Gas Prices Closing in on 2008 Highs

by Bespoke Investment Group

ln the summer of 2008, the price of oil ticked close to $150/barrel, and at the same time the national average price for a gallon of regular gasoline ticked to $4.05. Gas prices didn't stay above $4 for long, however, and within a month of the $4.05 peak, the price had dropped by 35 cents. Within three months, in the midst of the financial crisis, the price per gallon had fallen to $2.80.

As shown below, the price of gas is now much closer to its 2008 high than the price of oil. In fact, the national average for a gallon of regular is currently at $3.90, or just 3.8% away from $4.05. Oil, on the other hand, is still 28% from its all-time high reached in 2008. Consumers can only hope that prices don't stay near or above $4/gallon for long. Unfortunately, a big decline in gas prices would likely coincide with a slowdown in the economy and a drop in equities. 

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AUSSIE DOLLAR VOLUME VERSUS PRICE

By Rohan Clarke

We knew that the times were extraordinary – but looking at the rapid ascent of the Aussie dollar this week is enough to get one questioning whether something else is going on.

Quickfire movements such as we have seen are uncommon enough events, though the most recent decade seems to have had its fair share. The last time that the Aussie was able to sustain this type of move without at least a reflexive correction was in the 70′s and the world was a very different place then…

Or was it? After Nixon ripped the USD from the last vestiges of gold convertibility in 1971 (some background here), the USD was pummeled relentlessly.

And in real terms:

Now we are faced with a similiar dynamic. Whatever the why’s and wherefore’s, the USD has few friends. Expectations of its imminent demise are widely held. Short positions dominate. Ultimately, consensus is its own worst enemy – the weak side becomes the counter-trend trade. But that is what drives a market correction not a change in trend. Looking at history, the USD could have a year or three of heavy weather before the trend is exhausted.

Still with the Aussie overbought, and overvalued by ~40% on PPP measures, we should pay attention to the breadth measures that are suggesting that volume continues to undermine this latest rally.

With the domestic economy having all the bouyancy of overripe cheese, I remain of the view that the AUSDUSD is at risk of a material correction on a global tightening of liquidity (as QE2 fades into the distance and China continues its tightening ways – note there is risk to this view as Japan has kicked it monetary stimulus machine back into gear). If the Aussie signals technical weakness, I expect to add to our short AUDUSD position (here).

For clarity, the short AUDUSD position is part of a portfolio that includes long gold and oil positions (that generally benefit from weakness in the USD). Also, as an Australian based investor, my equity portfolio is natively long Australian dollars.

Having said all this – it is what it is – a short AUDUSD position. And well out of the money at an exchange rate of 1.09…

3May10 - Added to the short position after the dollar reversed off 1.10. With weakness in copper, gold and equities starting to creep in – there is gathering momentum for a USD rally and risk selloff.

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THE DOLLAR – DOWN, BUT NOT OUT

By Andrew Johnson

• Five-day average of the daily sentiment index shows just 6% dollar bulls
• But dollar bulls also say they have some data on their side, most notably a booming stock market
• The announcement of a Greek debt restructuring could roil European bond markets and prompt money to flow from euros to dollars

The beleaguered dollar can’t seem to escape a huge one-way market bet on its decline, but with the currency slumping to fresh lows this week, a few dollar bulls are starting to snort.

Data on currency futures due Friday afternoon are expected to show a market that is heavily short dollars. That raises the potential for a sudden “short-covering” rally if something were to spur buying. Potential triggers can be defined as positive–progress on a plan to reduce long-term U.S. deficits, for example–or negative, such as an external event that prompts a flight of capital into the safety of dollars.

Ultimately, however, the market will look for any signals from a hitherto reluctant Federal Reserve that it is ready to more aggressively unwind its ultra-loose monetary policy, the overwhelming factor behind the dollar’s descent.

Although Fed Chairman Ben Bernanke made it clear [last week] that the Fed would likely end its $600 billion bond-buying program at the end of June as planned, he was highly cautious about the prospects for actual monetary tightening. That message was taken as a signal to pummel the currency. The dollar rout has now been so pronounced that some were wondering whether it faces a full-blown crisis.

