Gas prices at another record… U.K. truckers shut down highways, threaten to barricade refineries
Oil retreats… George Soros and Byron King on crude’s next move
Chris Mayer on the skyrocketing costs of power generation… power plant construction costs double
Vietnam in a nasty bear market… why the wave of selling might crescendo this week
What the U.S. could learn from the fall of Bear Stearns
Plus, Alan Greenspan speaks to The 5?! A sneak peak at our exclusive conversation
The national average for gas ticked up another cent last night. It’s now up to $3.94. That’s 21 consecutive days of record highs.
But petrol’s not rising just here in the States. Truckers in the U.K. are… well… pissed.
Big rig drivers in London staged a proper protest yesterday. Hundreds of truckers brought a major London highway (A40) to a screeching halt during a protest of high fuel costs. They’ve got a right to complain… the average gallon of gas over there costs $8.61. Diesel in the U.K. is even crazier: $9.56 a gallon.
"It’s hard to find words to describe the severity of the problem,” said trucker spokesperson Peter Carroll. “It’s not even a problem, really; it’s a meltdown."
Protesters threaten that if Gordon Brown and company don’t take action soon, they’ll begin blockading oil refineries and gasoline storage depots.
Oil pulled back by $7 dollars overnight — the biggest 24-hour decline in two months. Light sweet crude sold for the low, low price of $126 at the New York open this morning. That didn’t last too long… it’s back up to $130 as we write.
The price of oil, when charted, “has this parabolic shape which is characteristic of bubbles,” George Soros reminded the Telegraph this week. “You can also anticipate that [the bubble] will eventually correct but that is unlikely to happen before the recession actually reduces the demand.
“The rise in the price of oil and food is going to weigh on and aggravate the recession."
“I am convinced that a large measure of oil’s price run-up,” says our own Byron King, “is due to excessive money creation by the U.S. Federal Reserve, especially since last September or so. But now the Fed seems to be signaling that its interest rate cuts are over. And the Fed will be introducing less new credit into the U.S. monetary system. We’ll see. The Fed has blown smoke at us before.
“But if the Fed is really serious about halting excessive money creation and stabilizing the value of the dollar, I think that is the necessary element for oil prices to stabilize.”
As oil retreats this morning, so do food prices of the world… mostly.
Corn and soybeans — now sickly seen as sources of energy — were sold yesterday and today as crude oil backed down. Rice prices in Chicago followed suit… what started as a routine down day turned into a limit-down sell-off for rough rice futures yesterday. Cambodia announced its decision to lift a two-month rice export ban, and Chicago rice futures fell 75 cents, to $19 per hundredweight.
Wheat, on the other hand, rallied again yesterday. Extra dry conditions in Australia coupled with very wet weather on the Mississippi continue to put pressure on this year’s wheat harvest. At $7.59 a bushel, wheat — despite these reports — remains well below its March high of $12 and change.
To be expected, the dollar firmed up a bit as oil declined. The dollar index gained half a point and scores 72.6 this morning. The euro trades for $1.56 today, the pound for $1.97 and the yen has weakened to 105.
Gold’s been getting shellacked this week on dollar strength and oil weakness. As we write this morning, the precious metal is down to $900.
“Construction costs for power plants have doubled since 2000,” reports Chris Mayer. The price to build new power in the U.S. is up 19% this year alone and nearly 70% from 2005.
“It’s been difficult to add capacity, because regulators are reluctant to allow energy prices to rise to market levels, so investment has been discouraged. That, and there is always lots political opposition anytime anyone tries to build a new power plant in this country.
“But the biggest threat now is cost. It’s hitting all type of power plants… labor, materials, equipment, design, engineering… all up. The costs for a nuclear plant have nearly tripled since 2000. Wind has more than doubled. Natgas and coal plants, up 92% and 78%.”
Chris noted that this spell of inflation doesn’t even factor in financing or fuel costs… during this “credit crisis” and resource boom, it’s safe to say neither are getting any cheaper.
“And the kicker… The weak U.S. dollar is at least partially responsible, because 30% of the equipment needed to build power plants comes from overseas.”
Chris saw this trend developing in 2006 and recommended his readers purchase ABB — a power grid manufacturer. Those who heeded his advice are up 90% since.
If you haven’t heard, today’s the last day to take advantage of our current Mayer’s Special Situations offer. Click here to learn how you could get MSS free for the next three months.
