Oil Price Slides!

Good day… And a Wonderful Wednesday to you! Three straight days without rain here in St. Louis! WOW! It did, however, rain on the currencies’ parade yesterday. About mid-morning, the brakes were applied to the run on the dollar, and the car was put into reverse. Retail sales disappointed, and PPI is not anything to laugh about. All that and more, as we head into the day after a 15-inning All-Star Game!

Front and center though is the good cop/bad cop thing that played out with Fed Chairman Ben Bernanke (bad cop) and SEC Chairman Cox (good cop). Big Ben sent the dollar packing in the morning with his statement that highlighted the Fed’s predicament. Big Ben noted that parts of financial markets remained seriously disrupted (which screams, no rate hike), but that dollar weakness had helped cause inflation to rise. (Here he goes again trying to blame everyone else for the Fed’s creation and feeding of inflation… Oh well, this statement screams, no rate cut!) The currencies all took turns taking a swing at the piñata (dollar)… And… It looked like the volcano was about to blow. Oh, I don’t know, I don’t know, I don’t know where I’m a going to go when the volcano blows! (Ahhh, a little Jimmy Buffett on a Wonderful Wednesday!)

But then along came Jones… Slow talking Jones… The SEC chairman stepped up to the microphone and the next thing you know the markets felt better. Oil started sliding… And the dollar caught a bid, when it looked like that was the last thing that was going to happen yesterday! The SEC chairman announced that the SEC would begin writing rules to limit short sales. This immediately stopped the negative feelings on a dime… The thinking here is that Freddie and Fannie can survive in their current state as long as the short sellers are kept from selling shares short, thus putting additional pressure on the stock values. This is a good idea for the short term… But really, this is simply a Band-Aid.

So, the big debate now, is this… Can Fannie and Freddie survive in their current state? I say no! And one of my all-time fave economists, Nouriel Roubini, doesn’t believe so either… Ty sent me a few quotes from Mr. Roubini yesterday. Put away the sharp objects folks, before you read these…

Nouriel Roubini predicts the worst financial crisis since the Great Depression and the worst U.S. Recession in the last few decades. This isn’t a Pollyanna report folks… This guy is good at what he does, is well respected, and I think is bang on here!

Here are two of his latest points… Again, put away the sharp objects!

“The FDIC that has already depleted 10% of its funds in the rescue of IndyMac alone will run out of funds and will have to be recapitalized by Congress as its insurance premia were woefully insufficient to cover the hole from the biggest banking crisis since the Great Depression…

“Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.”

WOW! If only someone in Congress would take notice of this and ask some questions, besides Ron Paul, whom I believe has been labeled a “malcontent” by other members of Congress and therefore is not taken seriously. If he were taken seriously, there would have been some major changes in the past year, and to my recollection, there have been none, zero, nada, zilch, a great big goose egg!

OK… Back to the task at hand… So… The price of oil dropped from the sky yesterday, dropping $8 from the $146 level it traded at yesterday morning. As far as I’m concerned, that’s a good thing! But I wonder where that slide came from? Well, actually, I think oil traders were spooked by Big Ben’s thought that both growth and inflation have risks. Will it continue to slide? Ahhh grasshopper, if I knew that for sure, I would be writing this from Fiji! Seriously though, I don’t see it sliding back to $85. The oil supply is still diminishing, while the demand, even with the U.S. battening down the hatches, still strong (see India and China)… And economics 101 tells us that when this scenario exists… The price will go up. I’ve told you all this before, but for new readers… My dad used to have a saying that he shared with me during the oil embargo of the ’70s. He said, “Chuck, there’s no such thing as a supply problem, it’s merely in need of a price adjustment”… Smart man, my dad..

Well, in the United Kingdom this morning, unemployment for June, jumped the most since the last recession in 1992. 15,500 jobs were lost in June, bringing the unemployment rate to 2.6%. Here’s a piece of data that screams, rate cut… But earlier this week we saw a report that showed inflation was anchored above the target ceiling, and that screams rate hike. See! I told you the other day that the U.K. has the same problems as the U.S. only on a smaller scale… A mini-me if you will! HA!

The euro (EUR) traded as high as 1.6038 yesterday, and then actually saw it slide to 1.5885 yesterday afternoon. It has since crept back above the 1.59 level, as the “feel good” moment the SEC chairman gave the markets yesterday is slowly fading away. The underlying awful fundamentals for the U.S. economy continue to rise to the top.

