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A Different Kind of Rate Cut

On Tuesday, the Federal Reserve's Open Market Committee acted as everyone expected and left interest rates unchanged. No surprise from the Fed here, but what did come as a surprise, I suspect, was a different kind of rate cut helping to calm this market.

This different kind of rate cut isn't generated in the offices of the Treasury Department. This rate cut comes straight out of the energy pits, and manifests itself in the form of substantially lower oil prices.

The chart below shows just how steep the decline in crude oil prices has been during the past several weeks. The price of light crude now is $121 a barrel, well off the high of $147 reached in the first week of July.

The decline in crude prices, as well as a decline in gasoline prices, has temporarily lifted the heavy cost burden that has plagued consumers throughout most of this summer. What this decline in oil prices amounts to, in essence, is an interest rate cut that goes directly into the pockets of every American.

Given the decline in oil prices, along with some positive developments in the financial sector, it's no wonder we've seen a big rally in the equity markets. On Tuesday, the Dow surged more than 300 points, proving that there still are some bulls out there lurking around Wall Street.

During the past several weeks, the S&P 500 index has made a run higher, and now is almost back above its 50-day moving average (blue line), as seen in the chart below.

But before we get too excited, keep in mind that this rally has taken place during a bear market. Often, bear-market rallies are quite strong. Unfortunately, strong bear-market rallies often are followed by even stronger moves to the downside once the exuberance fades.

In my opinion, the market environment right now can only be described as a trader's market.

So, how do you take advantage of a trader's market? Well, the simplest answer is to trade. By trade I mean you can't get too comfortable with any long position in your portfolio. You also can't be complacent with any of your short market positions.

I know many of you want to be active traders right now, but I also know that many of you need help with this potentially profitable, yet challenging proposition. If you want to learn how to actively trade in this market using exchange-traded funds (ETFs), then my ETF Trader advisory service is for you.

To find out more about how to trade in this trader's market with ETFs, click here.

ETF Talk: Edouard Spares U.S. Natural Gas Supply

History offers important lessons if we remember what happened in the past and use the information to our advantage. Tropical Storm Edouard offered the latest example of that adage in the natural gas sector. Severe storms that batter the natural gas producing region along the U.S. Gulf Coast typically hurt production and lead to temporary supply shortages. Fortunately, Tropical Storm Edouard did not cause any major damage to the nation's natural gas infrastructure when it hit the Galveston, Texas, area with heavy rain and strong winds on Tuesday.

It was a welcome development for natural gas companies that have been losing market value in recent weeks. Indeed, two funds that track the sector have taken their lumps during the past few weeks but remain in the black year-to-date.

The United States Natural Gas Fund LP (UNG) only dipped in value by four cents to $40.49 a share on Aug. 5 -- the day that the tropical storm struck. The fund's one-month market return, as of Aug. 5, is -32.35%. Year-to-date, however, UNG is +17.52%. UNG seeks to replicate the performance of natural gas by investing in futures contracts traded on the NYMEX.

The Dow Jones-AIG Natural Gas Total Return Sub-Index (GAZ), an exchange-traded note (ETN) that is designed to reflect the performance of natural gas, dropped 22 cents a share Tuesday, Aug. 5, to close at $53. The decline marked a 32.46% drop in value for the fund during the past month. The plunge provided an indicator of the sector's high volatility. The downward swing of GAZ is more dramatic when measured against its year-to-date return of 17.01%.

The modest fall in the value of both funds yesterday is a fairly benign result for a sector known for its wild swings. Natural gas is no exception to the general rule that reduced supply of any commodity, amid steady or growing demand, boosts its price. Exogenous factors, such a hurricanes and tropical storms, certainly affect this sector dramatically at times. The following graph reflects that reality.

Recent Growth in Natural Gas Production in
the Lower 48 States Breaks with Historical Trends

For the past several years, the price of natural gas has been in the $6.50-range for the month of July. This year, however, it peaked at $13. In addition, the U.S. Department of Energy warned in July that natural gas bills could be 40% higher than usual this winter.

The federal agency also reported that natural gas production in the lower 48 states has seen a large upward shift. After nine years of no net growth through 2006, an upward trend began. A 3% rise in natural gas production between first-quarter 2006 and first-quarter 2007 was followed by an exceptionally large 9% increase between first-quarter 2007 and first-quarter 2008.

Improved technology, developed in recent years, now allows for the economic production of resources in deep water. High and increasing natural gas prices have spurred more natural gas drilling and a trend to move from drilling simpler vertical wells to horizontal wells.

