Forecast – Oil back at $100, Global Market Volatility, CPI and Housing Stats, and More!

by Addison Wiggin & Ian Mathias

  • Oil hits another record high… Byron King on the “real reason” $100 oil is here to stay
  • Global markets swing up, then down… blow-by-blow of the latest worldwide volatility
  • Mixed readings from the latest homebuilder stats… The 5 highlights the trends your portfolio needs to know
  • Consumer inflation soars… which prices rose the most, and how higher CPI caused a dollar rally
  • Dan Amoss on the trouble at Northern Rock… and how England’s problems could soon be ours

Oil closed at $100.01 yesterday, a record high. What gives? For starters, this is never good for oil prices:

The Alon USA oil refinery in Big Spring, Texas… bit of a flare-up

And of course, there’s your typical “rebel uprising” news from Nigeria this week… rumors that OPEC is going to cut production… and more than one CNBC cheerleader calling for a quick U.S. economic comeback, leading to higher U.S. demand.

“But the real reason oil finally broke $100,” says our oil man Bryon King, “is a fundamental shift in global production. The old ‘Seven Sisters’ are aging relics — Standard Oil, Royal Dutch Shell, British Petroleum, Texaco, Chevron, Exxon and Mobil. They are no longer what they once were. Today, these poor spinsters collectively control less than 10% of the world’s oil resources.

“The old seven have now been replaced by the new ‘Seven Other Sisters’ (SOS).” These are:

Saudi Aramco (Saudi Arabia)
Gazprom (Russia)
CNPC (China)
NIOC (Iran)
PDVSA (Venezuela)
Petrobrás (Brazil)
Petronas (Malaysia).

“The party line from the SOS and OPEC,” Byron says, “is that ‘the market is fully supplied.’ Well, only if you like paying $100 a barrel.”

Despite the impending recession, U.S. consumers appear to be willing to keep up their spending. At least a quick glance at Wal-Mart’s fourth-quarter earnings would suggest so. U.S. benchmarks gained 1.2% on the news yesterday that Wal-Mart posted 4% growth through December.

Then “investors” took a closer look… and saw a gloomy 2008 forecast from Wally World economists.

By the end of the day, the Dow and S&P ended down 0.1%. The Nasdaq dropped 0.6%.

After very publicly announcing a new office in Mumbai, private equity group Kohlberg Kravis Roberts & Co. announced yesterday that the firm has delayed payments on billions of greenbacks in debt. The bank, apparently, borrowed these untold billions to invest in Alt-A home loans. Whoops…

KKR’s aftermarket news coupled with oil’s rise hit Asian markets hard. The Nikkei 225 shed 3.3% on the news. The Japanese government also downgraded growth expectations for the first time in 15 months.

Then, as if more were needed, news came that inflation hit an 11-year high in China… and the Shanghai Composite got knocked for a 2% loss. Benchmarks in Australia, Singapore and India all followed in kind.

In Europe this morning, stocks are down too. The CAC and the DAX dropped 1.5% and the FTSE closed down 1.2%.

Back here in the U.S., homebuilder confidence edged up in February. The National Association of Homebuilders/Wells Fargo Housing Market Index rose one point in February, to a score of 20.

But before you get all lathered up and start buying, keep this in mind: Aside from December and January scores, builders have never been so pessimistic.

Of the three components that make up the index, “buyer traffic” and “present market condition” sentiment rose. The portion measuring “six-month outlook” fell.

Permits to build new homes in January fell 3% to a 16-year low, reports the Commerce Department today. Not since November 1991 have so few builders applied to break ground on new developments.

As new permits sank, “housing starts” actually rose… albeit slightly. Housing starts crept up 0.8% last month, to a seasonally adjusted rate of 1 million — a three-month high. Even here, we see economy in action: Single-family home starts fell over 5%. But buildings with two or more units rose 22%, fueling the starts’ uptick almost entirely.

Consumer prices in the U.S. rose by 0.4% in January. When you yank food and energy out of the mix, prices still rose 0.3% — the highest monthly rise since June 2006.

In fact, damn near everything rose last month: Food and energy prices rose 0.7% — food’s biggest monthly rise in almost a year. Prescription drugs were up 0.7%, hospital prices up 1%, airline fares rose 0.8%. But don’t worry: New car prices fell by a stunning 0.3% in January. Keep those rate cuts a-comin’, Ben!

