What we can say is that oil is still sky high at $139 a barrel.

Shock Market Trader editor Mike Burnick says there could be a painful correction around the corner. If there is, there’s one sub-sector of the energy industry that would actually benefit big time from such an oil correction: refiners…

Since 2001, the price of a barrel of oil has risen more than 600% to a recent high of US$145. The price of unleaded gasoline however has jumped “only” 300% or so over the same time frame to a recent price of US$4 per gallon.

Stuck Between High Taxes and Refining Costs

That math just doesn’t add up if you’re in the refining business. Not surprisingly, the price of oil is the biggest factor that determines the price of gas. In fact, crude oil accounts for 75% of the total cost of gasoline. The other next two biggest factors (at about 10% each) are taxes, and refining expenses.

There’s no way to avoid the taxes. One of the Presidential candidates proposed temporarily suspending Federal taxes on gas recently. But then someone pointed out that nobody would fix the potholes or widen the lanes on the interstate highway system if they stopped collecting gas taxes. That comment effectively silenced the idea.

So with taxes pretty much a “fixed cost” and crude prices escalating, the companies that refine oil into unleaded gasoline and diesel have been caught in a squeeze play. And it has decimated their profit margins.

In fact, profits at U.S. refinery operators plunged 98% in the first quarter because they were caught behind-the-curve on skyrocketing oil prices. Refiners have been raising prices to be sure. But they just haven’t been able to hike prices for gasoline, heating oil, and jet fuel fast enough to keep up.

To Know When Refiners Are a BUY Again…Keep an Eye on the Crack Spread

As a result, refinery stocks in the S&P index have been clobbered. These stocks have sunk 40% even as oil prices set new record highs. But the key to refinery profits is what’s called the crack spread.

The crack spread is the theoretical profit margin a refiner should earn from processing three barrels of crude into two barrels of refined gasoline and one of heating oil. That spread has plunged 38% over the past year. And it’s taken industry profits down the drain along with it.

But crack spreads, like so many relative price relationships in financial markets, are constantly shifting from peak to valley and back again. Last year the crack spread for refiners was almost US$23, today it’s just under US$14 — a big shift.

As you can imagine, this huge shift has come from crude oil’s unusually strong advance. Falling crude prices however can actually be a boon to refiners. “You really want to own refiners when oil’s going down, and not straight up,” according to Cambridge Energy Research.

But now energy sector fortunes may be reversing. At least that’s what smart-money investors, including industry insiders and hedge fund mangers, are saying.

In the last month alone, refining company executives have purchased US$2 million worth of their own shares, according to Bloomberg. That’s more insider refiners buying than at any time since 2000. In fact before March of this year, insiders had been very consistent net-sellers of refining stocks — “dumping more shares than they bought every week since 2003.

“Anyone right now buying the refiners would have to be banking on a pullback in oil prices,” according to one fund manager interviewed by Bloomberg.

A Lower-Risk Way to Make Money Off a Widening Crack

Buying the refinery sector right now just might be your best bet among the various energy sector plays, especially considering the “speculative” overbought state of crude oil futures at the moment.

Unfortunately, there’s no ETF I know of that gives you a broad based bet on the refining sector, at least not yet. Several leading refiners including Valero Energy (VLO) and Tesoro Corp (TSO) are among the stocks with big recent insider buys, according to Bloomberg.

This should even make a good “pairs-trade” strategy for you. Typically a pairs-trade involves going long one stock or ETF — in this case a refiner. Meanwhile, you would sell-short another major, integrated oil firm like say, Exxon Mobil (XOM) at the same time.

But here’s a pairs-trade twist that goes long-long — perfect for retirement accounts.

Buy the ProShares UltraShort Oil & Gas (DUG), which is designed to go up in price as the overall energy sector declines. At the same time, buy your favorite refiner, and earn potential gains as the razor thin crack spread widens again.

Source: What to Buy Before the Oil Bubble Busts

Will the ‘Cold War’ Against Inflation Heat Up?

Mike Burnick

Another Federal Reserve Bank official said in a speech this week that he is: “Taking the recent inflationary pressures very seriously.” He also said “Policy needs to react decisively” to keep expectations of higher inflation in check.

So is this just more lip service from the Fed in an attempt to jawbone inflation (and perhaps support the dollar)? Financial markets aren’t so sure, because the Fed funds futures continue to price-in a Fed rate hike sometime this year.

The major economies of the developed world are bracing for a recession. At the very least, we’re all experiencing a sharp slowdown in growth. In fact, the U.S. economy expanded at a feeble rate of just 1% in the first quarter.

