"France and Europe reeled on Monday from a resounding French 'No' vote that could sound the death knell for a proposed constitution for the European Union," a Reuters wire story reported.

"The charter, designed to ensure smooth decision-making in the enlarged bloc, requires the backing of all member states to enter into force."

"While the outcome was not seen jeopardizing the monetary union that underpins the euro," Reuters hopefully surmised, "leaders feared the expected political uncertainty could hit investment and reform efforts."

And let’s face it - particularly the French population, collectively, would never agree to even a hint of economic reform which would defile the sanctity of the 35 hour working week. 35 hours is ample, or so they have decided. Inconveniently however, economic policies that promote short working weeks and low productivity do not always yield an abundance of jobs. The French unemployment rate recently touched a 5-year high of 10.2%.

So where does leave the good old faithful US dollar – touching year high levels against the Euro.

But it would be imprudent indeed to proclaim a new dollar bull market. A Euro bear market - yes; but a dollar bull market – I don’t think so – at least in the medium to long term. In fact there is likely to be a growing disatisfaction with all paper currencies – euros as well as dollars. Perhaps the answer lies in the ground – with that fascinating and enduring yellow metal - gold.

But for those interested in diversifying out of both the dollar and the euro – but still remain in the currency world, here’s the information you’ve all been waiting for:

A look at opportunities in world currency investing.

The following information comes from Tom Dyson, reporter on The Rude Awakening, young sister publication of our syndicated Daily Reckoning...

"That's the scuttlebutt from several Chinese traders, CEOs (party connected) and a couple of fund managers," he responded when pressed for his source moments later. "It makes sense - there is absolutely no sense of urgency over here, but they are seeing some pressure from the threat of tariffs on textiles. It will not be some huge revaluation - 5% would be high - 3% more likely to pacify 'the West.' Take it for what it's worth, if it happens, you will have the inside track on the number."

Certainly,looking at the spreads in the forward market, one has to conclude something's going on. The banks trade currencies at either a spot rate or a forward rate. The spot rate is the rate you get for changing your currency immediately, while the forward rate is the rate you get for agreeing to change your currency at a certain point in the future.

One month ago, the yuan was trading at a 70-point premium in the 1-month forward market. Recently, however, that premium had increased to 400 points. One way of stating this is that the market is predicting a 400-point move in the exchange rate – from 8.2765 yuan per dollar to 8.2365 - imminently. Looking 12 months ahead, the premium is closer to 4,000 points, implying an exchange rate of 7.89 yuan to the dollar, or a 5% appreciation.

But sources say that we're still a long way from a floating renmimbi, and if they do anything, it’s likely they'll simply move the peg a notch or two - nothing dramatic, but just enough to appease the politicians for the time being.

Now lets take a look at some of the fundamentals from a social perspective. Chris Mayer, Fleet Street editor, has been researching what sociologist Thorstein Veblen dubs "China's new leisure class" – a burgeoning Chinese middle class with an appetite for travel and tourism, and a market segment that will grow exponentially as the yuan floats higher...

"This trend will have enormous investment implications as the world caters to the Chinese and their spending patterns. I have written about the growing number of Chinese tourists before, and my latest investment idea is a play on the idea of this new leisure class. It doesn't take a lot of imagination to picture how traveling Chinese with money burning holes in their pockets will benefit hotels, for example."

In 2003, according to the World Tourism Organization, some 20 million Chinese traveled abroad spending $48 billion dollars in the process. The WTO project 13% annual growth in Chinese tourism over the next decade and by 2020, some 100 million Chinese will travel abroad each year for their holidays, making China the fourth largest source of outbound travelers, they say.

"Increasing affluence in China, and the emergence of a large middle class, will help the travel industry generally. Interestingly, the Chinese like to gamble.In 2003, 90% of Chinese travelers to the United States visited Las Vegas, so you can see there are many ways to make money off Chinese prosperity without the perils of investing in China."

In my next post, we’ll be taking a look at how you can get a foothold in the “new economy” of China without the risks of direct investment.

In the meantime, protect your dollar assets and learn how the foreign exchange markets work at the same time. Here’s a good place to start: Forex Trading Systems

Now, we all KNEW this crisis was coming soon, but even according to the so-called 'experts'... we weren't supposed to run out of energy for another 25 - 30 years. But that's not the way it's happening. Adison Wiggin of The Daily Reckoning brings us the following report:

"Already, we're seeing the symptoms of a collapse: soaring oil prices; tension between petroleum-starved economies; deadly terrorism in Saudi Arabia… But this time, it's not about ideology... it's about geology. Deep underground, the world's source of cheap oil is on the brink of running out. And nothing you do to make or protect your money can or will ever be the same again.

First a little history. And let’s start at the very beginning ('a very good place to start', so I’ve heard)...

Millennia ago, oil was a laxative. Then in 480 BC, the Persians used oil to dip and light fire-tipped arrows, which they launched over the walls of Athens. Back then, it's hard to believe, oil didn't mean much at all!

The world had the Renaissance, the Enlightenment, and the American Revolution... all without the benefit of oil. Then something changed… something people didn't expect to make such a difference at the time.

Cities got bigger. Big cities needed better lamps. Along came kerosene! In 1861, Nikolaus Otto invented the first gas-burning engine. Along came gas!

Then Ford showed us how to mass-market cars… and build mass-market factories. Oil made it possible to mass-produce food, cities... and war...

For the whole of the 20th century, we soaked up cheap oil to run our cars and heat our houses... light our porches... and power our tractors. Oil gave us plastics. And petrochemicals.

Oil shaped America... and the rest of the developed world. It changed us. And without oil, America… and the rest of the 'civilized' world shuts down... farms close; hospitals don't open; streetlights don't burn; trains and trucks don't run; planes don't fly. This isn't some fantastic doomsday scenario. It's just simple fact.

We burn through nearly 30 million barrels a year. Even 90% of the chemicals we use for farming, making drugs and making plastics... all come from oil. It's a habit we can't quit.

Some of us commute a hundred miles per day to and from work. Six billion people... driving 700 million cars. Globally, cars alone outweigh humans by 4 to 1. Every day, each car uses four times more energy in fuel than people need in food.

At the airport, a thousand planes a day take off and land, each carrying as much as 24,000 gallons of fuel. Passenger jets alone burn about 1,200 gallons of fuel each hour!

The phones, Internet, televisions, washers, dryers, refrigerators and stereos in our homes... the trucks, trains, planes and ships that deliver food to our supermarkets... our factories, tractors, turbines and compressors... weekend car trips to the beach, boxes of cereal on grocery store shelves, fudge-ripple ice cream in the freezers, heaping piles of fruit on the produce rack... none would exist or arrive without oil. On average, most food in North America travels 1,300 miles from farm to plate!

Now some disturbing statistics:

Over the last five years, the world has burned 27 billion barrels per year. But the oil industry only discovered 3 billion new barrels per year. How long can you use up nine times what you're finding in replacement? Not long!

In the 1930s, a geophysics professor at Columbia University made a discovery worth billions of dollars to oil investors and oil companies. He discovered how a liquid under pressure - like oil - can get trapped under hard rock. He also discovered how to get it out. And oil companies STILL use his discovery to find and recover millions of gallons of oil. Oil they otherwise would have missed completely.

But then Dr. Marion King Hubbert made another discovery. In 1956, Hubbert discovered that oil fields CHANGE dramatically as you drain out the oil.

At first, barrels of crude come squirting out of the drill hole. That's when times are easy. But after years of pumping, pressure disappears. Suddenly, the REST of the oil gets harder and more expensive to draw out.

When your entire business depends on how much oil you have in reserve, this is a very big deal. In fact, the biggest deal. When you get to the halfway drainage point - the 'peak' - the cost of getting the rest of the oil out skyrockets. Supply enters a permanent downward spiral. And pretty soon you have to look somewhere else if you don't want to run out of petroleum.

In 1956, Wubbert worked for Shell Oil. His bosses BEGGED him not to release his controversial 'peak oil' findings. But during a speech, he painted a chilling picture nonetheless... for a room full of oil executives and engineers. He told them that by 1970 the United States - the world's largest oil power - would hit its own devastating oil production 'peak.'

Now, you've got to picture this:

At the time, America could crank out more oil than any other country in the world. So nobody believed him. In fact, they ridiculed him. And the controversy that followed nearly ruined his career. Shell even hired other geologists willing to put the peak date in 1990 or even 2010... and Hubbert was all but shunned by the industry bigwigs.
But guess what happened. Like clockwork...

The United States hit its production peak in 1971! Oil well after oil well across Texas and Louisiana started to dry up. Domestic oil production took a downturn and never recovered. Within just three years, gas and oil prices soared... and US oil imports TRIPLED. OPEC suddenly had an advantage over the United States it had never had before. And the face of oil economics... and oil politics... changed forever.

Hubbert had been right. Many people got wiped out financially during the crisis that followed. But it turns out that was only the beginning!

