Oil Explodes/Consumer Debt Surges

It was a historic day in the financial markets. On a day when everyone thought the jobs report would dominate the markets, oil stole the headlines. Oil had its biggest one day move ever moving up over $10 to $138/barrel.

We finished down a whopping 400 points on the DOW. We also broke the key 1370 level on the S&P(more on this later).

OIL!

Here is the news on the incredible move in oil today.


"June 6 (Bloomberg) -- Crude oil rose more than $10 to a record as the dollar weakened after the U.S. unemployment rate grew the most in two decades and Morgan Stanley said prices may reach $150 within a month.

Oil may ``spike'' because ``Asia is taking an unprecedented share'' of Middle East exports, Morgan Stanley analyst Ole Slorer wrote. The dollar weakened against the euro after the unemployment rose to 5.5 percent, signaling the Federal Reserve may be reluctant to increase interest rates. Oil also rose after an Israeli minister said an attack on Iran may be necessary.

Oil is ``being used as a hedge by speculative buyers for the weakened dollar,'' said Gary Adams, vice chairman of oil and gas consulting at Deloitte & Touche LLP in Houston. ``We are seeing that the price will continue to go up as investors look for alternatives.''


Quick Take:

Oil inventories are down and demand is up. Throw in massive speculation, a cheap dollar, and Israel threating to blow up Iran and it equals a historic $10 move up in oil.

If we go to $150-200/barrel in oil then this economy is going to get mashed. The consumer already is hanging on by a thread and spending their stimulus checks at Walmart. Throw in $175 oil and its lights out.

Consumer Debt Surges

Without the housing ATM card to draw from, the consumer has run to credit cards as a last way to spend money. This will be the final few puffs that get blown into the debt bubble before it bursts, leaving the banks with massive defaults.

Here is the new on the desperate consumer:

"June 6 (Bloomberg) -- U.S. consumer borrowing increased more than forecast in April as Americans racked up personal loans for everything from vacations to automobiles to education.

Total consumer credit rose $8.9 billion for the month to $2.56 trillion, the Federal Reserve said today in Washington. In March, credit rose by $13.1 billion, previously reported as an increase of $15.3 billion. The Fed's report doesn't cover borrowing secured by real estate.

Consumers used their charge cards less and personal loans more in April, in the aftermath of the credit-market collapse and the deepest housing slump in a quarter century. Weaker consumer spending, which accounts for two-thirds of growth, could send the economy into recession.

``The consumer is getting hit hard on so many fronts from rising gasoline prices and grocery bills that are going through the roof,'' said Chris Rupkey, chief financial economist at bank of Tokyo-Mitsubishi in New York.

In advance of today's report from the Fed, economists forecast an increase of $7.2 billion in consumer credit during April, according to the median of 30 estimates in a survey conducted by Bloomberg News.

The Fed is calling for lenders to consider forgiving portions of mortgage debt to help ease the housing contraction and stem a rash of home foreclosures and plunging in real-estate values. The situation ``is bad and it's getting worse,'' Sandra Braunstein, the head of consumer and community affairs at the Fed, told a meeting of the Conference of State Bank Supervisors at Amelia Island, Florida on May 22."


Final Take:

This is the last gasp of air that the consumer has left in the spending tank. After the credit cards get maxed out, there is nowhere left to go.

When you are out this weekend, take a look around and see how many people are paying in cash. I forget what money looks like its so rare in my neck of the woods.

I had a waitress tell me the other day that she hardly ever sees cash where as 5 years ago about 50% of her checks were paid with the greenback.

The consumer is now almost out of options. The next step in this cycle will be defaults and massive debt deflation on assets like houses.


Bottom Line:

The selling continued into the close, and we broke right through the key 1370 level on the S&P that was considered a key level for the bulls to hold.

The technicals on this break mean we most likely will move downward from here. If we had held that 1370 then a bounce was in play on Monday. If the pressure from oil continues on Monday things could get very ugly.

Stay Tuned.