Oil and Dollar Plunge, Gold Soars, TARP Out of Cash, Automakers Brace for Worst, A Currency Trade, and More!

by Addison Wiggin & Ian Mathias

  • Oil hits four-year low… Byron King offers “crude” forecasts
  • Dan Amoss on why Obama and OPEC want higher hydrocarbon prices
  • Dollar decline intensifies… Bill Jenkins on a potentially profitable currency disparity
  • Gold soars… Ed Bugos with new price targets and a short-term outlook
  • Chrysler shuts down production till Jan. 19… but still pays UAW employees?
  • White House hints at auto bailout before Christmas… as long as the TARP isn’t out of money

OK… time to talk oil.

Light sweet crude plummeted over $5 yesterday and overnight, to as low as $38 this morning. That’s the cheapest oil since July 2004.

Why? While the newsmakers were watching OPEC, traders were more interested in the weekly U.S. inventory report. The Energy Dept. reported a surprise 500,000 barrel rise in oil supply from last week, a stark contrast compared to the expected 900,000 barrel decline.

And OPEC, despite the headlines, simply failed to shock the market. Everyone and their mother expected around a 2.2 million bpd cut, and that’s precisely what the cartel announced. There were rumors circulating that a non-OPEC nation (likely Russia) would announce a production cut simultaneously… when such decisions failed to materialize, sellers took over.

Still, coupled with the last round of cuts, OPEC just took over 4 million bpd out of the market … or at least they said they would.

“Don’t bet against OPEC on this one,” suggest Byron King. “Saudi Arabia needs oil prices at $60 per barrel or so just to cover its national budget. At $45 per barrel, they are losing money. Russia needs to see oil at $75 to keep its accounts in balance, and that’s before they lay the keels for the new fleet of aircraft carriers they are discussing. And those poor souls in Iran? Mr. I’m-a-Dinner-Jacket needs $100 oil to meet payroll. While Generalissimo Chavez of Venezuela needs $125 oil to cover the national outlays.

“So OPEC wants to cut output and try to drive the oil price back up. They want to cut output by over 4 million barrels per day. That’s a lot of crude. So expect to see oil prices heading back up in 2009. We won’t see $147 again anytime real soon. But expect higher oil prices as 2009 unfolds, and expect to see higher prices for everything else within the energy chain.”

“I don’t think the market,” adds Dan Amoss, “is looking ahead at just how extreme the Fed/Treasury will be in debasing the dollar. Especially the market for crude oil futures, which could turn back up in a hurry. Most of what they’ve been doing thus far has been pumping money into Wall Street’s gaping black hole. In the new administration, I expect them to attack deflation from the other flank, including a potential nationwide mortgage refinancing initiative.

“We should keep in mind that the Obama administration, along with OPEC, WANTS to see higher hydrocarbon prices. Otherwise, their alternative energy proposals will look too uneconomic. Unfortunately, I expect them to achieve this by pushing a more European pricing structure for gasoline (higher gasoline taxes to fund alternative energy).

“Why unfortunate? Because it’ll take even more capital out of the energy supply chain when it needs ALL the capital it can retain to maintain supplies. And the government already sucks most of the value out of the energy supply chain with current taxes, royalties, etc.

“Should be interesting times, at least.”

Despite crazy-cheap oil and gas prices, AAA expects a 2.1% decline in holiday travel this year. According to a study released by the group this week, “only” 63.9 million Americans will travel at least 50 miles during the Christmas-New Years period, about 1.4 million fewer than last year and the first such decline since 2002.

“Without question, the economic downturn of 2008 eroded the discretionary income many Americans would have spent on travel and, for some, altered their travel plans throughout the year,” said AAA chief executive Robert Darbelnet.

Believe it or not, AAA says travel costs are down. Airfares are an average 9% cheaper than this time last year. Hotel fees are anywhere from 3-16% cheaper than in the 2007 holiday season, and AAA claims car rentals are only a bit more expensive this year. Factor in a national average gas price of $1.67 today… might want to visit Mom while its still affordable.

Oil’s fall is particularly odd in light of the dollar’s performance lately. The greenback has been getting slammed, as we illustrated yesterday and forecast last week. Since we wrote you last, it’s been much of the same…

The dollar index fell right through 80 yesterday, a historic point of support. Looking at the chart above, it seems that traders are intent on popping the bubble that began during the worst of the equity bear market. The index is just under 78 as we write.