See, the data Hubbert had discovered a full 14 years before the US oil peak didn't just predict a peak in the lower 48 states of the America... the same data ALSO predicted similar peaks for the rest of the world's petroleum nations... until the entire GLOBAL OIL PRODUCTION hit a permanent downward slide!

Sure enough, look what's happening... one by one, other oil producing countries have started to fall.

Libya peaked in 1970. Iran peaked in 1974. Romania - once Hitler's prize petroleum conquest - peaked in 1976. Brunei peaked in 1979. Peru in 1982. Cameroon in 1985. Indonesia peaked in 1997. So did Trinidad.

So far, a total 51 oil-producing countries have already SLAMMED into a wall of peak oil production. That's dramatic. On average for the whole European region, the peak year for oil production was back in 2000! For the whole Asian-Pacific area, it arrived in 2002! And for the former Soviet Union, the oil peak came in 1987!

I don't have to tell you what this means...

Shrinking energy supplies ALWAYS mean skyrocketing energy prices, even when the collapse in supply is temporary. What will it mean when that supply collapse is permanent? What will it do to the stock market... to budding small businesses... to the job market... and to the prices of everyday goods?

Another 16 major oil-producing countries have not yet hit their peaks... but the peaking dates are ALSO right around the corner. Many, many people will get caught unaware. However, others could make hundreds of thousands of dollars simply by buying the right energy and resource investments.

And what is more, some countries might have a lot less oil than they are prepared to admit! That's right. All along, someone has been LYING to us about how much oil they actually have on hand. I'm talking, of course, about the royal family of Saudi Arabia...
You saw what happened recently when Shell Oil shocked investors by admitting to over-estimating their oil reserves by 4.5 BILLION barrels. Think about that. Because it was an earth-shattering revelation...

When Long Term Capital Management crashed, it lost $1.6 billion. When Enron fell apart, it wiped out a breath-snatching $60 billion in investor capital. Yet when Shell admitted their reserve shortfall of 4.5 billion barrels... priced at the recent peak for oil prices... that's effectively a $189 BILLION blunder. No wonder Shell shares plummeted 9% in a single day!

But compared to what the crown princes of Saudi Arabia are doing, Shell Oil's indiscretion looks like child's play! That's right… when it comes to remaining oil reserves, here's the real scandal: Saudi Arabia claims to have enough that they won't hit their oil peak until 2011. Saudi petroleum minister Ali Naimi recently told a Washington DC energy conference "Saudi Arabia's oil reserves are real...There will be no shortage of oil for the next 50 years."

BALONEY! Do they have as much oil as they say they do? Absolutely NOT. What Naimi isn't telling you OR his colleagues is the truth about the Ghawar field. Ghawar was Saudi Arabia's biggest oil field discovery. In 1948, it held a mind-blowing 87 BILLION barrels of oil. That's a huge amount.

Then in the early '70s, the world's top four oil companies - Exxon, Chevron, Texaco, and Mobil - estimated there were 60 billion barrels of oil in the Ghawar. That's still incredible.

Since then, though, the Ghawar has churned out 55 billion barrels of crude. You do the math! SIXTY BILLION minus 55 BILLION... means only 5 billion barrels of oil left! That's not 50 years of oil. It's barely enough to sustain global demand for another THREE WEEKS!
The Saudis know it, too. Every day, they quietly pump 7 million gallons of seawater under the Ghawar oil reservoir just to sustain pumping pressure.

Sure, Saudi Arabia has another 300 oil reservoirs to draw from. But they still get as much as 90% of the oil they sell from a tiny handful of those reservoirs. The rest have already started to dry up! And that shouldn't surprise you, because five of Saudi Arabia's oil fields are so old, they were discovered between 1940 and 1965!
What about the rest of OPEC? Are they lying to us about total reserves too?

In 1986, OPEC made a new rule for its members: You could only export as much oil as your reserves. Within weeks of the 1986 quota rule, almost every OPEC country 'upgraded' its reserves so they could push more oil out the door and rake in more oil revenues for their coffers. Here's the thing: Those countries made the overnight 'upgrades' in their reserves WITHOUT a single new oil well discovery being made... and WITHOUT a single new rig being built! It's a scandal that has ALREADY cost investors and energy buyers hundreds of billions of dollars.

Over the entire history of the Oil Age... starting in 1859... the world has burned approximately 950 billion barrels of oil. Some of the most respected geologists in the world put the remaining oil reserves at 1 trillion. That sounds like a lot of oil. Until you consider:

When you average together peak production dates for all the major oil producing countries... including Saudi Arabia and the rest of OPEC that have not yet peaked... YOU GET A GLOBAL PEAK PRODUCTION FORECAST FOR SMACK-DAB IN THE MIDDLE OF 2006!

That's the conservative estimate. CBS MarketWatch says the coming peak oil crisis will 'dwarf that of 1973.' And the San Francisco Chronicle is saying we're looking at 'social and economic upheaval across the globe...'

And it's not just the geological crisis that will make energy scarce. For instance, take a look at China...

• General Motors just made an announcement. They're about to double their production of cars for the Chinese market.

• China had just 700,000 cars in 1993. Now they have 7 million. They also had only 15 million motorcycles then. Now they have over 100 million!

• China's energy use alone has already doubled over the last 20 years. Suppose China started using oil at a rate like, say, Mexico?

• Right now China uses just 1.7 barrels of oil per Chinese citizen. Mexico uses 7 barrels per person. If China matched those rates, total DAILY oil demand in China would soar to 24 million barrels per day… more than in the United States. And about 30% of the total oil demand worldwide!

• China expects to import TWICE as much oil as the United States within the next 15 years. Their rate of oil demand growth is already double the percentage demand growth worldwide.

According to the International Energy Agency (IEA), global demand just grew this year at its fastest pace since 1980. Average global demand is 88.1 million barrels a day. Out of that, about 20 million barrels of daily oil demand comes from the United States. That's a hard number to get your head around.

Think that $50 per barrel is expensive? How about $150 per barrel or more?

The reality of this could arrive sooner than you imagine. And when cheap oil finally does disappear, the world will search desperately for something... anything... to fill the void.

But wind, solar, hydrogen, thermal and more... most of these alternatives to oil energy are just NOT READY for prime time. They're either just too expensive to use or too different and complicated to develop SOON enough to make a difference.

However, among the most immediate options that DO work is the most incredible energy breakthrough by far... liquid natural gas (known as "LNG").

Natural gas, as you know, has been around forever. You have it lighting your stove, fueling your pilot light, maybe heating your water. But there has always been a big downside to natural gas. It's hard to move it around. In gas form, it can't flow through a pipe like oil. And you can't pack it into the hull of a cargo ship like you can several tons of coal.

"LNG" - liquid natural gas - changes all that:

The gas is super-cooled to a temperature of minus 260 F. You know that cooled gases turn into liquids. And in this new liquid form, natural gas is MUCH easier to handle. It takes up just 1/600 of the space it needed as a gas. It's also incredibly cheap to move around. And because it's natural gas, it still burns cleanly… even more cleanly than oil or coal. And the economics of LNG are perfect for the tricky crisis ahead.

Alan Greenspan recently told Congress that LNG is an ESSENTIAL "safety valve" for exactly the kind of tight supply energy crisis we're facing ahead. Here's what that means for you as an investor:

Washington is ready to throw huge money behind LNG. Investors who get in early, in the right LNG-focused companies, could make a FORTUNE.
The Big Oil companies are excited, too. At a recent energy conference, Exxon Mobil CEO Lee Raymond recently gushed (no pun intended) over the future of LNG. In fact, virtually all of the major energy companies have LNG research, facilities and exploration going on right now... they're getting ready to build more... and across Asia and Europe, this looks like the boom technology of the energy industry for years to come.

There's no denying this will be one of the most important new energy sources of the century! It's practically guaranteed by the fundamentals. Natural gas itself is already the fastest-growing energy market in the world . Nine out of 10 new electrical power plants burn natural gas. And consumption worldwide will double by 2025!

LNG will meet a huge and growing portion of that demand. It's already starting. World oil trade increases at 2.9% per year... while world LNG trade is increasing at more than TWICE that rate... or 6.7% per year! When "E-Day" hits in 2006... global LNG trade should be about 34% HIGHER than it is right now!

Your opportunity to make money investing in the right LNG companies over the next couple of years is HUGE. Make no mistake.

However, you won’t get rich playing LNG's future by buying stock in the majors like Exxon Mobil or any of the other Big Oil companies. They've just got too much else going on. It would be like buying an ocean to catch a fish! It’s necessary to hunt out the specialists in LNG production.

Here's another explosive opportunity you don't want to miss... METHANE.

In the golden age of Texas oil... you could practically tap a new well just by kicking over the right rock. There was that much oil sitting that close to the surface.Those days are over for oil. But right now there are over 700 trillion cubic feet of coal bed methane gas just sitting in coal beds all across the United States and Canada. At least 100 trillion cubic feet of this gas is recoverable already.

Now consider this... unlike most of today's big oil deposits, coal beds are huge and flat. They also sit very close to the surface. And virtually ALL coal beds also contain methane gas. Methane, propane and butane ARE the main gasses in natural gas. And with natural gas demand exploding... new coal bed methane technology will give ENORMOUS new opportunities to smart investors!

