…and what a week it was.  We saw some extreme volatility in everything from equities to energy.  The currencies hit milestones and continued to keep on keepen’ on.  There was a plethora of economic data that I will try to sift through and make some sense of.  All in all, it was a busy week chalked full of info and data.  So without further ado, let’s dig right in.

Oil

Oil remained extremely volatile this week.  Mexican’s state owned Petroleos Mexicanos, or Pemex, came back online after a shut down of 600,000 barrels per day of production due to ‘gale force’ winds.  That combined with an expected increase in U.S. supplies sent the price of oil back below $90. 

Well, the expected 400,000 barrel increase in U.S. supplies turned out to be wishful thinking.  The actual numbers came in 3.89 million barrel decline.  That combined with the Fed rate cut had crude oil trading over $95 /barrel on Wednesday and we topped $96 in Singapore over night.  Oil dipped on Thursday with everything else under the sun, but still had it trading at a $93+ level.  This Friday crude is trading just short of $95 again.

In the near term it’s really beginning to look like we will see $100 oil before $80 oil.  That doesn’t mean we won’t see a pull back into the mid $80’s, but I am still seeing buying on the dips and upside pressure in this market.  At this point, the most important thing to keep your eye on going forward is the weather.  A cold winter, as predicted, combined with low supplies is an equation for higher oil prices. 

We haven’t really begun to see the effects of higher priced oil at the consumer level.  This will be extremely inflationary.  I would look for this to start to show in the prices of everything from gas at the pump, to the food you eat, and the plane tickets that you purchase. 

Just about everything that we consume needs oil in some form or another for transportation and production.  Don’t think that the producers will be footing the bill on this one.

Natural Gas 

I mentioned last week that I thought natural gas was undervalued.  Well it seems that I wasn’t the only one with those thoughts.  Qatar’s Oil Minister Abdullah bin Hamad al-attiyah said that natural gas is ‘very, very undervalued.’  He went on to say that he is ‘unhappy, unsatisfied with the gas price.’

Being that Qatar has the third largest natural gas reserves with proven resources of approximately 900 trillion cubic feet, they definitely have an interest on the subject. 

Here in the U.S., the EIA came out and reported that U.S. supplies grew on Thursday.  So natural gas sold off right?  Not really.  In fact, we saw NG rally over 3% on the day.  Actually, it was one of the few markets that actually went up on the day.

It seems that natural gas is one of the last cheap ways to play the energy markets right now.  Therefore, we have seen a large increase in the inflow of capital into the NG market.  

Anyways natural gas had a nice week, and this Friday has NG trading at $8.55 as forecasters predicted weather in the Midwest to get cold.  About 79% of the homes in the Midwest are heated by gas heaters.  As I briefly mentioned earlier, the National Oceanic and Atmospheric Administration predicted that this winter will be colder than the last.

Natural gas is still cheap.  

Uranium

I would like to confirm the rise in the spot price of U3O8 that I mentioned in last week.  Trade Tech is reporting a $4 increase while UxC is reporting a $5 increase.  This Friday I am seeing some preliminary reports that uranium has jumped to $90 /lb.  Again, I will wait for Trade Tech and UxC to confirm this data. 

Trade Tech reports that there were additional buyers in the market.  Speaking of additional buyers, the U.S. DOE has put in a formal request for 250 tonnes of off-spec low-enriched uranium.

But that definitely isn’t the biggest story of the week for uranium.  Both Cameco and Uranium One came out with some disappointing news. 

We’ll start with Cameco.  They reported that their Cigar Lake project will experience further delays and won’t be back into production until at least 2011.  This news came with a release that 4Q profits will decline as a result of lower prices. 

This is not the first time that Cameco has pushed back its timeline in getting Cigar Lake back online, and I’m not convinced it won’t be the last.  In a situation like this, management is usually under pressure by shareholders to come out and say that they will get production online as fast as possible.  This usually makes for timeline that is lofty at best. 

Uranium One came out with a revised planned production for 2008.  The company was expecting to produce 7.4 million pounds of uranium oxide.  The revised number was 4.6 million pounds.  This is definitely a significant decline and the market responded with a 17% sell off of Uranium One.

This type of news has plagued the market for uranium and will definitely have a significant impact on the spot price of uranium going forward.  Allow me to indulge. 

There are very few significant producers of uranium out there.  So when there is a supply disruption it will carry an impact, and it seems that 2007 is the year of woes for uranium miners.

First we had the flooding of Cigar Lake.  We then had the flooding of Energy Resources of Australia’s Ranger operations due to Cyclone George.  Now we have the decreased outlook for Uranium One. 

