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DOLLAR, STOCKS AND BONDS...ALL LOWER TODAY

Overall, this has to go down as one of the nastiest days I have seen yet for U.S. assets as a whole, on a day when the Treasury is busy conducting another debt auction. I have stated many times in the past that it is highly unusual to see downside volatility on Treasury bond prices and the dollar on auction days, and today the Treasury sold $15 billion in five-year notes with a ten-year note auction of $9 billion scheduled for tomorrow. The dollar is currently trading lower versus the euro and yen, U.S. bond prices traded lower right from the open after some rumblings out of Germany, and U.S. stocks, especially some of the big caps in the Dow Industrials, have been bleeding red ink since the open. When the government needs to sell $15 billion, we normally see bonds and the dollar with a neutral to positive bias; not so today!

It is also unusual to see gold and silver do anything constructive on a Treasury auction day. For most of the morning it looked like the metals would be held in check to remain very close to yesterday’s close, but just before the lunch hour in New York, silver popped for twelve cents to $7.61 spot, with gold moving two dollars higher at $442 spot. A twelve cent move in silver and a two dollar move in gold are nothing to write home about, but the CHANGE IN TRADING PATTERNS is clearly noteworthy. As I write, the dollar continues to deteriorate, dropping below 81.50 on the U.S. Dollar Index. The intra-day low for the greenback was 81.47, so watch the 81.50 level VERY closely, as it will most likely be defended by the dollar bulls. According to Jim Sinclair, a break below 81.50 means we breakdown below 80 into uncharted waters. A break below 80 should be enough to propel gold through the resistance at the prior high of $460 en route to $500+ later this year.

To digress a moment, in the opening paragraph I said bond prices moved lower after some rumblings out of Germany. It turns out Germany’s economy may be picking up faster than was anticipated. Industrial Production in Germany was expected to gain 1.8%, but instead grew by 3.1% in January, the biggest gain in nearly a decade. There has also been more talk from European bankers about higher interest rates to slow the rate of inflation. Threats of higher inflation and big gains for industrial production caused European bonds to sell-off, and the ripple effect came across the Atlantic like a tsunami to the U.S. bond market. Oil also moved higher in Europe, and the combined effect of higher interest rates plus high oil prices sent U.S. stock futures decidedly lower before the opening of the U.S. markets. With strength coming out of Germany, Europe’s largest economy, investors sure didn’t seem to be attracted to U.S. assets…stocks, bonds and the dollar are all getting sold today.

Oil Gets Interesting!

After trading higher overseas last night, crude oil came into N.Y. trading 26 cents above yesterday’s close and just hovered in the early going as all traders waited patiently for the Energy Department to release their weekly inventory data. Crude was expected to build 1.7 million barrels, unleaded gas was expected to build 100,000 barrels, and distillate supplies which include heating oil anticipated a draw of 1.5 million barrels. It turns out crude had a much bigger build than was expected by adding 3.1 million barrels to inventory according to the Energy Department, but note the API reported an even bigger build of 6.2 million barrels. Gasoline stocks dropped 200,000 barrels per the government and dropped 269,000 barrels per the API report, both a bigger draw than expected. Distillate inventories fell less than expected with the government reporting a draw of 800,000 barrels and the API actually showing a build of 239,000. The big picture for oil inventories says we have more inventory than expected, but the price moved higher nonetheless. When the reports first came out crude sold down to a low of $54.16, but it didn’t last for very long. With about 45 minutes left in NYMEX trading, oil was higher by $0.80 to $55.40, but then sold off in the last half-hour to close the day six cents higher at $54.65. The last half-hour was also interesting because President Bush was on live on CNBC detailing his new energy plan for the USA.

The President said we need to lessen our dependence on foreign oil. They said that back in the Seventies and did nothing about it. President Bush says we need an up to date electricity grid to supply the country. How many new homes have been built in the last five years…millions!!!! They will need electricity from somewhere, but the President says we haven’t invested any money in the last twenty years to address our growing needs. He believes we will need to build more nuclear and coal-fired power plants to generate electricity. Some of the newer plants have been built to run on natural gas, but there isn’t enough gas at affordable prices to give us enough electricity for our future needs. I’m waiting to see a big heat wave this summer causing a huge draw on electricity needs to run air conditioners. We have built the new homes and office buildings, and now must find more ways to feed the growing energy demands. Yesterday the Energy Department released data showing demand for oil should grow by 2.5% this year, but there are some concerns as to whether suppliers can produce the incremental supplies needed. These are complex global issues, but suffice it to say the race is on to secure future energy supplies!

“Unspoken Macroeconomic Drivers”

One of the developments that I find most interesting comes with this Reuter’s headline, “Iran’s President Set To Visit Venezuela. The presidents of Iran and Venezuela, two major oil producers pushing to maintain high prices and at odds with U.S. global policies, meet this week for talks that could stoke tensions with Washington.” I would say that is a major understatement! Mr. Bush must be furious! What if the two leaders decide to back each other up if either one is being pressured by the U.S.? Iran is number two globally in oil behind the Saudis and Venezuela ranks number five as an oil producer. If recollection serves me, we get roughly 15% of our oil from Venezuela. We also know that Venezuela wants to sell the eight refineries they own here in the USA. Mr. Chavez wants away from exposure to the USA and has decided China would be a better place to sell their oil.

