SENTIMENT: EXTREME CAUTION
The market is very worried now. The GOP has used Terror as their platform. Unfortunately for me, a Kerry supporter, its working. As a trader, I cannot let my own personal biases go against my trading systems & experience. Also, I cannot fail to see that Rudy Giuliani's speech yesterday was devastating to Kerry. His silence is telling.

The GOP knows that people are scared. Even though everyone probably would feel safer if either Giuliani or McCain were in charge, their blessing of W combined with the image of W on Ground Zero is very powerful.

The markets are scared of many things. Oil. Terror. The list is long. This week, they are terrified of two things:
1. INTC quarterly update (Thur)
2. Employment report (Fri)

Sentiment & the trading technicals are both painting a bullish picture. I shorted semis back in Feb. Covered after making 15%. What a mistake that was. Now, its too late to go short. Its better to go long.

In addition, Greenspan is not blind to the Terror. He will not raise interest rates in light of it.

TRADE: BUY SEMIS
It seems pretty scary but, I think that now is the time to buy semiconductors (SMH). The INTC quarterly report is scaring everyone to death.

MEME: STAGFLATION
Looks like the ole stagflation meme is starting to be blessed by some heavyweights. Paul McCulley of Pimco in his latest missive has devoted an entire article to it:

Thus, in the fullness of time, the economy takes on the smell of stagflation, all because (1) your father-in-law imposed a price shock by doubling the price of your mom-in-law’s scalloped potatoes, and in response, (2) you tried to get even with him by doubling the price of your wife’s coconut cream pie. Who would have thunk it?

McCulley is an early/middle indicator so we still haven't reached the Maria Bartiromo blessing stage yet, but we are getting there.

Its quite possible that the GOP Convention will eliminate some of the bad feelings, but partying is never a cure for deep ills. The hangover feels much worse.

TRADE: Long AAPL vs. Short AMZN
I have had this trade on for a short while, but today looks like it may be a breakout day for this trade. Although I am basically weighted 1:1 on this trade, I think it is probably better to short less AMZN as the key bet is on the music segment (also AMZN is more volatile).

PREMISE:
Who hasn't heard of the iPod? The initial buzz created by the ad campaign is now becoming increasingly self-sustaining as the Internet is creating momentum for the buzz. I don't claim to be a Buffett-style investor (certainly he would never invest in such a high P/E stock), but he did stress the importance of brand. The replacement costs for creating a competing brand are tremendous. Just ask Sony.

iTunes is actually more potent than iPod because it is a new media delivery mechanism for the Internet that ranks higher than Wal-Mart or Amazon in satisfaction IMHO. Instant gratification is the name of the game here, and iTunes delivers this better than any Internet mechanism I know.

On the flip side, Amazon is running dry of ideas. Bezos talks about how customer satisfaction is job one (what CEO doesn't say that?), and how word of mouth advertisement is more potent than any ad campaign (thereby justifying his policy of not advertising on tv and passing on "savings" through free shipping). Certainly true, but maybe it also suggests that Amazon's business is cutting so thin that it can't afford to advertise or maybe it has nothing new to advertise.

Also ominous was its recent dour guidance. In terms of sales, it clumps music sales into the media category. This seems to be a new label as it no longer talks specifically about music, books, & dvds. Media represents 2/3 of their sales. So, the surge in iPod sales cannot be good for the music category. There is no clarity on just how these music sales are doing. Amazon is famous for obfuscation. My guess is that media sales will start to slump mysteriously and that Amazon knows this is in the pipeline which is why it is issuing cautionary statements.

Amazon is offering free music downloads. However, these seem to be offerings from amateurs. They have seen that Walmart.com is not making headway against iTunes, so certainly throwing money at a strategy when they are already behind MSFT, Wal-Mart, RealNetworks, Sony, etc., will probably be interpreted as a sign of weakness, not strength.

My guess is that the trade should play itself out by the Christmas season. Also, back to school sales has not yet peaked. If you get on board the trade today, there should still be plenty of juice.

Stick with the leader.

THEME: OCTOBER SURPRISE Pt. 2 -- OIL
Sentiment this week is about one thing: OIL.

I have been talking about oil and its effects since Q1 of 2004. Now people are finally starting to get uncomfortable. There are a lot of bogey-men dancing about: al-Sadr, Chavez, Putin, etc. Let's go beyond the obvious and look at the real reason why oil is going up.

