Obama's transition team co-chair, John Podesta, called drilling for oil and gas on 360,000 acres of BLM land in Utah "a mistake". Could President Obama reinstate the executive order against offshore drilling that was only recently rescinded by his predecessor?

According to the Monday morning market, the oil supply/demand balance is shifting in favor of the energy bulls. Crude oil was up more than 4%, and natural gas was up 6%.

Thursday night the Fed reported $103.6 billion in reserve funds were added to the system in the week ended October 8th. This boosted the balance to $1,547 billion, a 7.2% increase in just one week. Over the past 12 months, an increasingly desperate Fed has presided over a 69.9% expansion of reserve funds to stimulate the economy.

So far there has been little discernable effect in the equity market from this pump priming. Ditto for the frozen credit markets and dormant consumer spending. Financial and auto stocks continue to be hammered as the Treasury hurries to implement the recently passed $725 billion in aggregate bailouts.

What's wrong with a little inflation? With almost all asset values in freefall, a little inflation would be a good thing right? It could mean salvation for the housing market and make it easier to repay the $10 trillion federal debt. Don't think the federal government isn't aware of that fact.

Of course, you can't have inflation during a recession, or can you? Over the past 50 years, annual CPI inflation hit double digits just three times. Two of those years, 1974 and 1980, saw negative GDP growth but annual CPI jumped 12.2% and 12.4% respectively. The other year was 1979 with 13.3% CPI growth on the eve of the first quarter 1980 downturn.

With the close of the third quarter on Tuesday, some energy producers will actually show a benefit from the plunge in oil prices. Companies that hedge the majority of their oil and gas production will see sharp mark to market gains in the third quarter. Remember, during the third quarter the price of natural gas lost all of its meteoric second quarter gain and then some.

In addition, crude oil is once again in double digit territory, where it was in March. Among those that use extensive hedging, limited partnerships and heavily leveraged E&P names are prominent. These entities cannot take the risk of a downturn in the commodity market. These are the names that took outsized paper losses in Q2, and are now poised to bounce back. In some cases the non-cash gains will be eye opening.

Even if the bailout is approved this week, it will have already failed in what I believe to be its primary objective, the partial restoration of bank balance sheets.

Thanks to the mark-to-market accounting (now mark-to-panic), bank assets are in for another hit at the September 30 close for the third quarter. Falling home prices and higher default rates point to lower asset valuations. While the decline in mortgage security assets is very real, the requirement for banks to mark down these long-term assets every quarter is a relatively new.

On Thursday night, we learned Washington Mutual (WM) with $307.2 billion in assets became the largest bank failure in U.S. history (see MarketWatch). In July, Indymac with assets of $32 billion failed. WaMu is the 14th bank or thrift to fail this year.

How bad is it? On June 30, the FDIC had just $45.2 billion to insure deposits. Bloomberg reports the final FDIC bill could top $150 billion and that is separate from the $700 billion bailout currently under debate on Capitol Hill.

The SPDR Energy Sector (XLE) plunged by as much as 4% in early trading yesterday, registering a new 52-wk low. The low water mark of 61.06 followed 10-consecutive days of above average trading volume, and was more than 16% below the 50-day moving average. By noon yesterday, the XLE recovered all of its morning loss. Commodity prices were not the catalyst. The underlying prices continue to fall with crude oil down 3% and natural gas off by more than 1%. RBOB gasoline is also a laggard with a decline of more than 3%.

Value investors are just finding it tough to sit on their hands. Insiders, who may be the best value investors of all, were scooping up shares last week. According to wsj.com, insiders bought $21.0 million in energy sector shares while selling only $16.6 million. This is a rare reversal of the typical insider selling pattern for all stocks.

Those Bulls, so used to winning last year, can't catch a break. Management is pulling out all the stops to seize the momentum, but to no avail.

Four times this season, seldom used Bulls pinch hitter 'Bench' Bernanke was called in. Four times he delivered hits for his team (75bp Jan 22, 50bp Jan 30, 75bp Mar 18, 25bp Apr 30).

The July PPI report surprised economists with the headline finished goods inflation at +1.2%, doubling expectations. The core PPI at +0.7% also topped the consensus estimate. Year over year the PPI was up 9.8% compared to 9.2% in June and 7.2% in May. Next month, economists are likely to err on the high side if they fail to account for the unique way monthly PPI data is gathered.

PPI data does not reflect end-of-month price gains, or an average monthly price gain. The Dept of Labor explains in the July report that, "Prices submitted by survey respondents are effective on the Tuesday of the week containing the 13th day of the month." [Emphasis added.]

The yield on the 10-year treasury is 3.91%, just 1 basis point shy of the 2008 closing high set in mid-February. The bond market may be bracing for an ugly inflation surprise with the release of the April CPI this morning. The Street is looking for a +0.3% headline and +0.2% core inflation rate at the consumer level. However, there are plenty of reasons to believe the number could go higher.

Just yesterday, Knobias reported that import prices soared 1.8% in April, following an upwardly revised 2.9% increase in March. Compared to the same month last year, import prices have risen 15.4%, the biggest increase on record.

The Bulls managed to clear extraordinarily weak March retail sales reports with little trouble on Thursday, only to be sucker punched by GE's Q1 EPS miss. Making matters even worse, the Univ of Mich/Reuters Consumer Confidence Index fell to 63.2 from 69.5, its lowest level since March 1982. This sets up the return next week, of the 800lb gorilla from 1982, Stagflation.

Why stagflation? The next hurdle for this tentative market could well be the March PPI (Tues) and CPI (Wed). The next round of inflation numbers will show the effects of rapid money supply growth, tight commodity supplies, a persistent trade deficit and a declining dollar. The inflation inputs actually started to roll in yesterday.

The news on the U.S. consumer is relentlessly negative this year. Soaring prices for gasoline and food, plunging home prices, spiking foreclosures and credit card delinquencies are all serving to drain off the discretionary dollar. However, retailers are surprising the Street with better than expected earnings per share, often amid negative top line and same-store sales comps. How do they do it? Take a look at Dollar Tree (DLTR).

Dollar Tree (DLTR) markets to the demographic caught in the heart of the consumer squeeze. Wednesday morning, the low end discount retailer reported Q4 sales fell (1.5%) year over year. Net income fell (3%) to $94.7 million. However, through the magic of its share buyback, Dollar Tree reduced its share count by (9.7%), and lifted its EPS to $1.04 from 96c a year ago.

The bellwether financial sector (XLF) has not participated in the broad market's 3-day rebound this week. Today, under pressure from subprime losses and downgrades, the group is extending its decline. The XLF was a valuable leading indicator for the broad market in 2007, and may be sending a warning to investors once again.

Last year the XLF completed a "double top" on June 1, and was already down 5% when the broad market peaked in mid-October. The XLF offered an unambiguous turnaround signal on Jan 22, the S&P 500 (SPY) followed one day later. By Jan 24, the XLF was up 10.9% over 3 sessions. The S&P 500 lagged behind with a modest 2.0% gain.

We have been trained for years that soaring inflation doesn't matter if it is not reflected in the core CPI, excluding food and energy prices. However, when it comes to retail sales data, all we strip out is autos. The ugly truth is that if we take out the impact of surging gasoline and food prices, retail sales in January were flat.

Retail Sales, total rose 0.3% M/M and 3.9% Y/Y.