Americans Stop Driving, Housing Crisis Worsens, Institutions to Blame for $130 Oil, Bill Bonner’s Fav Investments, and More!

  And according to MasterCard, gasoline sales were down 7% compared to the week leading up to Memorial Day in 2007. Hmmm… wonder why?

  Retail gasoline struck a national average of $3.93 this morning, yet another record high. Gas is up 20 days in a row now, and 11 states feature average prices above $4 a gallon.

  Home prices across the country have fallen over 14% from last year, reports the March incarnation of the S&P/Case-Shiller Home Price Index this morning. The chart tells the story on this one… ouch:

“There are very few silver linings that one can see in the data,” says David Blitzer, chairman of S&P’s index committee. “Most of the nation appears to remain on a downward path.”

That’s putting it nicely. In the index’s 10 major metropolitan areas, prices fell 2.4% from February to March and 15% year over year. Per usual, Las Vegas was the ugly duckling of the data… prices down a staggering 26% in one year.

In its 20-city index, 19 areas reported annual home price decline. Fifteen of those reporting cities registered record lows, 11 of which were in double-digit decline. Only Charlotte, N.C., managed annual growth, as home prices there have risen 0.8%.

  New home sales plunged 42% in April, year over year. According to this morning’s Commerce Department report, sales of shiny new homes rang in at an annual rate of 526,000 in April… that’s actually a 3% improvement from March, the first new home sales uptick in six months.

But the horrid housing trend, as illustrated above, is still alive and kicking. April’s 42% yearly decline is the biggest annual crash since 1981.

  So this comes as no surprise… consumer confidence is at a 16-year low. The Conference Board’s consumer confidence index scored 57.2 in May… down five points from April and well below expectations. The index hasn’t seen this level since 1992. May marks the fifth straight month of decline.

  "I still believe there is a greater than 50% probability of recession," Alan Greenspan told the FT over the weekend. When we last checked the gauges on his recession-o-meter, Mr. Bubble seemed all but certain the U.S. was plunging into contraction… looks like the former Fed chairman is hedging his bets.

“That probability has receded a little and I think the probability of a severe recession has come down markedly… A recession is characterized by significant discontinuities in the data. It started off that way — there was a period of sharp discontinuity from December to March. But then it stopped.

“No one knows how this tug of war will end — specifically, whether the financial crisis will end before it drags down the real economy.”

  At $133 a barrel this morning, oil prices were climbing toward record highs again. Crude shot up a buck or two in the premarket after another Nigerian drilling site was attacked by rebel forces. The light sweet stuff has since backed off a bit… to $130 as we write.

  “In the short and medium term,” says Byron King, “I expect to see OPEC nations working to stabilize the international oil market.” (Assuming, of course, that they have the ability to do so.)

“Wide swings in oil prices are not good over the long term. It is not in OPEC’s best long-term interest to damage the U.S. economy with excessively high oil prices. And it is not good for OPEC to promote a political consensus within the U.S. that leads to a firm national commitment to develop alternatives to oil dependency.

“I think OPEC will subtly attempt to stabilize oil prices very soon. There will not be any big announcements or trumpet blowing about it. OPEC is too smart and too Byzantine when it comes to important things like that. But when the OPEC actions kick in, I think that oil prices will begin to drift downward to a level near $110-115 through the summer and into the U.S. elections in November.”

  “Institutional investors are one of, if not the primary, factors affecting commodities prices today,” suggested hedge fund maestro Michael Masters before Congress last week. In the latest chapter of the oil blame game, the finger is pointed at an unsuspecting group: pension funds, sovereign wealth funds, university endowments and other “institutional investors.”

"These parties,” continued Masters, “who I call ‘index speculators,’ allocate a portion of their portfolios to ‘investments’ in the commodities futures market, and behave very differently from the traditional speculators that have always existed in this marketplace. I refer to them as ‘index’ speculators because of their investing strategy: They distribute their allocation of dollars across the 25 key commodities futures according to the popular indexes — the Standard & Poor’s — Goldman Sachs Commodity Index and the Dow Jones-AIG Commodity Index."

So could it be… the commodity bubble is just a simple act of large funds diversifying assets in the latest “hot sector”? Maybe. Check out this chart nicked from our colleague John Mauldin … investments in commodity index funds have multiplied 20-fold since 2003:

We wonder if the dog is wagging its tail, or the other way around?