Just as in the old days of easy Texas oil wells, the fact that most coal beds sit close to the surface means gas developers do NOT have to drop deep drills to get at the gas. It's right there, within easy reach. Which makes it very cheap to get out of the ground.

And that's not all... exploration costs are low, because most of the coal beds in the United States and Canada have already been discovered. So all that's left now are the costs of processing and recovery.

So there you have it… not only can you survive the demise of cheap oil. Investing in the right LNG and METHANE stocks should enable you to prosper.

To read the full article, see the Agora Publishing site for An Urgent Warning

To learn how to trade the commodity markets and prosper, take a look at some commodity trading systems at Online Trading Systems

And the price of gasoline at the pumps isn’t exactly heading south. For the data, take a look at the Oil and Gas prices. Look out for $60+/barrel in the not distant future.

Justice Litle, reporting in The Daily Reckoning, takes a closer look at some of the longer term influences which will shape the world energy markets in the future:

"China's oil demand has doubled over the past decade, and the pace is only increasing. There will be ups and downs along the way: When the current infrastructure boom and the flood of foreign investment slow, energy demand will slow for a time also. But in the long run, the trend is inexorably steep. Consider this from The Economist (from "The Hungry Dragon," September 2004):

"In around 20 years' time, China's income per person could be close to South Korea's today. If its energy consumption per person also rose to current South Korean levels, its energy demand would quadruple. The increase alone would be greater than America's total consumption today, yet China's energy use per person would still be only half that in America. At present there is only one car for every 70 people in China, against one car for every two Americans. If car ownership were eventually to rise to American levels, there would be 650 million cars on Chinese roads - more than all the cars in the world today."

How is China going to ensure energy security with such a tall order to fill, let alone generating capacity for such incredible demand? First, by developing strategic ties with key energy producers who prefer an alternative to the "Bush doctrine" of the United States; second, by investing in local production and alternative energy sources that will reduce reliance on imports over time.

With key producers like Venezuela and Russia already in place, and with Canada as a long-term energy source, China's secondary focus is on alternative energy.

Through development of local resources and investments in cutting-edge technology, China can further close the energy gap and reduce dependence on outside partners. To this end, China is upgrading its nuclear power capabilities and investing heavily in advanced technology that will turn coal into petroleum products. It is in this area where Western investment opportunities remain; while it is not feasible to invest in the Venezuelan or Russian governments, China cannot avoid partnering with Western companies when access to technology is required.

Nuclear power is a natural choice for China. The standard "green" objections to nuclear power simply do not exist in the Middle Kingdom. Furthermore, China has awful problems with water shortages, air pollution and acid rain. A nuclear alternative could remedy some of these issues by substituting nuclear energy for fossil fuels and removing stress from the environment. Nuclear power has another green aspect as well: It produces virtually zero carbon dioxide, and thus does not contribute to global warming.

China has plans to develop a new type of reactor design known as a PBMR, or pebble bed modular reactor. The pebble bed reactor is theoretically cheaper and easier to build than traditional PWR (pressurized water reactor) plants. The pebble bed reactor also has a safety edge in that it is supposedly "meltdown proof": The reactor's uranium "pebbles" (actually the size of billiard balls) are coated with high-density carbon, preventing exposure in the event of a coolant leak. Thus, in theory at least, the disasters of Chernobyl and Three Mile Island could not happen with a PBMR. Furthermore, because the pebble bed reactor design is modular, extra generating capacity can be added over time, allowing for further development as needed and less lump sum expense for initial construction … …

On another experimental front, China is spending more than $3 billion on a coal-liquefaction plant in Inner Mongolia. The Shenhua Group, China's largest coal producer, has partnered with a U.S. technology provider to convert coal into petroleum products. In a nutshell, the process involves breaking coal down into hydrogen-enriched molecules, which are then converted to traditional oil products. According to Zhang Yuzhou, vice president of Shenhua Group, "The project consists of two phases of construction, and after the second is complete, the plant aims to yield 5 million tons of oil products annually and greatly reduce China's reliance on crude oil imports."

The winners and losers in China's quest for energy security revolve around transport, exploration and technology. China's demand for oil imports will rise inexorably over time, even as their internal energy sources come on line. This will create a rising demand for tankers, which in turn may benefit shipbuilders over the long cycle. As oil economics turn in favor of further exploration, there will be more opportunity in development and wildcat-style exploration projects, with big profits to the winners and heartbreak for those who come up dry. Look for the oil majors to participate indirectly in any exploration boom as well, spreading their risk through funding and backing of smaller players.

And of course, alternative energy technology is coming into its own. For the past few decades, alternative energy was simply not an economically viable option: Crude oil was too inexpensive, the initial development costs too high, to take alternatives seriously. But now, the development seeds are being sown, with compelling economics on the horizon for fossil fuel substitutes. In this arena, the companies positioned to profit most are those with hands-on intellectual property...alternative technologies that can be sold, licensed or leased but not easily copied or stolen, due to implementation requirements and need for hands-on expertise.

With the 20th century's books now closed, China looks to the 21st...and they know it is their time. In this new century, the dragon will rise again. As investors, we ignore China's destiny at our peril. Whether we see China as friend or foe is irrelevant; in fact, whether or not China fully succeeds in its ambition is irrelevant. What is certain is that China's strategic actions, and the resulting reactions, will dramatically alter the global landscape. We are in the beginning stages of a sea change."

So there we have it - as investors and traders we would be wise to pay heed to these global economic trends in the energy and related industries. For those with an eye to the future, there are phenomenal profits to be made; but for those with their heads firmly buried in the sands of time, possibly equally large losses.

In a future post, we’ll be taking a look at how to safeguard your investments and actually profit from the forthcoming turmoil.

For the full article, see The Dragon is Ravenous

And that flies in the face of the "conventional wisdom" one hears on almost every street corner these days. Not to mention from the lips of the likes of George Soros and Warren Buffett.

But lets not confuse issues. On long term fundamentals I’m a Euro bear, on short to medium-term "trades" I’d be foolish not to be a Dollar bear and Euro bull.

But it’s the fundamentals that interest me most. Of course the technicals are fine to enable one to eat, but its in the fundamentals - and I’m talking hear about the global economic picture – the BIG PICTURE - not just about "selective" fundamentals, plucked out to justify one position or another – that you’ll find where we’re ALL headed in the long term.

Sure, at the moment the euro is between a rock and a hard place. Eurocrats and perma-bears like to blame the US dollar’s decennial low against the euro for Europe’s currency and economic troubles. And when we talk here about "Europe", I’m referring to Continental Europe (Eurozone if you like) and not the UK, which is a relative economic oasis at the edge of it’s continental neighbour’s economic wasteland. The Ugly Americans, according to them, are importing more than they export and thus requiring the (allegedly ever-so-thrifty and prudent) foreigners to bankroll Yankee consumption.

But with every tiny soundbite emanating from Brussels, Tokyo or Seoul, the dollar drops a bit more. And with every decline, the relative value of European and Asian dollar-denominated currency reserves and company earnings drops as well. Unfortunately, due to insufficient economic reforms in the respective countries, domestic demand is stagnant or even recessive - and in no shape whatsoever to make up for falling US demand.

In Japan, where dollar reserves are estimated at US$820 billion, each cent the dollar loses in value means US$8.2 billion in unrealized losses. In 2004, the European Central Bank (ECB) recorded a tripling of its losses - to over 1.63 billion euros, due mainly to a devaluation of its dollar reserves by 2.1 billion euros.

And its no better in Germany where cash-strapped German finance minister Hans Eichel won't be expecting no check in the mail from the Bundesbank this year: experts forecast a break-even year for the German central bank, with a potential loss of 500 million euros.
Given this dynamic, it becomes quite obvious why China, for one, steadfastly refuses to float the dollar: any increase in the yuan would erode its central bank reserves while making Chinese exports more expensive. And internal demand in a country that still pays third-world wages for workers producing high-end goods is simply insufficient to make up the difference!

European firms, too, are feeling the pain. French defense contractor Thales just cut its forecast for 2005, which it had calculated at an exchange rate of US$1.15. (The dollar is trading at US$1.33 today.) Thales chairman Bernard Arnault was quoted as saying that the company "had to wipe 500m euros off our operating profit due to the decline in the dollar alone." Even the recently celebrated aerospace firm EADS indicated that the weak dollar is forcing it to build 300 of its new Airbus A380 super jumbos to break even. That’s a 20% increase over its previous forecast.

Each drop in profitability and each euro in non-realized central-bank profits translates into greater pressure on the respective domestic market and public debt level. And public debt, as a percentage of GDP, is already higher in Japan, China, Germany, Italy and France than it is in the US.

Did you get that? I’ll repeat for emphasis:

Public debt, as a percentage of GDP, is already higher in Japan, China, Germany, Italy and France than it is in the US.

