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Message: Oct.28/09 from The Daily Reckoning
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Oct.28/09 from The Daily Reckoning

posted on Oct 28, 2009 04:53PM
Dollar up, gold down. There's something we haven't written for a while. An ounce of our favorite metal dipped another $7 yesterday after falling $13 on Monday. It was the fourth straight session gold was in the red. Meanwhile everyone's favorite whipping currency, the greenback, consolidated gains won earlier in the week after sluggish consumer confidence data eroded risk appetite.

One day does not a trend make, dear reader, but it does us give pause for thought. What if we dollar bears are wrong about the greenback's fate? What if all these column inches spent bashing the buck - and the frauds at the Fed in charge of protecting it - all come to naught?

"Nonsense!" we say.

Mankind will eventually bury the greenback in the cold, hard ground, alongside every fiat currency that ever went before it. The only question, it seems to us, is when the first shovel of dirt will be thrown. Traders from New York to New Delhi are gathered around the open pit, but they may have to wait, at least for a while. Just to be on the safe side, we've bought (

Here in the Far East, the dollar is a particularly curious entity. Once upon a time, the mighty greenback was the best show in town, the "must have" ticket for the rocking Asian economies. China, Korea and Japan all amassed gargantuan stockpiles. The three hold about US$4 trillion (with a "T") in foreign reserves, much of it in US Treasuries. Even Taiwan - an island one-third this size of Tasmania but with a population equal to Australia - has stashed away the equivalent of US$332 billion in foreign reserves.

But that was then. This is now. And now everyone knows what all those dollars - and the men who stand behind them - are really made of...paper and promises, promises and paper. And now that the game is up, everyone is betting on a dollar collapse. But that presents a problem, and an opportunity, in itself...

"Whenever you find yourself on the side of the majority," Mark Twain once observed, "it is time to pause and reflect."

Right now, every necktie on television is betting against the dollar. The Powershares DB US Dollar Index Bullish and Bearish Funds - which measure the sentiment for and against the greenback versus a basket of six major currencies - are showing dollar bearishness in the extreme. But what if this "recovery" is not all it's cracked up to be? What if equity markets suddenly start resembling reality - even for a short while? If risk appetite contracts, even marginally, might we see a rally in short term Treasuries...just like we did last time? And just how quickly will currency traders be able to cover their short dollar positions if such a scenario unfolds?

We don't know the answers, dear reader. We only observe that the larger the mob, the more likely it is to be galloping in the wrong direction.

So are we dollar bears, or bulls? The answer, dear reader, is both - the former over the long haul...but the latter before then.

Dan Denning, our friend and colleague on our Australian DR desk, puts it thus: "Though we are confirmed US dollar bears, the dollar is looking oversold. Stocks are looking overbought. And frankly the reflation of all asset markets (bonds, stocks, commodities, and real estate) is looking over cooked... Watch out!"

The 5's Ian Mathias sent along a few thoughtful observations during yesterday's choppy trading action...

We're not surprised to see an indecisive market today. Not only do traders have to decide the fate of this long-running bear market rally, but there's a cacophony of economic data squawking around this morning. Roll the videotape:


Good news... Looks like home prices are on the mend, eh? S&P reports that its home price index improved in August for the seventh month in a row. The headline chart has a nice look to it. At face value, home prices appear to be soaring up as violently as they crashed. But as with all things economic... It's all how you spin it.


Oh...bummer. The same index simply plotted against time and its month- to-month value tells basically the same story it's been telling all year: Unless you bought your home before 2003, chances are it's worth less today.

Kind of hard to dispense a bunch of "conviction buy" ratings with that in mind.

The latest consumer confidence details offer a similar perspective. The Conference Board reported this morning that its index of consumer confidence declined just a bit thus far in October, from 53 to 47. That's not great news for the Street even at face value, as the consensus was looking for a very small improvement.

The fine print, unfortunately, doesn't offer any silver lining. In fact, check this out:


The Conference's Board's gauge of consumption attitudes is supported by two subindexes: one that gauges how people feel about the present situation and one that somehow charts its future expectations. The present index, aka the only one worth trusting (if the crowd was any good at seeing what was coming...well...we wouldn't be in business) just hit a score of 20.7. That's the lowest it's been throughout this entire crisis. In fact, you'd have to go back 26 years for a score that low.

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The Daily Reckoning PRESENTS: In today's column, Byron King presents some of the many exciting opportunities the next global oil shock will present those in the know.

Peak Oil - The Rewards
By Byron King
Pittsburgh, Pennsylvania

We should expect a global oil shock by 2012...at the latest. But an oil shock doesn't have to be completely shocking. Why not beat the rush and get ready for the shock now. You might even make a few dollars in the process.