And when data for the second quarter finally gets reported, we’ll know if we’re officially in a recession yet or not.

But even as the economy slows, consumer price inflation in the U.S. rose to 4.2% in May, while wholesale prices rose 7.2%.

Meanwhile, emerging market economies continue to enjoy very robust economic expansion, expected to average 6.7% this year. That compares quite favorably to growth estimates of just 1.3% for developed countries including the U.S. and Europe (the U.S. will grow just 0.5%).

While inflation is running above the Fed’s comfort level in the U.S. (and the ECB’s target in Europe), inflation in the emerging world has become an even bigger threat. In fact, inflation exceeds double-digit rates of 10% or more in 50 economies around the world, nearly all of them emerging markets.

This is an economic environment that looks shockingly similar to the “stagflation” era of the 1970s and early 1980s.

Famed investor Warren Buffett highlighted the dueling threats of slower growth and faster inflation recently saying: “I think the ‘flation’ part will heat up and I think the ‘stag’ part will get worse.”

MIKE BURNICK, Senior Editor & Global Markets Analyst

Source: Will the ‘Cold War’ Against Inflation Heat Up?

Inflation or Deflation…Pick Your Poison

By Mike Burnick

“The U.S. economy, and most other developed nations continue to be squeezed between two opposing economic threats. Commodity-price inflation and asset-price deflation are creating havoc with financial markets, while global consumers, businesses, and central bankers are caught in the cross-fire.”

The U.S. Federal Reserve appears to be caught like a deer in the headlights. Bernanke and company were unable to reach a consensus last week about how to deal with the twin flations. The FOMC decided to hold-the-line, keeping the fed-funds rate steady at 2%.

By contrast the European Central Bank (ECB), confronted with the same economic data as the Fed, has reached the opposite conclusion. The ECB just raised its benchmark rate to ward off inflation- now at an uncomfortably high 4% in the Eurozone.

Of course this makes life difficult for the U.S. dollar. There is the slight matter of “yield differential,” which my friend and colleague Jack Crooks has discussed at length.

The dollar “yields” just 2% (the Fed funds rate) while the euro yields 4.25% (the ECB benchmark rate as of yesterday’s meeting).

That’s why Treasury Secretary Paulson was busy with a four-day, whirlwind tour of Europe earlier this week. He’s desperately trying to talk ECB finance ministers into a less-hawkish stance.

After all, higher Euroland rates could send the dollar plunging further. That in turn will lead to even higher commodity-price inflation. A vicious cycle if ever there was one.

The dilemma for central bankers around the world is trying to figure out which is the greatest threat to economic stability at present:

A. The threat to growth from deflation in real estate and equity market values amid the housing recession and credit crunch.

OR

B. The threat to purchasing power that results from accelerating inflation rates around the world.

The Fed has focused more on the de-flation threat, while the ECB is more concerned with in-flation at the moment – and financial markets are caught in the cross-fire! Stay tuned…

Source: Inflation or Deflation…Pick Your Poison

Runaway price growth is certainly testing confidence in emerging markets, and stock prices in these BRIC nations are feeling the strain. However, according to Mike, a tighter monetary policy response in these countries could deal stock market investors a “death blow.”

In India prices are rising there at over 11% in annual terms, and are likely to be behind the government’s three-month ban on corn exports. And the country’s Sensex stock index is down 34 percent so far this year, led by ICICI bank (NYSE: IBN), which has lost more than half its value.

India could be a sign of things to come in the other BRIC nations (Brazil, China and Russia), says Mike. Investors in these markets should beware.

Beware of Falling BRICs

By Mike Burnick

Don’t look now…but two of the most popular emerging markets in recent years are in trouble. It seems the BRICs are crumbling under the weight of soaring inflation!

These fast-growing emerging market countries include Brazil, Russia, India, and China. This year, they are facing their biggest economic challenge so far this decade: Runaway Inflation.

Inflation is accelerating in the BRIC economies and central bankers are responding with tighter monetary policy. While higher interest rates may be the standard remedy to combat inflation, tight money policies usually wind up dealing a death-blow to stock market investors.

The China Syndrome

The biggest runaway success story in recent years has, of course, been China. “The next century belongs to China,” say the bulls. And while there’s a lot of truth to that, the fact is sky-rocketing inflation is cutting into the Chinese miracle.

Consumer price inflation in China (which is almost certainly understated) is running at an “official” rate of nearly 8%. That’s the highest in nearly 12-years!