Each high-level complaint about the weak dollar translates into a further fall in the value of the dollar. The euro’s valuation is choking off the already modest (read "negligible") growth rates in Europe (read "Continental Europe") - and is likely to do so until the central banks take active steps to depress its value.

These steps become even more likely considering that a correction of the US current account deficit would be even worse news. If the US were to restrict imports of foreign goods, for example, the miniscule economic growth rates in Europe and Japan would collapse.

Get it? Good!

But for the short term, and since traders have to eat too, let’s join the party, trade forex and get bearish on the dollar.

And within the commodity markets, perhaps the most arcane item to trade, at least by non-specialists, are the meats.

A recent article by veteran commodity trader Kevin Kerr in The Daily Reckoning gives us a rare insight into just what exactly are meat futures. Here are some extracts:

"Few markets conjure up as many images from investors as the meat futures markets do. Some people will think of Old West cattle auctions, with cowboys and ranchers bidding on prized bulls. Others know the meat markets are just like any other market, though they still hold on to the notion that it's exotic and full of risk …

Certainly meats are risky, the same as any market. But they're also a vital market filled with many opportunities for your portfolio. Of course, you're not likely to hear about them from your broker. The sad fact is, most analysts on Wall Street only know cattle as it's served up to them at a Morton's or Ruth's Chris Steak House.

Essentially, meats are traded on Chicago Mercantile Exchange. And as I said, all trading is done much the same as any other commodity. Of course, like all markets, meats have a very unique language. Traders concentrate on data that nobody else looks at …

Cattle are used in a variety of products - leather, soaps, animal feed, even camera film. But of course, when we talk cattle, we're mostly talking beef - everything from steaks to hamburgers.

As far as trading is concerned, cattle are broken up into two different categories: feeder cattle and live cattle …

Feeder cattle - sometimes called lean cattle - are just as alive as live cattle. They're simply calves that will be sent to feedlots to fatten up. Once they've gained enough weight, they can become "live cattle" - ironically, the ones that get shipped out for slaughter.

The slaughtered cattle meat is graded and sorted. If you've bought meat in a grocery store, you probably know a little something about that. The meat you buy is most likely labeled "Choice," "Select," or "Standard." In all, there are six categories of beef, and five yield grades, measuring how much beef came from the cow.

About 50 % of the meat is sold as steaks and roasts, 5% as stewing beef, and the rest becomes hamburger.

The butcher can then sell what's left of the cow to leather manufacturers and others that use cattle products.

Not surprisingly, cattle are raised all over the world. At last count, there were more cattle in India than in any other country. Brazil runs a distant second, with China, the United States and Europe rounding out the top five.

Beef doesn't have a very big import/export market - it's usually consumed in the country it's produced. Among exporters, Australia leads the way, followed by the United States. Most of the U.S. beef comes from just seven states - Arizona, California, Colorado, Iowa, Kansas, Nebraska, and Texas.

Like everything else, beef prices are a function of supply and demand. And like all commodities, a variety of factors can affect both.

You'd probably think weather doesn't play as big a role on cattle production as it does with other farm commodities. After all, with cattle there really isn't a planting, growing or harvesting season. Short of a severe drought or a major flood, the cows will always be there.

But the fact is, it takes a lot of money to raise a cow. Feeder cattle need a lot of pasture. And live cattle need a lot of feed. If there's too much or not enough rain, the pastures won't be able to support as many cattle, so ranchers will have to cut back on the number of cattle they raise. That'll limit the supply of feeder cattle, which in turn limits the number of live cattle.

Meanwhile, if grain prices are adversely affected by the weather, the feedlots may cut back on the number of cattle they buy. Again, this reduces the overall supply of cattle.

Demand, on the other hand, can fluctuate wildly. The main factor is usually personal income. The more money people make, the more they're willing to plunk down $50 or $75 at for a steak at Morton's. Usually increased paychecks translate into increased demand for high quality beef faster than most other foods.

If people are tightening their wallets, however, macaroni and cheese may be the meal of choice.

Other demand factors are less than economic. I'm talking about people's diet and preference. The mad cow disease scare pushed some people away from beef. (You might remember that some cattle ranchers blamed Oprah Winfrey for starting an anti-beef drive.)

More recently, diet fads like Atkins have brought people back. So if you're a beef trader, you have to keep an eye on pop culture. Keep track of what talk and tabloid shows are saying, what big celebrities say they're eating. You never know when a simple sound bite could lead to a big rise or drop in beef prices …

Now that we have the cows out of the way, let's look at the pigs. Lean hogs are the other major meats contract...

"Lean hog" may sound like an oxymoron. But as far as trading is concerned, it simply means a pig big enough to be slaughtered. So your pork chops, ham and even bacon come from lean hogs.

In fact, 20% of a pig's meat becomes ham. About 17% becomes pork loins and chops. And 15% - the hog's belly - is used for bacon. (Let's just say the rest of the meat falls under the category of "Other" and leave it at that.)

Just four states account for more than half of U.S. pork production - Iowa, Illinois, Indiana and Missouri. You may have noticed those are all Corn Belt states. That's not a coincidence... because farmers like to keep their pigs near their favorite food source. Yes, corn. So once again, weather plays a big factor in hog prices. If corn is expensive, farmers will feed their pigs less. In turn, it reduces the supply of lean hogs. And that drives prices up.

In fact, a key report to keep your eye on is the Hog/Corn price ratio. Simply put, it's the price of hogs versus the price of corn. Naturally, the higher the price of corn, the lower profits a pig farmer will see. So you can expect farmers to cut back on the number of pigs they raise.

The natural flip side is when corn prices are low compared to the price of hogs. More than likely, farmers will try to take advantage of the high prices to raise more pigs.

Weather plays a role on pigs another way. Pigs have a habit of becoming lethargic when the weather gets too hot - just like people do. Not only do they eat less, they also breed less. That ultimately means lighter pigs are sent to the butcher, while the number of baby pigs decreases. Colder weather makes for better breeding conditions (go figure...), increasing the next generation of piggies …

The demand for pork remains as strong as it ever was. Beef may be "what's for dinner," but pig farmers are busy reminding people that pork is "the other white meat." Meanwhile, the Atkins diet and other fads have reversed people's bacon aversion. In fact, since there's almost no market equivalent to bacon, demand has remained fairly constant."

Read the full article in the Daily Reckoning 03/01/2005.

For a good introduction to the fascinating world of commodity futures trading you can do no better than the Futures Trading Secrets course from Bill McCready: Commodity Futures Trading

Citigroup stated that the firing of Yamada and her team is part of an effort to control expenses, and the company is planning to eliminate up to 1,000 jobs from its global corporate and investment banking division:

Citigroup Eliminates Stock Technical Analysis Group

Naturally this released yet another barage of the customary anti-technical analysis invective which seems to emerge at every opportunity:
Technical analysis--you're fired! Is there any value to this controversial stock picking method?

I'm sure TA techniques could be used to spot just such denigrating opportunities!

However, I think it important to highlight the fact that Citigroup never claimed that TA doesn't work. The action simply implies that their customers just aren't buying the analysis that the company is producing. Instead they choose to focus their remaining analytical resources on fundamental analysis. Let's face it, with its roots firmly planted in facts and figures - the average investor finds this much easier to comprehend.

But for a trader, whilst the analysis of fundamentals plays a part and should never be ignored, it's importance for short term trading, day trading, swing trading, etc. is much less pronounced.

For example, we know that the markets can move dramatically at the time of fundamental announcements. Depending upon individual trading style, this will tell us either to keep out of the markets altogether at these times, or be prepared to act quickly upon specific signals. The news release of fundamental announcements are a time for skilled traders to make huge gains when positions are correctly managed.

So that's fine - people have voted with their feet and market forces have done their work - nothing changes - which is why TA is such a useful trading tool!

In a former (one of several) life, I worked in the petroleum industry - and there was nothing better than to see a rise in the price of crude. It meant more exploration, more drilling ... more, yes - a word we don't here too often these days ... INVESTMENT.

And all of this was great too for the then ailing UK economy, which still relies heavily upon North Sea oil revenues - a huge proportion of the price of petrol (gasoline) at the pumps is actually tax. It also meant more jobs in the (also ailing, and indeed disappearing) construction and fabrication industries. So, all in all, oil price rises, in a nation accustomed to petroleum prices at 4 times or more higher than those in the US, could be considered as, well ... beneficial (although not generally appreciated to be such by the typical consumer). But, in any event, the impact of a dollar or two ... or even 10 ... on the price per barrel was not a mega-burdon.

Clearly this is not so at the other side of the Atlantic. And, let's face it, the United Kingdom doesn't exactly have a "UK Dream" to support.

But let's take a closer look at the relation between oil and dollar prices:

Briton L Ryle, Chief Trading Strategist at Money-Flow Matrix Trader has this to say:

"Crude futures jumped back over the US$50 mark today. And as you might guess, stocks and the US dollar went lower. There are rumblings that oil exporters and Russia are converting dollars into euros and that’s pressuring the dollar. But should that have an effect on crude?

Actually, yes.

