Market Notes: Energy Traders in Denial and an Incessantly Rising Dollar?

Includes: DIA, KBE, QQQ, SPY
by: Carlos X. Alexandre

The Fed kept QE on the table, undisturbed as planned, and has already pumped over $100 billion into the street. Interest rates and the dollar continue to increase while equities appear to struggle — or are just adjusting — to the new reality. Gold bugs are completely confused, because economic data runs counter to their predictions of inflationary pressure and by now the dollar should be drowning, further defying the skeptics that swore that the Fed’s Quantitative Easing policy would weaken the currency. It should have, but there’s more at play here than meets the eye!

In addition, and according to the ever reliable Fed, economic activity is anemic at best. Yet Copper is now at the same level that it was in the Spring of 2008, getting over $4 per pound and quickly reaching for overbought territory. Misplaced economic hope is behind its ascent, and the influx of cash into the commodity arena will soon look for the door, because raw demand is counter to supply prices, and the expectation of further appreciation will be met with reality.

Click to enlarge:


Oil Inventory 2007-2010

Furthermore, what is one to make of the largest weekly drop in oil inventories (-9.9 million barrels) in nearly 4 years? Maybe an abnormality, and according to the EIA’s report,

U.S. crude oil imports averaged 7.7 million barrels per day last week, down by 1.4 million barrels per day from the previous week. At 346.0 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. Total motor gasoline inventories increased by 0.8 million barrels last week and are in the upper half of the average range. Total motor gasoline inventories increased by 0.8 million barrels last week and are in the upper half of the average range.

It appears that, despite an increase in total oil consumption of 3.2% over the last 4 weeks compared to the same period one year ago, demand is easing while oil traders appear to be in a state of denial.

The long-term trend for the Dollar changed from neutral to positive, and the long-term trend for the Yen switched from positive to neutral. I wrote the article Special: Did Bernanke Have a “Flash of Genius?” on November 5, 2010. While I was attempting to create an entertaining piece, there was a “bit” of truth to it. I did say that Treasuries could not be dumped, and by that I meant wholesale, such as the Chinese Politburo going to market with wheel barrows full of U.S. bonds. Their hands are tied! It’s the private investor doing the selling, and it’s taking place in every sovereignty on the planet. Better yet, the private investor is demanding increasingly higher rates from everyone, because politicians of all stripes cannot just spend without consequences.

We live in very unusual times and the current environment is far more complex than it looks. Oh Boy, do the usual ETFs look good (NYSEARCA:SPY), (NYSEARCA:DIA), (QQQQ), and (NYSEARCA:KBE), even if a short-term drop ensues—which I doubt! Stay tuned!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.