Crude Oil, the Dollar & Gold -- A Disconnect

MrKen wonders when crude oil will correct and move lower. Is crude a "bubble" or not? In Friday's Wall Street Journal ((5/16/08)--"Bernanke's Bubble Laboratory"--the charts of the Nasdaq Composite (3/95-2002), Las Vegas Home Prices (8/01-2/08) & Crude Oil (6/03-present) are plotted on one graph. The chart of Oil and the Composite (which peaked in march 2000) look eerily similar. With the Fed sopping up excess liquidity recently, according to Barron's 'Up and Down Wall Street Daily' (5/16/08)by Randall Forsyth:

"The popular perception is that Bernanke has opened the floodgates. "The Fed is providing an extraordinary amount of liquidity," according to the head economist of a major bank.'

"The data, however, do not bear this out. The Fed itself actually has turned tight and growth in the money supply slowed from its breakneck pace in the past month. And, coincidentally, the dollar has pulled out of its nosedive and gold has pulled out of its ascent."

"...Specifically, the monetary base -- bank reserves plus currency, as measured by the St. Louis Fed -- contracted by 0.5% in April, according to calculations by Free Market Inc., a Chicago economic consultancy. Over the past three months, this measure of the Fed's own actions has grown at a mild 2.1% annual rate..."

--will crude oil soon follow the precious metals lower, despite bullish forecasts by Goldman, Sachs & UBS?

Kopin Tan writes in his column in this week's Barron's (5/19/08) "In Stocks, Summer Nonchalance Arrives Early"--

'...CRUDE OIL'S price tag isn't the only thing that's the subject of buzz; some of its recent relationships are also much talked about.'

'Take crude oil and gold, which have moved in lockstep over much of the past two years. Since mid-March, however, gold has pulled back more than 10%, partly as traders unwind their flight-to-safety trades while the credit crisis recedes. In contrast, oil has continued to climb, tacking on another 20% to an already impressive rally as the two commodities grow ever further apart.'

'Something unusual, too, is happening between crude oil and the dollar. These two have tended to move in opposite directions, and the dollar's weakening had in fact helped drive oil higher. Yet both have rallied over the past month.'

'If we expect these relationships to revert to their typical behavior, then crude's straying from the norm with both gold and the dollar suggests it may be well the errant one.'

'That has been true in the recent past. Bespoke Investment Group found just three instances since 1986 when oil has rallied 10% or more over a two-month period while gold fell by double-digit percentages. In the two months following such divergences, oil has declined two out of the three times to register an average loss of 22.5%. Gold, on the other hand, has rallied each time to post an average gain of 5.9%.'

'Exorbitant oil prices curb consumption and act as their own check, and few will be surprised if oil takes a breather after soaring nearly 150% over the past 16 months...'

Curtesy of Barron's -http://online.barrons.com/public/main?mod=topnav
& http://online.barrons.com/article/SB121094212709898613.html?mod=rss_
barrons_up_and_down_wall_street_daily&page=2

Quantum's Jim Rogers says US 'out of control'

The case for commodity stocks has been forcefully, and in my opinion, quite correctly expressed by Jim Rogers, co-founder of the Quantum Fund. While sharp corrections are possible at any time, Rogers is taking a longer term view.

Especially alarming is his thesis of armed conflict over resources. But of course we have already experienced this; the U.S. invaded Iraq to secure the desperately needed oil resources of the region. To the conservative neocons** out there who insist that we selflessly sought to bring democracy to Iraq--well, Karl Rove appeared on Fox News on Sunday (3/2) as an analyst to point out that the U.S. could not allow Al-Qaeda to build up a base in Iraq because it would endanger our oil supply.

**The Wall Street Journal, for example, has written many silly, disingenuous editorials about this county's putative motives for invading Iraq; e.g., the invasion was not about oil but only about the fact that Saddam Hussein was a 'bad, bad man & killed many of his own people' & the U.S. is so selfless and pure that it was a moral imperative for our 'Dear Leader' to send its imperial armed forces to Iraq in order to topple him. As if siding with dictators with blood on their hands ever bothered Amerika; re Stalin, Batista, Franco, Shah Pahlavi of Iran. Not to mention supporting Saddam against Iran in the almost decade-long war in the 1980's and selling him much of the chemical weapons technology he later used to kill his own people (along with France & other European countries).

Memories tend to be quite short in the U.S.A.--as short as attention spans...

From the London Times Online (2/28/08):

Leo Lewis, Asia Business Correspondent

Jim Rogers - who co-founded the now closed Quantum Fund with George Soros - told 750 global fund managers in Tokyo today that, America is “completely out of control”, there will be a 20-year bull market in commodities and that prices will be in turmoil.

And he also warned that it “made sense” if global competition for resources ended in armed conflict.

Mr Rogers told delegates to the CLSA investment forum that the prices of all agricultural products would “explode” in coming years and that the price of gold, which hit an all-time high of $964 an ounce yesterday, will continue its surge to as much as $3,500 an ounce.

Gold would continue to rise, the analyst Christopher Wood told fund managers, “because it is the exact opposite of a structured finance product”.

