Oil Futures Surge Higher as Libya Burns

Things are not looking good folks.  It looks like crude is headed back over $100 by the morning:

My Take:

The market looks AWFUL tonight.  Stock futures are diving and gold and silver are surging as Libya sinks into a full blown civil war.

Qaddafi has officially reverted back into his old "lunatic" self as the walls begin to cave in around him.   The situation in the Middle East is bordering on the brink of chaos. 

IMO, There is more uncertainty over there today than ever before which says a lot when you look at the history of this region.

The questions are endless:

Who will rise to power in Egypt and Libya(after the regime falls)?
What happens to the Suez canal?
Which government will fail next?
Does oil go to $200 if Saudi Arabia is next?

I could go on and on.  Wall St will spin all of this change as being one gigantic positive for the markets as the crazy dictators come crashing down like a ton of bricks.  The market rallied on the rumored death of Qaddafi on Friday.

This is retarded thinking in my view.  The reality here is millions of impoverished arabs are becoming desperate as inflation takes the cost to living unaffordable levels.  These worries are now starting to drift over into the Western world:

The EU is getting increasingly concerned about rising prices. there are reports that they might bolt on the Fed and start raising rates in order to quell inflation:

"(Reuters) - The Federal Reserve and European Central Bank may go their separate ways if Middle East unrest provokes a sustained, inflationary oil price spike.


Crude prices creeping back into the triple digits have sparked concern about slower economic growth and will no doubt reignite two long-running monetary policy debates:

Should central banks have a single inflation-fighting mandate, as the ECB does, or dual goals of price stability and full employment, like the Fed?

Should policymakers focus on headline inflation rates or strip out volatile food and energy prices?"

Take Continued:

This is NOT good folks.  If the EU starts taking rates higher then our currency is toast unless the Fed follows.  Gas is closing in on $9 in the UK, and I am sure the prices are similar throughout the whole EU.

The PIIGS simply cannot afford this type of shock as their unemployment rates hover over 20% in some areas. 

The walls are closing in on this whole charade people.    The Fed is slowly getting "boxed in".

What will Ben do next?

Does he risk a huge surge in global inflation as he continues dropping money out of helicopters?

OR

Will he be forced to raise rates which then risks the whole economic recovery?

The Bottom Line

The right answer is to raise rates of course.  There is no economic recovery to save.  Government spending created an artificial one there for a bit, but we all knew all along that this was not sustainable. 

The problem the Fed has if it raises rate then it will likely put this country into an economic depression.  This is why I fully expect Ben to choose option A.

This means you should expect to see prices continuing to rise until the whole thing inevitably collapses.  $140 oil should do it.  

Remember, we are much less prepared for an oil spike this go around.  Unemployment is nearly twice what it was when a similiar "shock" occurred back in 2008.  This means the consumer will roll over much faster this go around as Americans continue to remain jobless.

This is all going bad much sooner than I originally thought.  If oil continues surging like this then the central banks of the world are going to have some tough decisions to make when it comes to interest rates.

Sticking our head in the sand and running up the government credit card with mind numbing amounts of debt is not the answer.  The market will eventually force the Fed to raise rates if Ben continues to deny that we are seeing inflation.

Keep an eye on Bernanke's testimony in front of Congress this week.  What's interesting here is the ECB has their policy meeting regarding interest rates right in the middle of his testimony.  We should learn a lot about what Ben is thinking as he is forced to take some tough questions.  I am sure the phone lines of the central bankers will be lit up in the hours before Bernanke speaks.

That's all I have time for tonight.  I didn't even get a chance to discuss Ireland's dramatic election results..  The ruling party got abused by the voters.  In fact, the ruling party came in 4th place which is mind boggling when you really think about it.

The concern here of course is what will the new regime do in regards to the EU bailout of Ireland?  Does the Irish now tell the ECB to take a hike and refuse to pay the money back?  I would if I were them.  Why would any government sacrifice it's people in order to pay back a bunch of greedy bankers?  Afterall, that's what the bailout is all about.