Loyal readers of this blog will know that I have been speculating that the nature of the Bush October surprise is going to about Iran. Now that the economy is no longer a big selling point for Bush, he has to do an about face and swing the other way: TERROR. Strategically, it makes sense: he knows that his ratings were highest post 9/11. He also consistently scores better than Kerry in the Terror department. Also, let us not forget Clinton's Iraq attack during Monica-gate.

Iran is playing its role perfectly: it openly flaunts its nuclear capability. Iraq and Saudi Arabia hate Iran. Israel wants to bomb Iran. The EU is trying to talk reason into Iran, but to no avail. Iran must be hit sooner or later. Sounds like something Paul Wolfowitz would say.

So, Bush keeps filling the SPR (Strategic Petroleum Reserve). Ominously, it is at 666 million barrels right now. The White House says that the SPR will continue to be filled until times of emergency.

So, let's just say Israel gets trigger happy. The US says "OK, let's get 'em." So, then in October there is a joint air strike on Iran. Oil then spikes up to $75 per barrel, and BOOM! Bush releases the SPR and the market collapses!

Sounds too Wag the Dog for your tastes? Well, just consider that Bush the elder did just that when he launched Desert Storm.

Here is a quote from a leading analyst that is worth considering:

"President Bush is the only person in the world who can break this cycle of fear and anticipation and greed … by releasing oil from the Strategic Petroleum Reserve or by just telling the world that if things don't improve we will step in," said Fadel Gheit, senior energy analyst with Oppenheimer & Co. "If he releases between 1 and 2 million barrels per day for the next 30 days, I guarantee you that oil prices will go back to $30."

ACTIONS:
Its too early to fade oil. Stocks will continue to rise a bit but will then falter. Wait for the October Surprise before diving into stocks or shorting oil. Keep dividend paying stocks, REITs, gold, and plenty of cash.

THEME: SMART MONEY
In studying sentiment for years, and judging various prognosticators by the results, I can tell you that you should follow these guys in the order presented:


1. Thomas McManus
2. Tobias Levkovich
3. Ed Hyman
4. Paul Desmond

These guys have performed admirably during the bear/bull/bear cycle of the last 4 years. McManus & Levkovich have been extremely sharp in calling the stock market. Ed Hyman, being more of a macro-economics guy, has been pretty good with bonds. Paul Desmond has not really performed well in 2004 with all the gyrations, but he is on to keep an eye on when the market makes BIG moves. He called the bottom of 2003 pretty much dead on.

SENTIMENT: DESPAIR
The market is gripped by despair. The current environment reminds me of the market in August of 2001. The bearish mood was only resolved after the scary month of September.

For longer-term players, buying some tech exposure here is a good idea. However, keep cash available to buy if the lows of S&P 1060 break and we get a scary dump.

THEME: RICH vs POOR & MY LAWN
The one year spread between Walmart (WMT) vs Nordstrom (JWN) basically says it all. In one year, the spread has made 90%. Why? Because the rich are getting richer and the poor are getting poorer. Inflation hits the poor harder because they have less ability to hedge. Rising energy and food prices hit the pocketbooks of the poor harder.

So what explains this behaviour other than simply saying that the Republicans are screwing the poor and giving away money to the rich? A look at my rain starved lawn explains it all. When there is no rain, the whole lawn turns yellow. Everyone suffers. The rich suffered during 2000-2002 in proportion to the poor because at least their stock based wealth hurt them disproportionately more. During the bubble, many insiders genuinely ate their own cooking and loaded up on stocks. So in 2003, when it became clear that the stock market was coming back, at least temporarily, it is like when rain returns to the yellow lawn. Every plant gets water, but the weeds are more hardy and absorb it faster.

Now, if the weeds had memory of the drought, they would not go crazy and carry a lot more stocks, but in fact would trim back their stocks quickly. With out predicting whether stocks are going to rise or fall in the future, they sell stocks in a hurry because it is found money.

It is the gullible public that once again believes the rain will last forever that gambles once more. That is why stocks cannot break their old highs until the generational bull/bear cycle is played out for good.

The weeds always win.

MEME: STAGFLATION
The word is popping up now, but still not given much credence.
We need Maria Bartiromo to bless it before we go bullish.

Economist Allen Sinai of Decision Economics Inc. in Boston said the Fed's decision to put a brave face on economic prospects represented a big wager by policymakers that the impact of rising energy prices will soon fade.