And yet various currency market participants say the market is now so heavily geared against the dollar that it simply can’t go any lower, making a rebound a strong possibility.

“The five-day average of the daily sentiment index shows just 6% [dollar] bulls,” said William O’Donnell, head of U.S. government bond strategy at RBS Securities in Stamford, Conn. “That’s about as extreme a bearish reading for any commodity that I’ve seen over the years.”

“The bar for the market is low,” for the dollar to make a comeback, said David Woo, head of G10 global rates and currencies research at Bank of America Merrill Lynch in New York. His bank is counting on a comeback.

Dollar bulls also say they have some data on their side, most notably a booming stock market whose confidence in the U.S. economy runs counter to the very notion of a “dollar crisis.” The rebound in stocks is one of the mechanisms through which the Fed has been successful in re-inflating the U.S. economy, these people say. The Dow Jones Industrial Average has risen almost 100% from its March 2009 low, as excess liquidity has gone in search of returns.

There are also innumerable ways for the dollar to benefit from bad news in other markets. The announcement of a Greek debt restructuring, increasingly the topic of speculation, could roil European bond markets and hurt euro zone banks’ balance sheets, prompting money to flow from euros to dollars. Actions by China to cool its overheating economy could undermine the currencies of emerging markets that sell to the Asian giant. And any sense that speculators are dumping oil and other commodities that may have risen too far could hurt currencies tied to those commodities and boost the dollar.

The dollar’s trade-weighted index has fallen more than 6% since August, when Bernanke first broached the idea of a second round of “quantitative easing” bond-buying. It is now lower than it was before the financial crisis of September 2008 and closing in on its lowest levels ever.

Notably, the selloff has worked mostly in lock-step with a deterioration in the Treasurys market, where fears have grown that foreign investors will dump dollar-denominated assets because of their mistrust of both the Fed’s monetary policy and the federal government’s fiscal planning. Meanwhile, Newport Beach, Calif.-based Pacific Investment Management Co. has dumped all U.S. government-related holdings from the Total Return Fund, the world’s biggest bond fund. PIMCO’s Bill Gross argued that unchecked spending on Medicare and Social Security will add to the nation’s ever-growing debt load. Such comments have helped the dollar to sink further and faster.

But if there are concerns about the U.S. government’s balance sheet, U.S. corporates appear to be in a much healthier state. Companies such as Ford Motor Co. (F), United Parcel Service Inc. (UPS), 3M Co. (MMM) and many others have reported strong results this week, helping to lift equity investors’ spirits. The weakened dollar is bolstering U.S. exporters’ financial results by making their goods more competitive in the global market.

The question is, which is sending the right signals for the dollar, bonds or stocks?

Dollar bulls say that the bond market is a red herring. They point to the resilient euro, which has soared to 15-month highs against the dollar despite an ongoing crisis in the euro zone’s sovereign debt markets. And if bondholders start taking haircuts on their loans to Greece or other peripheral euro-zone countries, that trend could rapidly reverse.

Meanwhile, there is some hope that Standard & Poor’s recent announcement putting the U.S’ AAA credit rating on negative outlook could spur a deal in Congress to rein in fiscal deficits, a move that could spur confidence in the currency if it doesn’t do too much harm to the economy in the process.

According to Bank of America Merrill Lynch FX research this week, a one percentage point improvement in the U.S. structural budget balance as a share of gross-domestic product data has been associated with a 7% appreciation of the dollar against the euro over the last 40 years.

If no positive or negative news is forthcoming to boost the dollar and it continues to fall in contradiction of what policymakers see as the more positive fundamental backdrop, there’s always the remote possibility of central bank intervention to prop it up. But even if talk of a “crisis” grows, such a policy response is seen as unlikely, not only because a weaker dollar helps achieve the Obama administration’s stated goals for increasing exports, but also because it would entail a rare, politically fraught coordinated move by the world’s major central banks.

