Dow Jones 10973.56 0.00 6:00 am PDT, June 29, 2006 NASDAQ 2111.84 0.00 For info, visit access.smallcapnetwork.com S & P 500 1246.00 0.00 Change your subscription status here Russell 2000 688.04 0.00 VOLUME 06: ISSUE 49 When Bernanke Speaks, People Listen In case you haven't heard (which is unlikely), Federal Reserve Chairman Ben Bernanke is set to discuss a major interest rate decision today as part of a two-day Federal Reserve meeting. The question really isn't one of whether or not the Fed is going to raise rates. It's pretty much a foregone conclusion we'll get another 1/4 point rate hike today. In fact, the market may have already factored it into current prices. We're far more interested in the Federal Reserve's language used to describe the current situation, as it holds the clues about the Fed's future rate decisions.  Of course, interpreting the specific language the Fed uses has become an art form in itself. For instance, we learned the term 'measured pace' is a short way of saying rates are going to go up for a long time, but in very small increments. Or, an 'accommodative policy' simply means the FOMC isn't going to do anything that might spook corporations out of growth initiatives. The most recent term under scrutiny is the 'potential for inflation'. As we've seen, you can pretty much bet the 'potential' for inflation is the soft way of saying inflation is a verified problem the Fed intends to resolve - with a rate hike.  But when Bernanke speaks today, it's going to be a little more than a routine testimony. This time around, there really is a possibility the FOMC is going to discuss a possible end to the interest rate increases. The market wants it, with some investors even expecting it. Although the Fed has never actually committed to a neutral interest rate level, 6.0% seems to be the consensus as well as the long-term average. With the current effective Fed funds rate at just under 5.0%, there's not a whole lot of room left to push rates much higher. Plus, Bernanke and the Fed know the market is growing weary of relentless rate increases, even if they're merited. Of course, if the FOMC ends up hinting about more rate increases in the near term, that creates a dangerous scenario for stocks. Yet, it's a distinct reality every investor should at least prepare for, as the underlying reasons for a rate hike are still quite evident. Rather than bother trying to outguess the deliberately-elusive Bernanke, we'll just look at both of the possible Fed language scenarios. More importantly, we'll examine what each scenario means for the market. Remember, the language clues are subtle, although you'll have no trouble finding every detail about them afterwards - the media will pounce on the speech's transcript like a monkey on a cupcake.    Scenario 1: Hawkish  If Bernanke sees inflation persisting into the future, he'll raise rates now, as well as then. It really is as simple as that. Look for the words 'tightening' or 'restrictive' if this is the case, although the Fed Chairman certainly isn't limited to those policy descriptions. The key hawkish phrases he's used even in his short tenure include: "To the extent that the recent behavior of long-term rates reflects a declining term premium, the policy rate associated with a given degree of financial stimulus will be higher than usual" (March 20th) "Possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressure" (March 28th) "...some further policy firming may yet be needed to address inflation risks" (May 10th)  "...a number of factors augmenting the upside risks to inflation" (May 31st) "core inflation...has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability" (June 5th)  If today's forward-looking statements sound something like these, odds are that he's planning on a little more tightening to tweak the economy. The market will probably hate it, especially with all the chatter about a possible end to the rate increases. If this is the case, don't be shocked if stocks end up falling under their recent support and moving on to new lows for the year. Summer is usually a lethargic, slightly-bearish period anyway, so this disappointment could pretty much wipe away the investor enthusiasm needed to spark a decent rebound.    Scenario 2: Dovish  On the other hand, the Fed may actually change their tone this time around, and allude to a break in the long streak of rate increases. The key words to describe this outlook have traditionally been 'accommodative', or 'loose', although there are several other terms that could be utilized as well. Interestingly, it's not as if Bernanke hasn't shown brief glimpses of the idea already. Just take a look at some of the dovish hints he's already dropped:  "not worried about the inverted yield curve...low long-term rates will keep the economy moving" (Feb. 16th)  "I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come" (March 20th)  "Most [FOMC] members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much" (April 18th)  "Significant uncertainty attends the outlook for housing, and the risk exists that a slowdown more pronounced than we currently expect could prove a drag on growth this year and next" (April 27th) Needless to say, investors would love to finally have that relief, and we suspect that everyone would be a lot more willing to start buying stocks because of it. So, in the short run and the long run, today could be a pivotal day. If the news is good, we'll look for stocks to easily correct their short-term oversold situation with a strong bounce. In the bigger picture, an end to the rate increases would unchain a market that's been plagued by years of Fed tightening.    