It seems that anytime oil rises, the dollar falls. If you superimpose a US dollar chart over a crude chart, you’ll clearly see the relationship. But it’s important to understand that the relationship is not casual. Like gold, oil should rise when the dollar drops.

That’s because crude oil is denominated in US dollars. Forget supply and demand dynamics for a minute. Forget China’s insatiable appetite for crude. Ignore the financial media’s fixation on weather reports for the Northeastern United States and what that means for heating oil.

The single biggest force on the price of oil is the US dollar. And that’s because the price of oil represents the real buying power of the dollar. It’s not a fixed peg that implies a benefit, such as can be found with the US trade deficit.

Since 2000, the US dollar has lost around half its value. Crude oil consistently traded below US$20 a barrel during the late 1990’s. And it wasn’t until OPEC adopted the US$22-to-US$28 price band on March 28, 2000, that crude prices got above US$20 a barrel for good.

Stocks are down today because of the appearance of that US$50-a-barrel price on the tape. But if the stock market was going to crash because of high oil prices, it would have done so already. The fact is, US GDP growth is largely immune to higher oil prices, as we’ve seen.

The US economy grew at a 3.1% rate in the fourth quarter. Crude prices ran between US$45 and US$55 during that same period. Low interest rates and rising income will keep US consumers spending enough to maintain US GDP growth at 3% to 3.5% - regardless of whether crude futures are trading for US$40 or US$50 a barrel.

Most oil analysts expect flat to lower prices for the remainder of the year. And yet nobody is willing to go on record and predict a rally for the US dollar. But, interestingly, one of the biggest dollar bears in the world over the last few years, George Soros, isn’t forecasting more declines for the US dollar. Rather, he’s linked its fate to crude prices.

Now, a guy like Soros can always be expected to talk his position. If he wants to cover a dollar short, he’ll say publicly that the dollar is going down. So in light of his apparent candor, I can only assume that Soros currently has no position in the US dollar. Maybe he’s long the euro.

There’s one thing that all the hand wringing about the dollar and oil proves - there is an abundance of fear in the market right now. This despite the fact that the economy is on pace for 3% to 3.5% growth, the forward P/E for the S&P 500 is moderate at around 20, fourth-quarter earnings were above expectations, and economic data is coming in mostly as expected."

You can find the latest data on oil and gasoline prices, presented graphically, here: Crude Oil & Gasoline Prices

As I said at the beginning - great news for traders!

Nassim Nicholas Taleb, in a recent article published in The Daily Reckoning, wants to prove that theory wrong and show that those who start each day with a clean slate and new ideas make the most rational investors.

He claims that in today’s world, self-contradiction is considered culturally to be shameful, and goes on to quote from Proust, whose novel A la Recherche du Temps Perdu ("In Search of Lost Time") features a semi-retired diplomat, the Marquis de Norpois, who, like all diplomats before the advent of the fax machine, was a socialite who spent considerable time in salons. The narrator of the novel sees the Marquis openly contradicting himself on some issue (a pre-war rapprochement between France and Germany). But when reminded of his previous position, he did not seem to recall it. Proust reviles him:

"Monsieur de Norpois was not lying. He had just forgotten. One forgets rather quickly what one has not thought about with depth, what has been dictated to you by imitation, by the passions surrounding you. These change, and with them so do your memories. Even more than diplomats, politicians do not remember opinions they had at some point in their lives and their fibbings are more attributable to an excess of ambition than a lack of memory."

The Marquis is made to be ashamed of the fact that he expressed a different opinion. Proust did not consider that the diplomat might have changed his mind. We are supposed to be faithful to our opinions or be considered a traitor!

It should be mentioned at this point that Taleb is a trader and professor of mathematics, specializing in the risks of unpredicted rare events ("black swans"), who has held senior trading positions in New York and London, before founding Empirica, a trading firm and risk research laboratory.

And Taleb believes that the Marquis would also have made a good trader. However, he considers that the public person most visibly endowed with such a trait to be George Soros, one of whose strengths being the facility to revise his opinion rapidly, without the slightest embarrassment. He goes on to provide an anecdote perfectly illustrating Soros' ability to reverse his opinion in a flash:

The French playboy trader Jean-Manuel Rozan discusses the following episode in his autobiography (disguised as a novel in order to avoid legal bills). The protagonist (Rozan) used to play tennis in the Hamptons on Long Island with Georgi Saulos, an "older man with a funny accent," and sometimes engage in discussions about the market, not initially knowing how important and influential Saulos truly was. One weekend, Saulos exhibited in his discussion a large amount of bearishness, with a complicated series of arguments that the narrator could not follow. He was obviously short the market. A few days later, the market rallied violently, making record highs. The protagonist worried about Saulos, and asked him at their subsequent tennis encounter if he was hurt. "We made a killing," Saulos said. "I changed my mind. We covered and went very long."

What characterizes real speculators like Soros, differentiating them from the rest is that their activities are devoid of path-dependence. They are totally free from their past actions. Every day is a clean slate. Quoting from Taleb:

"There is a simple test to define path-dependence of beliefs (economists have a manifestation of it called the endowment effect). Say you own a painting you bought for $20,000, and owing to rosy conditions in the art market, it is now worth $40,000. If you owned no painting, would you still acquire it at the current price? If you would not, then you are said to be married to your position. There is no rational reason to keep a painting you would not buy at its current market rate – it is an emotional investment. Many people get married to their ideas all the way to the grave. Beliefs are said to be path-dependent if the sequence of ideas is such that the first one dominates.

There are reasons to believe that, for evolutionary purposes, we may be programmed to build a loyalty to ideas in which we have invested time. Think about the consequences of being a good trader outside of the market activity, and deciding every morning at 8 a.m. whether to keep the spouse or part with him or her for a better emotional investment elsewhere. Or think of a politician who is so rational that, during a campaign, he changes his mind on a given matter because of fresh evidence and abruptly switches political parties. That would make rational investors who evaluate trades in a proper way a genetic oddity - perhaps a rare mutation. Researchers found that purely rational behavior on the part of humans can come from a defect in the amygdala that blocks the emotions of attachment, meaning that the subject is, literally, a psychopath. Could Soros have a genetic flaw that makes him rational as a decision maker?

Such trait of absence of marriage to ideas is indeed rare among humans. Just as we do with children, we support those in whom we have a heavy investment of food and time until they are able to propagate our genes, so we do with ideas. An academic who became famous for espousing an opinion is not going to voice anything that can possibly devalue his own past work and kill years of investment. People who switch parties become traitors, renegades, or, worst of all, apostates - those who abandoned their religion were punishable by death."

You can read the full article here: Spotless Minds

Taleb's interests lie at the intersection of philosophy, mathematics, finance, literature and cognitive science, but he has stayed extremely close to the ground, thanks to an uninterrupted two-decade career as a mathematical trader.
His book Fooled by Randomness, into its second edition in 2004, has been published in 14 languages, and the author's ideas on sceptical empiricism have been covered by hundreds of articles around the world. In it he examines what randomness means in business and in life and why human beings are so prone to mistake dumb luck for consummate skill.

I recently came across a research paper which appeared in the Special Section of the August 2004 Elliott Wave Theorist, Robert Prechter’s monthly market analysis publication:

OIL AND STOCKS: A CRUDE CONNECTION
by Tom Denham

For decades, people have fixated on some economic indicator du jour as the key driver of stock prices. This idea is seductive because, as Robert Prechter has noted many times, it helps investors “explain” otherwise mysterious market phenomena. In the 1980s, it was the weekly money supply report. Then it was the bond market and, off and on, inflation. Later it was the near-term trend of the U.S. dollar, and for a while, it was consumer confidence levels.

Each indicator came into vogue for a period of time and during that period was accepted without question. This acceptance occurred despite the fact that any decent historical analysis would have proved that the supposed correlation did not exist at all.

Current Conventional Wisdom

If you have been keeping up with conventional wisdom, you know that the indicator of the moment is the price of crude oil. Prominent market analysts claim that oil prices and stocks are inversely related, i.e. that rising oil prices are bearish for stocks and falling oil prices are bullish for stocks. Financial newspapers are replete with comments like these:

• “…historically high oil prices…pose a threat to global economic growth and the prospects for stock markets.” (29 May 2004)
• “The fall in oil prices…may bring some relief to financial markets.” (4 June 2004)
• “US stocks turn lower as oil price jumps.” (14 July 2004)

This is not the first time we have been told that oil prices are an indicator of stock trends. Before we investigate whether oil prices actually do correlate inversely with the price of stocks, we have two questions to explore.

1) Are Oil Prices Actually “Historically High”?