As a result, the People’s Bank of China raised benchmark lending rates six times last year. The Bank has also ordered banks to set aside more reserves than ever before. Both of these monetary tightening moves are definitely NOT friendly to stocks. So it’s no surprise that the Shanghai market index is down 48% year-to-date.

Still, China’s got a lot going for it. This impressive economy has massive foreign currency reserves – that swelled by US$40 billion last month alone – to an estimated US$1.8 trillion!

China also has an undervalued currency. If policymakers allowed the currency to float more freely, it would almost certainly erase a large chunk of that country’s imported commodity price inflation.

Unfortunately, other BRICs in the region don’t have it so easy…

The “I” Is Being Incinerated

The “I” in BRIC, India has been one of the emerging world’s most popular markets in the last few years. But now the country faces a big reversal of its recent fortune.

For starters, the Indian stock market, bond market, and currency are all getting incinerated as inflation soars, and investors lose confidence in the economy.

Wholesale price inflation is running at 11% in India – the highest level in 13 years and climbing. The Reserve Bank of India responded by raising interest rates, but it may be too little too late.

Investors are scared that a combination of accelerating inflation and more rate hikes could derail India’s record 8.8% annual growth.

Overseas investors are pulling money out of India at a record pace now. Investors sold a net US$6.2 billion worth of Indian shares so far this year, sending its benchmark stock index plunging 30% in value.

Bond prices and India’s currency, the rupee, have also come under intense selling pressure. The rupee, which had been one of the world’s strongest currencies, retreated 8% in value this year. That’s its worst performance since 1993.

What’s Happening in Brazil and Russia

The other BRICs, Brazil and Russia, have so far held up relatively well.

This is mainly due to their resource-rich economies. Brazil is a big net exporter of agricultural products and metals. And thanks to a growing energy industry and new offshore oil fields, Brazil should become energy self-sufficient this year.

Russia, of course, is one of the world’s largest oil producers, so it too enjoys a favorable trade balance amid booming exports, and growing foreign exchange reserves.

Is India an Early-Warning Sign for the BRICs?

Still, the BRIC economies are under stress of seeing their economies crumble under the threat of runaway inflation. India’s troubles are perhaps just an early-warning sign. Inflation in China is running close to 8% in spite of higher interest rate.

Inflation in Russia just topped 15%. Brazil, which suffered a painful hyper-inflationary past, recently raised interest rates after inflation crept up to 5.4%.

Stock investors, seeing this threat on the horizon, are now pulling money out of the BRIC markets. As an Indian government official said recently, “Until inflation slows, this crisis is only going to widen.”

Inflation is the biggest threat to emerging markets this decade, and threatens to derail the BRIC success story. How aggressively these nations deal with the problem, will be the key to how quickly they can get back on track again. But for now, it’s safer to watch from the sidelines.

Source: Beware of Falling BRICs

Why $143 Oil Looks Dirt-Cheap Compared to Other ‘Necessities’

By Mike Burnick

Investors are fretting over US$143 oil. Consumers are concerned about US$4 gas. But a recent story on CNBC.com really put this all in perspective. The story revealed how the high price of crude really stacks up against several other “necessities.”

The conclusion…oil’s actually pretty cheap at these levels.
In fact, a trip to your favorite neighborhood sports bar will really give you sticker-shock. A barrel of Budweiser (NYSE: BUD) beer will set you back US$447.25.

Would you like some Tabasco hot sauce for your chicken wings? That’ll cost you US$6,155.52 a barrel! Hmm…I’ll take mine mild.

Switching to water to quench your thirst instead of beer won’t save you much either.

A barrel of Perrier will set you back US$300.61 per barrel.

How about a trip to your local neighbor Starbucks (NASDAQ: SBUX) instead? Cost: US$954.24 a barrel. That’s only IF you take your coffee black. Adding milk will cost you another US$163.38 a barrel.

Of course you can always just stay home, and drown your inflation sorrows in a pint of Ben & Jerry’s New York Super Fudge Chunk instead. Cost: US$1,609.44 a barrel.

Clearly, it’s belt-tightening time for the average American amid these soaring prices for everyday “necessities.” Just cut back on the luxury items and you’ll be OK. After all, who can afford Chanel No. 5 at a cost of US$1,666,560 a barrel? My wife will just have to do without!

MIKE BURNICK, Senior Editor & Global Markets Analyst

Source: Why $143 Oil Looks Dirt-Cheap Compared to Other ‘Necessities’

Mike is worried by rising inflation rates in the so-called ‘BRIC’ emerging markets: Brazil, Russia, India and China.

