Saturday, January 20, 2007

Some Weekend Musings Part 1

For purposes of charting and discussion on crude, we're now talking the MARCH contract and pricing.

First, I love how misinformed the reporting can be out there. Take this Reuters report on Friday's gold rise (Click Here). The report states that gold rose as crude oil gained. Indeed, March crude did rise $1.59 Friday, while gold rose by more than $8 an ounce. And yes, I am well aware of the general price relationship between gold and oil since higher crude oil can certainly stoke inflationary pressure and lift the price of gold and vice versa - heck, at my last employer I created a gold to oil index with charts going back 50 yrs which we used in various broadcast applications.

The fault in the Reuters gold report on Friday is simple. While March crude rose Friday, for the week March crude slipped 47-cents, while gold rose nearly $10 an ounce for the week. The Reuters reporter might want to ask himself how gold achieves in a weekly rally while crude puts in a weekly decline, if he's trying to tell us that gold rose Friday because oil rose. You can even take it a step further: When crude last traded at $50/bbl in May, 2005, gold was trading at about $430. One wonders how gold can now be above $630 with crude hovering back near $50 again if the two commodities are supposed to move together like the Chang and Eng Bunker Siamese twins.

Jim Sinclair at points to ETFs along with all of the other wild and wacky things going on in the world for gold's move from the January 6th closing low of $606.90. Sinclair, notes that the sobering message from our shaky voiced Fed Chairman about the completely unfunded future federal liabilities totaling about 40-trillion dollars has served to thin the ranks of the dollar bulls. I agree.

The above chart of the dollar index shows a 'so close yet so far' scenario - so close to crossing that 200 day moving average. I've been around financial markets long enough to know that nothing is impossible in these financial markets, but that chart sure argues for caution against bullish dollar expectations.

As I've stated before, the Fed is clearly on hold - with a near zero chance of an interest increase with housing in the distress that it's in. Just look at this past week's housing data. Single family housing starts fell 4.1 percent in the December housing starts report (Click for the Commerce Department Data). Oh, you saw the headlines blaring housing starts UP 4-1/2 percent? Well, there was actually a drop in starts of single family dwellings. What skewed the overall number was a sharp rise in multi family apartment units (up 19%); more of those units are going up to accomodate more renters who either have been priced out of buying a home by higher interest rates, or who have lost their homes to foreclosures. Even the overall rise of 4.5% in December starts from November was still down a whopping 18% below the year before. If anyone's telling you the Fed will soon be lifting interest rates, cancel your subscription to their stock service!

As for crude, last week's API and DOE data, along with OPEC non action, even the high open interest in the March NYMEX crude contract would argue for continued lower price movement in the weeks ahead. Imports of crude are running at full tilt again at over 11 million barrels per day, however it is interesting to note that demand for gasoline is also running at full tilt - more than 9 mln barrels per day as well. Refiners, of course, have more than met the demand as inventories have been going up and will continue to do so. The Schork Report noted on Friday that the NYMEX 3/2/1 Crack is contagoed out to July with a six month strip trading at over $10.50 a barrel; so the refiners are making plenty o' money as well!
While we're swimming in oil, there's still plenty of demand for the stuff here in the U.S. as well, meaning we won't see $45 by Monday afternoon. I won't throw them up again, but inspection on the crude chart, USO, even the CRB itself point to oversold conditions in many commodities including crude - though that has not led to any meaningful rebound, and may not.

Where does this leave the stock market? That will be in Part 2.

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