Treasuries Down, Oil Up, Unrest Abroad
Investment Research for Online Investors

John Dalt

01/27/09

I am still watching the USO and DXO to put on the oil trade we have talked about over the last two weeks, betting on higher future oil prices.  Some information that helps weave together the future of oil imports came from Pemex, Mexico’s state oil company. They announced last Wednesday that crude production was down 9.2% from 2007. Pemex produced 2.79 million barrels per day, down from 3.08 million barrels per day in 2007. Exports dropped 16.8% to 1.4 million barrels per day. Mexico is the U.S. third largest oil supplier. Oil income provides 40% of the government’s annual budget. The problems are evident in these numbers, while production dropped 9.2%, exports fell 16.8% due to more oil consumed at home. You can readily see as production falls the exports fall 82% further. They are using more at home; it will not be long until they export NO oil. Then, how do they pay for their government, remember 40% of their budget is from profits on exported oil. Get ready for civil unrest south of the border. This same relationship is going to play out around the globe in the future. Economies that are built around oil exports (Iran, Qatar, Russia, Saudi Arabia, etc) are going to face upheaval as exports slow even while domestic consumption is increasing. In many cases, they are hastening the day of reckoning by subsidizing gasoline use to their citizens.

U.S. Treasury largest purchasers over the last fifteen months were Arab oil countries.  They purchased $245 billion worth. The next largest buyer was China, who alone bought $233 billion worth. Now that interest rates are not as attractive, oil exports are worth less, China’s do dads are sitting on Walmart shelves unsold, who is going to buy treasuries? China has already said they want to diversify their investments. South Korea said it was time to sell treasuries. The U.S. is in a jam, we want to sell boatloads of treasury bonds to fund the bailouts and stimulus bills. Who is going to buy them? When your top purchasers quit coming in the store, it is hard to stay in business. Interest rates are going up....watch TBT. TBT is the ultra short 20 year treasury ETF I told you about on 01/09/09.   I have played it in the swing trade portfolio, but am on the sideline now waiting for the next set up.

December existing-home sales rose 6.5% compared with November results, topping views.   It seems lower prices and interest rates are generating some interest.

Many politicians have strained to tell us how bad everything is as they push for more government spending.  The chart below may help us understand where we are right now.  You can look at the cup as half full or empty, it is all in your attitude.

I am inclined to see we are not as bad as some would have us believe; maybe I am not quite so anxious to drink the medicine they are trying to force down my throat.  Over the years, I have always tried to look for the unintended consequences.  Looking at the above chart, is there a correlation between bad economic times and war?  I do not know, but it is a little alarming.   

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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