I’m not going to make any comment here. I’m just going to recommend you fill up you gas tank tonight. Take a look at the chart of crude oil futures…you’ll see what I mean.

Actually, I will say one thing….when do you think the rest of the world will realize OPEC and other exporters are just toying with us? It was OPEC yesterday, and Libya today. They’re just yanking our chain.

Oh well, the bubble will pop eventually, once we realize the supply/demand ratio hasn’t gotten nearly as small as the price would indicate. In the meantime though - manipulation or not - I’m steering clear.

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Bear in mind it’s all temporary, but with the Fed’s key interest staying level at 2.0%, effective interest rates - and therefore the dollar - are sinking a little bit. In the dollar’s case though, a little can actually be a lot.

The chart below is the same one I’ve been featuring for a while now. It’s the U.S. Dollar Index (UDX), and you’ll see it’s bouncing around between a key support and resistance zone. In the shadow of today’s news, the sawbuck is sinking again. I think the dollar had largely been driven up by the possibility of a rate hike. Now that we know they didn’t raise rates, down goes the dollar. I suspect we’ll see the index fall all the way back to the lower support line.

Like I said, it’s all temporary. In the bigger, long-term picture, the Fed’s going to be forced to push rates higher sooner than later. This chart will still tell you when that’s begun to positively affect the greenback.

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This is just the first of several blog posts I’ll be posting today about the bigger picture, so be sure to stay tuned. For now though, I want to start with oil since it seems to be the most pressing issue. Though we’ve seen a couple of bullish days for oil, I think it’s worth noting that crude’s charts are still finding a ceiling around $138.

On the flipside, we’ve also seen a floor at $132, so we’re hardly ready to be oil bears yet. No, we’re just stuck in zone until one side or the other flinches.

I still contend oil is so overbought that there’s a greater likelihood of downside rather than upside. So far though, the market had neither proved nor disproved the theory. Mostly I’m waiting for the charts to tell me which way to trade, but we have to break out of this range first.

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Odds are you saw today’s stories regarding the worst homebuilder sentiment in years. In a nutshell, the National Association of Home Builders said its preliminary NAHB/Wells Fargo Housing Market Index fell to 18 last month (down from the previous month’s level of 19). That was the same level seen in December, as well as the lowest reading (seasonally adjusted) since the index began in January 1985.

As usual though, you only got half the story. What you didn’t get is what I’m going to give you… what happened after the previous record-low reading in the NAHB/Wells Fargo Home Builders index from January of ’85.

In January of 1985, new housing starts totaled 105.4K. The total fell to 95.4K the next month. Six months later, there were 160.7K starts.

Also in January of 1985, houses completed totaled up to 119.2K…the lowest total in a year at the time (and also the lowest total for the next year). Six months later, total completions tallied up to 147.0K.

So what? Homebuilder sentiment was wrong more than 20 years ago. Could it be just as wrong now? I think it could be, and I don’t seem to be the only one. The Homebuilders Index was up 2.03% today. Somebody had to be buying these stocks. (Just FYI, the NAHB sentiment reading hit a low two years before starts and completions started to trend lower, making it irrelevant at best.)

I’m not saying these stocks are at a bottom, and I’m not saying these stocks can’t go lower. I am saying that based on their track record, I’d be more apt to do the opposite of what journalists seem to want you to do. As the chart below shows, ‘houses started’ and ‘houses completed’ are at 15 year lows. How much worse can it get? And, how much worse is it likely to get? I still see turbulence ahead, but I think the housing market and housing prices are set to recover. There were more mortgage applications last month than there have been in months, so…..

Just for the record, yes, I recently bought a house for this reason. It’s a bit of an upgrade, and I still have to sell my current house (a condo, actually). In weighing the upside and the downside and my expectations though, I think the housing market is on the way up more than on the way down. I’m holding out for a decent price on the sale of my condo. I’ll let you know how it’s going.

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By now you’ve certainly seen the headlines about today’s inflation data. May’s 4.18% rise in the cost of an average basket of goods was the biggest increase in six months. Chicken Little reporters - and the talking heads on TV - would have you thinking the sky is falling. (They weren’t nearly as feverish in January when we learned December’s inflation rate had decreased by the same amount that May’s increased.)