Speaking of “high oil prices” prompts the question, “What is high?” In December 1998, oil sold at $10.35/barrel. After seven months, in July 1999, it was 100% higher at $21.12. After 15 months, in March 2000, oil was 200% higher at $34.20. After nearly five and a half years, in June 2004, oil was 300% higher at $42.38. So when did oil become “too expensive”? At $20? $30? $40? If oil was not too high after climbing 100% or 200%, what makes oil suddenly too high after crossing 300%? Sticker shock at $40 oil is primarily a psychological event. How do we know this? Because real oil prices are actually substantially lower now than at several previous peaks. As Paivi Munter points out in “Bond Jury Out on Effects of Oil” (FT.com, 25 May 2004), “In 1979 to 1984, average annual prices in today’s money exceeded $50 a barrel for four consecutive years, reaching $72 in 1980.” Yet in the eyes of many, the issue of “high oil prices” now is bigger than ever. Apparently, perception of “historically high” oil prices is due as much to psychology as to actuality. We hasten to add that we are perhaps the most extreme bears on the planet with respect to stocks (for details, see Conquer the Crash), but the trend of “historically high” oil prices has nothing to do with our analysis, nor should it, as we are about to see.

2) If a Simultaneous Correlation Exists, Would It Be Valuable?

A prominent stock analyst recently asserted, “If crude oil extends today’s reaction, stock markets are likely to stage another technical rally. Conversely, if crude rallies, share indices will be under further pressure.” Fine. So what do investors know about next week? Answer: nothing. Even if we were to accept the analyst’s premise that oil prices drive stocks, unless he also tells us where oil prices are heading, his “forecast” is really no forecast at all. It tells us nothing about the path ahead for stocks. “It is not good enough to say, for instance, that stocks will go up as long as earnings increase,” Prechter wrote in The Wave Principle of Human Social Behavior. “You must predict earnings to arrive at a payoff. To do that, you need an indicator of earnings. And so on; the cycle is endless” when making external-cause claims.

Surprise, Surprise: There Is No Correlation

As with all external-cause claims relating to financial markets, there is a more serious problem with this supposed correlation between stocks and oil: It doesn’t actually exist.

People naturally default to the “external cause” model, borrowed from physics, when analyzing markets. This case, in which the price of oil is supposedly pushing stocks around, is no exception. But as Prechter explained and demonstrated in the May and June issues of The Elliott Wave Theorist, the laws of physics are not useful in describing or forecasting market behavior. Let’s take a moment to test the facts about the purported “obviously sensible” correlation between oil and stock prices.

The Standard Contradiction

If you were to perform a quick survey of Financial Times market-related headlines from 1999 to the present, you might be amazed to discover that the polarity of the presumed correlation had changed to suit circumstances. Prior to 2000, the newspaper cited rising oil prices as a reason stocks were heading up, but once stocks topped in 2000, it blamed rising oil prices as a reason stocks were moving down.

How could this possibly be? It’s quite natural, really. As Prechter states in The Wave Principle of Human Social Behavior, “[A] duality of meaning holds for all [such presumed external-cause] relationships.”(p.376) In the case of oil, one can convincingly argue, “Rising oil prices hurt transportation and electric utility companies and are therefore bad for the economy.” On the other hand, it is quite reasonable to assert, “A healthily expanding economy requires more energy consumption, which naturally leads to higher oil prices. What else would you expect?” As always, “fundamental” arguments (1) always appear sensible, (2) can be utterly contradicted by another sensible argument and (3) never explain the data. Refer to the following figure for a few examples relating to oil and the stock market:

Is There Any Consistent Correlation?

If the price of oil were a key driver of the stock market, we would see a consistent relationship between the prices of oil and stocks over time. Here’s a chart of the S&P Composite index and crude oil for the past 20 years. Notice that when oil peaked at $41.15 in 1990, the S&P was part-way along a two-decade rally. At crude’s next peak at $37.80 in 2000, the S&P was near a top. Then when oil spiked to $39.99 in 2003, the S&P was near a low. Likewise, oil’s four major lows during this time came at very different points in the trends for stocks. So anecdotally, at least, it appears that no relationship exists. But what about statistically?

Let’s take a look at the statistical correlation of the S&P Index and crude oil in 10-week segments. If these markets were truly correlated on this timeframe, we would see a flattish line somewhere near the “100” line in either the upper or lower panel. Instead, what we find is that the correlation swings erratically from positive to negative. Sometimes oil and stocks advance or decline together, sending the correlation into positive territory, and sometimes oil and stocks move inversely to each other, sending the correlation into negative territory. So statistically, there is no consistent relationship between the prices of oil and stocks on this timeframe.

Even on a longer term basis the swings are just as erratic. What’s more, the polarity of the relationship can change at any point; reversals sometimes occur at relative extremes and sometimes not.

Denham goes on to consider even longer time frames, reviewing ten notable swings in the price of oil over the past 20 years and tracks what happened in the S&P during those moves. In event #1, oil declined 70% into April 1986 while stocks rallied 56%. In event #2, oil rallied 322% into 1990, and stocks rallied 20%. In event #3, oil declined 67% into 1993, and stocks rallied 60%, a near inverse. But oil and stocks then trended together in event #4 into 1996, when crude oil rallied 95% and stocks rallied 52%. And so on. Of the ten significant oil swings in this list, five coincide with a stock move in the opposite direction, and five coincide with a move in the same direction. (Event #2 turns current conventional wisdom on its head, as it was oil’s biggest rise of all yet accompanied a substantial advance in stocks.) So we find negative correlation half the time and positive correlation the other half, which is no correlation at all.

The DAX, too

The lack of correlation is just as dramatic when we compare oil prices to the German DAX stock index, as demonstrated in the latest issue of The European Financial Forecast. Rest assured — with the socionomic insight as a guide — that you are unlikely to find any stock index that consistently tracks the price of oil.

Conclusion

To say it plainly, the data show no consistent relationship between oil and stocks of the type that conventional wisdom purports to be causally sensible. As we have already shown, even if there were, it wouldn’t help you predict stocks. Therefore, paying attention to stock forecasts based on the price of oil is a waste of time. Worse, they are setups for bad investment decisions. Shorting stocks on an oil spike (presuming you even knew that it was a peak, which you wouldn’t) or buying stocks at an oil trough may seem like a reasonable decision, but as this study shows, it’s simply a blind gamble, and rolling the dice is not an investment strategy.

As far as we can see, there is no consistent leading or lagging relationship between these two sets of data either.

Elliott Wave International has just announced a new FreeWeek event. This will give you access to their forecasts for the DJIA, S&P, NASDAQ, Gold, Silver, Bonds, U.S. Dollar Index and analysis of cultural trends from the world’s largest and best-known market forecasting company. EWI uses the incomparable Elliott Wave Theory to provide forecasts of every major freely traded market in the world.

During FreeWeek you get complete access to three forecasting services: The Elliott Wave Financial Forecast, Short Term Update and Robert Prechter's Elliott Wave Theorist. You shouldn't miss this event. You can get access to their FreeWeek here: EWI FreeWeek

The Big Mac index is an informal way of measuring whether one currency is at the theoretically correct exchange rate with another currency. The measure assumes that the theory of purchasing power parity (PPP) holds.

The main tenet of PPP is that the exchange rate between two currencies should naturally adjust so that the cost of a sample basket of goods should cost the same in one currency. In the Big Mac index, the "basket" in question is considered to be a single Big Mac as sold by McDonald's. The Big Mac was chosen because it is available to a common specification in many countries around the world, with local McDonald's franchisees having significant responsibility for negotiating input prices. For these reasons, the index allows for meaningful comparison between many countries' currencies.

The Big Mac PPP exchange rate between two countries is obtained by dividing the cost of a Big Mac in one country (in its own currency) by that of a Big Mac in another country (likewise in its currency). This value is then compared with the actual exchange rate; if it is lower, then the first currency is under-valued compared with the second, and conversely, if it is higher, then the first currency is over-valued.

For example, suppose a Big Mac costs £2.00 in the United Kingdom and $2.50 in the United States; thus, the PPP rate is 2.00/2.50 = 0.8. If, in fact, the dollar buys £0.55, then the pound is over-valued with the respect to the dollar.

The Big Mac index was introduced by The Economist newspaper in 1986 and has been published by them regularly since then. The index also gave rise to the word Burgernomics.

To get the latest Big Mac data, you can find it on the Economist site here:

The Economist: Big Mac Index

In January 2004, The Economist introduced another index, the Tall Latte Index. The idea is the same, except that the Big Mac is replaced by a cup of Starbucks coffee, acknowledging the global spread of that chain in recent years. In a similar vein, in 1997, they created a Coca-Cola map that showed a strong positive correlation between the amount of Coke consumed per capita in a country and that country's wealth.

The burger methodology has limitations in its estimates of the PPP. For example, local taxes, rates, levels of competition, and import duties for burgers may not be representative of the country's economy as a whole. Nevertheless, the Big Mac index has become widely cited by economists.

However, a major problem with such indices is that they completely omit to take into account historical differences. i.e. convenience food in many parts of Europe has a higher “perceived value” than in the USA – indeed the same applies to many items sold in shops (possibly related to the different values nations place upon labor).

So, for example, the typical difference (specifically, the median) has been for Big Macs in Britain to be 19% more expensive than in the States. So the fact that a Big Mac costs 20% more in the UK right now doesn't mean Britain's pound is 20% overvalued. It's about in line with history - which is NOT what most experts would tell you right now!

