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Bailout Brouhaha

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Thursday saw stocks bounce on hopes for a quick resolution by lawmakers to agree on the $700 billion bailout plan. As of this evening investors are going to be disappointed. No deal was announced although many expect Congress and the Senate to work through the weekend to get something done.

Both crude oil and the U.S. dollar managed to bounce higher on Thursday - something that doesn't happen very often these days. Normally if the dollar is up, oil is down. OPEC's President Khelil commented on the oil-dollar relationship and suggested that oil could be poised for gains. A number of analysts believe that the U.S. dollar could fall sharply as the country struggles to stabilize the financial system.

Our price at the pump could be set to rise again. Texas refiners are still struggling to get back on line and the gasoline shortages in the South are now expected to last another two to three weeks. Wednesday's inventory report revealed that refineries are only operating at 66.7 percent, the lowest level since 1989.

Supply disruptions in Nigeria remain a concern. The fragile ceasefire is reaching its fifth day but rebels for the Movement for the Emancipation of the Niger Delta (MEND) are threatening to resume their "war" if the country's military doesn't comply with the recent call for peace. It seems that oil companies in Nigeria can't catch a break. MEND isn't their only concern. The latest threat is a strike by members of the National Union of Petroleum and Natural Gas Workers, which would further impact production.

China continues to gobble up oil resources. The Oriental power is expected to sign a $3 billion, twenty-year deal to develop Iraq's Ahdab oil field soon. Meanwhile Venezuelan President Hugo Chavez continues to cozy up to the Chinese. Chavez just announced that his country's oil exports to China will rise to 500,000 barrels a day and could reach 1 million bpd by 2012. China has certainly pulled out all the stops to gain access to Venezuelan oil. They plan to build multiple refineries designed to process Venezuela's heavy-crude oil in addition to building four oil tankers and launching a communication satellite for Venezuela.

Looking toward Friday it could be another interesting day in the markets. The failure to agree on the government's bailout package for the financial system creates more uncertainty and Wall Street hates uncertainty. This plan, no matter what shape it eventually takes, is not going to be a magic pill. The U.S. and global economy still appear to be slowing. If the economy is slowing then demand for oil should fall. Crude oil was already sliding in after hours markets toward $107 as traders react to the news.

Another late night development was the failure of Washington Mutual (WM), the nation's largest thrift. The Office of Thrift Supervision decided that WaMu's financial position had declined to such a state that the company had insufficient liquidity to meet its obligations. The government seized WM and handed it over to the FDIC who in turn conducted an auction. The winning bidder was J.P.Morgan Chase (JPM), the same bank that bought the failing Bear Stearns. For a cool $1.9 billion JPM gains all of WM's deposits, assets, a few liabilities, about 2,200 retail offices, and over 43,000 employees.

Jim Brown


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