Keep a close eye on this.  Until next time.....

GDP Miss...."The New Normal"

Here is a shocker(NOT!):

"WASHINGTON (Reuters) - The economy grew slower than initially estimated in the fourth quarter as government spending contracted more sharply and consumer spending was less robust, a government report showed on Friday.


Gross domestic product grew at annualized rate of 2.8 percent, the Commerce Department said in its second estimate, marking a downward revision from its initial 3.2 percent estimate.


Economists had expected GDP growth, which measures total goods and services output within U.S. borders, to be revised up to a 3.3 percent pace. The economy expanded at a 2.6 percent rate in the third quarter. For the whole of 2010, the economy grew 2.8 percent instead of 2.9 percent.

The pace of growth was too slow to do much to lower the unemployment rate, which fell during the quarter from 9.6 percent to 9.4 percent. It fell again in January to reach 9 percent."

My Take:

Stocks are up on the news which isn't a surprise because we were due for a bounce after 3 days of nasty selling.

I just love these economists and their "misses".  Let me share a funny story here from "the credit trader".  He loves to tell this story about a large banking customer that he traded treasuries for back in the 1970's and '80's.

His client would ask "the credit trader" what his firm's economist was advising when it came to where the 10 year bond was going to trade.  If the economist said that he expected bonds to sell off then his client would immediately take the other side of the trade for shits and giggles and go long.  "The credit trader" told me that his client won way more times than he lost when he took these bets.

They both would share a nice chuckle when his client would make money on these trades.

My point here is economists are pretty much worthless.  There are a few who have a clue, but for the most part they are shills that are bought and paid for by the people they work for on Wall St. 

The Bottom Line

The market is pretty quiet.  The DOW is up around 60 points.  IMO, Stocks going to trade on oil in the near future so if the Middle East stays quiet and oil prices remain steady then I wouldn't be surprised to see us move higher.

The longer term fundamentals however remain weak.  GDP growth below 3% means ZERO job growth folks which is not good when you consider 1/5th of this country is unemployed.

No jobs means that housing will remain weak and continue to deteriorate.  It also means that the consumer cannot recover and start buying the millions of I-phones that Apple needs in order to keep up it's amazing growth.

The stock market has not accepted our "new normal" growth rate of 2-3%.  Stocks are priced for perfection.  We need a robust recovery in order to create the earnings growth needed to sustain these prices.  Folks...I hate to say it but it "ain't gonna happen"!

If QE stops in June(which I am starting to doubt after seeing the bad GDP print), then I expect to see negative growth by Q4 of this year which means we will likely dip back into a recession.  We could possibly even see it in Q3 but I think that might be a tad too early.

If QE does not end and #3 is announced then inflation is going to continue to be a problem.  It's going to destroy profits as input costs continue to rise.  We are seeing signs of this already.

Can you imagine what the dollar is going to look like if QE3 is announced?  It's not going to be pretty.  You can be assured that the bond market won't be too happy either.

The bulls are still loaded with lots of profits so don't be surprised if this POMO market rises from here for a tad.

I stick hold firm on my prediction of a sell off as the ending of QE approaches in the March to May time frame. 

What a Difference a Day Makes!

Whoa!  I don't even know where to start today.  Should I begin with $100 oil or the ugly bond auction. 

Let's start with the 5 year bond auction and the 10 year bond's reaction to it:

My Take:

Today was a scary day.  There was nowhere safe for money to hide.  Cash started flying into treasuries in the morning as stocks sold off thanks to more Lybian mayhem.

That was working just fine until the bond auction was announced at 1PM.  Santelli gave it a D-.  Here are the ugly details:

"Bonds fell after the five-year note auction drew a high yield of 2.19 percent and a bid-to-cover ratio of 2.69, below the average bid-to-cover ratio of 2.79 posted over the past ten auctions.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold."

Take Continued:

As you can see above, treasuries sold off following the poor auction results. 

