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Author: Mike Celeste Editor: Tony Ponzo June Circulation: 8031

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July 4th Notice - In observance of the long July 4th holiday weekend, we will not be sending the newsletter next week. The newsletter will resume delivery the following week.

Highlight of this past week: The Basic Strategy is starting to look pretty good for the month of June as we close out EW with another profit. That makes four splitters closed out for June which is a welcome sight as we believe it could be a sign that the economy is improving. Check it out Basic Strategy

In this Issue---
SplitMaster Basic System---
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We had another splitter close out and it had a decent win, especially in this market. However, we could say "we wuz robbed" in view of the fact that the stock was downgraded exactly on our sell date open, so we lost a nice chunk of profit with that down open--about 3 points more would have been in the gain column. Under these conditions, tho, we will take the win as it was still a pretty decent win and we look forward to some new split announcements.

Options---
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Our SPY option plays have been improving as the indicies have started swing back and forth in a more predictable manner. But the gains have been on the small side. A way to plan for this kind of market is to use a dollar system for deciding how many options to purchase, say, for an Indicator Play. Sometimes we are more on the conservative side and pick a lower priced option to make a play with. If you dollar average, for every $1,000 to invest in a $1.00 option, you would get 10 contracts---For a $2.00 option you would get 5 contracts, etc. Also, when considering a sell point, we often go for a 10% profit, which is a terrific return in 1 day. During these critical times, tho, we have been cutting down the profit goal and look more to a 5-7% profit goal. Another possible adjustment to the sell price could be the strength of the market. There are many times when we believe we see resistance and decide to get out a bit early and take a lesser profit. The goal is to make a profit. Another consideration is to look at how low the option went AFTER we made our buy. If it went down, but not quite to the stop loss point, we can consider a 10% rise from that low point and look for an adjusted sell around that level, and still look for a price that is not a loss. That is our basic thought. Then we have Aggressive players that go a bit further than our goal. They often do better, but do take the risk of a potential loss. All of these thoughts go into our decision making--as the market is moving along.

Momentum Plays---
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We had more plays this week in the Momentum strategy. There were four plays in all, three wins and one loss. The loss was on an earnings play. Our signals have been keeping us out of plays that are not gaining momentum in the expected direction as we go into the open of the day. But this week the momentum looked good on an earnings play we were following. Unfortunately, right in the middle of our play there was some news that came out that instantly took the entire market down as well as our play. Ironically, later in the day the market came back up and so did our play. Those type of things happen from time to time and that is just one of the hazards of the stock market. The other three wins were smaller wins but we are feeling pretty good about them as they were SPY plays and they seem to be getting more stable.

We have been testing the Spy Support/Resistance points again. We had temporarily stopped using this strategy because of the severe market conditions that developed in May. Our tests have been very positive, and we have been posting the support and resistance points on the site as we see them. That way we are showing in advance what the statistics show and members can see how it would have turned out on an actual play. And some members actually play them even though we are saying they are not official. Earlier we reported some entrances/exits after the SR point (support-resistance) point was met, but now we are reporting in advance. The tests so far show wins in 9 out of the last 10 times---now they could be large or small wins, but they are wins. What we have to watch for, of course, is to try to get net profits at the end of the day. In other words, you don't want something like 3 net losses by a large dollar amount, wiping out 10 previous wins in dollar amount.

Next week we intend to make more actual plays using the SR calculations, along with any Indicator plays that come up.

Indicator Play---
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We had 2 smaller wins this week in the Indicator play. That makes 10 wins and 5 losses so far this year, for a 67% win rate, and 5 wins and no losses for June..

The markets are still tough to read, but the criteria is at least guiding us to wins and not losses. As long as we don't have any extreme news we look forward with confidence.

The Economy, The Markets & Commentary---
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We have been saying that we think the market is in a trading range. It is also our belief that the momentum is more to the down side than to the up. This week we felt we were coming off the higher end of the trading range. That feeling was substantiated, with a pretty good loss for the week, as the Dow and Nasdaq dropped 4 of the 5 trading days. That meant that we again slipped below the levels at the beginning of the year, so here we are near the end of June, losing when considering the past 6 months. (See stats above) In spite of this kind of market, it is interesting to note that our two Indicator plays this week were for an up play, and both of them made profits---not big, but still profits in a strong down move for the week. This action confirms to us that longer term investing just isn't a good thing to do at this particular point in the market timing.

Economic news was definitely slanted toward the negative side this week. New home sales showed a big decline from the previous month. The reason was fairly well predicted, but the size of the drop was not. The home credit plan expired and most believed that would be a negative, and it was. We are getting closer to the new season of earnings releases, but there is a disturbing trend developing now. More companies are lowering estimates for future earnings and that does not build confidence in recovery plans. The shipping index, which calculates commodity shipping is down around 40% and that is definitely not a positive. Another thorn is the news that banks are going to release a lot more homes that are behind in payments, and start the foreclosure process. Of course, that means that the supply of homes is going to increase considerably.

The Senate did not extend unemployment benefits, so that will have a quick impact on the economy. Already the Commerce Department revised the expansion of the economy downward to a 2.7 annual rate increase from a prior estimate of 3 percent. This is not good news.

Next week we need to watch the credit report. It has been going down and that is somewhat in contrast to the fact that consumers seem to be spending amounts that are out of proportion to income---more spending than expected--even tho retailers are noticing slowdowns in sales, and thus the lowering of earnings estimates.