Unlike crude oil, when a supply disruption occurs in the uranium market there isn’t an immediate impact in price.  What we get is a delayed effect.  While demand continues to increase on a global level as a result of growing energy demands combined with the move to cleaner energy, future supply continues to be non-curtain at best.

As of last week, I thought the uranium market was beginning to look like something worth investing in again, but it is still a market that makes me nervous.  So, I sat on the sidelines. 

Now I’m not going to say that I’m going to run out there and jump into the market, but I will do some reevaluating of the situation.

Equities 

We saw strength in general equities leading into this week and up until the market close on Wednesday.  The main reason for the strength was the lead up to the rate cut.  After the announcement of the 25 BP cut in the Fed Funds rate and the discount rate, stocks didn’t seem to know quite where to the go, and seemed to aimlessly finish higher.

Then came Thursday…the Dow kicked over 360 points while the S&P and NASDAQ followed suit.  Sure enough, the Fed stepped in and injected another $41 billion into credit markets…who in their right mind would be buying dollars right now?  

Leading the fall were the financials, and leading the financials was Citigroup with a 7% decline.  That happened to be the worst decline in over 5 years for the company.
 
The street is very worried about this company’s balance sheet; as they should be.  They should feel the same way about all of the investment banks balance sheets.  Last week I mentioned that analysts were saying the financials ‘toilet bowled’ the quarter, meaning that they attempted to pile all of their losses into one quarter.  I’m fairly confident that both the investment and commercial banks have some surprises yet to come.

Financials weren’t the only companies to fall.  Both consumer and energy stocks took it on the chin.  It’s starting to look as if the energy sector might be topping. 

The consumer stocks are starting to show that Americans are feeling the pinch of all the debt that they hold.  I see much more downside in this sector as the housing market deteriorates more significantly.  Consumers without their home equity credit card will be hard spent to buy that new widget.

I am a long term energy bull, but these stocks are ready for a correction.  If you have positions, consider taking some profits off of the table.  Sit on some cash, and wait for a pull back. 

Anyways, domestic equities continue their slide this Friday as the DOW has kicked another 80 points.  Wall Street is reporting that the positive jobs data is the result of the sell off…Huh?

Economy 

There was tons of economic data released this week.  For both your sake and mine, I will focus on the areas of most interest.

The pessimistic news in housing, in my opinion, really stole the show this week as far as economic data goes.  Housing prices posted their biggest decline since 1991, and we saw a doubling of foreclosures from the 3Q of last year to the 3Q of this year. 

Also, 17.9 million homes stood empty on the market.  That is the highest number since the Census Bureau started reporting the data.  The numbers showed a year over year increase of 1 million homes.  The interesting part of this statistic is that of those 17.9 million homes that are empty, only 2 million are for sale.  The rest are on balance sheets and going through the foreclosure process.  So have we seen a bottom in the housing market?  I don’t think so.

We also saw consumer confidence decline for the third strait month to a 2 year low.  The Chicago purchasing index also hit its lowest number since February and consumer spending fell off as well.  That is some scary data, and then this came out… 

3Q GDP expanded at 3.9%!!!  I have to say that I was a little bit surprised to see this.  The numbers were estimated to come in at 3% growth. 

So where did this come from?  Some analysts have been saying that the numbers are a manipulated result of an upcoming election.  This might make hold some truth, but I think we can attribute this growth from a couple of important factors. 

The first is the weak dollar.  This hits on two fronts.  The weak dollar makes U.S. good cheaper to foreigners therefore increasing exports and earnings on foreign soil has to be exchanged into U.S. dollars.  Although the growth is nominal, it shows up in the GDP numbers.

The second item that I believe contributed to the higher than expected GDP growth is the large increase in credit card debt.  This is an extremely scary notion and cannot be understated. 

U.S. credit card debt expanded to $915 billion dollars.  Citigroup’s CFO Gary Crittenden said that ‘credit card holders were beginning to increase the balance on their cards or take cash advances for the first time.’  As a result of this scenario, Citi has set aside $2.24 billion aside for loan losses.

American Express and Washington Mutual followed suit and increased their credit card loss reserves by 44% and 20% respectively.  (Report by CNNMoney) 

Now this credit card debt is sliced up and sold to investors the same way that mortgage backed securities are.  Could this be the next wave to the credit crunch?  It’s hard to say, but this is definitely a sign that the American consumer is strapped as a result of the enormous level of debt that they hold and this will begin to show itself.

How does consumer debt as a percent of consumer GDP running at 340% sounds?  To answer my own question, it sounds pretty dam scary in my opinion. 