India is particularly hard hit. This week the central bank there signaled it would keep raising borrowing costs to mixed reviews.

Indian inflation was driven by the first increase in retail prices of gasoline and diesel this year. The International Herald Tribune reports that,”India joined China, Indonesia, Malaysia and Sri Lanka as a near doubling of oil prices pushed up costs and eroded profits of refiners.”

It’s also worth keeping in mind that BRIC nations have still relatively small economies compared to the US, Europe and Japan.

“If you look at them in real (and not in overly flattering purchasing parity power) terms,” says The Global Guru editor Nicholas Vardy,” the BRIC countries are best compared with large U.S. states in terms of economic heft. China and its population of 1.3 billion generate as much economic wealth as do the 60 million inhabitants of California and Texas. India’s economy is the size of Florida. Brazil’s is the size of New York. And Russia is smaller than Ohio and Illinois combined.”

BRICs Crumble Under Threat of Inflation

By Mike Burnick

The most popular group of fast-growing emerging market countries which includes: Brazil, Russia, India, and China are facing their biggest economic challenge this decade. Like everywhere else on the planet, inflation is picking up in the BRIC economies but it’s much worse over there and central bankers are responding by raising rates and tightening monetary policy.

While these rate hikes may be necessary to fight inflation, tight money policies are usually a very unfriendly environment for stock investors.

India is the latest BRIC under fire. Wholesale price inflation is running at 11%. That’s the highest level in 13 years and climbing. So the Reserve Bank of India responded last week by raising its benchmark lending rate to 8%. Global investors are signaling a vote of “no confidence” in the central bank move, because they sent Indian stocks plunging.

India’s currency, the rupee, is also under attack, having lost 8% of its value against the dollar this year, the worst performance for the rupee since 1993.

India is in the riskiest position among the BRICs when commodities are soaring like this. That’s because India is a net importer of most resources, including 75% of its oil.

It’s possible India’s troubles are perhaps just an early-warning sign of other troubles to come for the BRICs. Inflation in China is running close to 8% in spite of several interest rate increases last year. Inflation just topped 15% in Russia. Brazil, which suffered a painful hyper-inflationary past, recently raised interest rates after inflation crept up to 5.4%.

Seeing this threat on the horizon, stock investors have been busy pulling money out of some BRIC markets. China’s CSI 300 Index is down over 50% from its 2007 high, while India’s Sensex Index has plunged by one-third in value. Share prices in the first two markets of the BRIC alphabet, Brazil and Russia, have so far held up relatively well. This is due in no small part to their favorable trade terms and the fact that both are resource-rich exporters.

All of the BRICs are threatened by the risk of inflation. As an Indian government official put it, “Until inflation slows, this crisis is only going to widen.”

MIKE BURNICK, Senior Editor

P.S. Speaking of inflation, the big Fed rate decision comes this afternoon. We’ll find out whether Bernanke will really “get tough on inflation” as he has claimed in the last few weeks. Keep an eye on the news because there will be some very real profit opportunities once the decision hits the headlines.

Source: BRICs Crumble Under Threat of Inflation

As I write this, one of the greatest icons of corporate America is in play. When all is said and done, global “value” investors including Warren Buffett will earn a tidy profit no matter what happens.

More than a year ago I wrote here in the A-Letter that even if you’re attracted to fast-growing global markets, you should still keep an eye on opportunities here in the United States. Specifically, I told you to pay attention to U.S. blue-chip shares offering healthy international exposure (Going Global by Investing Local).

In that article, I pointed out that these days many big U.S. multi-national firms get most of their sales and earnings from overseas markets.

Case in point: Anheuser Busch (BUD:NYSE). America’s largest beer company has made several successful overseas investments in recent years, boosting its bottom-line.BUD scored with a 50% stake in Mexico’s Grupo Modelo, the maker of Corona – one of America’s best-selling imported beers.

The value of BUD’s stake in Modelo has quadrupled in value since the 1990s. BUD made another shrewd move by making a strategic investment in China’s largest brewer: Tsingtao.

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Combined beer volume from these two overseas investments has soared more than 60% in just the past two-years. These two brands now account for over 20% of BUD’s total sales!

European Brewer Goes Global with a Buy-out Offer for BUD

Now, going global by investing local has been completely turned on its head. Another leading global beverage company is making an offer to buy-out America’s biggest local brewer. Read on to learn why Buffett may come to the rescue of Anheuser Busch from Inbev (INB:NYSE).

Source: Will Warren Buffett Save Anheuser Busch from Inbev?

But of course, this isn’t just a U.S. problem. In fact, “official” inflation rates in American look positively tame compared to soaring inflation around the world.