With that in mind, here are the headlines these guys didn’t write….

• Inflation Still Less Than November’s Peak
• Inflation Data That’s More Than a Month Old Impacting Today’s Market
• This Year’s Average Inflation Rate Still Less Than 2007’s Average Rate

It’s amazing what a little spin can do, isn’t it? Every headline you read above was just as true as the one you saw for real.

The other thing that makes me think these guys are working to sustain the hysteria…..six months? Usually when we get the ‘highest’ or ‘lowest’ comparatives, it’s something we haven’t seen in years (if not decades). Six months? Seems like reporters are really scrambling for something big to talk about.

Anywho, here’s the chart. Do with it what you will. Just don’t let the lemmings writing news articles tell you what to do with it. As for me, I think inflation has been contained. Bernanke’s threats and apparent willingness to scoot rates upward now are not likely to be hollow, and the market (all markets) are starting to price that in.

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I can remember feeling - not that long ago actually - that this day would never come. Then a few days ago I started saying maybe, just maybe the U.S. dollar was on the mend. In a June 2nd blog entry a specified what it would take for the sawbuck to get out of its rut. Then, in a June 5th comment I was disappointed one of those key resistance levels was threatened, but not crossed.

Well ladies and gents, I’m pleased to inform you as of today, the key short-term barriers have been toppled. The U.S. Dollar Index (UDX) is currently at 73.92…which is higher than May’s peak. The move followed a low of 72.13…which was higher than May’s low of 71.82. Higher highs? Higher lows? Could it be????

Don’t get too excited just yet - this chart’s still all over the map. But, I think this is a good first step on the road to recovery.

Just to fully illustrate the scope of what’s going on, I’m inserting two charts in this commentary. One if them is a zoomed-in short-term look, so you can see the detail. The other is a long-term, zoomed-out look, so you can put it in perspective. Take a look at both, then keep reading for my final thoughts.

Here’s the question though…can it last? I think it can. Why? There’s one problem at the heart of a weak dollar, and that’s low interest rates.

As you may have figured out pretty quickly, the dollar was gaining in strength while rates were on the way up. The dollar lost value as interest rates fell. Ben Bernanke already hinted last week that inflation was becoming a real concern, and the Fed was poised to act as needed. Translation: Don’t be shocked if rates start to creep up.

Now, I don’t expect the Fed to ratchet up the Fed Funds rate anytime super-soon. In fact, they may not need to at all; sometimes the worry about it has the same effect as actually doing it. As long as rates are (1) not moving lower, and (2) the Fed keeps the possibility in play, then the dollar can start to mend itself.

Like I said, there’s still more choppiness in store for this chart. And, despite the recent rebound, the bigger-picture chart still has another resistance line around 77. But, at least the greenback is fighting. 

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In television’s ‘Get Smart’ series from the 60’s, Don Adam’s character - Agent 86 - had a tag line I’m sure some of you remember well when he fell short of accomplishing his mission…”Missed it by that much.” That’s kind of how I feel about the U.S. Dollar index right now - we missed a breakout by that much.

I’ll refer you back to Monday’s blog entry “What Will It Take to Break the Dollar’s Slump?” It was then I illustrated what I thought were the short-term and long-term hurdles for the sawbuck, the first of which was under attack.

Basically, I felt a good first step on the road to recovery would be a move past May’s high of 73.89. Well guess where the U.S. Dollar Index (UDX) peaked today - right at 73.87. The problem is, it immediately turned south, and is now back to 73.13 (and still pointed lower).

So much for a breakout…at least today.

No big deal; it could still happen. And, 73.89 is still the make/break level. We’ll stay on top of it, but I wanted to give you guys a little heads-up about what we’re watching.

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Though I usually like to talk ‘reality’, a little ‘theory’ every now and then can be fun…as long as it’s small-cap related. I found an interesting article yesterday regarding the likely performance of small cap stocks during an economic recovery. The Wall Street Journal’s Larry Light points out some of the best and worst scenarios for small cap performance, looking at factors like inflation and international business. He even mentions some sectors that are currently poised to lead.

Of course, it all may be moot if we’re really not at the beginning of a recovery yet. I believe we are, but the evidence is still shaky (at best).