Also, asset backed paper shrank for the 12^th week in a row as investors continue to shun risk in the debt markets.  Maybe the fed rate cut will help, but I sincerely doubt it.

Friday’s jobs data was also released.  The BLT reported that 166k jobs were added this past month while economists were expecting an increase of 80k. 

What a pointless statistic.  I don’t know if you recall the jobs data that came out pre rate cuts in August.  It said that 14k jobs were lost in the prior month.  Well the following month the data was ‘revised’ to a growth of approximately 90k.  How the hell do you go from a 14k loss to a 90k gain in jobs?  Well, you might look at the margin of error allowed by this statistic.  The BLS allows for a margin of error of approximately 100k jobs.  So who really cares what the numbers say.  

On that note, I’m sure you’ve noticed that I really haven’t said much of anything on the rate cut topic.  That’s because I really don’t much care about it that much.  The Fed didn’t surprise anyone with their move, and markets had already priced it in.  Bernanke has already showed his willingness to sacrifice the dollar in order to prop up financial markets. 

Now that we’ve recognized the course that the Federal Reserve has set us on, we have to position ourselves to profit.   If I have to say so myself, that is quite the transition into our next section… 

Currency/Precious Metals

I decided to combine these two into the same section because it all seems to be correlated.

Anyways, what a week it was for the currencies.  Let’s dig right in. 

Record levels were set and then reset this week.  The pound hit a couple of fresh 26 year highs hitting levels just north of 2.08.  We will have to watch how deep the credit crunch runs in the UK before we can see how high we will go here, but 2.10 doesn’t seems to be too far off.  The Bank of England’s Monetary Policy Committee will meet next week and I expect them to keep rates unchanged.  We will just have to wait and see, but even this modest outcome could result in strength for the pound.

The Euro moved above the 1.45 level.  We also saw Euro-zone inflation increase to a two year high of 2.6% which was above the expected 2.3%.  Germany, who until China recently passed as the worlds #1 exporter, reported that exports grew while unemployment fell.  It looks like the strong euro isn’t killing the economy.  I wonder if anyone in this world understands the BENEFITS of a strong currency.  I sincerely doubt it being that the major currencies of the world are in a race to see who can devalue their currency at the fastest pace.  This Friday, the Euro hit 1.4525 today.  Did I mention that that is another record high?

Anyways, in their recent meeting, the ECB held rates steady, but this data will force them to at least keep interest rates steady and possibly ponder the notion of a rate hike in the future.  Even with that, don’t underestimate the stupidity of central bankers.

I mentioned that China recently became the world’s #1 exporter.  Also, the Yuan is set to have its biggest monthly gain since May, and as I write this Friday, Bloomberg is reporting that the Yuan will experience its biggest weekly in two years.

On a non-currency event, after China opened their online ticket sales for the coming Beijing Olympics, they were forced to shut down the site due to a tremendous amount of volume.  I expect these Olympics to be quite the spectacle. 

Back to the currencies, the Aussie dollar hit .93 and there was a lot of data that came out suggesting that a rate hike might be in order when the central bank meets next week.  Approvals to build or renovate houses or apartments rose 6.8% which was 7 times what economists were predicting.  Also, loans to consumers and business rose 1.2%.  Along with that strong data, retail sales grew .8% while economists were predicting a .5% rise.

It wasn’t all positive though.  The Aussie trade deficit expanded to $1.9 billion.  Although growing imports are sign of strong domestic consumption, it isn’t a positive for a currency.  In the long run this trend should reverse itself with Australia’s large resource base.

There is lots of positive economic data coming out of Australia.  It seems that .95 isn’t too far away and after that we can start looking for parity with the U.S. dollar.

Anyways, as I write this Friday afternoon, the A$ is trading at .919 as the yen strengthens and the high yielding currencies are weak across the board.

Maybe the biggest story in the currency markets was the Loonie.  After hitting a fresh 47 year high on news that their economy grew .2% in August despite the turmoil in the U.S., the Loonie pushed to 1.0614 which is a 130 year high after the U.S. rate cut.  I said last week that the Loonie was within sneezing distance of 1.05.  Well it obviously didn’t stop there. 

The C$ pulled back in the 1.05 range on Thursday, but as I write it is at a fresh 130 year high at 1.0692.  You can attribute today’s strength in the Loonie to the release of Canadian job’s data.  Unemployment north of the border dropped to a 33 year low as the Canucks added 63k jobs, which was 5 times what economists were predicting.