Folks, I don't what to say here....If we can't sell bonds now when stocks are selling off at the same time the Middle East is in the process of blowing up then when in the heck can we sell them???

The bond action spooked me more than the revolution in Libya today.  All I can say is this is a really really bad sign for treasuries moving forward.

Is the Fed Waking Up? 

Sure sounds like it.  Two of the Fed presidents created some serious waves today. The Fed's Plosser first came out with this bomb:

"WASHINGTON (MarketWatch) -- One of the most hawkish of the new voting members of the Federal Open Market Committee, Philadelphia Fed President Charles Plosser, on Wednesday said he's considering voting against continuing the $600 billion bond buying program but is also concerned about undermining the Fed's credibility. "Based on my reading of the economic outlook and challenges that the economy faces, I have expressed some doubts that the benefits outweigh the costs of this policy," Plosser said before the Rotary Club in Birmingham, Ala. "However, I supported continuation of the policy in January because it is generally a good practice for a central bank to do what it says it is going to do unless circumstances significantly change." He said should economic prospects continue to strengthen, he would not rule out voting to bring the bond buy program to an early close. "If the growth rates of employment and output begin to accelerate or if inflation or inflation expectations begin to rise, then it may be time to begin taking our foot off the accelerator," he said. "

Hoenig

Kansas City Fed President Hoenig then hit the wires with a fiery speech that was directed at the TBTF banks.  Here is the speech:

"Fed’s Hoenig Says U.S. Should Break Up Largest Financial Institutions

“I am convinced that the existence of too big to fail
financial institutions poses the greatest risk to the U.S.
economy,” Hoenig said today in Washington in the text of
remarks prepared for a speech. “They must be broken up. We must
not allow organizations operating under the safety net to pursue
high-risk activities and we cannot let large organizations put
our financial system at risk.”

Quick Take

Talk is cheap but this is a start!  Don't think for a second that the political chaos we are witnessing in the Middle East didn't have anything to do with these speeches.

The Fed is well aware of what money printing does.  They are also smart enough to realize that they need to hedge when their games start self destructing on them and the rest of the world.

They can tell us that they see no inflation until it's completely obvious that it's staring us right in the face.

In case you didn't notice we have definitely reached that tipping point:

I mean Christ....

When oil hits $100 a barrel, gold soars over $1400 an ounce, and monarchies start toppling due to soaring food costs I think it's kinda hard for the Fed to come on TV and tell us "we see no signs of inflation".

They understand that people are only stupid to a point.   The question now is will they ACT.  The Fed has a tendency to do a lot of barking instead of biting.  I will congratulate them when I see action Jackson.

The Bottom Line

$100 dollar oil is gonna hurt folks.  I wouldn't be surprised to see $4-5 gas by the summer which is when demand starts peaking.  That's a big punch to the gut for the consumer.

Today's Fed speeches were VERY interesting to say the least.  My guess is the Bernanke is taking some SERIOUS heat from the world's central bankers.  Most commodities are denominated in dollars folks which means the Fed's money printing creates and imports inflation to the rest of the world!

Let me remind you what the dollar has been looking like recently in case you haven't noticed:

This recent price action is going to only make matters worse overseas.  BTW, the dollar is selling off hard ahter hours tonight.

The fact that the Fed is hinting that they might end their QE program tells me that their arm is being seriously twisted by the powers around the globe.

The governments of the world were more than happy to play along with the Fed's games until they realized that they might lose power in doing so.

Folks I don't know how else to say this:  If the Fed is forced to stop QE then the financial system as we know it is toast.  Bond yields will immediately soar(they already are) and the banks will be toast because they own billions and billions of them. 

The Fed knows this, and I think it's a little too coincidental that Hoenig's speech focused on breaking up the TBTF banks.

It's too early to tell what's going down here but today's events are certainly interesting to say the least. 

That's about it folks.  You all saw the market today.  It was ugly, and if the Fed is forced to pull back on QE it's going to get even uglier.

Let's see if the robots can create a bounce tomorrow after two nasty days of selling.