I want to wish everyone a happy and safe Fourth of July!

The Labor Department reported that non-farm payrolls rose by 132,000 in June, which was essentially in line with estimates of 130,000. However, the biggest news in the payroll report is that the April and May payrolls were revised higher by a 75,000, which means that the job market is much stronger than previously believed. Although the unemployment rate remains at 4.5%, the job market is so strong that the unemployment rate could fall to 3.9% by election time next year.

Normally a strong job market can result in wage inflation, which has been one of the Federal Reserve’s top concerns. Fortunately, wage growth slowed to 0.3% in June after a revised 0.4% gain in May. Hourly wages are up 3.9% in the past year, down 0.1% from May’s year-over-year gain.

Although 3.9% wage growth is higher than overall inflation and appears inflationary, after factoring in productivity gains, wage inflation is well-behaved. As a result, I still believe that the Fed has room to cut interest rates if core inflation falls in the upcoming months. We have the best of both worlds right now, steady economic growth without new inflationary pressures.

The stock market had its best day in four years today as the Dow shot up 284 points to a new high and the S&P 500 also hit a new record. Why? Merger Mania is still going strong and June same-store sales were better than expected.

What if someone told you one year ago today that the Dow was about to soar 25% in the next twelve months? You probably would have thought they were crazy, but that's exactly what's happened. I think the reason is clear. Wall Street is excited about earnings season, and I am too.

But I have to warn you--a rising tide will not lift all boats. Yes, some stocks will rocket higher, but many others will languish. The key to navigating your way through this market is to focus on fundamentally superior stocks, stocks with healthy sales, earnings, and cash flow and the like. That's the only sure strategy during uncertain times like this. Fortunately, these are exactly the kinds of stocks I pinpoint for investors in my Emerging Growth service.

I'm happy to say that Emerging Growth has been one of the most successful investment advisories for the past generation. My team and I have built a great track record by focusing on fundamentally superior stocks trading at good prices. Our results speak for themselves. From 1985 through 2006, our legendary Buy List is up over 4,800%. Those aren't my numbers, by the way, that's according to The Hulbert Financial Digest, an independent tracker of investment newsletters.

At Emerging Growth this year is shaping up to be one of our best years ever. We just had another huge winner thanks to (you guessed it) Merger Mania. This time it's Chaparral Steel (CHAP). The company just accepted an $86 a share takeover offer (or $4.22 billion) from Gerdau Ameristeel of Canada. That's a nice 14% premium over CHAP's previous price.

Merger Mania has been especially rampant in the steel sector, and I knew that sooner or later, some suitor would come for Chaparral. I first recommended CHAP to members of my Emerging Growth service last October. At the time, the stock was going for just $37.21 a share.

The deal still needs to be approved by shareholders, but assuming everything goes smoothly, Emerging Growth subscribers will walk away with a 131% profit.

Not bad for nine months' work!

The New York Times revealed last week that the Blackstone Group has devised a way for its partners to avoid paying taxes on the bulk of what it raised from its recent IPO. Although Blackstone partners will initially pay $553 million in capital gain taxes, these partners will get back about $200 million more than that over the long term, due to the amortization of goodwill.

Lee Sheppard, a tax lawyer who critiques deals for Tax Notes magazine, has studied the details of the plan. She described how the tax system actually operates at the highest levels of the economy. Ms. Sheppard said, "These guys have figured out how to turn paying taxes into an annuity." She added, "What people don't realize is that the private equity managers, the investment bankers, all the financial intermediaries, are in control of their own taxation, so the debate in Washington about what tax rate to pay misses the big picture."

In other words, Blackstone is a lot smarter than Congress. The Blackstone Group isn't planning to pay any federal taxes at all, no matter what tax rate Congress passes! How can they do that, you ask? It has to do with the fact that when you pay above book value for a business, the buyers incur "goodwill" above a company's book value, so they get to depreciate that goodwill as an expense for many years. This means that private-equity groups can structure their acquisitions so that they incur positive operating cash flow, but post a tax loss due to all the goodwill that they have incurred and are depreciating. So no matter what the federal tax rate is, Blackstone has no intention of paying it. Now you know why they went public, despite threats of higher taxes from the Senate Finance Committee.

Obviously, this revelation (by The New York Times and other news media) about how the private-equity business works is stirring debate about reforming the tax code. The truth is that "goodwill" isn't an accounting trick, since it's been around for decades and isn't likely to go away anytime soon. About all Congress can do is to extend the time frame that Blackstone and others expense goodwill via depreciation. But they will undoubtedly incur massive resistance from all kinds of business interests. Under President Clinton, depreciation was lengthened, but it received stiff opposition from the business lobbies. Other business lobbies, such as those for aviation, were able to obtain favorable depreciation rules for private jets, which have subsequently been reduced by the Bush administration. Depreciation is a very touchy subject and will be hotly debated in the back rooms of Congress, who will be pulling their hair out trying to figure out how to deal with folks that utilize depreciation to avoid taxes. An Alternative Minimum Tax (AMT) on corporations is possible. Although AMT is a very dirty word for millions of middle-class taxpayers, corporations don't vote (they just lobby), so a corporate AMT is possible.