The Buzz There's nothing that would make us happier than to see the market go higher. And from a long-term perspective, the right economic foundation is in place to make it happen. However, reality is reality. As of right now, Wall Street is whispering inflation is still not entirely under control. As such, a rate increase in the near future, on top of today's, is likely.  What data signals the need for a little more tightening? There are a couple of key indications. First, consumer prices - even subtracting out the ridiculous surge in oil prices - has still topped expectations by increasing 2.4% on a year-over-year basis. And second, the Q1 Gross Domestic Product increase was an annualized 5.3%. Both are forecasted to ease in coming months, but even an easing of the numbers would still leave them at levels which required doctoring from the Fed. And let's not even talk about what the inflation figures look like when oil is factored in. In fact, some experts argue a 1/2 point rate hike today is a possibility. Although we think it's the less likely of Ben Bernanke's choices, there is actually an upside to the idea. One big shot in the arm might go ahead and bring this process to a grand finale. In some respects it could be painful for stocks, but in the bigger picture, it would just go ahead and just get the obvious completely out of the way...the odds of the Fed tacking on another 1/4 point rate increase after a 1/2 increase are astronomically low. After all, a 1/2 point move today would push the Fed Funds rate up to 5.5%, just a 1/2 point shy of the accepted 'neutral' rate of 6.0%. In any case, we'll just part with this idea...don't get bogged down by the way things 'should' be, or the way you wish things were. Take the language clues and respond to them in a way that improves your opportunity to make or preserve money. That's your job as an investor, or as a trader. We really don't know what Bernanke is going to say today, and it's dangerous to try and outguess the Fed. And in Ben Bernanke's case, he's particularly inconsistent (as we saw in his comments above), which makes the guessing game even more perilous.     We Value Your Feedback   Got comments, questions or suggestions? Send 'em on over: Editor@smallcapnetwork.com If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC 4653 Carmel Mtn Rd Suite 308 #402 San Diego, CA 92130 Execute Makes Major Headway in Europe  In a recent edition of the SmallCap Digest, we compared news from small companies to a lightning strike - it can happen anytime, anywhere, and without warning. But when it does, it's a big deal. Well, lightning struck yesterday when Execute Sports (OTCBB: EXCS) announced a 181% increase in European orders for snowboards in 2006/2007. That raises overseas sales by 51% on a year-over-year basis. For lack of a better way of saying it, that's not too shabby, especially considering European snowboard market is estimated to total about $100 million on an annual basis.  Just for some perspective, Execute's 2005 revenue totaled about $1.4 million, which included domestic (U.S.) sales. Even just capturing a small piece of the European snowboard market share would still be a big boost for the company's top and bottom lines. Based on the way Execute is fostering the foreign market, they're on track to take a big piece of that pie.  By the way, Execute's snowboards are marketed under the 'Academy' brand name.  As for the stock, it hasn't necessarily been easy to own lately. The question is just one of when all this good news will start to get some traction with the investing community. It's a great corporate story...Execute's products are top-notch, and they're getting their stuff to the consumer through some powerful distribution channels. Yet, this recent IPO has had a tough time getting attention. We still like the company and the stock, and if you do too, the recent share price of 24 cents makes for a great entry point - especially as oversold as it is right now. Just keep in mind how young stocks like these can take some time for other investors to find. But when they do, they have the potential to grow exponentially.  It might be worth taking a look at our initial profile on Execute Sports by clicking here. You'll be able to see the reward potential is still pretty high, despite the risk. .    The Soup de Jour: Mergers & Acquisitions Merger and acquisition activity tends to run hot and cold. By that, we just mean mergers usually come in waves, and are followed by a period of general disinterest in corporate acquisition. For example, in early 2005, M&A news was non-stop, especially in the telecom arena. There hasn't been much merger news of late, but it looks like we may be entering another substantial M&A period. This time though, it looks like it's going to be led by the steel and mining industries. For instance, Phelps-Dodge (NYSE: PD) recently made a move to buy Inco (NYSE: N) and Falconbridge (NYSE: FAL). Barring a regulatory setback, the acquisitions are probably going to happen, much to the delight of all involved parties. Mittal (NYSE: MT) has also initiated a merger with European steelmaker Acelor. Shareholders still need to vote on the matter, but odds are that it will be approved.  