Oil and Gas at Record Highs, Behind Friday’s Selling Spree, U.S.’s Biggest Budget Ever, and More!

by Addison Wiggin & Ian Mathias

  • Gasoline reaches a new milestone… welcome to $4 a gallon
  • Oil finds a record of its own… 4 records, actually. Whose words gave us $139 crude
  • Kevin Kerr on when to expect a commodity pullback
  • Markets of the world fall… what brought about Friday’s sell-off
  • Lehman Bros. raises emergency funding… Dan Amoss on the “fishy” details of this morning’s release
  • Congress approves the biggest government budget in history… and hints at even bigger to come
     

  Oy. So many headlines, so many all-time highs, and only five minutes. Where to begin… how about the morning commute?

  Four bucks… ouch:

The national average gallon of gas reached $4 for the first time over the weekend. In fact, gas is up another couple cents this morning, to a record $4.02. That’s 30 cents in a month and nearly a full dollar over last year. If you’re still clinging to your diesel rig, it’ll be $4.79, on average.

  Oil shot through the roof on Friday. Light sweet crude spiked $11 (a record) during the New York session, or over 8% (record), to an intraday high of $139 (also a record) and closed at $138 (yep… record).

Most of the “reasons why” were typical… weak dollar, strong demand, questionable supply. But it was a Morgan Stanley report — suggesting that oil would reach $150 very soon — that really sparked the buying spree.

“Asia is taking an unprecedented share” of Middle East oil, Morgan Stanley analyst Ole Slorer said as he called for $150 barrels by July 4. Goldman Sachs chimed in this morning, predicting oil will reach $149 by the end of the summer.

Heh… and for what it’s worth, one of the only investment banks not calling for higher oil prices is Lehman Bros. The brokerage house’s current prediction is $100 by the year’s end and an average of $80 for 2009. More on their ability to predict gains and losses in just a minute…

Oil has settled down just a bit this morning, to $136.

  “So much for the BIG commodity sell-off so many of the commentators had been so vocal about in the last few days,” says Kevin Kerr. “Now, the correction in commodities may come soon, but it just goes to show that the worst may not be over for the dollar just yet.

“Mr. Bernanke’s tough talk spooked the market early this week, but talk just isn’t enough. The market doesn’t want any more rhetoric or empty promises; it wants action. Until Mr. Bernanke can deliver a rate increase — a very hefty one — don’t expect commodities to pull back.”

  As oil skyrocketed Friday, the U.S. stock market plummeted. Kicked off by an exceptionally lousy jobs report , the sell-off on Wall Street was as steady as it was severe:

 

There was no “new” villain plaguing the market, just the same cast of characters: expensive commodities, weak U.S. economy, weaker dollar, struggling financials and the bottomless housing crisis. The problem was that they just happened to all show up on the same day … Trichet’s comments; 5.5% unemployment rate; record foreclosures; $139 oil and Lehman, MBIA and Ambac all looking like they could fail any second.

The Dow shed 395 points, or 3.1%… the biggest point and percentage loss since February 2007. The S&P 500 and Nasdaq fared the same.

  Wall Street’s bad juju then crossed the Pacific. India felt it the worst, as the Sensex plunged 3.2% overnight. Markets in Japan, Taiwan and South Korea felt the pain too, all falling 1.3-2%.

  This morning, Lehman Bros. announced it’ll be raising $6 billion in emergency funding. The brokerage house said it expects a $2.8 billion second quarter loss, about 10 times bigger than the typical analyst expectation.

Our Lehman analyst, Dan Amoss, saw it coming. He told his Strategic Short Report readers to short LEH. Despite the profits rolling in today (LEH fell 7% premarket) Dan says the worst for Lehman may still be yet to come:

“I read the Lehman press release this morning, and it seems fishy. Lehman said it reduced mortgage exposure by 15-20%… that means it sold $12.7-16.9 billion in toxic mortgage/real estate assets in a stressed environment. That hardly seems possible.

“Lehman could also be shorting the ABX and/or CMBX again as a synthetic way to reduce exposure. Or maybe Lehman financed the sale to a closely related third party — say, a hedge fund run by a Lehman alumnus. In both cases, it’s not likely to be a ‘true’ sale, because Lehman would retain an economic exposure to these assets.”

For Dan’s full report on Lehman, including how he recommends you short LEH, click here.

  Corn has set a record of its own. The cold, wet conditions we’ve been telling you about all spring just got a whole lot worse… parts of Iowa, Indiana, Wisconsin, Minnesota and other Midwestern states suffered a weekend of heavy rains and floods. Here’s a photo sent by a reader in Wisconsin… this “creek” is usually narrow enough to jump over:

The already booming corn trade has responded… corn contracts for July delivery are up to $6.63 a bushel. Despite a big pullback in March, corn is up 40% this year and has nearly doubled since last summer’s lows. Through the “magic” of options trading, Kevin Kerr’s Resource Trader Alert readers are up 130% on their open corn trade. They don’t call it the “millionaire’s market” for nothing.

  And our last “record high” for you today — perhaps the most depressing: The U.S. Congress has quietly approved the biggest government budget in the history of mankind. Late last week, Democrats gave final approval to the $3.1 trillion annual budget proposed by President Bush back in February.