Our story begins with "Peak Oil" - the belief that conventional production of crude has already peaked, and has already slipped into an irreversible decline. As "Peak Oil" moves from mere theory to indisputable fact, the global economy will face wrenching changes. But the vigilant investor will gain an opportunity to profit along the way.

As I discussed in

Geologist Art Berman, for example, offers a decidedly negative view of the latest "big thing" - obtaining large volumes of natural gas from "tight shales." In a comprehensive review of production and flow rates from several thousand wells drilled in the past decade in the Barnett Shale of Texas, Mr. Berman presents a gloomy forecast.

Looking at a large sampling of Barnett wells, the overall data reveal that initial gas flows decline rapidly. With some wells, the drop-off is as much as 70% in the first year, with further declines of 20% in the second year.

This hardly dovetails with the happy talk about how "shale gas" will supply US energy requirements for the next several decades, if not a couple of centuries. It appears that most Barnett wells are short-term money losers, with a few prolific wells carrying the bulk of capital expenditure.

According to Mr. Berman, the picture is not much better in other shale plays, such as the Fayetteville and Haynesville shales. And similar gloomy data are just now starting to come in on the embryonic gas play in the giant Marcellus formation of Pennsylvania.

But this bad news does need to be ALL bad. As the world's mature and aging oil fields slip into an irreversible decline, production from the world's new offshore discoveries will become increasingly important.

Therefore, forward-looking investors can begin TODAY to make selective investments in those sectors of the oil industry that will flourish during the coming oil shock. I am particularly fond of the "deepwater" sector...and have been urging my subscribers for several months to focus on the companies that facilitate deepwater oil production.

Marcio Mello, the former "explorationist" from Petrobras (PBR: NYSE) and now independent petroleum consultant, electrified the Denver meeting of the Association for the Study of Peak Oil & Gas (ASPO) with his analysis of several high-profile deepwater discoveries.

In a riveting talk that lasted well over an hour, Marcio detailed the immense petroleum potential of offshore Brazil, as well as the Amazon Basin. If Marcio's estimates are correct, Brazil may be the location of nearly 200 billion barrels of additional petroleum resources. That's well within the range of current resource estimates for Saudi Arabia.

For good measure, Marcio described the petroleum potential of offshore West Africa - another 130 billion barrels - as well as the Congo region, with 50 billion barrels or more.

Finally, Marcio described the "unknown potential of the US back yard, the Gulf of Mexico (GOM)." Marcio offered remarkable insight into the deep regions of the GOM, 100 miles and more offshore Texas and Louisiana. He showed early work he performed on a number of GOM areas, including the site of BP's (BP: NYSE) recent billion-plus barrel find at the Tiber site.

If his analyses of the South American, African and GOM petroleum systems are correct, the world has access to much more conventional oil than people previously believed. But accessing and producing this oil will require a trillion-dollar level of offshore, deepwater investment. It's a 30- to 50-year project.

"Deepwater" will be a BIG business.

Some of the companies that are well-positioned for the deepwater era of crude oil production include Petrobras, Repsol (REP: NYSE), BP (BP: NYSE) and StatoilHydro (STO: NYSE). I am also a fan of subsea equipment builders like Cameron Intl. (CAM: NYSE) and FMC Technologies (FTI: NYSE), plus service companies like Halliburton (HAL: NYSE) and Baker Hughes (BHI: NYSE).

These are a few of my favorite long-term plays for the long-term era of deep-water development.

Regards,

Byron King,
for The Daily Reckoning


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And finally today, Joel Bowman with The Daily Endnote...

Asian and European markets largely floundered overnight after Wall Street's lackluster session yesterday.

Here in the Far East, Japan's Nikkei 225 dipped 1.35% by the close while Hong Kong's Hang Seng and the Aussie All Ords ended down by 1.85 and 1.45% respectively. China's CSI index was the only major measure to buck the trend. It finished higher by 0.45%.

Back to the European measures and London's FTSE, Germany's DAX and France's CAC 40 all finished lower by around 1.3% for the day.

In the commodity pits, crude had slipped back a bit last we checked. A barrel of the world's goo was down about 60 cents to just shy of $79. Gold was hanging on around $1,036 per ounce...but looking a little punch drunk.

And that about wraps it up for today. If you'd like to comment on anything from today's issue, or indeed any issue, just drop us a line at the address below.

We'll be heading back home to the Gold Coast, Australia, tomorrow...but we'll be checking our email in airport lounges along the way.

Until next time...

Cheers,

Joel Bowman
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