Credit Suisse, a bank thought to have largely dodged the subprime mess, announced a nearly $3 billion write-down yesterday. It blamed “pricing errors by traders.” The details of the errors made by these careless, rouge traders (conveniently quartered in the bank’s asset-backed securities division) will knock over $1 billion from CS’s first-quarter earnings.

Credit Suisse stock fell over 6% in Europe. Standard & Poor’s has placed its credit rating under review.

“The Northern Rock bailout is troubling,” says Dan Amoss in response to our coverage yesterday. “In many ways, the British economy is a microcosm of the U.S. economy. Both are considered safe havens for international capital — but for how much longer?

“Both economies pushed the envelope on housing inflation and credit growth. Both are involved in the unsound practice of trading paper money for energy and manufactured goods. And both are moving to the left politically. This doesn’t add up to attractive conditions for investors, so you want to be picky and skeptical in your investment decisions.”

If you’re exceedingly skeptical, you may want to place your bets accordingly. Dan can help. His latest “short” in the Strategic Short Report pulled in 173%. Get subscription details here.

The dollar was in the pits all day yesterday. Then, miraculously, higher-than-expected inflation readings from the government sparked a rally. The dollar index jumped over half a point, to 76.5, within an hour of the CPI’s release. Go figure. Traders must be thinking Ben’s ready to slow the rate cuts… but can he afford to?

Regardless of this fuzzy rationale, the euro dropped to $1.46. The yen finally let go of 107, up a point to 108. And the British pound, the mangy dog thus far in 2008, lost a full cent, to $1.93.

Gold rose as high as $930 last night, and has been trading steadily around $920 since. We’re still looking for that nice breakout to the upside.

“Should we be concerned,” asks a reader, “with the ever increasing amounts that are being floated by the Fed as loans to shore up the capital of U.S. banks? You bet! Because this is what these loans are; they are, in a nutshell, the difference between the regulatory capital required to stay in business as a bank and the net worth of certain banks assets and liabilities. The deficits become ‘short-term loans’ so as to keep these certain banks ‘afloat’…

“This appears to be a very ‘convenient’ way for the administration to avoid going to Congress and explaining why certain banks are failing and the need to vote (and lobby for) additional money and the complete overhaul of the U.S. banking industry. Instead, Bush’s cronies at the Fed are, with a debit here (the Fed books), a credit there (the bank books), and voila, $50-150 billion magically appears to avoid an embarrassing situation and the inconvenience of holding a Treasury auction.

“In fact, what this accounting shell game is achieving is very much an off-balance-sheet (remember Enron) borrowing against the nonexistent equity of certain banks. When the smoke clears, those bad loans will wind up U-KNOW-WHERE… on the balance sheet of the U.S. government as write-offs buried in some arcane language related to funding the Federal Reserve.

“Didn’t the Japanese try to hide their bad real estate loans this way?”

The 5 responds: They sure did.

“I thought you might enjoy this picture,” a Venezuelan reader writes. “My apologies for the quality, but I took it with a cell phone (VERY discretely…):

“This poster was in the waiting area of the Ministry of Small and Medium Industries of Venezuela. The main captions say:

Top — ‘Recognize These People!’ ‘Enemies of the State!’
Bottom — ‘Merchants of Terror!’ ‘Manufacturers of Lies’, ‘It Is Forbidden to Forget!’

“The photos on the poster are of various owners of media outlets such as local newspapers and TV stations. What may catch your attention is the seal of the U.S. Department of State as the background.”

The 5: Chavez really is a man of the people, isn’t he? What a great leader.


Addison Wiggin,
The 5 Min. Forecast

P.S. Starting today, we’re offering three free months of Dan Amoss’ Strategic Short Report. As we noted yesterday, the Dow is yet to exit its current downtrend… why not let Dan show you how to profit during these dismal market days? His SSR subscribers just cashed in a 173% gain by betting against belabored computer retailer Systemax, and Dan’s other open positions are up an average 27%. In the current bear market, those gains are pretty tough to beat.

Learn about the Strategic Short Report, including our three months for free offer, here.


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