Iranian President Mohammad Khatami and Venezuelan President Hugo Chavez will meet tomorrow, Friday and Saturday to sign deals in oil, gas, petrochemicals and shipping during President Khatami’s visit to Venezuela. It appears energy traders are not willing to give up their long positions in light of increased inventories. Could it be that energy traders are going to wait it out over the upcoming weekend to see if we don’t get some kind of whacky announcement early next week? There are clearly some “wild cards” out there in the energy complex!

I’m going to take this mess one step further and say there is more to all these developments than meets the eye. There is plenty of speculation out on the internet that the real reason we are going after Iran is not because of their program to develop nuclear power/weapons grade uranium. The real reason is to protect the global status of the U.S. dollar. HoweStreet.com ran an article on March 5^th that included, “Why Iran is Next.” Here is an excerpt of the article with the link to the whole thing if you want to read more.

“In October 2004, William Clark, award-winning writer and author of the soon-to-be published book Petrodollar Warfare—Oil, Iraq, and the Future of the Dollar (spring 2005), gave his opinion on the reasons for a pending U.S.-Iran crisis in an essay titled “The Real Reasons Why Iran is the Next Target: The Emerging Euro-denominated International Oil Marker”.

Clark blames “unspoken macroeconomic drivers” for the U.S.’ determination to attack Iran, in particular the fact that the Tehran government plans to open a euro-based oil exchange in 2005 or early 2006, which—if successful—“would solidify the petroeuro as an alternative oil transaction currency, and thereby end the petrodollar’s hegemonic status as the monopoly oil currency.” This, says Clark, would deliver a devastating blow to U.S. corporations, which own both the London’s International Petroleum Exchange (IPE) and the New York Mercantile Exchange (NYMEX), the main global oil traders.

All three current oil markers, the West Texas Intermediate crude (WTI), the Norway Brent crude, and the UAE Dubai crude are dollar-denominated. Iran, however, has required payment in euros for its European and Asian/ACU exports since spring 2003. “It would be logical to assume the proposed Iranian Bourse will usher in a fourth crude oil marker—denominated in the euro currency,” predicts Clark… a probable scenario in light of the fact that “the European Union imports more oil from OPEC producers than does the U.S., and the E.U. accounts for 45% of imports into the Middle East.”

In June 2004, the UK Guardian noted that “Some industry experts have warned the Iranians and other OPEC producers that western exchanges are controlled by big financial and oil corporations, which have a vested interest in market volatility.” BP, Goldman Sachs and Morgan Stanley, proud owners of the IPE since 2001, refused to comment.”

The plot clearly thickens in the realm of global energy supplies and who will have the power to control resources globally. The war is on! I’m still long my unleaded gasoline contracts and two weeks ago I bought natural gas contracts at $6.20 and today nat-gas closed at $6.88, up another three cents. I meant it earlier when I said I was expecting an electricity crunch this summer when air conditioners go into high gear. We have neglected to develop alternative power to reduce our dependence on foreign imports, and likewise we have not invested in infrastructure to harvest and deliver natural gas to meet the growing needs. We are now paying higher prices for the lack of foresight and must compete globally for limited supplies.

On a little lighter note, the Mortgage Bankers Association said their applications index fell 0.7% following a decline of 2.4% the prior week. Applications for refinancing fell 4.6% after falling 9.9% the prior week and the purchase index increased 2.7% following a gain the week before of 5.3%. The thirty-year fixed rate dropped five basis points from 5.74% to 5.69% and one-year adjustable rate mortgages averaged 4.43%, up from 4.27% the prior week. Mortgages are moving along fine for new purchases, but it sure looks like the economic stimulus from refinancing has reached its limit. Homeowners have finally backed-off from extracting cash from their home equity…smart thing to refrain from.

By the end of today’s trading session, the Dow Industrials dropped 107 points to close at 10,805, a loss of 1% while the NASDAQ held up a bit better with a 12 point loss (.6%) to close at 2,061. Thirty-year Treasury bonds were NAILED for a loss of 1.45% (big one-day hit for bonds) pushing the yield up 0.13% to 4.82% and the dollar was hit for a loss of nearly a half-percent. U.S. assets sold-off across the board.

Most analysts agree higher interest rates will choke our economy and put a slow death to the housing market. The powers that be can not afford to let the bond market fall apart, because it will take real estate and stocks right down with higher interest rates. Martin Goldberg will be writing tomorrow, and he has a gut feel we will get a really bad unemployment claims number tomorrow just to throw a bid back into the bond market. Marty and I had a good talk and lots of good laughs when we spoke earlier today. I’m long unleaded gas, nat-gas, silver, and gold along with mining stocks. Marty is also long precious metals mining stocks, but has some favorite “shorts” that are kicking in nicely to the downside for him. He laughs about how ugly some of the charts are starting to look and plans to profit on the downside! There are certainly lots of ways to skin the cat! I hope you’re finding the way that works best for you in these crazy markets!!

Have a Great Evening!

Mike Hartman

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