And yet --

Latest data published by The Economist indicates that the cheapest burger is in China, at $1.26, compared with an average American price of $3. This implies that the yuan is 58% undervalued relative to its Big Mac dollar-PPP. On the same basis, the euro is 25% overvalued, the yen 17% undervalued.

Here's the chart

I'll leave you to draw your own conclusions!

By Eric J. Fry

Curves, Peaks and Dips

"Hubbert's Curve" is NOT part of the female anatomy...

But it is, nevertheless, a thing of beauty to long-term
crude oil investors.

Back in the 1950s, Shell Oil geophysicist, M. King Hubbert,
discovered a phenomenon he dubbed, "Hubbert's Curve."

The Shell geophysicist theorized that oil production from a
new field would tend to rise until about half the
recoverable oil had been produced, then peak and fall off
sharply, all along a classic bell-shaped curve.

Furthermore, Hubbert understood that in the real world of
crude oil production, the "second half" of the
theoretically recoverable reserves would be relatively more
difficult - and expensive - to extract, which would prompt
oil companies to abandon fields before extracting all
"recoverable" reserves.

Based on his theories, therefore, Hubbert predicted in 1956
that U.S. oil production would peak in the 1970s. Most of
his contemporaries scoffed at the notion. But his
prediction turned out to be surprisingly accurate. U.S.
production did indeed peak in 1970.

"Using the same model," writes Jeremy Rifkin, author of the
The Hydrogen Economy, "Hubbert estimated in 1971 that the
middle 80 percent of global oil production will be produced
within fifty-eight to sixty-four years, or less than one
lifetime."

In other words, 80% of the world's oil would have been
produced by 2035...at the latest.

"If M. King Hubbert is proven right once again, the world
has either reached or will soon reach peak global
production," observes Steve Belmont in a new report
entitled, "The Death of Cheap Oil." (Belmont is the Senior
Market Strategist for the Rutsen Meier Belmont Group LLC in
Chicago).

"Hubbert's predictions for exploration are also proving to
be true," Belmont continues. "Now that all the cheap
sources of oil have been found, oil companies are cutting
spending for new exploration. The windfall profits
generated by the 3-year run-up in crude prices are not
being spent on finding new oil, but on share-buybacks,
dividends and/or efforts to purchase already-discovered
reserves. Exploration is decreasing because today's
smaller, harder-to-drill fields provide less bang for the
exploration buck."

"Most geologists agree that there is still plenty of oil
left to be discovered," Belmont admits, "but given the cost
of extraction, it is not economically feasible at current
prices. The world may not be running out of oil. It is,
however, running out of cheap oil."

Even the world's largest oil producer may be running low on
"cheap oil"...or any kind of oil, for that matter. Saudi
Arabia pumps 13% of the world's oil and is responsible for
23% of the globe's reserves, making it the most important
player on the supply side, followed by Iran with 11% of the
world's reserves and Iraq with 9%.

"According to official Saudi state calculations," says
Belmont, "Saudi Arabia could produce at current levels of
10 to 11 million barrels per day for 50 years. However, we
view that number with a certain degree of skepticism.
Matthew Simmons, chairman of Simmons and Company
International - an investment bank specializing in the oil
industry says the official Saudi numbers are too high and
that Saudi fields are aging much faster...According to Mr.
Simmons, the Saudis need to strip water out of nearly every
well and this is a sign that Saudi fields are aging much
faster than the industry has planned for.

"Almost every oil field sits on top of water," Belmont
explains. "New oil wells draw up the crude first and have
almost no water content. As a field ages, more and more
water gets mixed with the crude oil. Wells that are almost
dead will reach a 'water cut' of 40%. According to Nasen
Saleri, manager, reservoir management at Saudi Aramco, the
'water cut' for Saudi wells in 2003 was 27%."

In other words, most of the easy-to-get stuff is gone and
only the hard-to-get stuff remains.

"Consequently," Belmont's report concludes, "we may have
entered an era of perpetual shock where supply and demand
are balanced so precariously that the slightest disruption
could send prices soaring. The world is currently using 98
percent of its producing capacity; OPEC was pumping flat
out in 2004 yet prices remained stubbornly high. This was
unprecedented in the short history of crude oil."

So there you have it, folks; demand is climbing and
supplies are dwindling...At least CHEAP supplies are
dwindling. So what's the far-sighted investor to do?

Belmont recommends call options on crude oil futures.
That's his business, of course. Steve is not a stockbroker;
he's an options broker on commodity futures. So naturally,
he prefers this medium as a way of capitalizing on the
crude oil rally he anticipates.

"Most investors think of energy stocks first," says
Belmont. "However, if you own the more well-known stocks
you also know that they haven't kept pace with crude oil
itself. History has proven that an investment in energy
stocks is not necessarily an investment in crude oil. In
fact, in the recent bull market, traditional energy stocks
have not returned anywhere near an investment in crude oil
itself - not by a long shot."

To illustrate his point, Belmont presents the nearby chart
showing "the relative performance of crude oil [versus]
Chevron Texaco since early 2002, a period that encompasses
most of the bull market. As of late December 2004, crude
oil had gained 157%. Chevron Texaco had gained only 16%.
There are numerous other examples of the same phenomenon."

Why not play crude oil directly, Belmont asks?

"NYMEX crude oil futures and options allow investors to
make bets on the movements of crude oil directly," he says,
"offering the cleanest possible play on this most essential
of all commodities. Crude oil futures are extremely
volatile, so we would not recommend trading them directly
for most investors. Crude oil call options are another
story. Crude oil call options trade on the New York
Mercantile Exchange or NYMEX...

"Each NYMEX crude oil call option," Belmont explains,
"gives the buyer of the call the right but not the
obligation to be long a futures contract covering 1,000
barrels of light, sweet West Texas Intermediate grade crude
oil at a specific price known in option jargon as the
'strike price.'...For example, as we write this report, the
spot (front) contract West Texas Intermediate crude oil
futures are trading at roughly $45 per barrel. Long-dated,
December 2006 $50 crude oil call options are going for
roughly $2.30. Multiply times the 1,000-barrel contract
size to get a total cost of $2,300 per option.

"At $60 per barrel, a $50 call would be worth at least
$10,000. Why? Because the holder of a $50 call could simply
exercise the right to be long at $50 per barrel and then
turn right around and sell his 1,000 barrels into the
market for the going rate of $60 per barrel. Multiplying
the $10 per barrel difference times the contract size of
1,000 barrels yields a gross profit of $10,000 per option.
Since our hypothetical option holder paid a premium of
$2,300 for the right to be long, the net profit on this
position would be the $10,000 gain minus $2,300 or $7,700."

Of course, options buyers should not forget that a DROP in
the oil price would render a $50 call option worthless.

Your editors at the Rude Awakening are prohibited from
revealing the exact option Belmont recommends currently.
But we can share his rules for buying options on crude oil:

1) Buy NYMEX calls with at least 15 months until
expiration.
2) Buy calls with strike prices no higher than 10% above
the spot crude price.
3) Pay no more than $2,500 for each option.

Lastly, Belmont advises, "Consider buying NYMEX crude calls
in multiples of two, holding one for the long term and
using the other as a trading position."

Your New York editor contacted Steve yesterday to find out
how Rude Awakening readers could reach him, in the event
that they wished to do so. "Well, I'll be skiing this
week," Steve said sheepishly. "So they should contact my
colleague in Chicago, Sue Rutsen, at 800-345-7026."

"Thanks, Steve."

Now that's what I call an "educational" post - not only educational but immediately "useful"!

The Rude Awakening is published daily alongside it's parent publication The Daily Reckoning

By Eric J. Fry

The world will not run out of oil any time soon...just
CHEAP oil...

So says a fascinating report that bears the title: "The
Death of Cheap Oil." The report's author, Steve Belmont,
Senior Market Strategist for the Rutsen Meier Belmont Group
LLC in Chicago, lays out a compelling - and somewhat
frightening - case for much higher oil prices.

Admittedly, oil prices might retreat a bit over the near
term, as evidenced by yesterday's $1.20 slide to $45.28 a
barrel, but Belmont believes the price of crude oil will be
much higher by the end of 2006 than it is today. He bases
his bullish call on the inevitable - he believes - clash
between shrinking supplies and soaring demand. To preview
his conclusion: Buy long-dated call options on crude oil.

In Today's Rude Awakening we highlight the first half of
Belmont's argument: oil demand. Tomorrow we'll examine the
supply side, while also revealing Belmont's suggested
course of action.

"Oil prices are vulnerable to a perpetual state of shock,"
Belmont's report begins, due to a 'new era' of soaring
demand, depleting supplies and semi-permanent geo-political
tension, especially in the Middle East. "The $40 per barrel
peaks of the past decade could easily become the floor of
the next," Belmont predicts. "$70, $80 or even $100 per
barrel oil is not only possible, but probable in the coming
decade."