Anyway, if you’re interested in a good, quick read on how small caps fare in a recovery, Light’s article “In a Rebound, Small-Cap Is Beautiful” is worth a look.

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A few weeks ago I posed the possibility the U.S. Dollar may finally be on the mend. Interest rates had stabilized, and the Fed has pretty much said they’ve made all the cuts they intend to. Since then, bond and lending rates have moved a little higher…all good things for the sawbuck’s strength.

Despite a good start shortly after my comments, the dollar’s rally stalled. We saw a little bit of recovery last week, yet we’re still shy of last month’s high level for the U.S. Dollar Index (UDX).

So what’s it gonna’ take to get out of the slump, and how will we know when we’ve done so?

The answer to the first question is higher rates. Bennie and the Feds aren’t likely to help on that front anytime soon, so it’ll have to happen within the lending system itself. Still, it’s possible.

As far as how we’ll know when the slump is over, there are two things we can look for on the chart.

1) A move above last month’s highs of 73.89 for the U.S. Dollar Index. Amazingly, that would be the first time since 2005 we will have actually seen the index make a significant higher high.

2) If criteria #1 is met, then by default at least part of criteria #2 will be met, which is a move above one of the big resistance lines (purple). Even then, there’s another hurdle to get over…the 200 day moving average line (red). As you look back the last three years or so, you can see how it’s been a problem.

That ain’t gonna’ happen tomorrow though…meaning this is a much bigger-picture idea. If it does though, I suspect heavy American exporters will feel a little pain, while we’ll all enjoy better prices on imports. Indirectly, it’ll make foreign stocks more attractive. That’s still pretty far down the road.

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Last week we opened a can of worms - albeit a good one to open - with a detailed look at crude oil’s chart. Since it really is starting to stifle the economy be creating excessive pain at the pump (consumers always complained, but didn’t mean it until recently), the future of the market really does depend on what’s next here.

My ultimate line in the sand was $118, but my short-term checkpoint was $124. Both of those support lines were rising though.

Well as of today, oil’s down again. This time, ‘demand concerns’ are cited as the reason (whatever). That still doesn’t break a key support level, but the line is under attack.

No big deal yet, but it’s worth keeping an eye on (which we will).

Side note: I’d really prefer a blow-off top for crude oil to nail down a reversal. We may not get it though, which is why I’m somewhat inclined to think oil may not be done rallying yet. Only a tumble under $118 would really make me think the underlying fundamentals had changed. 

That said (and here’s my contrarian side coming out), the ‘oil higher and higher’ chant has never been more in unison than it is now. With everybody and their brother on board the idea of a never-ending price increase, crude may have indeed hit its peak.

With the holiday weekend now completely over, I suspect we’ll see the gas-pump gouging ease off. In turn, I’m looking for crude oil prices to fall back from their recent record highs. In fact, crude oil is so overbought and ripe for a dip, there may even be a trade-worthy move in the works.

The daily chart tells the story…crude’s been on a rampage. The same chart also tells us not to jump the gun either, as this stall isn’t anything unusual. But man-oh-man are we overbought. Take a look at the daily chart below, then keep reading for thoughts on the weekly chart (where reality really hits home).

On the daily, though the trend has been strong, it doesn’t look ridiculously over-extended.

Now take a look at the weekly chart to see just how far we’ve come. The last three months have been the biggest move (relatively) in years for oil. Stranger things can and will happen, but all bubbles will pop eventually. Is oil’s ready to? Or at the very least, is oil finally at its max price?

If you really want some perspective, now take a look at the monthly chart of crude oil futures. As wild as the last twelve months have been, we actually saw more explosive crude gains in late 1999 and early 2000. Of course, that one tapered off after being overbought for a while…kind of like what we see now.

Just for the record, I’m not one of those folks that expects to see oil at $200. Several factors shape oil prices, the least of which is supply and demand. The dollar, inflation, and hysteria have a lot to do with it, and those things are all tapped out for the time being - at least in my view.

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Ouch. Wednesday took a bite out of stocks. Or, should I say Bernanke took a bite? His grim expectation of rising unemployment, continued inflation, and the Fed’s unwillingness to do any more than they already have didn’t exactly give the market a warm, fuzzy feeling.