It goes without saying the smaller companies are the ones the bigger companies are looking to acquire, and the evidence of the current interest is clear. Now may be a good time to start finding some off-the-radar steel producers and miners that would be good buyout candidates. And even if a suspected acquisition doesn't go through, you could do worse than a steel miner or producer. The steel stocks have really started to move higher again over the last few days -much more so than the rest of the market. The offer from Phelps-Dodge essentially knocked Canadian company Teck Cominco (TEK-A:TO) and Swiss miner Xstrata (XSRAF.PK) out of the running for Inco and Falconbridge, respectively. However, it's now obvious that Teck Cominco and Xstrata are shopping for growth, or at least considering it. Keep your ears and eyes open for hints from those two possible suitors, if you're looking for a buyout play.  By the way, the symbol for Teck Cominco will be changing today to 'TCK-A'. It's listed on the Toronto Stock Exchange, but the ticker change will affect stock quote retrieval sources in the U.S. as well. Subscribe Information is power and timely information is profitable. Become informed and profit from SmallCapDigest Profiles and Trading Alerts by becoming a Preferred Member today. There is no cost associated with your email subscription. Add your email address below and make sure to check your email inbox and confirm your opt-in request to start receiving the SmallCapDigest Email Newsletter on a regular basis. To ensure newsletter delivery, you can add any additional email addresses you may have to the SmallCapDigest Member List. Receiving the SmallCapDigest Newsletter in multiple locations is the best way of making sure you don't miss the next investing or trading opportunity! For web based email addresses, the SmallCapDigest recommends @yahoo.com or @aol.com for timely and reliable email newsletter delivery. Subscribe Here Note: Your email address will be kept strictly confidential, and will not be shared with any other entity for any purpose at any time. If you no longer wish to receive the SmallCapDigest, simply follow the instructions located at the bottom of every SmallCapDigest Newsletter Edition. Unsubscribe Here D I S C L A I M E R: The Small Cap Digest, the Small Cap Network, its website and email newsletter (hereafter, cumulatively referred to as "SCD") , is an independent electronic publication committed to providing its readers with factual information on select publicly traded companies. SCD is owned and operated by TGR Group, LLC ("TGR"). TGR is not a registered investment advisor or broker-dealer. All companies are chosen on the basis of certain financial analysis and other pertinent criteria with a view toward maximizing the upside potential for investors while minimizing the downside risk, whenever possible.  Moreover, as detailed below, TGR accepts compensation from third party consultants and/or companies, which it features in the publication and circulation of SCD. To the degrees enumerated herein, SCD should not be regarded as an independent publication.  Click Here or go to http://access.smallcapnetwork.com/compensation_disclosure.html to view our compensation on every company we have ever covered, or visit the following web address: http://www.smallnetwork.net/profile_disclosure.html for our full profiles and http://access.smallcapnetwork.com/short_term_alerts.html for Trading Alerts.  TGR Group LLC has been paid a fee of $30,000 and 300,000 newly issued restricted shares by Execute Sports for coverage of the company. In addition, one of the prinicipals of TGR Group purchased 100,000 shares of Execute Sports at a cost of $.25 per share prior to the public offering. The shares are now eligible to be free trading.That individual may choose to sell the shares at any time. This should be viewed as a potential conflict of interest. From time to time TGR sells shares received as compensation for coverage of client companies. Shares received are sold in the open market. Since the shares are received as compensation for services as previously disclosed, and not for investment purposes, TGR does not view the sale of the shares as contradictory to any opinions delivered in the content. This should be viewed as a conflict of interest by shareholders or prospective shareholders of the client companies.  TGR, its Members and Members' families, are forbidden by company policy to own, buy, sell or otherwise trade stock for their own benefit in the companies who appear in the publication unless specifically disclosed.  All statements and expressions are the sole opinions of TGR and are subject to change without notice. A profile, description, or other mention of a company within SCD is neither an offer nor solicitation to buy or sell any securities mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein.  THE READER SHOULD VERIFY ALL CLAIMS AND DO THEIR OWN DUE DILIGENCE BEFORE INVESTING IN ANY SECURITIES MENTIONED. INVESTING IN SECURITIES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK. THE INFORMATION FOUND IN THIS PROFILE IS PROTECTED BY THE COPYRIGHT LAWS OF THE UNITED STATES AND MAY NOT BE COPIED, OR REPRODUCED IN ANY WAY WITHOUT THE EXPRESSED, WRITTEN CONSENT OF TGR.  We encourage our readers to invest carefully and read the investor information available at the web sites of the Securities and Exchange Commission ("SEC") at http://www.sec.gov and/or the National Association of Securities Dealers ("NASD") at http://www.nasd.com. We also strongly recommend that you read the SEC advisory to investors concerning Internet Stock Fraud, which can be found at http://www.sec.gov/consumer/cyberfr.htm. Readers can review all public filings by companies at the SEC's EDGAR page. The NASD has published information on how to invest carefully at its web site.