With the euro trading off in the afternoon, the rest of the “little dogs” took on water too. The leader was the Aussie dollar (AUD), which in the morning had reached a healthy figure of 98+ cents. Not to worry; in my opinion, this just points out that the currency can and probably will get right back there, and more eventually.

The BIG WINNER from yesterday though was… Drum roll please… The Japanese yen (JPY)! Not only did it move to the 104 figure, it has now moved to the 103 figure! WOW! (Remember, yen is a European Style priced currency, which means as the price goes lower, the more value it returns in dollars!) OK… It’s barely into the 103 figure, at 103.90, but still, that’s got a great look to it, don’t you think?

The rot on stocks is really helping yen, as all these problems coming to a head in the past week have really put “risk aversion” back on the menu! With risk aversion prevalent, the carry trades are getting unwound, and that feeds nothing but good times to the Japanese yen and Swiss franc (CHF).

Speaking of the Swiss franc… It’s creeping up on parity to the dollar again. We saw it reach parity earlier this year, when stocks were circling the bowl… But, then recovered, and the franc fell back… But now, it’s all back to the same negativity feelings of earlier this year for stocks, and that underpins the franc, BIG TIME!

There are quite a few earnings announcements due today here in the states… Hmmm… Could be why the stock futures are down 4 right now. There is a lot of uneasiness in the marketplace folks… This could get really ugly before the dust settles… So be careful out there!

Yesterday, we saw the color of the June retail sales report… And it looks like the temporary boost that retail sales saw from the rebate checks has just about petered out. Retail sales posted a 0.1% gain versus the 0.4% forecast, and the previous month was revised downward from 1% to 0.8%. Auto sales are just killing the retail sales numbers… But it’s not just auto sales folks.

June’s PPI (wholesale/pipeline inflation) jumped from 7.2% in May to 9.2%! Uh-Oh! Of course, the media reported the ex-food and energy number of 3%, which was unchanged… What a bunch of baloney! Food and energy isn’t the only inflation that’s going on! See why I think this report is stupid… But today we get one that’s even more stupid – CPI (consumer inflation)! Who knows what will print here?

We’ll also see the Net TIC’s flows… The net security purchases by foreigners, which is used to finance the current account deficit. The total is expected to show a figure of $60 billion, which is far below the $80-85 billion needed on a monthly basis to finance the deficit. Which tells me that the dollar will continue to remain weak, as it is used as a “carrot” to entice foreigners to purchase U.S. assets at a “discount” (from the weaker dollar).

So… Before I head to the Big Finish… I wanted to talk about Big Ben for a minute… Yes, he was blaming the weak dollar for inflation yesterday, never mind the fact that he has printed money supply at a rate of 16%! However, there were a few things that he said that sounded like he was finally reading the Pfennig.

He said that the weak dollar had played a part in the price of oil… Remember, I brought that to your attention months ago! And… He said that speculation hadn’t been a big deal in the price of oil… Something else I’ve said over and over again.

But, then he put out a laundry list of “risks” to the economy… So, read this and see if this doesn’t sound like something right out of the Pfennig!

“Some of the obstacles the U.S. economy faces are the ongoing strains on the financial markets, declining home prices, a softening labor market and rising prices of oil, food and other commodities, as well as escalating inflation”, said Fed Chairman Ben Bernanke… He forgot we’re fighting a war! I’m going to go the Pfennig distribution list to see if he signed up without me knowing! HA!

Currencies today 7/16/08: A$ .9785, kiwi .7725, C$ .9990, euro 1.5930, sterling 2.002, Swiss .9945, ISK 78.20, rand 7.6780, krone 5.0650, SEK 5.9725, forint 146.40, zloty 2.0250, koruna 14.60, yen 103.90, baht 33.47, sing 1.3460, HKD 7.7980, INR 43.11, China 6.8105, pesos 10.30, BRL 1.5930, dollar index 71.57, Oil $137.30, Silver $18.82, and Gold… $974.70

That’s it for today… So, of course, I did NOT stay awake for the whole 15-innings of the All-Star Game, I barely made it past Albert Pujol’s two singles! 12 straight for the AL… When I was a young man it was always the NL that won. Did you all like the state of the union address on EverBank that I had in Monday’s Pfennig? I thought that would be a good thing to do, given all the rumors and facts of bank problems going around. It was a better day for me yesterday, as the good days far outnumber the bad days for me… And that’s a good thing! I continue to get tons of emails from people with wishing me well, good health, and encouragement… A great big THANK YOU to one and all! Those all help, believe me! So… Get ready for some Big Time data today, and have a Wonderful Wednesday!

Chuck Butler
July 16, 2008