Such actions have occurred only a few times in the past. In July 1995, the Fed and other central banks bought dollars for yen and Deutsche marks, but that was mostly aimed at weakening the yen. It was only back at the Louvre Accord of 1987 when there was truly a concerted effort to boost the dollar. And even that was launched to undo the dollar-weakening effects of the 1985 Plaza Accord.

The real barrier to a sharp dollar rally are the low yields that investors earn on it. Near-zero interest rates have severely limited the dollar’s appeal and instead set it up as a funding vehicle for investments into higher-yielding, riskier assets. Changing that scenario depends on the Fed.

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SPX Pullback History, 2009-2011

by Bill Luby

Since there has been only one significant pullback in stocks so far in 2011, I am taking the mild selling from the last two days as an excuse to update a table of pullbacks that I have been updating periodically since stocks bottomed back in March 2009.

The table captures some of the details of the fifteen significant (in magnitude and/or duration) pullbacks in the SPX during the last 26 months, with the current pullback – so far at only 1.5% from peak to trough – highlighted in yellow.

Not counting the current 1.5% dip, the mean pullback has been 6.5% from the peak, with the median coming in at 5.6%. Using these numbers, a median pullback would take the SPX down to about 1294 and a mean pullback would drop the index down to a little over 1286.

A pullback that matches the 17.1% drop from April to June 2010, which is the largest during this bull market, would drop the SPX back all the way to 1136.

As you think about the current selling and the recent propensity for buy-on-the-dip investors to keep most pullbacks from becoming too severe, this bit of historical benchmarking should be able to serve as a guideline for evaluating how deep and how long the next pullback might extend.

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Win with Chinese Coal Stocks

by Rudy Martin

International coal prices hit $124 per ton last week, the highest level in five months, largely due to strong demand from reconstruction projects in Japan. But coal supply is also tight, because of flooding in Australia, Indonesia, South Africa and Colombia.

Perhaps no country is more affected by this development than China, which experienced 9.7 percent GDP growth during the first quarter. According to the country’s National Energy Association, China’s electricity consumption will rise 12 percent this year, which could lead to power shortages. In response, the government is putting restrictions in place as the peak season approaches. Big industrial provinces are already scaling back power consumption plans. These reductions are likely to hinder aluminum, cement, zinc and steel output.

In addition, China’s National Development and Reform Commission called a meeting this week of domestic coal suppliers to ensure stable supplies.

Coal powers the Chinese economy, and China is by far the world’s largest consumer. Coal accounted for 71 percent of China’s energy in 2008 — more than three times the United States’ share. The Electricity Council estimates that the country’s coal demand will reach 1.92 billion tons in 2011, up nearly 10 percent from last year.

Demand for electricity is exploding due to China’s rapid urbanization and rising middle class. Emerging wealth means powering new refrigerators, air conditioners and other appliances in homes.

Luckily for China, it sits atop the third-largest amount of recoverable coal reserves in the world behind the U.S. and Russia. The country more than doubled its coal production from 1999 to 2009. Despite this increase, production couldn’t keep up and the country became a net importer of coal two years ago.

The Chinese government made it clear that it wants to wean the country’s power grid from coal. But that’s proven to be a difficult task. Hydroelectric, nuclear and other renewable fuels combined make up only 10 percent of total power. And the EIA forecasts that China’s coal consumption will nearly double over the next 25 years, as the economy continues to grow and electricity demand remains strong.

With coal’s short- and long-term status atop China’s energy mix intact, I think China’s domestic coal producers stand to benefit. Subscribers to my Emerging Market Winners newsletter have already made 23 percent on Yanzhou Coal Mining, ticker symbol YZC. That’s one way to light up the portfolio performance meter. 

Watch the video.

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A Dollar Collapse? No Way – The U.S. Dollar Rocks! (Propaganda)

by The EconomiccCollapse

Are we on the verge of a dollar collapse? Don't believe the skeptics. The truth is that there is no currency in the world that is stronger than the old greenback. The U.S. dollar is the reserve currency of the world. 

