Wednesday, April 13, 2011


As I drove the kids to school today I noticed that once again fuel prices are high.  Unfortunately I have one of those cars that takes only the super premium 93 octane blend of gas, so I am always looking at the most expensive level of gas pricing when I drive around town.  This morning's damage in my neighborhood store was $4.11 for the super premium grade.  While I'm sensitive to the cost of filling up the car, I'm fortunate and blessed in that I make enough money where it doesn't harm me and it gives me something to complain about and blog about.  On the other hand, there are people that are getting brutalized daily by the effects of the speculative froth that is caused by loose monetary policy and it's famed QEII debacle.

Quickly I'll review, the Fed buys bonds from dealers and they in turn are using that money to park it in assets that are more likely to provide some type of return.  In addition, since hedge funds and other investors cannot find investments that will compensate them for the risk they are taking (try living on the interest created on a bond portfolio), they are forced into other securities and investments that at least attempt to reward you for the risks.  Thus, the Fed's aim has been wildly successful.  Market participants have shunned safe assets and been driven like a herd into risky assets like stocks and commodities.  And there you have it, investors are buying commodities because they can't get paid anywhere else.  Speculators have bought gold, silver, wheat, corn, cotton, oil, and gas.  Almost every commodity has been on fire.  Remember the summer of 2008 where investment banks had oil tankers filled to the brim sitting off the coast to speculate on the surging price of black gold?  Recall the $148 oil spike?  I'm not hearing the same stories of excess, but we are seeing a mass flood into these alternative assets to flee poor rates of return and a declining value of the dollar.


I'm not sure how Americans will ultimately deal with rising gas prices, but over the last several weeks as prices have soared, drivers have been constraining their fill ups.  As the article notes, drivers bought 2.4 million gallons of gas less than last year at this time.  The average price for gas in the nation was $3.77, remember that the all-time high in July of 2008 was $4.11.

This article says that some folks have been walking more, riding public transportation, and simply not going places.  Other reasons that we've seen a reduction in the consumption of gas may be that Amerikans have bought more fuel efficient cars that require less gas.

The foxnews article also keyed on one interesting point here that for me speaks to a larger macro-economic shift. 
"The decline is somewhat puzzling because Americans typically curb their driving only as a last resort, after sacrificing other forms of discretionary spending, like shopping for new clothes, or going to movies, concerts and restaurants.

But demand for gas is falling while other types of spending are on the rise. Retail sales rose 2 percent in March compared with a year earlier, surprising economists who were expecting no increase or even a decline."
So, consumers are curbing gas consumption, but someone is out there spending away.  What is the answer for the data?  I think it clearly shows that the divide between classes is growing AND we can only thank our friends at the FED for the disaster and attack on the poorest who can ill afford to handle the assault on their wallets.  To clarify, the poor working class folks are getting crushed since fuel is a significant portion of their pay checks.  On the other hand, the Fed strategy has been successful driving 401Ks and brokerage account values higher, so the wealthiest of individuals are back spending and engaged in business as usual (let's go out to dinner and a movie!).

Not buying it?  How about the quote here? -
"About two and a half days' worth of Whitney Shaw's pay each month goes just to fill up her 2001 Hyundai Accent. The administrative assistant is thinking about taking the bus for her daily commute, 50 miles each way between Branford, Conn., and Hartford.

"It's three hours of pay from work just to fill up my tank even once, so I'm definitely feeling it," Shaw said while filling up for $3.61 a gallon at a Valero station on the Berlin Turnpike."
Let's assume that it costs $75 to fill up and as Whitney Shaw describes, is 2.5 days of her monthly pay.  Assume also that she works 5 days a week or a total of 20 days a month.  Given all of that, Whitney is making $600 a month, clearly she isn't wealthy and obviously $75 is a large portion of her monthly take home pay, essentially 12.5% of her take home pay.  Perhaps just one year ago, the cost was $55 to fill up?  That is $20 a month less to spend on essentials, pay down debt, or splurge for a movie. 

I love the Foxnews article because it simply drops in that most analysts are looking for $4 gas, and some $5.  The way the quote is couched makes it seem like there is no chance that we'll be at $5.00 gas.  I think that $4.00 is absolutely figured in and that $5.00 is easily within reach.  What are the factors that prevent $5.00 gas from arriving?  Where are the forces that will make global demand for oil abate?  Is peace suddenly breaking out in the Middle East?  Probably most importantly, is the US Dollar getting stronger here?

In the article by CBS News - Gas Prices Climbing Toward $5 we get a mind blowing picture of the thought processes of folks that live in Chicago, the home of our President. 

Drivers Monday morning were practically numb to the price spikes.

"“What are you going to do?” said Shannon Thompson. “We’ve become so gas-dependent in this country. There are so many SUVs. I mean, I’ve had a hybrid. It worked great. Right now, I’m just going to deal with it.”

Prices at some gas stations outside the city were still below $4, a bargain compared to the $4.29-$4.40 range at some service stations downtown."
What drives me crazy here is the acceptance of the situation.  I can almost see them shrugging saying, that's the breaks!  "I guess we're stuck with high gas.  I bought a hybrid so that's all I can do!  Yeah OBAMA, just give him a chance!"

Are you kidding me, it's all about the policy?!   We have a Presidential administration that believes that our best course of action is to buy more oil from Brazil rather than exploit our own resources.  We have an environmental policy that holds us hostage to Middle Eastern despots, radicals, and UN pacifists, and we have a FED that is driven to destroy the US Dollar in the name of suspending market principles to save a bankrupt system.

For another perspective I've added an interview here with Stephen Schork, president of the Schork Group.  Stephen talks about the outlook for oil prices and mentions his thoughts on natural gas in the last few moments too.

So what's the point besides noting that gas is higher and no one has a clue that the Fed is the cause and there is no stopping it?  Well, since January 17th I've been suggesting that we need to buy gas and energy related stocks.

As we look at the trading view, we must examine oil first.  I've used USO here as a proxy for oil, but we all know there are tracking issues with that etf.  Having said that, it gives us a general idea of what we're up against, if you assume that all the fundamental items we discussed (Fed, global demand, summer driving season) are all still in play.

Based on the action here, there may be a drop in USO to the $41.14 area, but this area of previous resistance should be support.  USO has a lot of room to run with a target of $47 and $53.00 

Since USO looks pretty bullish here, that leads us to examine UGA which is the US gasoline etf.  If we are going to see oil move even higher, US gas prices too should inflate.

I've presented the 4 year weekly view of UGA and clearly we are at a point of resistance at $52, although I believe it will be minor.

The 3 Year UGA view is also good as it shows the area of support near $48.00.  I dropped the resistance line at the $52.00 area, but please note, it is there. 

As I review it, I believe that the target for UGA is still right at $64 or so, but I'd be out around $60.00 or by late June or early July (next earnings season in July may be a killer) whichever comes first.  The $60.00 target may not seem like that much from here, but if you'll recall we highlighted this target in January when UGA was trading at $39.50.

That is the update, please be careful and of course limit your driving cause it is going to cost you.