The Chinese are publicly questioning the cheap dollar and expressing concern for the U.S. budget deficit. This is all talk aimed at the Europeans. It does not upset the Chinese. They tie their currency, the yuan, to the U.S. dollar. As the dollar becomes cheaper, their exports gain advantage against every other major currency. They are crying in their beer.

The U.S. has pressured China to let their currency float, which would take away their competitive advantage in exports to the U.S. They will not do it. There was a small adjustment in 2008, but since the credit crisis began, the currencies have moved in lockstep.

The NYSE observed two minutes of silence yesterday morning before the opening bell, followed by a lone Marine playing TAPS. It was moving.

Subscriber T.M writes,

Crude oil inventory reports came out Wednesday from the Energy Information Administration (EIA). Is the trend towards higher prices supported by the numbers?

Crude oil inventories were down four million barrels but still 7.7% above last year’s level. This was a larger drop in inventory than the market was expecting. Imports dropped 764 thousand barrels, 486 thousand barrels below the four-week average. Imports for the week were 1.846 million barrels less than one year ago.

One of the great things about writing our daily MarketToday newsletter is the ability to view the market as an observer. To spend the day reading other’s views and watching the ‘great dance’ that occurs every day between buyers and sellers.

On certain days, the screen is all green as it seems every stock is headed higher, it always reminds me of the saying, “A rising tide lifts all boats.” Other days, the screen is all red, as sellers try to dump every stock they own, reminding me of the classic video with comedians John Fortune and John Bird explaining the “Subprime Banking Mess.”

Natural gas has been in the news for the last few months as supply has outstripped demand. Natural gas is now under $3 mcf, which is a multi-year low. Jimmy Carter declared over 30 years ago, “The U.S. is running out of natural gas.” Fast forward and gas is now cheaper than coal for generating electricity. Shale gas has been exploited with new drilling technology.

If you liked natural gas producers when gas was over $10 mcf, what's not to like about $3 mcf natural gas? Many newsletter writers have pushed the natural gas play since last spring. I believe the time has arrived. We are coming up on winter, and natural gas is poised to heat millions of homes. The economy seems to be recovering, and natural gas is the energy that supports manufacturing. One other use in natural gas's favor: transportation.

The market wants to continue the rally that sprang to life Wednesday. This can only be interpreted as looking for an excuse to rally. Crude oil looked to be in oversupply, and with questions about the strength of the economic recovery, was teetering on dropping.

Eight million barrels of imported oil didn’t show up in port last week. Oil, gasoline and distillates inventory in total dropped 11.2 million barrels! The market caught the fever from the commodity trading pits, and we were off to the races. Does this make sense? No, higher crude oil prices suck money out of the economy faster than even Oh! Bama and Congress can. Higher gasoline prices take money from every consumer's pocket.

The crude oil trade came back with a vengeance yesterday. I have called oil the "trade of the year" but had become bearish in the last three weeks. We had broken the trend of declining inventories, the rally was running out of buyers and the general market looked lower. I surmised that some of the “oil on ships” that was sold on futures last spring was showing up in port and oil prices would correct lower.

The Energy Information Agency (EIA) gave crude oil a shot in the arm yesterday. Inventory dropped 8.4 million barrels. Gasoline inventory dropped 2.1 million barrels. Diesel and other distillates dropped 700,000 barrels. I can’t tell you how surprising these numbers are to me. Get long oil - the trade is on!

8/12/09

The real surprise today was the reaction to the Energy Information Agency (EIA) report. Crude inventories continue to build. Crude Oil stocks increased 2.5 million barrels, gasoline decreased one million barrels, and distillates increased 800,000 barrels. Add them all together and we have 2.3 million barrel build in inventory. Crude oil dipped then regained to lose only fifty cents after the report came out! We have all heard that the market can stay illogical longer than you can stay solvent; we are witnessing illogical movements in the oil market.

8/11/09

The Fed is meeting and will issue their report today, Wednesday. The market does not expect any change in current actions. The $300 billion purchase of treasury bonds is scheduled to end in September. So far, they have bought $253 billion with printed money.

1. Silver moves more than gold because it is a thinner market.
2. Silver is a precious and industrial metal, thus silver’s price may move based on expectations of the health of the economy.
3. There is NO shortage of silver. We mine less than demand, but the shortfall is recovered from scrap. Last year, for example, 680.9 million ounces were mined, and 176.6 million ounces were recovered from scrap. If we recover less in scrap, the mines will deliver more.

Disclosure: No positions

There is a simmering problem developing in the precious metals market. Before it becomes a wild fire, I want you to be aware of it. The iShares Silver Trust (SLV) is an ETF that owns silver bullion equal to the capitalization of its shares. As the spot price of silver fluctuates, so does the price per share of SLV. All good so far.

However, do they really own silver equal to the capitalization of the ETF? There have been questions about the integrity of SLV for at least a year, but most were treated like “black helicopter” sightings. The questions are gaining weight, and being made with more certainty.

“Cash for clunkers” is a great example why the government is not capable of running the health care system. The clunker program offers up to $4500 for your low gas mileage, less-than-25-year-old car.

When you trade in your gas-guzzler the dealer advances the $4500 credit, destroys the car, and bills the government. This is where the wheels come off the program. One dealer said it took five hours to fill out the paperwork for one clunker. Truth number one: Government runs on paperwork. So much for streamlining health care claims processing, and squeezing all those legendary “inefficiencies” out of the claims process.

Health care is on everyone’s mind these days. Our administration and representatives are negotiating the terms to take over our health care system, in the belief that it is too expensive and will cripple our economy if the costs are not controlled. The human element is the plea to cover people that do not have insurance, so they will have access to the best health care money can buy.

The market gods are smiling this week. How do you explain it? We were teetering at 880-900; everyone (including your author) believed we would drop to 820-840 before a meaningful advance would occur.

California’s lawmakers approved a budget Monday night to address the $26 billion deficit, or nearly 30% of the general fund. They did it with $14 billion in cuts, and the balance in slight of hand. Borrowing from local governments, shifting money from one state account to another, and accelerating collection of taxes.

The Energy Information Administration (EIA) report on petroleum comes out every week. We cover this report, to help us understand what is happening in the market.

The Wall Street Journal had a great article on the housing foreclosure crisis last week. Thanks to reader Alan M. for bringing it to my attention. Stan Liebowitz, professor of economics at the University of Texas, breaks down the statistics of the mortgage market to reveal the real problems.

We all marveled at the creative financing that was done. Only in America could you find a zero down, adjustable, interest only, low documentation loan. It takes a special kind of marketing department to dream up these kinds of financial instruments.

Wal-Mart (WMT) made headlines yesterday when it appeared they succumbed to the desire to curry favor with the government. Wal-Mart now backs a push for an employer mandate for health insurance. The story is more complicated than capitulation on Wal-Mart’s part. The Washington Post has a good article on Wal-Mart’s endorsement of an employer mandate.

Disclosure: No Position

Our two main topics today are silver and oil. Silver is a precious metal, but much more. It is in almost every electronic piece of equipment produced in the world. Oil is in everything produced in the world, period. Energy, without it, you would need a horse walking in a circle. I have called crude oil the trade of the year. We may be facing a soft period ahead for a week or two, but who cares?