Orders for durable goods — those meant to last more than a few years — declined 0.5% in April, says the Commerce Department today. The drop could be loosely interpreted as “good” news… Wall Street expected a far larger decline of 2%.
No surprise if you’ve been reading your daily 5 Min. Forecasts… aircraft sales were the wart of the report, plunging 24% in April. In fact, excluding aircraft and military orders, durable goods orders rose 4.2% during the month.
So all we need to do is cut oil prices in half, restructure the airline industry and design an entirely new paradigm for domestic travel. That oughta bring durable goods orders right back to the good old days.
The U.S. stock market rallied a bit yesterday after oil prices finally backed down. Despite a handful of scary data (Case-Shiller Home Price Index, new home sales and consumer confidence ), it was all eyes on crude oil yesterday. As light sweet crude abandoned $130, traders pushed money into stocks and buoyed the broader equity markets. The Dow rose 0.5%, the S&P 500 gained 0.7% and the Nasdaq shot up 1.5%.
Speaking of major exchanges, keep an eye on Vietnam. First and foremost, the Ho Chi Minh stock index is neck deep in a nasty bear market:
Investors were gaga for the VNI last year… Vietnam’s genuine growth prospects pushed the index up over 23%. This year, Vietnam has been slammed with double-digit inflation and a hard-core credit crisis… thus, the VNI has plunged 55% year to date.
And today, we learn Vietnamese officials have halted trading for the third straight day. The State Securities Commission says a computer glitch has crippled trading capabilities and hopes to resume trading by the end of the week. We couldn’t help but notice the VNI had been free-falling into the abyss leading up to the convenient stoppage… the index was down over 20% in May alone.
Over-the-counter trading in Hanoi has stayed online, and has been trending down all week. When the Ho Chi Minh exchange officials turn the power back on, we wouldn’t be surprised to see some serious fireworks.
Elsewhere in the world, Brazil is in the final stages of creating a sovereign wealth fund. The bill to enact a Brazilian SWF heads to the nation’s congress today. When approved, the bill’s sponsors estimate the fund will control $10-20 billion, almost all of which will be invested abroad.
Brazil was able to create this new SWF after the Brazilian government produced an annual surplus… 4% of Brazil’s GDP. Must be nice.
Check out this chart from today’s Wall Street Journal:
Pretty interesting depiction of just how quickly Wall Street lost faith in Bear Stearns. Like every other big financial brokerage house, Bear’s day-to-day operations were financed by short-term loans backed by little more than their illustrious reputation. The credit default swap market, as illustrated above, bets on the probability of those loans going bad. You can see the slow but steady realization that Bear was overextended and undercapitalized… lending money to this fiscal nightmare became an undesirable proposition, to say the least.
When we see this chart, we think of the U.S. at large. What an appropriate allegory, no? As the U.S. — from small-town consumers to Washington bureaucrats — digs itself deeper in the hole, when will the risk to support our consumerism outweigh the benefits? When it finally does, will it all unravel this quickly? We saw what happened to Bear Stearns when its creditors turned the corner… we expect much of the same in I.O.U.S.A.
“You alluded to but missed a major difference between gasoline and diesel,” writes a reader. “The energy content of diesel, per gallon, is higher than that of gasoline. It takes more crude oil to make diesel, you get more mileage from diesel — it simply has more energy. So you are buying more energy.”
“I was told by a pipeline operator,” writes another, “that the new EPA regulations require testing for "low sulfur" at retail point of sale. All other fuels have always been tested at the refinery. This has created a transportation nightmare because diesel will pick up sulfur from the pipeline or tanker.
“It makes sense because the price of diesel was less than that of gas until October ’06, when the new EPA regs took effect for low-sulfur diesel. Except for railroads, they don’t have to comply with this ridiculous regulation/tax.”
The 5 Min. Forecast
P.S. “Greenspan blamed the era of low interest rates over which he presided,” Addison writes by e-mail this morning, “on the end of the Cold War and the fall of the Iron Curtain.”
We didn’t get much more from him than that. He and the film crew for I.O.U.S.A. were in Washington, D.C., today getting some last-minute interviews for the film… including a sit-down with none other than Alan Greenspan. We’ll hear a lot more from Addison and Alan, I’m sure, when Addison returns tomorrow.
P.P.S. Also, don’t forget… at midnight tonight, the “Chaffee Royalty Program” will no longer be accepting new investors. If you’re interested, now is the time to act.