran will get their wish and Israel will disappear, I doubt that it will impact their fundamentals.

All this being said, I expect that these stocks will move higher if there is a ceasefire and realistic plans for a longer-term solution. However, I expect that many stocks (not just the Israeli ones) will get a boost if this happens. At that point, I expect to hear that the stocks are healed, but I will still be searching for the real reason that the Israeli stocks will go UP or DOWN,

If the sole commentary you can come up with to explain why stocks are up today is that the market is “oversold,” please shut up. Enough already with this vague reference to a highly conceptual phenomenon that is rarely, if ever, a reason for stocks to head higher. Except for a few wishful short sellers, I rarely hear an excessive amount of the term “overbought.” And that’s a good thing for me because I would also find that to be an overly simplistic phrase that would have nothing to do with initiating a market reversal.

“Oversold” is one of those terms that if you repeat it long enough it might actually mean something and maybe that’s a good strategy for the bulls. I know many investors and especially those that watch too much CNBC have come to accept this as a ready answer to the never-ending daily need to identify the sole catalyst for an entire market to move in one direction or the other. Besides, “oversold” and “overbought” is technical analysis jargon. As I have said before, technical analysis is criticized by the majority of investors for most trading days and is only palatable at the points where bulls are desperate for any answer to the market woes. I know it feels good to find an answer when things are tough but it’s usually not the right answer. And if you really don’t believe in technical analysis, please don’t believe in it on your worst days.

I agree that selling in stocks can get overdone, but as we all know, they can get even more oversold. Here’s my point - oversold describes a situation where the majority of investors who want to sell at the current price or even a bit lower have already sold. It sets up an opportunity for new buyers and holders of the stock to absorb the selling pressure at a given price, stabilize and then move higher. I doubt that occured from Friday’s close to today’s open. Oversold conditions without a positive catalyst are likely to send the price lower. Oversold conditions with a positive catalyst (other than just being oversold) can set the stage for prices to head higher. Something else must come in to encourage holders to not sell and new buyers to put new capital to work.

One of the other criticisms I have about this term is that in my world, a stock gets oversold - not a market. Even while some stocks are oversold, others may have been going higher for weeks, months or years. So, if the reason for today (or any other positive day) is that the market is oversold, what explains the stocks that were already going up? And why then, did some stocks go down today? Those were rhetorical questions to which I do not need any answers. Stocks go up, stocks go down - there are many reasons - some fundamental, some technical. There is no one-size-fits-all answer and I am confident that “oversold” isn’t even close.

****Performance has been updated through 7/20/06 - please read through the following disclaimer and find the updated figures at the end of the post.

Before I discuss Hedgefolios performance, I want to cover myself with some cautionary language.

So here goes:

Nothing in my performance quoting is intended as an advertisement or in any other way meant to encourage anyone to subscribe to Hedgefolios. That part is easy given that Hedgefolios is entirely free right now, but when I start accepting subscriptions - the same nonsolicitation clause will apply. Regardless, you should be very hesitant to rely on any newsletter’s performance figures unless they are audited or verified by an outside party. To be as transparent as possible and remove any question of Hedgefolios credibility, I am hoping to have audited performance figures by the end of 2006. Until then, you need to be aware that any performance figure on Hedgefolios is NOT in compliance with the CFA’s AIMR Performance Presentation Standards and does not net out any transaction costs such as commissions or management fees. They are not a total return calculation as I do not include dividend yields or any compounding factor. These performance figures cover a hypothetical portfolio of the entire Hedgefolios stock universe with an equal weighting of each security. The calculation is simply the cumulative total of all gains and losses from the signals during the period in question.

All this being said and under those parameters, Hedgefolios performance for stocks:
2005, the Hedgefolios performance was +19.99% vs. +3.00% for the S&P 500 index
2004, the Hedgefolios performance was +31.19% vs. +9.00% for the S&P 500 index

As the year goes forward, I will update this post periodically to let everyone know how Hedgefolios is doing.

UPDATE: Hedgefolios stock performance for 2006 year-to-date (through 7/20/06 close) was up 11.74%. Over the same time period, the S&P 500 index was up 0.07%.

“Ladies and gentlemen, we interrupt our program of dance music to bring you a special bulletin…” (From the original War of the Worlds transcript). As I was drifting off to sleep during Bernanke’s testimony, I started to daydream about some news items that would get this market moving higher.

**Israel ends it barrage of Lebanon - Syria and Iran do not get directly involved.
**A coalition of UN members assigns peacekeepers in the southern Lebanese border.
**North Korea reenters six-party talks hosted by China.
**Oil declines into the $60’s.
**Fed actually pauses on August 8th.
**Earnings season doesn’t go poorly (note I don’t expect it to go great.)

Back to the current world…. I know there are times that the above wishlist seems so far away, but those are items that I believe are possible. AND more importantly, I think we could see some or all of them within the next 3 weeks. At least I hope so because reversing each of the items I mentioned to a negative scenario and this market will get very painful.

