Gas Prices Move Closer To The Tipping Point

According to the New York Times, prices for a gallon of regular unleaded gas are topping $4 at more service stations nationwide, revisiting the bleak territory of three years ago, when the average price for a gallon of regular gas reached a peak of $4.11 on July 17, 2008.  

A survey of about 100,000 stations showed gas prices were now averaging $3.77 a gallon nationwide.

The average is already more than $4 in California, Hawaii and Alaska, and analysts at the oil information service said drivers were paying more than $4 at some stations in at least three other states — Illinois, Connecticut and New York.

I explained in detail why the economy could not withstand $4 gas in Friday’s post.  We had already been short on oil and we doubled down on our short position on USO as oil hit $113 a barrel and yesterday morning, in the early am comments from my “Investing for Income” article, I added a suggestion to short silver futures as they touched $42 and, of course, we hit the oil futures shorts, which I reminded Members we could take as oil crossed below either the $112.50 or $111.50 lines.  As it turned out, they crossed both and we rode those puppies all the way down to $110 – finally catching the wave we’ve been PATIENTLY waiting for for ages.  

For our non-futures players, my trade idea was the USO April $44 puts at .35, those finished the day at .85, up 142% on the day trade (not bad either!) with each $350 contract returning $850.  This is a great example of how we can keep taking 20% losses (nickel losses on the futures) as we poke at various lines of resistance but, as long as we stay in the game and limit our losses – all it takes is one nice win to more than make up for it.  

Of course we took the money and ran on our day trades – we have our SDS and TZA hedges that make ridiculous amounts of money if we keep heading lower and we can jump back on the oil shorts while the market is open – it’s too scary to play the very thinly traded overnights (when they are not silly toppy).  

$108.50 is our first major bounce target in oil and we already hit $107.85 in the futures but oil crossed back over $110 at 6 this morning and gives us another shorting opportunity below that line – which acted as weak support yesterday.  We’ll look for a bounce back at $108-$108.50 and will probably take a long play over that line but with very tight stops as we do hope it fails and oil heads back to $95 to prevent the rest of the market from collapsing although that will collapse the energy sector and maybe the other commodities too – a fine illustration of why I was banging the table to go short on Friday!

This may be, as Charles Hugh Smith points out, the end game for the Fed.  We’ve been sensing it for weeks as we have gotten more and more bearish (and I was thinking last week, maybe too bearish) as the last low volume push back to our market tops was looking less and less impressive – especially as it was predicated on an ever-weakening Dollar.  

As Smith notes: “The Fed’s game plan–sink the U.S. dollar to goose corporate profits, reinflate asset prices and create “modest inflation”–is now the most dangerous game on Earth.”  We have the Fed’s new POMO schedule to look forward to at 2pm and if the market is going to turn up – that should be the rocket fuel this afternoon but, as Aerosmth likes to say – “it’s the same old song and dance, my friend” and it’s getting a bit tired.  

Now it is earnings season, when Warren Buffett’s proverbial tide goes out and we get to see who’s been swimming naked – Alcoa (AA) got us started with a small disappointment last night as top-line revenues were a slight miss and the company warned on forward earnings due to (surprise!) “high energy and raw material costs.”  Come on folks – how can this be surprising?  We’ve been seeing all year that higher input costs are not being passed on to the consumer – that’s a margin squeeze!  Do you think the people buying the market up to it’s 100% levels didn’t know this?  Of course they did, that’s why they drove the VIX down to 5-year lows and loaded up on puts!  They also sold calls to sucker who follow idiots like Cramer and BUYBUYBUY at the TOPTOPTOP. 