Virtually all of the nations on the face of the earth use it for trading and they always will. Why? Because the U.S. dollar is awesome. No currency on earth can compete with our awesomeness. So what that the dollar hit a new all-time record low against the Swiss franc today? Do you really want to move over with the Swissies and eat chocolate and make watches? No, you want to live in the land of American Idol, the NFL and apple pie - the good old USA. Who cares if it takes about a dollar and a half to buy a single euro now? 

Do you really want to go live with the Frenchies and eat a bunch of French bread while you wear a beret every day? Of course not. There isn't going to be a dollar collapse. As long as the USA is still number one the rest of the world is still going to need U.S. dollars. So quit your worrying.

The other day all of the "doom and gloomers" were crying that the sky was falling because the U.S. dollar had fallen for 8 trading days in a row. They were proclaiming that the "end of the dollar" was near because the dollar index was approaching a new record low.

The following is how an article from yesterday in the Washington Post described the recent slide of the dollar....

The dollar has fallen against a basket of six major currencies -- the euro, Japanese yen, British pound, Canadian dollar, Swiss franc and Swedish krona -- for the past eight trading days. That measure struck its lowest point since July 2008 on Monday, at 72.72. It hit bottom in April 2008 at 71.33. Its highest point since the euro’s creation was 120.92 in July 2001.

Well guess what?

The dollar index moved back up today.

That is what happens - currencies go up and currencies go down.

There is no need to get your pants in a twist over it.

When the U.S. dollar goes down, it makes our products more affordable overseas. When other nations buy more of our stuff that helps our businesses.

So when the dollar declines a little bit that is nothing to be alarmed about.

So far in 2011, the U.S. dollar has only lost about 6.5 percent of its value.

Should we be freaking out about a measly 6.5 percent?

I don't think so.

Do you want an even "scarier" number?

The dollar has fallen by 17 percent compared to other major national currencies since 2009.

Oooooooooohhhhhhhhhhhh - are you frightened out of your mind yet?

You better run outside Chicken Little - the sky might be falling.

The problem is that there are so many tinfoil hat wearing conspiracy theorists running around declaring that the U.S. dollar is dying that some people are actually starting to believe it.

Do you want proof that the U.S. dollar is going to be just fine?

Here you go....

Just check out what U.S. Treasury Secretary Timothy Geithner recently told the Council on Foreign Relations....

"Our policy has been and will always be, as long as I will be in office, that a strong dollar is in the interest of the country."

Bam!

You have the very words of the U.S. Treasury Secretary right there.

He has promised the we "will always" have a strong dollar policy.

Geithner has said it and that settles it.

Any questions?

Who are you going to believe? Are you going to believe the U.S. Treasury Secretary or are you going to believe a bunch of crazy Internet bloggers with blogs with titles such as "Economic Disaster" and "The American Dream Has Been Flushed Down The Toilet"?

Let's get real.

The U.S. dollar is just fine and there is not going to be some mythical "dollar collapse".

But isn't the price of gasoline going up?

Sure it is.

But that isn't the fault of the Federal Reserve. They don't set prices for gasoline.

The reality is that prices for different things go up and down. That is what a free market economy looks like.

Right now the price of gasoline is actually lower than it was back in 2008....

So shouldn't we actually be talking about falling gasoline prices?

I don't know about you, but I sure am glad to be paying less for gasoline than I was back in mid-2008.

But the tinfoil hat crowd will "cherry pick" statistics to make it seem like things are worse than they really are. 

They will break out scary sounding statistics such as the fact that over the past 12 months the average price of gasoline in the United States has gone up by about 30%.

LOL - cry me a river. Life is tough. People will cry over just about anything these days.

Who really cares that the average American driver will spend somewhere around $750 more for gasoline in 2011?

That is just a sign that the economic recovery is in full swing.

Do you know how much all of that money is going to help our oil companies?

They are going to be swimming in cash, and all of that wealth will "trickle down" and help out the folks on main street.

You would think that the half-crazed economic bloggers out there would be thrilled by all of this, but no - they just keep trotting out the "inflation boogeyman" over and over and over.

Well, you know what?

According to no less of an authority than Federal Reserve Chairman Ben Bernanke, we basically have close to zero inflation in the United State right now.