As the Asian economies continue industrializing, the report
points out, demand for oil will soar...or at least it
should. "Total global demand for crude oil is currently 80
million barrels per day (MBD)," says Belmont. "Of those 80
million barrels per day, America's population of 293
million people consume roughly 22 MBD. Meanwhile, Asia's
3.6 billion people - well over 12 times the size of the
U.S. population - consumed just 20 MBD. Should Asian per-
capita-consumption rise from its measly 7% of U.S. per-
capita demand to a mere 14%, the market would have to
supply an additional 20 million barrels of oil per day.
This is one-fourth of today's entire global demand...

"Let's look at it another way," says Belmont. "U.S.
consumption of crude oil is roughly 28 barrels per person
per year. South Korea's annual per capita consumption is
17 barrels and so is Japan's. These are both developed
Asian nations. China is rapidly becoming a developed Asian
nation, yet its per capita consumption of crude oil is only
1.7 barrels per year." But Chinese demand is racing to
catch up. Crude oil imports to China jumped a whopping 33%
last year.

But, says Belmont, the bull case for oil does not rest
entirely on the magnitude of demand, but also on the
rapidly changing structure of demand. Now that the Chinese
are maneuvering to secure long-term oil supplies, for
example, future supplies available to other buyers will be
reduced.

The Chinese are actively negotiating to secure long-term
supplies from countries as geographically and politically
diverse as Canada, Saudi Arabia, Iran and Russia. Indeed,
the Chinese and the Russians have embraced one another in a
kind of petro-political bear hug. "When it comes to the
classic relationship between a natural resource producer
and a natural resource consumer," says Belmont, "no two
nations appear more perfectly matched than Russia and
China. Russia produces far more oil that it consumes.
China consumes far more oil than it produces. Both share a
Communist past, a long border complete with road and rail
links, and a history of uneasy relationships with the
world's largest oil consumer: America."

This commercial relationship is spilling over into the
political sphere. For the first time ever, the Russians
recently agreed to hold a large military exercise together
with China on Chinese territory. The exercise will take
place in the second half of the year and will include
'state-of-the-art weapons', according to Russian Defense
Minister, Sergei Ivanov.

As these former Cold War allies draw closer politically and
militarily, they will also draw closer commercially - a
trend that is likely to divert a growing share of Russia's
vast oil supplies away from world markets toward the
thirsty Chinese economy. "Now the China has entered the
game," says Belmont, "America will find itself competing
for shrinking supplies at every level. Over the long haul
that can only mean one thing - higher prices."

Meanwhile, as China and the rest of the world ramp up their
oil consumption, oil production is peaking. The world has
consumed an estimated 1 trillion barrels of oil since the
drilling of the first well in the mid-1800s - almost half
of known recoverable supplies. And no new giant oil fields
have been discovered recently. In fact, discoveries of new
oil reserves peaked in the 1960s and have been declining
rapidly ever since. U.S. oil production peaked in 1970;
North Sea oil production peaked in 1999.

"Given the likelihood that world crude oil production
cannot rise much above 90 million barrels a day," observes
Kevin Kerr, the man behind the Resource Trader Alert, "and
the fact that world demand will easily reach 90 million
barrels per day by the end of 2007, there is little chance
of cheap oil returning. It is unwise to count on sustained
oil prices below $35 to $45 per barrel to ever return
again. You're far more likely to see $100 oil than $35 oil
again."

The Rude Awakening is published daily alongside it's parent publication The Daily Reckoning

If you don't know about Elliott Wave analysis, now would be a good time to start learning. You can find out more about it here: Elliott Wave Theory

Here's Bob Prechter's reasoning behind the new benchmark, in his own words:

"It's time to divorce our measures of value from individually (mis)managed currencies. Currency yardsticks are made of such elastic rubber that when one perceives change of value in something measured in currency units, nine times out of ten it is a change not in the thing measured but in the yardstick itself. The values of the U.S. dollar, the yen, the euro and every currency on earth fluctuate wildly all the time. Gold is the truest universal value benchmark, but it is impractical for use as an investment benchmark because fund managers cannot move their assets in and out of gold; the costs are prohibitive. Therefore, I have devised a new benchmark that is designed to be a stable representation of global purchasing power. EWI's new Stable Currency BenchmarkTM (SCB) comprises equal-value portions of the Swiss franc, the Singapore dollar, the New Zealand dollar and the U.S. dollar. Each currency is the most attractive one within its global quadrant – Europe, Asia, Oceania and the Americas – from the standpoint of political and fiscal stability. Three of these issuing countries have been politically neutral for a long time, a major advantage in wartime. Some of these countries have more political than fiscal stability, and vice versa, but in my judgment these are the ones whose currencies are most likely to withstand the pressures of a global depression and the social upheavals that will accompany it.

Undoubtedly with sentiment toward the U.S. dollar near an all-time low, some people will complain that the dollar should not be in the mix. This is one reason why it should be in the mix. Most investors and advisors get bearish after a 3-year decline, not before. They load up on foreign currencies just when their own is ready to recover. Three years ago, people would have complained that there were not enough dollars in the mix. The whole point of holding funds in the SCB is to stabilize one's global purchasing power. When one currency is weak, the others are usually strong. The fluctuations tend to cancel out, leaving a stable benchmark of value in a worldwide setting. The accompanying charts show the SCB as the benchmark against which individual currencies fluctuate. Figures 9 and 10 show the SCB against its components on two time-frames, and Figures 11 and 12 shows it against some other major currencies. Needless to say, most minor currencies have been downhill against the SCB.

One must refrain from making judgments about the individual currencies in the SCB based on their value histories from 1971, the year that currencies were freed to float. Beginning in 1978, or 1988 as you can see in Figure 10, gives a whole different look to the U.S. dollar and the Swiss franc. Beginning in 1992 would give a new perspective on the New Zealand dollar. Finally, the past is not the future, and my judgment on these selections is based as much on expectations as on past performance.

The benchmark will be adjusted on a quarterly basis to ensure that there are equal-value portions of the four currencies in the mix. The basis for adjustment will be their value in terms of gold. The SCB, as long as its components remain under the purview of sober governments, should be “as good as gold” in terms of maintaining value and better than gold in terms of cost and liquidity.

You may think of the benchmark as a new currency. You can measure anything in the world against it, thereby sidestepping wild individual currency fluctuations. The diversification inherent in the SCB mitigates the risk of choosing to hold your assets in one currency if that one were to get hammered during a global meltdown. It also gives you a consistent measure to value the price of goods, services, stock indexes or anything else. If you own stocks in a foreign country because its stock market is rising, you might lose the value of the gain in a depreciating currency. The SCB gives you a way to value all the world's investment indexes with a stable benchmark, which will thereby reveal if it is truly in a bull or bear market in terms of global purchasing power. Figure 13 shows the DJIA, the Nikkei and the FTSE indexes against the SCB, which factors out local currency fluctuations to give you truly comparative values. I am personally intrigued by the clarity of the five-wave decline in the DJIA from its all-time high, a pattern masked by the nominal Dow's denominator of depreciating dollars from 2001 to the present.

Whether you are a global fund manager or a sophisticated, globally oriented investor, I hope you will find this benchmark useful in coming years..."

Get full details about it here: The Stable Currency Benchmark by Robert Prechter.

Keep up with the benchmark at this new site dedicated to the benchmark: www.stablecurrencybenchmark.com

What’s this I hear you say – a day trader looking at market fundamentals? Seems to be a contradiction there. Surely us traders just look at charts, patterns, signals, retracements … yeah, sure we do! But doesn’t coming to grips with the fundamentals make it just that much more interesting? Of course it does – that way we need never switch off … every time we see a 1c increase in the price of gasoline at the pumps, it’ll be a reminder to check whose pumping how much oil where and its effect on commodity prices, and the knock-on effect to prices in the stores, labor rates … … the dollar … gold … climate change … all these interactions, which seem to go full circle.

Incidentally, did I tell you about the Midas Trader Club? No? OK, here’s the deal --- I’d highly recommend you go and sign up for it now. You can do it here: http://www.online-trading-systems.net/invitation.html
You’ve got nothing to lose and everything to gain. As a member you’ll be getting the inside info on the new systems I’m regularly trying out, plus access to lots of free resources, reports, software, etc, as I come across it. Much of it you won’t easily find elsewhere. So go on, sign up now … then come back and continue reading !!!

Now then, where was I? Oh yes, the global markets. If you’re going to be a well-rounded citizen and a credit to society, you owe it to yourself --- and the rest of mankind --- to know what’s going on around you, globally speaking.

And just so you know, I’m **warning** you now – so don’t say I didn’t tell you! I could be classed as something of a sceptic, a cynnic, and certainly a contrarian. Or should that be “contrary”? Quite possibly. Anyway, if you want to learn the **truth** behind the latest news reports in the popular media; find out whose **really** responsible for the decline of the greenback; like to know the best place to stash those gold dubloons you’ve been hoarding for years; or simply want to hear the latest **conspiracy** theory – you’ll get it all here.

I’m not asking you to agree with me – in fact I’d **hate** that. But come along for the ride – I’m sure we’ll have some great debate.

Now - on with the motley!