The FTSE lost 6,000 this morning and the CAC broke below 4,000 but the mighty DAX is at 7,131 despite the 1% drop this morning (8am) with 7,100 looming large as the 50 dma.  As you can see from the chart above, the Nikkei was diverging down long before the earthquake (and they have just raised their nuclear crisis to level 7 out of 7) and the FTSE was rolling over as well even as the US, Germany and China tested their 100% levels off the March ’09 lows.  For the year to date, the pump-monkeys pulled out all the stops to get the US and China indexes to a 5% gain for the quarter and it worked, with huge fund inflows in March as all the sheeple piled in to chase returns:

   

Don’t worry though, our long-term bullish premise is still intact and that premise is, of course, INFLATION – and lots of it.  We spoke last week about the near-doubling of our money supply with only the near-zero velocity of money standing between the inflation we’re seeing now (even if the Fed does not) and hyper-inflation that will make owning paper currency about the most fooling possible choice you can make. 

A Less Than Optimistic Outlook

How bad can hyperinflation get?  Funny you should ask because Import Prices were released today and guess how much we’re up since last month?  2.7%!  Isn’t that sweet?  That’s double the rate of change from last month (1.4%) and the highest rise since June of ’09, when we were bouncing back from a crash. 

Overall, import prices are up 9.7% from last year but don’t worry, we are exporting inflation as fast as we’re importing it and our export prices have pumped up 9.5% since last March – all part of Big Businesses overall strategy to sell you less but charge you more, which has been working really well for the past year.  But, as I said above – are we now at the tipping point? 

The IMF is, understandably, VERY concerned about inflation, forecasting that emerging and developing economies would see inflation of 6.9% this year, driven in part by rising food and energy costs but we are already past that point – expectations are that things will come back down in the next 3 quarters yet here we are with a 100% ACCELERATION in both import AND export pricing and the rose-coloured glasses that US Corporations have on in all of their outlooks are based on plans to push through MORE price increases.  Does this sound like a flawed premise to you?  

The G20 meet on Friday with 13 of the G20 already in crisis mode over food prices and China on the verge of disaster with property prices in Beijing collapsing 26.7% IN MARCH!  Yes, I said 26.7% in a single month.  Why is this not news, you may wonder?  Because it doesn’t fit the MSM premise that China will keep growing forever, does it?  If you think this is news you can use – then you should question your news sources that DON’T tell you these things and question their motives for burying this particular lead.  

The 26.7% drop in March reversed a ridiculous run-up in the past year and dropped prices to a 10.9% decline from last year – putting 12 months worth of Hong Kong property buyers quickly under water.  There was also, not surprisingly, a 40.5% decrease in the number of home transactions as would-be buyers can literally stand in front of the Realtor’s window and watch them mark down prices every hour or so.

Keep in mind China WANTED to reign in property speculation so this could just be incredibly brilliant government regulations immediately leading to a perfect balance in the property markets – or it could be the beginning of the next great economic disaster of the 21st century – stay tuned as the story develops!  

Another fun story is a great example of the thuggish behaviour employed by the Gang of 12, in this case it’s ring-leader Goldman Sachs (GS), who are being sued by the founders of Marvell Technology (MRVL) for (allegedly, so back off Lloyd!) tricking them into dumping their stock which GS, acting as their trusted (and paid) adviser on the deal, claimed had to be done according to a regulatory rule that Goldman Sachs made up.

“Goldman forced its clients to unnecessarily liquidate their holdings through forced margin calls, only to repurchase these same shareholdings for accounts owned by Goldman and its related hedge funds,” according to the complaint.

Goldman Sachs also forced a sale of Sutardja and Dai’s shares of Nvidia Corp. (NVDA), causing them to lose $166 million, they said in the complaint. The lawsuit, filed under California’s unfair competition and the state’s Consumers Legal Remedies Act, seeks compensatory damages for the two stock sales and unspecified punitive damages. 

These alleged financial thugs never cease to find new ways to allegedly disgust me further.  GS will have to fight this one in San Francisco, where they (allegedly) don’t have the justice department in their pocket so this should be very interesting to follow – assuming there isn’t a very quick settlement made to make this one go away.  

Meanwhile, we’ll see how much of the year’s market gains go away today.  As I said, we’ll be looking for a relief rally on the release of this afternoon’s POMO schedule.  If we don’t get that – it’s time to look back out those breakout levels and hope they hold!  

Try Phil’s Stock World here > 

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.