Mr. and Mrs. Deficit, ready to hand the next generation the bill

At its current pace, the just-approved 2009 budget may produce a deficit over $400 billion, one of the biggest on record. Of course, the much heralded path to a balanced budget by 2012 is very much intact… as long as all Bush-era tax cuts are reversed and the next president is able to jack up tax revenues by an average $129 billion a year.

Of the hopelessly swollen budget, $1.1 trillion goes to military spending and domestic programs funded through appropriations bills. The rest is tossed into the bottomless pit of Medicare and Social Security expenses and interest payments on our nearly $10 trillion national debt.

  Oh, and by the way, Congress earmarked a law in the latest budget to raise the national debt ceiling. The U.S. can now owe the world $10.6 trillion, an $800 billion increase. But hey, what’s another trillion or so among friends… not like it’s Congress’ money anyway. Addison better hurry up and get I.O.U.S.A. in the bookshelves on the big screens before the election… it’s much needed.

   After getting slammed on Friday, the dollar is recovering a bit today. The dollar index slumped as low as 72.2 this weekend, but it’s back around 72.7 today, about 2 points above its all-time low. Same story with the dollar versus its major competitors… the euro is down a cent, to $1.57. The pound is at $1.97, and one greenback will buy you 106 Japanese yen.

   Much of the dollar’s rise today comes courtesy of the latest pending home sales data. The National Association of Realtors reported a 6.3% rise in the number of homes under contract to be sold in April. In fact, the NAR’s pending home sales index has regained the 88 mark, the highest reading since October 2007. As you might expect, the sudden rise defied analyst expectations by a wide margin.

Year over year, the numbers aren’t quite as cheery. April pending home sales were down 13% since 2007 and 29% since 2005.

  Finally, amid all the chaos, gold has been steadily rising. It’s up $20 over the weekend and sells for $900 as we write.

  “To the struggling independent distributor, tell this to your myopic customers,” writes a reader. “Years ago, when I bought gas, I’d get my windshield cleaned and maybe even a free carwash thrown in or a fountain soda for a quarter. It didn’t cost the station a thing (Bumstead was already standing around at the pump, and the marginal cost of the soda with cup was less than a dime), and as the consumer, I got a real value from it. These days, they’ve abandoned me, making me buy gas from a vending machine, like it was a bag of Skittles.

“So I can get the same experience at the neighborhood Exxon, which is well lit and renovated, or I can go to Honest Fred’s, which is the same old dump with no differentiated appeal. Fred didn’t have to cut his service level to the bone, but he decided to anyway, ceding away his only competitive advantage. Now he is reaping the Darwinistic price for what he’s sown. Sorry to hear you’re caught up in the middle, but as for your customer base, so be it… he’s dug his own graves, and until he wises up to his own goal mistakes, he is an endangered species in need of being replaced.

“We’re all suffering from his actions… his volume is down because nobody sees the value in his store, I have dead bugs on my windshield, and he’s taking you for a patsy. Now, where is the closest Exxon again?”

  “If Mr. Trichet reads your column,” writes a reader, “he would be a proud man today, such is your flattery of our ECB president. This arrogant buffoon is clearly totally blinded by his own immense vanity. It might be cool to show off one’s ability to move markets or even to play cocksmanship with the Fed president, but in this case, the ex-shady banker and spectacular idiot completely failed to spot the correlation of oil to the dollar. In three quick steps, down went the dollar, up went oil and down went the markets. And on Monday, of course, the global Asian markets will follow suit. I am not ranting, and I didn’t lose money this week, but global economies need globally minded partners, so why do we bother with it when, as humans, we are still about as sophisticated as australopithecines?”

The 5: Since when was it the ECB’s job to worry about the dollar, oil prices or markets? Jean-Claude Trichet’s task is to maintain price stability in the eurozone… that’s it. We gave a nod to Trichet because he undid a week’s worth of Ben Bernanke’s cryptic Fed-speak with one honest, simply phrased sentence. What’s so unsophisticated about openly discussing policy in layman’s terms? Should he only be frank about matters that won’t damage the market? If that’s being “globally mindful,” we’re all in trouble.

  And finally, today — at last — a Ben Bernanke reader rap. We issued the challenge Thursday … here’s the sweetest fruit of your labor:

“Americans love to live swanky,
so we don’t really like Ben Bernanke.
He’s tough on the dollar,
makes me want to holler,
‘What is up with your rate hanky-panky?’
 
“When I read about Mr. Bernanke,
I tend to end up kind of cranky.
He may be a scholar,
but he’s breaking the dollar.
I’ve pulled my cash out of the banky.”

Cheers,

Ian Mathias
The 5 Min. Forecast

P.S. “Heh. I did read your P.S. on Friday , Mr. Mathias,” writes Addison from some undisclosed location in Baltimore. “Contrary to popular belief, I haven’t gone insane. The Agora Financial Reserve is the best deal in the financial newsletter publishing business. Hands down. But for some reason, we have to shout to get people to consider it.”
 
What’s he talking about? Find out here.
  

rspertzel

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