The data out of the Japanese economy was very negative this week.  They reported that economic growth was going to be less than expected, but more importantly they said that consumer prices probably won’t increase this year.  It looks like we won’t be getting any rate increase from the BoJ any time soon.  This means the carry trade will continue to roll on strongly.  The Yen strengthened as equities tanked.  It is currently trading at 114.74, which is still very cheap in my mind.

On that note, the S. Korean Won rose above 900 for the first time since 1997.  The Won is definitely benefiting from the carry trade, just like the New Zealand dollar, the Aussie dollar, and all of the other high yielding currencies.

One of the more interesting stories of this week comes out of Hong Kong.  On Halloween the Hong Kong Monetary Authority reported sales of HK $7.8 billion (US $1billion) in order to attempt to hold their peg to the U.S. dollar.  The report stated that this was 10 times the size of the two earlier interventions this month.  Hong Kong, unlike Kuwait and others are still attempting to hold their U.S. dollar peg.

Now here’s the interesting part.  On Thursday, one day after the above mentioned report was released, another report was released saying that currency traders were betting in the forward markets that Hong Kong would not be able to sustain their peg.

This speaks to the notion that countries will be hard pressed, at the cost of extreme inflation, to hold their U.S. dollar pegs for much longer.  I would put my money with the currency traders.  Anyways, I will keep an eye out for any news on this topic going forward.  Also keep your eye on the UAE dollar peg as inflation is really starting to take grip in Dubai.

For a final whirl wind finish in currencies, the rupee advanced as they increased their reserve ratios and exports rose at the fastest pace in 5 months.  Today marks the end of an eight day win streak for the rupee

The Brazilian Real rallied this week as both export and import grew to meet rising demands.  This economy is really heating up and it is worth keeping your eye out here.  I believe that Brazil is close to getting an investment grade rating from the ratings agencies.  Remember that right before China’s stock market soared they received investment grade ratings.

Sweden increased interest rates, along with Iceland, which already has the highest yield of all the high yielding carry trade benefiting currencies.  Norway held rates steady.

Let’s move from currencies onto the gold market, which is really the only TRUE currency in its own right. 

Well we saw gold futures head over $800 for a fresh 27 year high after the rate cut.  This market continues to benefit from a weak dollar and higher oil prices.  On that note, any idiot could have thrown darts at the PM miners’ stocks and taken an easy 20% over the past couple weeks. 

We saw a short pull back to $790 on the mini dollar rally on Thursday, but this A.M. gold for immediate delivery is trading significantly higher at $803.2.  That is the highest I have seen

There isn’t too much news besides that in the PM markets, but there is something that I would like to point out here.

Anglogold came out and reported a quarterly loss of $310 million dollars, which was their second quarterly loss of the year.  The catalyst of the loss was their forward hedge book.  They are sellin gold on futures contracts at prices significantly less than spot price.

This is exactly what we have seen going on with Barrick gold (thanks GATA).  The reason I bring up this subject is that this is a down right criminal act of price setting.  This should not be allowed and companies like Barrick are nothing more than tools of the central banks to assist in their price manipulation schemes.

If you don’t care about the illegal actions taken by a Barrick or a Anglogold, I assume that you do care about your portfolio’s performance.  When you are purchasing PM stocks, you are essentially purchasing a leveraged position in PMs. 

If you purchase a company that has hedged its position forward in futures contracts, you no longer have that leverage.  The only way this would be to your advantage is if gold prices declined below the contract price.  The scenario is more than highly unlikely.  So when you are purchasing into PM stocks, make sure that they aren’t hedged forward.

I would like to close this section of precious metals and currencies with a warning.  I am under the strong belief that the currencies, along with gold and oil are over due for a correction.  So although I have set price targets for some of these currencies and for the PMs, they could, and should experience a correction while the dollar experiences a loser bounce.  It’s hard to say when, but it will happen, but when this happens you will want to have some cash to do some discount buying. 

I am going to go ahead and publish this right now.  The currencies are running wild as I write this sentence.  I have been frantically going back and changing my current numbers after SEVERAL record highs keep getting broken.  I would not be surprised if the currencies, precious metals, and oil, at the end of the today, will be even higher than when I write this

Well, that’s pretty much it for this report.  I realize that there were some things that I didn’t cover, but this really was an eventful week.  I covered all of the topics that seemed to be of most relevant, but the thing is that I write this report for you guys.  So if there is a subject that you would like to hear more of, please email me and let me know.  If I missed something of interest on Friday, it’s most likely because I have already published the report, so I would appreciate some leniency there.  If I continue to miss important issues, I will publish this report a little later in the day.  Otherwise if you have any other questions or comments just send me an email at njfinancial@gmail.com. 

Happy investing,

Nick Jones