I am in the minority (Bullish) of participants in the new blogger sentiment poll at Birinyi’s Tickersense. I will NEVER be in the “Neutral” category as I prefer to take a firm position and avoid confusing people with where I stand. I guess this is part of my “blunt” personality that has been known to upset a few people from time to time. Even though Birinyi is keeping the individual responses anonymous (to protect the innocent?), you can be assured that my votes will be easy to predict. If the tone of my posts and the Hedgefolios Timing Indicator is positive, I will be responding with “Bullish” and vice versa. Given that I am currently hovering at the 50/50 level with the Hedgefolios signals and I refuse to say “Neutral,” I defer to my increasing belief that there is a good probability that this market is heading higher. I know I am in the minority with this sunny view and so far, I have been incorrect since the Hedgefolios Timing Indicator went bullish two weeks ago. Despite the geopolitical crises and their impacts on the market, I looked at all the signals this week and didn’t feel overwhelmingly discouraged. Even though Birinyi’s poll is new and I am not sure how you can make money on it, I think it will be fun to watch. If nothing else, it is a new reason to visit an excellent site that should be part of your investing routine.

It’s amazing how negative investors can get in a matter of days. I finally switch to a marginally positive market bias and now everyone is proclaiming doom and gloom. Timing is everything!! I guess I am being stubborn - just don’t call me an optimist - but at some point, reality has to set in and we will have to resume some rational assessment of earnings. I am not trying to downplay the significance of the geopolitical issues from Korea to Israel / Lebanon / Palestine / Syria / Iran - after all, people are dying. However, when I hear smart commentators and some guests proclaiming that we have already begun World War 3, I cannot help but feel that things are being exaggerated. It is possible that we have begun an apocalyptic series of events but there is no evidence of it (yet). In fact, I have been encouraged by some of the sideshows to this drama.

Let’s start with North Korea: The US did not preemptively take out the missile on the launch pad or try to shoot it down during its 40-seconds of fame. That would have been an act of war, played into North Korea’s hand and only worsened the situation. Instead, their actions and comments are the sole focus and the results are impressive to me. South Korea finally appears to be ready to stop enabling the North’s bad behavior and China seems like it is serious about dealing with their unruly child. These are net positives for the people of North Korea, South Korea, and Japan and in general, for world markets. Unless something new happens, I don’t expect North Korea to affect the stock market in a meaningful way in the short term.

Regarding the spiraling crisis in the Mideast - I am not as optimistic that this will improve over the next few days. Israel has clearly drawn a few big lines in all that sand - not just their little part of the sandbox. Gaza, Lebanon and Syria are no longer offlimits to Israel and I am confident that these areas will escalate into much more extreme violence over the weekend. However, I am in the camp that believes this mess is much more about Iran than anything else. I am sure they would love to take the spotlight off their nuclear program and the UN’s threat of sanctions if the most recent offer is not accepted by the mullahs. Given their financial influence over Hezbollah and Hamas that totals over $200 million annually, Lebanon and Syria are convenient pawns for Tehran. I don’t believe that Israel would attack Iran directly because of the geographic and political hurdles to get there. They will not gain support from Jordan, Syria, Turkey or Iraq so it looks like this battle will be contained along the Israeli border.

One of the disappointments I have had during almost 5 years since 9/11 has been the public response of Arab nations to the fight against terror. Oh sure, there have been a few comments but most of those have been only in response to attacks against muslims. When Jordan was hit, there was an immediate criticism of terrorism. When Saudi Arabia was hit, there was a similar immediate reaction. When it comes to terrorism in the Mideast, there is quiet when Israel or America or any non-Islamic members of the coalition in Afghanistan or Iraq are attacked. Beheadings are not met with outrage and neither are IED’s, but if a marketplace is bombed, then come compassionate calls for an end to killing other muslims. This is not about humanity or terrorism - the double standard suggests to me that it’s largely been tolerance for Islamic fanaticism and fascism.

However, in the current crisis, I am hearing some rumblings from Arab nations that suggest a change in this approach and for that, I am very hopeful. In the past 24 hours, the Syrian ambassador to London, in an interview with the BBC, called on Hezbollah to stop firing missiles at Israel and said “Syria is not interested in joining the battle.” This is significant. Furthermore, a Saudi official criticized Hezbollah’s capture of two Israeli soldiers and warned that Hezbollah’s actions could lead to “an extremely serious situation which could subject all Arab nations and its achievements to destruction. The kingdom sees that it is time for those elements to alone shoulder the full responsibility for this irresponsible behavior and that the burden of ending the crisis falls on them alone.”

There is an emergency meeting of the 22-member Arab League on Saturday in Cairo. If the leading members such as Egypt and Jordan or a joint resolution of all the nations, would stand up and denounce the actions of Hezbollah and Hamas, it would go a long way. For too long, Islamic terrorist organizations have received silence, support and tolerance. They won’t listen to the UN or anyone outside their group - maybe there is some chance that if leading Arab countries will speak out, they will listen. Just maybe, but that would be progress.

