Is Bernanke Bumping the Dollar?

 |  Includes: DIA, OIL, QQQ, SPY, UDN, UUP
by: John Dalt

Mortgage rates spiked yesterday as the Treasury sold $19 billion in 10-year notes. Rates at yesterday’s auction settled at 4.00%, up from the 3.9% quote on Tuesday - the highest since October of 2008

The oil play is getting crowded as crude trades over $70 per barrel. The dollar showed some strength yesterday. The Fed did not force down interest rates at the auction. Crude inventories are down more than expected but oil has primarily moved inverse to the dollar. Oil is a world commodity, priced in U.S. dollars. When the dollar goes down in value, it takes more Jacksons to buy a barrel of crude.

The EIA released their weekly report yesterday on petroleum. Inventory dropped almost five million barrels, which was more than anticipated. Last week the inventory had built by half that much, so the inventory is continuing the decline that started on May 1. While the inventory is going down (which is bullish), we are still approximately 70 million barrels above year ago levels. Unless the dollar reverses its decline, oil should continue to climb higher, if inventories decline further.

Inventory 6/03/09

The dollar strengthening is the wild card. If the Fed does not push down interest rates, this may be a signal that the value of the dollar is more important to Bernanke. He may use higher interest rates to signal Congress and the White House that deficits “do matter”. The Federal Open Market Committee meets again in two weeks. The coup de grace will be raising interest rates at that time, or at least setting the Fed Funds rate at 0.25% Currently, the Fed’s rate is a range of 0.00 to 0.25%

Bank of America’s (NYSE:BAC) CEO Ken Lewis will testify before Congress today about the bank’s acquisition of Merrill Lynch last fall. Lewis has publicly stated that the Fed and Treasury officials pressured him and the bank’s Board of Directors to complete the deal or be replaced. This should be interesting. E-mails from the Fed and Treasury have been leaked that would back up Mr. Lewis’s claims.

As we said before, “Mr. Lewis had a John Galt moment!” When you deal with pigs, you are going to get dirty. When you deal with bureaucrats, you are going to dance their tune. All for the greater good!

The handouts never end, or at least the line of companies that argue they should get to suck on the teat. Auto supplier companies to GM (GMGMQ.PK) and Chrysler met with the Treasury Auto Task Force yesterday, asking for $8 to $10 billion in loan guarantees. The suppliers argue they do not have the capital to ramp up production for the “new” Chrysler and the “new” GM.

When asked about the potential for a government bailout, Soleil’s Michael Ward said, “Why not?
They are giving aid to everybody else.”

I would not worry too much about ramping up production.
Who would buy one of their cars? I love GM pickups, Camaros, and Corvettes, but never again. Ford (NYSE:F) makes a nice truck and they are not trying to pick my pocket when I am not in their showroom.

Disclosure: No positions