As far as the impact Bernanke’s words had on me, I was neither surprised nor rattled. Did he really tell us anything we didn’t know? The biggest impact it had on us was that it spooked investors. That may be enough, however, for the selling to snowball. What happens next for stocks (the rest of this week) will be critical in determining what’s what.

What I’m still baffled about is his timing and lack of willingness to use a little psychology. He’s six months behind on his call, yet seemed oblivious to the fact that equity markets were finally starting to improve.

The only thing of real substance I can say right now is this….if he was six months behind on his recognition of a troubled economy, he could just as well be behind the eight ball on calling the trough. Like I said, I don’t truly know. It just seems to me this admission could also signal a capitulation of sorts. Maybe that’s just wishful thinking on my part….probably is.

In the meantime, I’ll keep watching index charts. While the Fed is feeding us the facts, stock charts are telling us what investors think of the data…which is the part that matters to you and me.

Of course I’ll also have my eye on the same economic data he’s thinking about….unemployment, inflation, and the dollar. I don’t necessarily see eye-to-eye on his forecasts. However, based on the current trends, he seems to be basically right. The trends for each of these data sets is undeniable when plotted on a chart. So, the truth is below - in living color. (Note how all the data is inter-related.) Just keep in mind every trend will end sooner or later.

That said, this data may or may not affect the stock market. And if it does, the ebb and flow of the economy may or may not be synchronized with stocks. If you think stocks always trade at their true value, that reality might drive you crazy. If you recognize that stocks rarely trade at what they’re actually worth, then the data has more value to you as a timing and psychological tool rather than a true barometer of economic health.

Anyway, the story is only half told; the other half will come in time. I’ll have the next chapter at a later date.

Normally I’d use my morning market comments to set the tone for the day (and share my thoughts about what the market probably had in store). However, we’ve got a ton of small cap stock news for this evening’s edition, so I’ll save it all for then. Instead, I’ll use this morning to do something I’d like to do more of - answer reader questions about the economy.

Here’s a question we got this morning…

I would appreciate if you can explain to me what the Fed is trying to achieve by lowering the Fed funds rate. My understanding is that if the Fed really want to help the financial sectors, is that they have to lower the discount rate to the same level as the Fed rate so that banks will borrow from the Fed than from each other. As it stands I don’t think most banks are still will to lend money to each other. I believe with these two rates at the same level then we will have more banks borrowing from the Fed than from each other. As it stand I believe the worst is not yet over and no bank is willing to lend to the other. Also the Fed can lower the discount rate to a rate lower than the Fed rate and banks will borrow from them. If there are any implications in doing this can you please inform me.

Thanks for the questions. I’ll try and answer them one at a time in the same order received. Bear in mind I’m not an economist, so I may not be able to address all of them. On the other hand, Ben Bernanke doesn’t seem to be an economist either, and that doesn’t seem to stop him from making big decisions.

1. The Fed is trying to stimulate the economy by making it cheap and easy to spend borrowed money. It’s not working. If a fed Funds rate of 3% didn’t do it, can 2% be much better?
2. I don’t know that the discount rate matching the Fed Funds rate will matter. Banks can choose to borrow where they want to. Like you said, they’re choosing the cheapest source right now. I don’t think banks are fearful of borrowing from one another in this case; they aren’t risky consumer loans. More Fed borrowing won’t stimulate anything more than what we have right now.
3. To my knowledge, there are no long-term implications to borrowing from one source or another. These are only short-term loans.
4. In the bigger picture, the issue still isn’t whether or not banks can acquire money to lend. The Fed has made billions of dollars available, and billions more are available from intra-bank loans. The issue is banks just not wanting to make consumer loans to anybody. That’s ok though - most consumers don’t want to borrow right now anyway.

Back to the key point though….I don’t think Bernanke did anybody any good. He caved to Wall Street by giving us rate cuts we wanted but didn’t need. Inflation surged because of the weak dollar, and the dollar was weak because interest rates were so low. You can’t avoid taking lumps, but the lumps he chose for us hurt more than the alternative.

That said, I think the worst is over, economically speaking. However, it’s not as if Ben had anything to do with it.

That’s just my two cents…or one cent, inflation adjusted.