"The economy is fine, ex-energy, is how I would put it," Sinai said, though he noted that the Fed was likely not pleased by the divergent trends it now was seeing between rates of overall economic growth and prices.

"That represents a risk to the outlook for the economy that's called stagflation," he said. "We're already observing slower rates of growth than had been expected and there is some suspicion that higher energy prices may be starting to bleed into core prices."

THEME: FAHRENHEIT 9/11 SECOND VIEWING
I saw F911 in a new theater that has just started showing it! I cannot remember a movie that started to show in a theater nearly 2 months after it premiered. This theater was more of a cinemaplex. It was a 4PM showing and surprisingly the theater was over 1/2 full. As before, the audience was composed of primarily people over 45. This makes F911 special in and of itself. Hollywood simply does not cater to adults any more.


The audience clearly was more conservative and the response was more muted. Not as many huge guffaws or snickers. However, true to form, the audience loosened up at the end of the movie, and voila, spontaneous applause! Applause says it all.


I eavesdropped on some of the chatter afterwards. One lady very quietly told her husband "there are just too many scary connections in the movie, it can't all be false." All that is needed is a deep injection of doubt in the minds of the viewers.


Memes from the movie are starting to spread. The 7 minutes meme is already hitting the Matrix. Kerry used it in a speech. If it eventually gains the same recognition as say the grassy knoll meme, then Bush will really be in trouble because more people of neutral political shades will go to see F911 just to see the infamous 7 minutes to satisfy their curiousity.


If you don't know what I am talking about, please see F911 inform yourself!

MEME: STAGFLATION
It was July 1 when I first predicted that the meme stagflation would soon rear its ugly head. Since then its only appeared on July 20. Well its appeared in the Matrix again:

" "The big story today is that oil is once again at new highs," said Peter Cardillo, chief market analyst with S.W. Bach & Co. "The market is being tanked by this situation, and also anticipating tomorrow's unemployment report."
"I think a good number [Friday] could reverse market psychology a bit," he added. "But a bad number would confirm what people are interpreting as economic malaise setting in again. Combine that with these oil prices, and I think stagflation would become the headlines a day."

Its too early to get excited because CNBC has yet to do a centerpiece story about it. So, stay bearish until then.

THEME: REAL REASON FOR OIL SPIKE

The Israeli Air Force has completed military preparations for a pre-emptive strike at Iran's Bushehr nuclear facility and will attack if Russia supplies Iran with rods for enriching uranium, Israeli officials said, according to a report in the London Sunday Times. Military sources said the raid would be carried out by long-range F-15I jets, overflying Turkey, with simultaneous operations by commandos on the ground.

COMMENT: Iran is acting defiant about its nuclear centrifuge equipment. It is also providing money & people to interfere with the internal politics of Iraq. The October Surprise that George W. may have up his sleeve is a bombing attack on Iran before the Israelis decide to pre-empt on their own.

THEME: OIL PRODUCERS
Here is an interesting piece from Stephen Leeb:

In Russia the story is a little different. In the wake of their defeat in the Cold War both oil consumption and production fell off a cliff. Oil production has come back quicker than consumption. But recently oil revenues have started to generate real growth in Russia and consumption has started increasing at a rapid rate. The Russian auto population is growing at a double-digit rate.

The obvious point is that the world's major oil exporters are backward economies with great political risks. To the extent the risks remain, their incremental oil -- to the extent it even exists -- will not be developed. But if the risks lessen then their growth will strengthen and with stronger growth will come much greater internal need for oil.

If Tom Clancy were writing a conspiratorial novel his premise might very well be that the U.S. has been secretly trying to thwart peace in the Middle East for fear that a politically stable Middle East would be coincident with vibrant economies that in the end would need all the incremental oil they produced for their own internal consumption. As a side bar, note that Iran -- OPEC's second largest oil exporter -- has publicly stated that it will likely be an oil importer within a decade, hence their need for a nuclear program. And if you look at the data, the Iranians may have a point. Since the country began growing at a fairly rapid clip, oil consumption has been rising fast enough to eat up all the exported oil within the next decade.

COMMENT: It is certainly worth noting that of the various world equity markets this year, some of the best performance have come from the Middle East stock markets. Higher oil prices certainly aren't bad for their economies, but given their extremely young population, can it be translated into jobs for them?

News out of China continues to illustrate the unquenchable thirst for oil over there. I read in the news that several men had been condemned to death for stealing oil from a pipeline. Now that's what I call an Energy Crunch!