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So Quickly We Forget

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Sunday night Asian markets rallied over 5% with crude over $65 on the prospects for a quick recovery after China announced a $565 billion stimulus program. The Dow opened up more than 200 points but declined to lose -73 points for the day and crude traded back down at $60. I guess $565 billion does not go as far as I thought.

Optimism in China faded almost as quickly as it blossomed on news of the stimulus package. After a strong start for the week Asian markets were down -3% on Tuesday morning on fears that the Chinese stimulus package will not be able to keep China and the rest of Asia from sinking in the global recession. Auto sales were down not only in the U.S. but off -9% in India and the rest of Asia is expected to look the same. Unemployment is rising and energy demand even in emerging economies appears to be sliding.

What a difference a quarter makes. Just a little more than three months ago commodities were in short supply and fears of shortages pushed prices to new highs. Now fears of a glut in everything from oil to copper has cut prices by more than 50% since the July highs. Obviously global demand has NOT changed this drastically and this is the impact of the pendulum swinging both ways from extreme over bought to extreme oversold. Once the last bull is finally shaken out of the market the pendulum of market swings will find the middle ground.

Crude prices failed to rally on news of new attacks by MEND rebels in Nigeria. The military said it killed eight rebels attacking an oil facility in the south. Every time rebels are killed the MEND group vows even stronger attacks as retribution for the deaths.

Meanwhile gasoline prices in the U.S. are closing in on the $2 per gallon level and demand is rising. It is not rising fast enough to provide a consumer bailout of the major automakers. Nobody is buying cars and those that want a new car can't get financing. The big three are begging for a bailout of $25 billion or more. GM warned that liquidity could fall below minimums needed to continue functioning if a bailout did not appear. President elect Obama has gone on record requesting aid for the automakers sooner rather than later. While I can't imagine they would be left to fail there is no rush to give them the money.

Fears of a recession so severe that current bailout measures for banks will not be enough to halt the decline have gripped Wall Street. The public broadcasting network on cable is running history shows of the great depression so people will understand what the government is trying to avoid. I believe we are near a bottom in the markets and Q4 is going to be the recession low. Unfortunately that means the next three months will be filled with continued bad news.

Crude oil has strong support from $55 to $60 and so far that initial support level has held. All the factors are pointing towards a rise in prices but we still need to flush the remaining sellers out of the market. That may take one more climax low to push remaining holders over the edge and that could happen any day now.

Jim Brown

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