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Looks like the folks who were making a bet that Bernanke would cut rates by 1/4 of a point were spot on. The Fed Funds futures said the odds were 75% that we’d see the Fed’s key interest rate drop to 2.0%, and sure enough, that’s what we got. That’s also probably all we’re going to see in a while. The market liked the idea of the cut, then processed the reality - it may be the last we’re going to see in a while. It ended up being a fairly uneventful day stock…slightly bearish.

My take - it was the right move. If a Fed Funds rate of 2.0% can’t get the economy breathing again, 1.75% or 1.5% isn’t going to either. Now all we can do is wait. For those of you who want more interest rate cuts, bear in mind it was Greenspan’s relentless rate cuts that ultimately set up the housing bubble…because money was too cheap and too easy.

For those of you who were concerned, my luggage made it back home with me safely (and even on the same plane as me).

As far as the trip goes, it was a productive one. I don’t know exactly when we’ll actually get the company name out to you. They’re trying to coordinate some things, and we want to see those fall into place before we pull the trigger and recommend it as a small cap stock pick. I suspect it will still be a few weeks off. In the meantime, here’s another hint…they’ve got some serious star power.

That being said, we’ve got another small cap stock pick right around the corner. I’m looking for that one to be presented to you guys sometime next week. In a nutshell, they make data transmission over the Internet even faster. The broadband bottleneck is a growing problem that is not only significant, but also preventable. This company is designing solutions to the problem.

From our small cap world…

StockGroup (SWEB) announced this morning Theresa McVean has been named the VP of Advertising Sales. Tons of good experience…managing director of online sales at the Toronto Star, a senior level job at The Globe, and the Interactive Advertising Bureau.

SpongeTech’s (SPNG) stock popped yesterday following Tuesday’s news of a $7.5 million order. Delayed reaction I guess.

In any case - and as I’ve said numerous times now - I think this small cap company is one of our best bets right now. We’re back above the 200 day moving average line, and made a higher high today (of 4.65 cents). If we can get to 5 cents, I think this thing could blast off. It’s one of the few companies putting their money where their mouth is, and growing the top and bottom lines.

By the way, did you see their latest news (from this morning)? Their sponsorship of a New York Mets game has already started to reap rewards, even though the game isn’t being played until May 13th. How’s a future game driving results now? The sponsorship package includes radio ad spots before the game….and they’ve already started.

The word is, those radio advertisements have caused their website’s traffic to increase by 250%. Given that you can order sponges via the site, this could add another incremental layer of sales.

Though it’s not a small cap name, Telemig Celular (TMB) is still one of our stock picks…one that took flight yesterday with a 6.0% gain. TMB shares are now at new 52-week highs, alleviating my concern from a few days ago that the trend had stalled.

As of right now, our gain on the Telemig pick is about 15%, and we’re roughly halfway to our target price of $79.20. I feel much better about this trade now.

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This has little to do with small cap stocks, yet it’s something we all should take note of and perhaps laugh about (since crying does no good at this point). I just want to capture some of the highlights we’ve gotten from our two prior Fed Chairmen - Alan Greenspan and Paul Volcker.

Basically, Volcker said Bernanke mishandled….well, mishandled everything. Greenspan has been slightly less critical of Ben, though has managed to land a few jabs here and there.

I find it uncomfortably ironic.

Greenspan also recently said the tech bubble in the late 90’s wasn’t his fault, nor was the subprime bubble his fault, even though miraculously low interest rates occurred under his watch and stayed there for a couple of years (apparently Alan has massive cajones). And, Volcker seems to forget the catastrophe that happened under his tenure.

Maybe it’s just me, but does anybody else wish Paul and Alan would just shut the hell up? I’ve got no particularly great love for the guy (Bernanke), but how are the economic screw-ups that happened under Bernanke his fault, while the ones that occurred under Greenspan and Volcker somehow ‘just the economy’.

Now, that’s life. Nobody in a public position should expect to never be second guessed. But, when the former folks posted in the same position start taking shots at the current guy, people are going to listen. When those same two guys say things are bad, people are going to listen even more closely.

To Paul & Alan….maybe you guys are right, but you’re making it worse. Shut up already. It’s not like your track records are impeccable.