Since we'll be electing a new Congress and president next year, Congress will likely hold hearings and make a lot of noise, but not raise taxes. Republican candidate Rudy Giuliani is proposing a flat income tax, as endorsed by Steve Forbes. Another Republican, Mitt Romney, is calling for flatter, fairer taxes and wants to get rid of all taxes on capital gains, dividends and interest. Obviously, his proposal to abolish taxes on interest will be very appealing to senior citizens that are hurt by up to 35% federal taxes on their interest income. I suspect that Romney will gain ground in the polls since senior citizens are the most powerful voting bloc.

On the Democratic side, I suspect that AMT relief and "fairer" taxes will be proposed. Former Treasury Secretaries Larry Summers and Robert Rubin are already working on new tax proposals that will likely be revealed in time for the Democratic and Republican conventions next year.

Today, the government reported that wholesale inflation fell -0.2% last month. That's the first drop since January. The core rate, which excludes food and energy prices, rose 0.3%. But much of that increase was due to cars and trucks. Take those out of the picture, core inflation was just 0.1%.

This is good news and it helped push the Dow over 14000 this morning.

Yikes!

Weeks after the meltdown of two prominent Bear Stearns Cos. (BSC) hedge funds that bet heavily on the market for risky home loans, the brokerage has told the funds' investors that the portfolios' assets are almost worthless, according to people familiar with the matter.

The assets in Bear's more levered fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, are worth virtually nothing, according to people familiar with the matter. The assets in the other larger, less-levered fund are worth roughly 9% of the value since the end of April, these people said. The April valuations weren't immediately available but in March, before their sharp losses, the enhanced leverage fund had $638 million in investor money, while the other fund had $925 million.

The two funds have been in the spotlight for weeks after suffering heavy losses in the subprime market. Late last month, Bear helped stabilize the less- levered fund with a $1.6 billion secured loan; the enhanced fund began trying to unwind its remaining $1.1 billion in debt.

From Bloomberg:

Consumer prices in the U.S. rose 0.2 percent in June, the smallest gain in five months, as gasoline prices retreated from a record.

The increase in the consumer price index followed a 0.7 percent rise in May, the Labor Department said today in Washington. Core prices, which exclude food and energy, rose 0.2 percent and were up 2.2 percent from a year earlier.

The figures come less than two hours before Federal Reserve Chairman Ben S. Bernanke is scheduled to testify before Congress on the state of the economy. Signs that price increases may have peaked will reassure policy makers, who last month said inflation remained their "predominant" concern.

Today's news postpones a Federal Reserve rate cut until the core inflation rate drops a bit more.

Most economists now estimate that the economy expanded at a 3% pace in Q2 after growing at a 2%, 2.5% and 0.7% annual pace in the previous three quarters. This is a major sentiment change and is largely caused by recent economic data indicating that the economy is breaking out of its slump.

Much of the economy's second-quarter resurgence is attributable to improving business spending and stronger export growth, which increased 2.2% in May to a record $132 billion.

The trade deficit was essentially unchanged from April, and a "flat" deficit, along with an upswing in exports, will add about 1% to Q2 GDP. By contrast, the trade deficit subtracted a percentage point in the first quarter, when GDP growth slowed to 0.7%.

Through the first five months of the year, the trade deficit ran about 3.4% lower than it was over the same period in 2006. Exports are up 6.9% this year, while imports are up 2.3%. On a yearly basis, exports have climbed almost three times faster than imports, with the biggest increase coming from capital goods, like civilian aircraft. Exports of industrial materials and consumer goods also set records in May.

Simply put, strong economic growth around the world continues to boost the earnings of many large-cap multinationals. These companies are also benefiting immensely from the weak dollar, which recently hit a new low against the euro. In fact, there's definitely a strong Wall Street perception that many U.S.-based companies that conduct their business abroad are benefiting from strong economic growth around the world.

From the Financial Times:

"We continue to see the subprime and credit concerns as a US, rather than global issue," said David Woo at Barclays Capital. "As such we expect broader dollar weakness to remain the key theme in the foreign exchange markets this week."

The dollar fell to an all-time low low of $1.3844 against the euro, before recovering to stand little changed on the session at $1.3825 by midday in New York. Meanwhile, the pound hit a 26-year high of $2.0603 against the dollar, before easing back to stand at $2.0580, still up 0.1 per cent on the session.

After soaring past 14,000 for the first time in history last week, the Dow fell 226 points today to close at 13,716. I wanted to get in touch with you, as I always do, to provide you with my take on the market's latest events.

Today's drop was a textbook example of profit-taking. The market had a great run last week, and it's simply consolidating its gains. I'm not concerned about today's correction, and you shouldn't be, either.