In this doom and gloom, there are reasons to be optimistic. I know it’s easy to reach for the worst case scenarios like World War 3 and $200 oil, but I am hopeful that other nations can step up to cool this down. I don’t know who wants to buy stocks this afternoon and if there is a buyer’s strike, this will get uglier than it is now. Maybe we can count on the elusive bargain hunters and bottom fishers to bail us out? I doubt it.

Last earnings season the bulls were trumpeting the strong reports and favorable guidance. Then when the Fed infatuation took over the markets, the bulls quickly shifted to the argument that the Fed should stop raising rates to avoid overshooting an economy that was clearly cooling. Somehow we went from strong earnings to not so strong future earnings in record time. It’s fun to watch investors who can switch so quickly between seemingly opposite points of view. Now we are back to earnings season with Alcoa kicking things off tonight and it’s time for the bulls to put on their other face. Or if not a whole happy face, they can at least talk out of the other side of their mouth and shout with joy about every positive earnings announcement and guidance. And oh yeah, try to downplay negative stuff like Friday’s 3M warning. Once we get through earnings season, they can go back to the dour prophecies of a slowing economy. That should be just in time to ramp up the rate pause rhetoric before the August Fed meeting.

Regardless of the noisey spin, I am intrigued by earnings season this time around. Usually I dread the confusion that this quarterly fiasco puts into the data that I use to decide on my signals. However, there are so many other competing factors (oil, geopolitics, etc.) that are making things difficult and for once, I am relying on reactions to earnings and guidance as a means for providing some clarity to the direction of this market. I have been struggling mightily for the past few weeks and believe that a shakeout in one direction or the other is coming. As I wrote last week, I am reluctantly becoming less pessimistic (as opposed to being more optimistic) and yet, my near 50/50 on UP and DOWN signals tells me that I need to be ready to quickly react. I rarely change signals on the same stock in consecutive weeks to avoid turnover, transaction costs and whipsaw performance. However, I am temporarily putting that prohibition on the shelf until further notice. If you don’t care for short term trading, then I strongly suggest you look at any Hedgefolios signal change with a lot of skepticism. On the other hand, if you appreciate rapid responses to the market - I think it’s going to be fun.

Prior to last week, Chairman Bernanke (and the rest of the FOMC) was being criticized for just about anything that was assumed to be wrong with the markets. Now, with the changing of a few words in the policy statement and some very far reaching interpretations by the “One and Done” crowd - he appears to have gone from zero to hero. Wasn’t that easy?!?

Here are the changes that I saw:
For the first time in 3 years, the Fed declined to offer any explicit guidance to its monetary policy intentions. Out went the phrase “the committee judges that some further tightening may yet be needed” and in went a nebulous discussion of its economic forecast. They still mentioned the risk of inflation but gave hope to the hopeful by saying that “the moderation in growth of aggregate demand should help to limit inflation pressures over time, the committee judges that some inflation risks remain”. The statement went on to say that the “extent and timing of any additional firming” would be determined by new information from yet to be received data. They also switched the phrase “any additional firming” in policy for “some further firming,” which seemed to really get people enthused. This change in language was broadly interpreted as a signal that the Fed is less certain about its next steps than the market thought it was.

Frankly, I don’t think much changed - they seemed confused before and they seem confused now. It’s always been said that “the market hates uncertainty,” and yet, it appears that this is an exception. Based upon Thursday’s reaction, the market now loves an uncertain Fed. Sometimes dreams are better than reality, but here’s what actually happened - rates went up 25 basis points (again), the Fed hasn’t said they are done (again) and they said they are reliant on future economic data (again). Nothing new there, and they certainly didn’t take the preemptive step of a 50 bps hike and an explicit statement of a pause at the next meeting that some were hoping for. However, the bulls finally got enough wording changes to spin this into “certainty” of a “possibility” to an end in rate hikes. I do have to give credit to the “One and Done” crowd - they didn’t give up despite all the previous failures.

We now have two months until the next meeting and I expect that there will be a great effort to interpret the economic data points as a support to an end in rates. As I have previously written, I don’t place much weight on what the Fed does, but since the majority of investors seem to be infatuated with it, I am going to play along - at least for a little while. I have been resisting the temptation to jump on board the summer rally train. Last week I talked about having a slow trigger finger and as a result, I got shot in the ass a few times. The reaction to the FOMC was significant, so I am not going to ignore it. Personally - I don’t trust it and I don’t like it. But Hedgefolios isn’t about what I like, it’s about what the market likes and where I think individual stocks and ETFs are heading. This week, I converted 335 stock signals to UP versus only 19 new DOWN signals. With a little more positive movement, I don’t doubt that I will have a similar situation with next week’s stock signal changes. Note that I changed 75 ETF signals to UP. One of the things I had been looking for was a massive surge in ETFs as a rapid way for investors to get back into a bullish frame of mind and that is what I saw last week. For the near term, I will be very sensitive to changes in the ETF technicals and expect that there will be increased turnover in this area. If I see deterioration, I will not hesitate to reverse course. I think it’s going to be a bumpy ride but from the significant improvement to the Hedgefolios Timing Indicator, I am hesitantly leaning towards a bullish move.