Just for the record, it was only a few months ago Greenspan was saying the U.S. was probably going to avoid a recession. The tune changed a couple of weeks ago. In other words, he was wrong. Maybe - just maybe - he’s wrong about Ben as well.

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All things considered, 80 to 90 cents on the dollar may not be bad. Of course, I’m talking about Citigroup’s (C) decision late yesterday to shed about $13 billion worth of leveraged buyout loans that - in the wake of the Bear Stearns (BSC) deal - may be deemed ‘a little problematic’. The net purchase price would be about $12 billion, paid out by the three buyers…Apollo Management, Blackstone, and TPG.

Good for stocks, or bad? The general opinion is that it’s good, if only in the sense that it’ll finally drive a nail in the coffin. I don’t entirely disagree with the sentiment, but there are a lot more nails to go before the last one is hammered.

I think what the market is missing is (1) this will generate a write-down for Citigroup next quarter (and they’re going to write-down about $17 billion for Q1), (2) Citi still has about 4 times that amount in debt exposure, and (3) the sale will still force something of a write-down.

In the long run it’s great for Citi; in the short run I think it’s bad.

As for the market, in the short run I think people will like the way this sounds, even if they don’t understand exactly what it means. That bullishness may only last a few hours though - until they realize it only creates another problem. In the long run, I think it’s bad for stocks; how many more Citi’s are out there that need to do the same?

I’m also reminded of something Groucho Marx and Woody Allen once said….“I’d never join a club that would allow a person like me to become a member.”

What’s that got to do with anything? What do Blackstone, TPG, and Apollo want with debt that Citigroup doesn’t want? The answer (the ‘right’ one) is just that these three groups are far better suited to own distressed debt than Citigroup is. Truthfully, I agree. However, I don’t see how those guys see these loans being worth 80% to 90% of their face value.

Most journalists are saying this is the beginning of the credit market’s great thaw-out. The theory is that since the Fed is now letting banks borrow using paper as collateral, they’re taking the opportunity to do so. As I’ve mentioned before, I don’t think that was ever the issue. I think willingness - from lenders and borrowers - has been the hurdle. I think Citi’s only goal here is to dump assets they don’t want while they can.

And once again, who’s left holding the bag? On the surface, it seems like its Blackstone, Apollo, and TPG. I don’t think those guys are that dumb though. Maybe this is the easy clean-up of a big mess, wiping everyone’s slate clean in one proverbial shot.

Anyway, futures are up this morning. I don’t see that lasting though, and I still own my QQQQ puts (which are up a little after Tuesday). The Citigroup news is a two-edged sword, and the bullish edge seems to be making the first cut.

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TGIF. The number of jobs in the U.S. was cut by 80,000 in March…the third straight month of job losses, and the most cut since 2003. Unemployment now stands at 5.1%.

Like I’ve said about umpteen times since January, the economy is in a recession. I guess Ben Bernanke finally opened my fan mail yesterday, as he publicly hinted he might agree. (Hey, at least he’s acknowledging something may not be right in the good ole’ Utopia States of America.)

The market opened up after the news came out, though I think that may have been some ‘big money’ trying to fool the little guys into thinking all was well….so they could unload some stocks. The market went red pretty quickly, and pretty deeply so far.

Yet, my QQQQ puts are actually under water a little bit. Guess I shoulda’ bought DIA or SPY puts - I’d be up now.

Regardless, I’m looking for reality to set in today. There are some big gains to be made in the wake of this week’s rally, and I doubt any trader is going to risk holding anything over the weekend in the shadow of the jobs/employment data. I still think my puts will be profitable by today’s closing bell. I’ll close them out then no matter what.

By the way, I’m not the only one who expects that bearish response to the jobs data. Bespoke Investment Group did a study on how the market responds when nonfarm payroll comes in better or worse than expected. ‘Better’ was tepidly bullish, while ‘worse’ was decidedly bearish. Just for the record, economists were expecting only 50,000 jobs to be cut. Click here to see their interesting research: http://bespokeinvest.typepad.com/bespoke/2008/04/nonfarm-payroll.html

Pick of the Day: Nothing. I’m not a big fan of jumping into a pool I can’t see the bottom of. Today’s turmoil and surpisingly-not-awful response has muddied the waters. I’m not going to try and find anything until next week.

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