Weighing Wall Street down today were disappointing earnings reports from several Dow components, including DuPont (DD), Texas Instruments (TXN) and American Express (AXP). Continued woes about the subprime housing market also factored into the selloff.

For instance, Countrywide Financial (CFC), a mortgage lender, reported a 33% decline in quarterly profit today. And, as more homeowners fall behind on their payments, the company said it must slash its guidance going forward.

The subprime problem is primarily a banking problem, and it's also a hedge fund problem. The housing market's problems are helping to facilitate the market's "seismic shift" from value investing into growth investing. As more investors flee subprime-related value investing, growth stocks have emerged as an oasis amidst the crisis. Today's selloff will only help investors gravitate towards my style of investing

The New York Times just reported very good news. It turns out that humans can still out-bluff a computer at poker.

Whew! But after 30 years on Wall Street, I'm not surprised. Technology will have a hard time catching up to us in that department.

I can't help but think of this article when I look at this week's action on Wall Street. The stock market got slammed for the second time in the last three days, but honestly--there's a lot of bluffing going on.

First, trading volume often dries up during this time of year. This is when all the Wall Street bigwigs head to their summer homes in the Hamptons or Martha's Vineyard. So when we see 200-point declines, let's remember that a lot of the big money people aren't joining in.

Also, these indexes tell us what the entire market is doing. Well, I'm not buying the entire market! Instead, my strategy is to focus only on the best names on Wall Street. My computer database constantly analyzes financial data to see what types of stocks the market is currently rewarding. At the end of the day, only about 0.5% of all stocks make it through my vigorous analysis.

I'll give you a great example of the kinds of stocks I'm finding. I currently recommend Vasco Data Security (VDSI) in my Emerging Growth service, and it jumped 12.6% today on very strong earnings. Unfortunately, this won't make any headlines, and except for a few technology professionals, not many investors know about Vasco. The company makes network security products, and as you can imagine, VDSI's business is booming right now.

For the second quarter, Vasco earned 18 cents a share, which more than doubled last year's total of eight cents a share. Sales soared 75%. Best of all, the consensus of Wall Street analysts was for earnings of 15 cents a share. That means that the company topped estimates by 20%. So if that's a bad market, I'll take it!

The selloff this week was a gross overreaction to the worries that the private equity business has ground to a halt.

Let me explain why that hurt the market. These private equity guys often buy a company with loans that come from banks, and there's often a bank syndicate involved. And they often pay off the loans by issuing high-yield bonds.

On Wednesday, two major recent acquisitions went to sell their bonds, and no one wanted to buy them. So Wall Street concluded that Merger Mania is over, private equity has dried up, and there'll be no more mergers and acquisitions. BA! That's blatantly false--and the market pounded the Blackstone Group (BX)--a publicly traded private equity firm.

The reason it's blatantly false is that those were risky private equity transactions. The safer ones will still continue, and they can be financed with quality bonds, or financed with debt from banks. Merger Mania isn't over, we just may have more quality mergers.

In the interim, there was massive flight to quality; the 10-year T-Bond is down under 4.8%; market rates have fallen, and market rates are so low that it's resuming gossip that the Fed may have to cut rates. Now, let me tell you why I think the Fed's going to have to cut rates--it actually showed up in the second-quarter GDP report, where our economy grew at a 3.4% pace.

When you look at the GDP report, most of the growth came from soaring exports. Consumer spending--and consumer contributions of second-quarter GDP--was much lower in the second quarter than it was in the first quarter. So this is renewing fears that as the housing market slows down, consumer spending is also slowing down.

The housing market is still a drag on the economy, but nowhere near as much in the second quarter as it was in the first quarter. Although this week we had very weak existing and new home sales, so I don't think the housing market is out of its little trough right now.

But the truth of the matter is that we're not in a perfect economy. It was really the weak dollar that caused economic growth to take off in the second quarter. So, it's a very interesting market we're in right now; this market's going to get much narrower.

Marathon Oil (MRO), which I recommend in my Blue Chip Growth Letter, is buying Canada's Western Oil Sands for $5.46 billion. This is a very exciting deal.

There's a big rush going on to get a hold of Canada's rich tar sands. The deposits there are estimated to be the second-largest in the world behind Saudi Arabia. Also, countries like Russia and Venezuela are being increasingly hostile to foreign investment.

Clarence P. Cazalot, Jr., president and CEO of Marathon said, "The Athabasca Oil Sands Project is truly a world-class asset with multi-billion barrel, long-life resource potential. Marathon's strategically advantaged U.S. Midwest downstream business is well positioned to provide both near and long-term solutions to maximize the value of these substantial bitumen resources. We are joining an ongoing and expanding project with strong partners, and collectively, we will be able to apply our technical and commercial skills to maximize both the recovery and value of these resources."

I currently rate Marathon Oil a strong buy up to $67 a share.