Good Bye QE 2. The commodity bulls will miss you.
The Fed meets today and if they do as expected, the policy known as QE 2, will come to an end as it wraps up its $600 billion Treasury buy-back program. If the Fed makes it clear that the money printing is coming to an end then we may see short commodity sellers once again have confidence to make a stand in the market place.
If you were a commodity bear it was very tough because let's face it, you were playing against a stacked deck. The Fed with its unlimited power to print more money and its willingness to do so, created an environment where commodity bears had to think twice before taking a short position. Stepping in front of a Fed driven commodity bull train made it more risky to be short despite the fundamentals of the moment. The Fed had the power to change the fundamentals by not only devaluing the currency, but by changing the fundamentals. By artificially stimulating the economy it would increase demand for commodities not only in the US but in the hot and expanding emerging markets. Not only had those governments like the Chinese moved to diversify its holdings in dollars, they looked to commodities as a dollar alternative. The Fed, fearing deflation, tried to create inflation by creating money out of thin air and they changed the entire commodity trend and drove away the deflation demons of that particular moment. The commodity bears knew that the Fed could at anytime run the printing press and change the fate of a commodity.
After QE 1 oil had just gotten out of the $30.00 per barrel handle into the $40s, the Fed shocked the floundering economic system that was in a deflationary funk. QE 2 was strike two against deflation and the Chinese. Ben Bernanke shortly thereafter defending QE 2 blamed the Chinese for forcing his hand. He said the Chinese, not the Fed, was creating global economic problems by preventing their currency from strengthening while their economy booms. The Fed felt it had no choice (but to print more money,QE2) as the U.S. government moved slow to attack a rising budget deficit and at the same time face an imbalance as the Chinese continue to manipulate their currency. As I wrote before, the Fed felt compelled to move as the Chinese siphoned off jobs and wealth from other parts of the globe at a rate that was unfettered by moderation by a rising currency that helped create imbalances. The huge influx of capital and by default artificially cheap goods, helped create and add to deflationary pressures in the U.S as well as other parts of the globe. That's not to say of course that cheap goods are not good because they are and they provide good growth for the economy, yet at the same time cheap goods on the back of a major budding economic superpower currency manipulation does not allow for an orderly fall in price, which exports deflation.
Yesterday all eyes were on Greece and the confidence vote in the new and supposedly improved Papandreou government. It appears it passed the test as traders expected and as far as I know Athens is still there and a no fault, or should I say no default, at least for this particular moment. The Euro may have rallied a bit, but oil seemed unimpressed so now the market will focus on the Fed and of course those precious oil inventories.
The American Petroleum Institute seemed to suggest the return of the Keystone pipeline will show that oil supply will continue to build. Yet it may be the signs of rising oil production around the globe that will help the oil bear hands. The International Energy Agency is seeing signs of increased Saudi Arabian production and Kuwait and even Venezuela seem to be increasing production. The Brent crude versus the West Texas Intermediate spread seems to have topped out so Brent should continue to move closer to WTI.
David Bird of Dow Jones reports, "Nearly 1 million fewer Americans will travel by automobile over the July 4 holiday than a year ago due to high gasoline prices, a survey by travel group AAA released Wednesday shows. Car-travel over the holiday period will drop 2.7% from a year ago, with 32.8 million Americans hitting the road between June 30 and July 4, down from 33.7 million a year ago. This year's figure is down from the record 35.1 million auto travelers hit in 2002, 2005 and 2007, but above the recession-hit 2009 low of 26.7 million travelers. Still, auto travel will make up 84% of total holiday trips. A little more than 3 million travelers, or 8% of holiday travelers, will fly over the weekend, a 9% rise from a year ago. That's despite an 11% rise in the average price of the lowest round-trip ticket for the top 40 U.S. air routes. The remaining 8% of travelers will go by rail, bus or watercraft. Although the national average retail price for regular gasoline has dropped 21.5 cents a gallon from a year ago, at $3.637 a gallon on Tuesday, the price is 33%, or 90 cents a gallon above a year ago, according to AAA Daily Fuel Gauge Report. AAA said it expects prices to be around $3.60 to $3.70 a gallon during the holiday weekend. The number of total travelers making trips of 50 miles or more during the holiday weekend by all means of transportation will be down 2.5% from a year ago, to 39 million Americans, AAA said. A survey of intended travelers showed that 56% said gasoline prices won't impact their travel plans. Of the remaining 44%, most said they would economize in other areas to pay fuel bills, while some would take shorter trips or travel by different modes of transportation. AAA said its travel forecast, based on economic forecasting and research from IHS Global Insight, included a survey taken between May 26 to May 30. AAA's daily gasoline prices reported by were about 14 to 21 cents a gallon then compared with Tuesday's level."
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.