You believe the Federal Reserve, don't you?

If not, there is probably something wrong with you.

Unfortunately, we have got a whole bunch of these self-proclaimed "experts" (who are really just legends in their own minds) running around proclaiming that inflation is not calculated the same way that it used to be.

Well, you know what? They are right. But it isn't some great conspiracy. The truth is that we have "improved" the way that inflation is calculated 24 times since 1978.

The government is always trying to become more accurate.

What is wrong with that?

But today we have a bunch of amateurs running around trying to tell us what the "real" rate of inflation actually is.

For example, a New York post analysis claims that the rate of inflation in New York City has been about 14 percent over the past year.

So how many prices did they measure?

A dozen?

Two dozen?

Who are you going to trust more - the Federal Reserve or the New York Post?

Perhaps the New York Post should just stick to reporting on the latest Elvis sighting and leave economics to the big boys.

If hack reporting by publications like the New York Post wasn't bad enough, we've also got numbskulls like John Williams from a website called "Shadow Government Statistics" running around proclaiming that the sky is going to fall because of U.S. government debt.

The following is a sampling of the smelly stuff that Williams is spreading around....

S&P is noting the U.S. government's long-range fiscal problems. Generally, you'll find that the accounting for unfunded liabilities for Social Security, Medicare and other programs on a net-present-value (NPV) basis indicates total federal debt and obligations of about $75 trillion. That's 15 times the gross domestic product (GDP). The debt and obligations are increasing at a pace of about $5 trillion a year, which is neither sustainable nor containable. If the U.S. was a corporation on a parallel basis, it would be headed into bankruptcy rather quickly.

Does anyone actually believe any of that nonsense?

How long has Williams been predicting that U.S. government finances are going to collapse?

Yes, he has been doing it for a very, very long time.

Has the sky fallen yet?

Are we living in an economic wasteland?

Has there been a U.S. dollar collapse?

No.

Look around you - everything is just fine.

Every time the U.S. economy has had a recession in the past, what has happened?

The economy has recovered and has gotten larger than ever.

And that is exactly what is happening again.

But sadly, there are more Americans than ever that actually believe that we are headed for economic disaster. 

In fact, there are some websites where they actually debate what the best place to live in the United States will be when the "economic collapse" happens.

Can you believe that?

People need to grow up.

Yes, the U.S. government is in debt. That should be no surprise. U.S. government debt is normal. The truth is that our financial system is designed to have U.S. government debt constantly expand and for there to always be a little bit of inflation in the system.

When the U.S. government goes into more debt, more money is created. If there was no debt in our society there would be no money.

So all of these bozos that claim that they want to get rid of all government debt don't know what they are talking about.

We need to trust that the experts over at the Federal Reserve know what they are doing. The prudent moves by Ben Bernanke have helped the economy to recover after the horrible financial crisis of 2008. Instead of being criticized, he should be commended. There is a reason why he was named "Person of the Year" by Time Magazine in 2009.

The Federal Reserve is watching inflation. If it starts spiking up a little bit they will stomp it out. They know what they are doing.

This is 2011 - the people running things were produced by some of the greatest academic institutions on the planet. Nothing is going to catch them by surprise. They know exactly what our problems are and how to solve them.

So quit listening to the tinfoil hat crowd. Yes, the U.S. dollar will fluctuate a little bit relative to other major currencies. That is nothing to be alarmed about.

There is not going to be a dollar collapse so stop waiting for one. The U.S. dollar is always going to be the greatest currency on earth. Why? Because the United States is the greatest nation on earth.

After all, what other nation on earth could produce Justin Bieber, Jim Carrey, Simon Cowell, Pamela Anderson, Catherine Middleton, Michael J. Fox, Seth Rogen, Brendan Fraser, Jason Priestly, Tom Green, Ryan Reynolds, Mike Myers, Kiefer Sutherland, Howie Mandel, Keanu Reeves and William Shatner?

Hopefully by now you have figured out that this is a satirical piece demonstrating how ridiculous much of the propaganda in the mainstream media really is. Thank you for taking the time to read my twisted attempt at humor.

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