One indicator of the transition from conventional to unconventional production is the number of rigs drilling "horizontal wells," according to the U.S. Department of Energy. In the late 1990s, about 40 drilling rigs, or 6%, were drilling horizontally. As of May 2008, the number of rigs drilling horizontal wells grew to 519 rigs, or 28% of the total. That increased production suggests that the long-term outlook for natural gas producers is a bit more encouraging than it would have appeared several years ago.

After a run-up in price for natural gas entities since the start of the year, it is not surprising that they pulled back significantly in the past month. At some point the downward trend will reverse. It certainly bears watching and I will be doing just that to try to detect when the pendulum might begin to swing in the other direction.

Chatting Under the Lemon Tree

Want to hear the latest update on my Lemon List, the list of America's worst-performing mutual funds?

Well, now you can take a listen to my chat with Fabian Wealth Strategies Vice President David Fabian, who presented me with the highlights (or should I say lowlights) of some of the most egregious mutual fund offenders in what was a very tough second-quarter.

To listen in on my chat with David, click here.

If you own a mutual fund, or if you were planning on buying a mutual fund anytime soon, I urge you to listen to this segment today. A little chat under the lemon tree could save you from a very sour-tasting portfolio down the road.

Open Letter to Obama

I am a financial guy, not a political pundit. I do, however, like to keep track of what's going on in the political sphere for the simple reason that what happens in Washington D.C., can really impact what happens on Wall Street.

In my opinion, the problems facing the economy and the market are some of the biggest we've seen in decades. Unfortunately, I think both political parties are to blame. But assigning blame really doesn't do anything to help fix our problems.

I read many political and market blogs on a regular basis and one of my favorites is Mish's Global Economic Trend Analysis, written by investment advisor Mike "Mish" Shedlock.

Mish has been right-on with respect to the credit crisis and the damage it has done to our economy. Recently, Mish wrote a terrific and extremely thought-provoking piece he titled, "Open Letter to Obama."

In this piece, Mish recaps what he thinks is wrong with the U.S. economy, and he provides suggestions for the presumptive Democratic Party presidential candidate, Sen. Barack Obama, that detail the tough medicine needed to get this country out of the financial mess we're in.

I warn you, you may be disturbed by what Mish has to say. But whether you agree or disagree with his views, I definitely think they are worth your perusal.

To read Mish's thought-provoking comments on the troubled U.S. economy and what Sen. Obama should do to fix it if he becomes president, click here.

Guaranteed Monthly Income For Life? You Betcha!

On Saturday, July 12, I held the latest installment of my retirement income conference call. Big thanks to all of you who called in with your great questions, and big apologies to those who couldn't listen live because the event had reached capacity.

Now, if you are one of those who couldn't get through, or if you weren't available to attend the call that day, don't fret. You can hear a FREE replay of the call right now by clicking here.

In this call, I discuss the many tools and vehicles you can use to produce a monthly income stream, and I show you how some products can offer you a 5% to 6% GUARANTEED return without losing control of your investments. These products are outstanding for taking a portion of your IRA or 401(k) and creating an income stream of $1,000, $2,000 or even $3,000 per month.

If you have an existing annuity and want to generate guaranteed income WITHOUT annuitizing your assets, then please listen to the replay of this informative discussion.

Remember, your assets will need to last you 20-30 years. You will need to create an income plan that will last as long as you do. We can help.

Farewell to a Literary and Moral Hero

"For a country to have a great writer … is like having another government. That's why no régime has ever loved great writers, only minor ones."

-- Aleksandr Solzhenitsyn

This week the world lost a genuine hero.

On Sunday, Aug. 3, Aleksandr Isayevich Solzhenitsyn -- writer, Nobel Prize winner, and the most famous Soviet dissident -- died at the age of 89 in his home near Moscow.

The great author lived a difficult, yet heroic life. Sentenced to eight years of hard labor in Stalin's Gulag prison system, Solzhenitsyn witnessed first hand the evils of totalitarianism.
His seminal work, The Gulag Archipelago, exposed these evils to what was then a rather naïve and dare I say Pollyannaish view of Soviet society by the intellectual elite around the world -- an elite that even today still thinks government is the panacea to all of society's ills.

Solzhenitsyn was a true champion of freedom, and a man who dedicated himself to revealing the horrors of socialism and exposing the ultimate evil of men like Lenin, Stalin, and the mass murderers who ruled the Soviet Union for decades.

For this great achievement, the world owes a tremendous debt to this literary and moral giant.
Farewell Aleksandr, you will be missed.