There was an interesting quote that was stated to originate from Investors Business Daily recently. It was reporting on the percentage of cabinet appointees who had previously worked in the private sector, not the government sector. It said that George W. Bush had about 55 percent, Bill Clinton about 39 percent, George H.W. Bush -51 percent. Then came the lowest percent, with President Obama, at 8 percent. Now that is an eye-opener, if it is correct. I don't know the criteria for determining the exact definition of "working in the private sector" and whether a time factor was considered, and whether temporary jobs were considered, but if you apply whatever criteria to each President, then the results are still showing a major difference. You would think that experience would be a necessity when considering someone for a job that involves the private sector. Ah, but I forget, we are talking about politics.

Here in our area of California, we are still seeing some massive cutbacks in local government budgets. Services are being eliminated, cut back severely, or specific fees are going to be charged for the service, instead of being paid from the regular tax income. And, talking about taxes, we are scheduled to see hefty hikes in taxes coming up soon--and that applies to corporations, also. We all know what that means to us as consumers. Prices will be made higher, or you will receive less for the same price. That seems to be the favorite method lately. I can't begin to name the number of items that I have seen with lower amounts in the package---and pretty soon we don't even notice it at all, or remember what we used to get.

Yes, the topic of inflation continues to be a joke on us common folk. The 2 major health companies were planning increases of 39% and 19% and only because the raise was so high did we get outraged, and the companies cancelled the raises---probably until the matter cools down, no doubt. They said there were some human errors in their calculations, when their figures were challenged. Doctors were scheduled to take 21% less for Medicare patients, and that has been delayed. The local water company announced water prices will be raised 38%. Here we go with the old story that we need to conserve water. So we all conserve and then they say they did not collect enough revenue due to the conservation so they have rto raise prices to cover the expenses and maintain a "normal profit".

Hey, T. Boone Pickens didn't start buying water companies for no reason. He could see this coming and will profit enormously. Here's another thing that bothers me about water companies and how they explain their price increase reasons. They say they have to replace old water systems. First of all, how many times can they say that--every price increase seems to include that reason. Secondly, my ancient accounting class taught me that depreciation is calculated every year, and technically, that depreciated amount is supposed to be set aside for future use when the system (or whatever) is replaced or repaired. It seems to me that they want their cake and eat it, too, as the old saying goes. By the way, here in California where we have water allotted it has been admitted that the winter rains have just about filled up the reservoirs, but that doesn't mean they are going to say increases in water is OK.

Then, don't you wonder where all the government spending is being used? We never got to hear about exactly how much bailout money was used, where it went to, and how much was repaid. Most of the people I talk to don't seem to see any benefits in their circle of life. It appears that pet projects continued to receive a big share of the government money pot (which we pay for, naturally)---and has it really helped like it was supposed to?

Recently there was an article about the fence being built along the US-Mexican border. We have been having lots of attention paid to illegals and this fence was supposed to solve a whole lot of the problem. This article said that "taxpayers have shelled out $15.1 million per mile for 53 miles of "virtual fence'. That is more than 12 times the original estimate---repeat--more than 12 times the original estimate. $833 million was set aside for this project in 2007. The vast majority of that money, at least $800 million, has been spent on a sliver, in Arizona, of the nearly 2,000 mile southern border, with about $20.9 million spent on the northern border. The totals come from the House Homeland Security Committee, which got them from the Homeland Security Dept. Customs and Border Protection confirmed the figures. The fence was supposed to monitor most of the southern border with Mexico by 2011. Now the 53 miles in Arizona is expected to be done by the end of the year"--End quote. So, we see 53 miles of a needed 2,000 miles, with almost all of the money already spent on those 53 miles. This is appalling, even for government overspending. I would venture to guess that not a lot of jobs were created in relation to the amount spent, and I would venture to guess that the contractors involved made out very well in the profit column.

With the degree of debt that all of these things are creating, I believe we can expect a recovery to be considerably more than the 10 years I mentioned in the past. I thought it would be more than 10 years, but now it feels like it will be extended well beyond that point. My basis was the last severe economic downturn we had here in California that lasted 10 years before full recovery--1989 to 1999--again in real estate and government defense cutbacks. Let's take a starting year of 2007 and use an even amount of years to fall and then recover--like 5 years down and 5 years to recover to the beginning point. With this severity, it could be seen to go past 2017 before all of this is restored, including jobs and real estate. Even with jobs, an alarming point can be brought up. Much of the increase in jobs is in the government arena. Like right now, the Census Report is building up the jobs report. That is a bad one to look at, because that work will end soon. Other job creations means that the size of the government is increasing (as usual) and that means that the cost that needs to be spent is going to be paid by the taxpayers. Mathematically, that cannot continue beyond a certain point before it brings down the system. This is the same reasoning we used 5-6 years ago when we predicted that we could not mathematically increase the price of houses and not increase that same level of income. That was topped off by the now famous single sentence we use---"You can't have 100% loans on houses with no proof of income, without a collapse".

Final comment---We are approaching the passing of financial reforms for banks, etc. We will not know (again, as usual) what is in it until it is passed, as changes are constantly being made, right up to vote time in the House and Senate. The President has announced that he is forming a new agency to deal with this, since there are currently 4-5 different ones doing the job now and not really knowing what the other one is doing. That brings up the report about how many new agencies were started under recent Presidents---the figure for President Obama was astounding when compared to others--but we voted for change, and that's what we are getting. (It seems to me that every candidate has changes proposed, as that is why people should vote for that person---but "CHANGE" was really the in-word in the last Presidential election. The big question seems to be--Can we afford all of this kind of change and can we survive all this change????

Stay tuned...............these are interesting times.

Today's Thought---
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The two enemies of the people are criminals and government. So let us tie the second down with the chains of the Constitution so that the second will not become the legal version of the first. ..........Thomas Jefferson.

Mike

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