The greenback’s sudden plunge is producing some odd disparities among its major competitors. The most notable are the euro and pound. Check this out:

“Wednesday saw more action in the markets,” writes our new currency man Bill Jenkins, “and a disparity that hopefully we can take advantage of. After the Fed rate cut, we saw both the euro and pound move higher. But overnight, the pound suffered a swift pullback, while the euro kept on marching up.

“As these two often move in connection with one another, and since the pound has been kept down and pent-up, this current pullback looks like it has all the makings of a good entry.”

We’ll keep an eye on this combo for you… Bill’s betting the pound is oversold. If you are interested in trading currencies along with Bill, keep an eye on your inbox tonight. We’re sending an introductory offer that will expire tomorrow.

This is all good news for gold. The shiny metal peaked around $880 yesterday, and has since backed down to just below $860.

“The biggest risk to the gold price outlook,” opines Ed Bugos, “is that the general economic outlook actually improves. I was amazed by the giddy response to the Federal Reserve’s announcement that I saw in the media and across the investment industry.

“Technically, the bulls keep chewing away at important resistance levels. First $775, then $850. Now we are bumping up against some trendline resistance at around $885. The reversal point is $940 on the front-month February gold contract.

“I suspect we’ll rally toward this $940 point and then pull back to the $835 level, to complete a right shoulder on the chart before decidedly reversing the downtrend. I expect the breakout rally to occur in the next few months, and for the move that follows to surprise many people on the upside. However, until then, you could see a general stock and commodity rally, with gold taking a back seat for a few weeks, especially should the economic outlook brighten further.”

The stock market, meanwhile, has been relatively quiet since the rate cut rally. The Dow ended down 99 points, or 1%, yesterday. A missed earnings report from Morgan Stanley set the tone for financials, which were already ripe for profit taking after Tuesday’s Fed cut euphoria. Banks and brokers then led the way down.

Chrysler announced today it will shut down all auto production for at least one month. All 30 of the automaker’s plants will be closed Friday, and workers are being told there won’t be work until at least Jan 19. The company normally closes up shop around the holidays… this shutdown is essentially an extra two-week “holiday” for their employees.

A paid holiday, we hasten to add. UAW workers will be paid 95% of their salaries while sitting at home waiting for your tax dollars to keep them employed. Canadian union employees will get 65%, mostly because the American military is way, way bigger.

The Bush administration wants an automaker bailout in place before Christmas, The New York Times reports today. According to the Times’ sources, Hank Paulson is seeing that his team is, as a GM exec phrased it, “putting on the aqualung” to dive into the dark abyss of GM and Chrysler’s books. “The autos will get the money as quickly as we can prudently do it,” Paulson said.

Should Paulson use TARP funds to prop up automakers, he’ll likely need to go to Congress and request the second half of the $700 billion bailout. Looking at all the programs he’s put in place so far, the TARP’s initial $350 billion fund should soon be exhausted.

Since he’s done almost nothing to satiate the populist agendas of the congressional majority, look for fireworks when he heads back to Capitol Hill with his tin cup. If he had any sense of humor, he’d charter a private jet and fly from BWI to Dulles.

“Hey, the Congress tossed our Social Security money in a slush fund for their wacky programs,” writes a reader in response to the cartoon we borrowed in yesterday’s 5.

“Why not toss their pension funds into a slush fund to get us out of debt? And some other items that could go on the sales block from the asset side of the government balance sheet: Yosemite, masses of federal buildings (filled with knuckleheads who take our money and spend it on dubious projects), wide swaths of land from sea to shining sea, a slew of other prime properties, mineral rights, etc., etc.

“The government isn’t as broke as we think if you look at all its resources. I wonder what value or mark-to-market value Yosemite could be placed at on the government’s balance sheet? I suppose that most of this stuff is ‘off balance sheet’ for whatever reason.”

“I want to say as a Reserve member,” writes another, “that the cost of joining Agora has been offset by about 100-fold, chiefly through options trading in the past month.

“I have tripled my portfolio from $300,000 using the S&P 500 puts suggested by another of Agora’s newsletters, and now, with GDX calls, I have made 100,000 into 300,000, and I am about to hit the million-dollar mark. I will rely on your sell recommendation when it comes, but it is hard to keep 200,000 profit on the table and at risk.

“They say the first million is the hardest…”

The 5: Thanks for letting us know how you’re doing, and congrats.

For serious investors, the Reserve makes a lot of sense: a one-time fee for a lifetime of advice. It’s not at all uncommon for Reserve members to earn their dues back quickly, and as evidenced above, some members use the Reserve to elevate their wealth to whole other level.

Whatever your investment goals, we suggest you consider it… learn about the Reserve, here.

Thanks for reading,

Ian Mathias

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