In a blistering attack on US monetary policy and the “helicopter cash drop” responses of the Federal Reserve, Mr Rogers described the American dollar as a “terribly flawed currency”.

He said that the plan by Ben Bernanke, the Fed Chairman, to “crank up the money-printing machines and run them until we run out of trees” had exposed America’s weakest point to her rivals and enemies.

The dollar may have declined recently, he added, “but you ain’t seen nothing yet”.

Talking to a room almost exclusively populated with Japan-focused equity investors, Mr Rogers recommended an immediate language course in Mandarin and a switch into commodities — the second-biggest market in the world behind foreign exchange.

Mr Rogers said that historic drains on wheat, corn and other soft commodity inventories have created market dynamics that could lead to severe food shortages.

The outlook over the next two decades would see prices of everything from cotton and sugar to lead and nickel “going through the roof”.

Heavily playing down the prospects of a big recovery in Japan, Mr Rogers said that the country’s demographics — as the fastest-aging country in the world — would cause it greater problems and an ever-diminishing quality of life for ordinary Japanese.

But he also said that other countries — including Britain, Italy, China and the US — should take note of what their own demographics would look like without the effect of immigration.

“Japan will be the perfect laboratory for the world to watch how a demographic crisis plays out,” he said.

Stock Picks for this Major Bear Market

MrKen has recently returned to trading stocks, as he has recently retired (62) and now has the free time to study and trade the market. Happily, I am showing @ a 15% profit for the January/February period in a most challenging investment environment. Here are the 3 long positions I currently have:

Coeur d’Alene Mines Corporation (NYSE:CDE) -- silver, gold, lead & zinc
Hecla Mining Company (NYSE: HL) -- silver, gold, lead & zinc
Stillwater Mining Company (NYSE: SWC) -- palladium, platinum & other metals

Almost all of the profit has been from HL; SWC was only purchased on 2/29. CDE has risen modestly in the Jan/Feb period.

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My short pick is: (but do not have an actual position at present)

Citigroup Inc (NYSE:C) -- financial products & services

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The rationale for these positions are both technical & fundamental:

TECHNICAL: The long positions have very high relative strength rankings (RS) as indicated in IBD (Investors Business Daily). The short pick has an extremely weak RS ranking. As discovered years ago by Edward O. Thorp (The Relative Strength Concept of Common Stock Forecasting--now out of print), stocks that are sharply above their 200-day moving average (MA) tend to outperform other stocks that have weaker rankings, with the converse being true for issues sharply below their 200 day MA.

FUNDAMENTAL: Silver, gold, platinum & palladium are soaring due partially to the decline in the dollar to record lows against the euro, yen & basket of 16 currences--and partially to favorable demand-supply considerations.

The greenback's slide is being caused mainly by the weak U.S. economy and the Fed's decision to "reflate" (print lots & lots of money) in order to avoid a sharp economic contraction (the dreaded 'R' word).- {More on this in a later post}-

Silver is beginning to outperform gold and most likely will actually benefit from the recently announced contemplated sales of gold by the IMF. Silver may be thought of as the "poor man's gold". Platinum, palladium & rhodium are also benefiting from power outages in South Africa (78% of world platinum productioncomes from South Africa) due to electrical infrastructure problems. These are not expected to be rectified until 2012!

And now on to my specific picks:

In 2007, Hecla Mining produced 5.6 million ounces of silver at an average total cash cost of negative $2.81 per ounce, after by-product credits. The company also has significant tax credits at its disposal.

Coeur d’Alene Mines had 2007 cash costs of $3.97 per ounce of silver. Coeur has no silver or gold production hedged.

Stillwater Mining- The precious-metals miner reported a $14 million loss for 2007 on essentially flat revenue and experienced labor problems. But 'The Motley Fool' notes that--

"How many of the companies you own have roughly doubled in 2008? None? You must not be on board the Stillwater Mining (NYSE: SWC) express. Homegrown Stillwater, which is going into 2008 with a minimal amount of hedges remaining on its platinum output. Although the company is predicting a roughly 10% rise in per-ounce cash costs, its margins ought to be magnificent."

Citigroup Inc. - Commodities, with their transparent pricing and liquidity, are the exact opposite of the toxic products that Citigroup and its ilk have produced. CDO's, sub-prime mortgages & tens of millions in trading losses are what you get if you try to 'bottom fish' this dog. OPCO analyst Meredith Whitney, who correctly predicted a cut in Citigroup's dividend back in October, last week indicated that C could fall to 16 or lower on more writeoffs. A great short!

Disclaimer:

All ideas, opinions, and/or forecasts, expressed or implied, are for informational purposes only and should not be construed as a recommendations to invest, trade and/or speculate in the markets. Any investments, trades and/or speculations made in light of the ideas, opinions and/or forecasts expressed or implied herein, are committed at your own risk, financial or otherwise.

MrKen is NOT a registered Investment Advisor & therefore NONE of the above discussion should be taken as investment advice. It is the writer's personal opinion ONLY, except where specific cites from financial publications & professional analysts are given.

As indicated above, MrKen at the time of this posting has long positions in CDE, HL & SWC.