Either way, growth in “index demand” is undeniable. Put in other terms, China’s demand for oil has grown to 920 million barrels a year. These same index funds are on track to own 848 million barrels this year.

  The 2008 Atlantic hurricane season is looking to be more active than normal, reports the National Oceanic and Atmospheric Administration. In their latest forecast, NOAA weathermen predicted up to 16 named storms this year, up to five of which will be major hurricanes. In terms of your typical Atlantic hurricane season, that’s slightly above average. Not the best news for an already edgy energy market.

For what its worth, NOAA predicted 17 storms last year, including three major hurricanes. There were 15 storms and two big-uns. We’ll leave predicting the weather to the dart throwers at NOAA… if you’d care to play along, check out Resource Trader Alert. Kevin Kerr booked 355% gains for his readers in 2006 on a hurricane-related orange juice trade.

  To be expected, the dollar traded lightly yesterday as the U.S. and U.K. took the day off on Monday. The dollar index stayed put right at 72 through the holiday. The dollar’s chief competitors did much of the same… the euro’s at $1.57, the pound sells for $1.97, and the yen is at 104.

  Gold flat lined at $927 through the weekend, but got hit with a wave of selling at the New York opening this morning. As we write, the precious metal is at $910 and falling.

 A buying opportunity, if you ask Bill Bonner. In lieu of yesterday’s market recap (of which there was none), we offer you this rare glimpse into Bill Bonner’s portfolio… here’s what our old friend has been buying these days, in his words:

1) Gold. Is it going up? We don’t know… we think there is a fair chance of it. But we don’t care; the gold (we hope) is for the next generation.
2) Swiss francs… because it is not the dollar
3) Emerging markets… because they are going up; it’s a trend we think will continue as the world economy regresses to the mean. We suggest an ETF of major developing markets… recognizing that some will probably fail and others will continue to grow.

(Bill’s always a crowd favorite at our annual Investment Symposium. He’ll undoubtedly have plenty of advice on hand this year, along with another “passionate” presentation. We hear there are less than 125 seats reaming… join us this July in Vancouver before this show sells out.)

  “OK, I understand that markets don’t operate on logic,” writes a reader. “But the price gap between gas and diesel is a total mystery.
 
“Diesel is a much less refined product than gas. Even ULSD — ultra-low sulfur diesel — is far less refined than gas. Home heating oil, which has been used in diesel cars for decades, is cheaper than gas. So why the hell is diesel fuel so much more expensive than gas?
 
“You have a lot of experts there in Agoraland. Would someone, ANYONE, who knows the answer please shed some light on this mystery. Thanks. Love your work. You guys rock.”

The 5: “Several years ago, diesel was about 25% less expensive than gasoline,” explains Kevin Kerr. “Then people woke up and found out they could buy a diesel VW and get 60 mpg and go 50-plus miles on a tank of fuel.

“You don’t get as much diesel per barrel of oil than you do gasoline. So as demand increases, more oil needs to be refined to create more of both products.”

“Diesel is more expensive in the U.S.,” continues Byron King, “because the refining industry has traditionally concentrated on producing gasoline. Within the forest of towers and pipes that makes up America’s refining industry, there are far more systems devoted to cracking gasoline than diesel.

“When you design a refinery, you are making the decision as to what the final mix of products will be. It’s possible to tweak things a bit when the refinery is up and running, but the basic outline of your product mix is pretty much set in steel — literally.”

Supply and demand… it’s a bitch.

Until tomorrow,

Ian Mathias
The 5 Min. Forecast

P.S. Addison is traveling to New York City this morning to interview Pete Peterson, founder of the Peter G. Peterson Foundation, the Concord Coalition and the Blackstone Group, among other things. Like Addison, Mr. Peterson is a long-suffering proponent of fiscal responsibility in Washington… in fact, he’s been blasting this horn since his days as Nixon’s Secretary of Commerce.  Should be an interesting interview and a worthy last-minute addition to I.O.U.S.A.   We’ll tell you more about it tomorrow.  

P.P.S. You’ve got one more day to take us up on our offer for Mayer’s Special Situations. We’re currently handing out three free months of MSS — Chris Mayer’s high-end guide to rare opportunities, spinoffs, turnarounds, buybacks and more. Chris’s latest pick taps the power of the “Chaffee Royalty Program”… a stock that collects royalties on the profits of metal mines around the world. Learn about it here.