According to a recent Bloomberg story, “The International Monetary Fund predicts the fastest inflation in advanced economies since 1995 this year even as they grow at the slowest pace in seven years.”

That sounds a lot like the definition of stagflation to me.

Around the world inflation is catching hold, which is a whole new challenge for global central bankers to deal with.

The European Central Bank (ECB) has a stated goal of keeping inflation in check at 2% or less. Too bad for them. Eurozone inflation is soaring at a yearly rate of 3.7% – the highest in nearly 20 years. Since prices are rising at nearly twice the ECBs target rate, there’s a growing likelihood of rate increases, perhaps as early as July.

Two of the world’s fastest growing economies – China and India – are struggling to reign-in what looks like runaway inflation – up 7.7% and 8.8% respectively over the last 12 months alone.

Inflation is running at annual rates of: 7.5% in Singapore, 9% in Argentina, 10.4% in Indonesia, 10.5% in Saudi Arabia, and a whopping 15% in Russia! Brazil’s central bank, which has done a great job bringing inflation rates down substantially over the last decade, recently began raising rates again to combat inflation now at 5.4% and rising.

So what’s the solution to high global inflation? A stronger currency might help. That’s what Federal Reserve and Treasury Department officials have been saying lately, talking tough on inflation – by talking UP the dollar. So far, this is just a war of words, but dollar-sentiment is shifting. We’ll see if this “tough talk” actually holds up next week.

MIKE BURNICK, Senior Editor & Global Markets Analyst

Source: Deflation, Inflation, Stagflation…Take Your Pick

But if you can set aside peak oil and the indisputable global food crisis for a moment, I want to talk about another threat facing the global economy. In fact, in my opinion, it’s the #1 threat to the global economy: the scarcity of fresh water.

This precious resource is also running in short supply. There’s no argument that water is much more necessary to life than oil. Without water, we die. Without oil…well, we learn to use bio-fuel… or bicycles.

Forget Peak Oil… What about Peak WATER!

Here in Florida, we’re already rationing our water, like many other areas around the world. Even as our “rainy season” begins, I’m restricted to watering my parched front lawn just two days per week. But that’s a very mild inconvenience compared to what’s going on in other parts of the world – and what’s likely to happen in the very near future here in the United States…

Due to global warming, glaciers in the Himalayas are melting fast. That’s bad news for emerging Asia, because a few hundred square miles off the Himalayas is the source for ALL the major rivers in Asia – home to nearly HALF the world’s population.

In places like Florida, where vast underground aquifers supply ALL our fresh water, rainfall isn’t enough to refill the sub-surface water tables.

It turns out water isn’t a “renewable” resource after all. Or at least Mother Nature is not renewing it fast enough to keep up with soaring demand.

“Demand for water continues to escalate at unsustainable rates” according to a recent Goldman Sachs report. “Globally, water consumption is doubling every 20 years. By 2025, it is estimated that about one third of the global population will not have access to adequate drinking water.”

Aging Infrastructure Leads to Short Supply

Water is running in short supply. It’s a global issue, and it’s approaching crisis dimensions. Consider that…

• Billions of people – don’t have access to reliable fresh water supplies
• The U.S. alone needs up to US$1 trillion in new water pipes and waste treatment plants by 2020.
• Half of the world’s population – will live under conditions of “severe water stress” within the next two decades.
• Water is also a vital industrial resource, used in the production of many other goods. For instance, it takes about 1800 gallons of water to produce a pair of jeans, 400 gallons to produce a cotton shirt, and 150 gallons for the Sunday paper.

The fact is, we’re consuming water faster than we can tap new fresh water resources. This growing crisis in the world’s fresh water supply means major profit opportunities are in store for companies working to find solutions.

Part of the solution involves building out new water infrastructure in developing nations where an estimated US$50 million a day will be invested on water supply projects over the next few decades. Meanwhile, aging water systems in modern countries are leaking like a sieve. They badly need infrastructure updates.

Global Water Crisis Will Trigger a Tidal-Wave of Spending

The World Water Council estimates that developing nations alone will need US$4.5 trillion in water infrastructure investment over the next 25 years alone. And this isn’t just a third-world problem…

In modern industrialized countries, municipal water systems put in place centuries ago are woefully inefficient and falling apart at the seams.

In Europe, most pipe systems date from before World War I and many haven’t been upgraded since then. These leaky pipes lose 40% to 60% of Europe’s drinking water before it can be used.

In U.S. municipal water systems 30% of the pipes are between 40 and 80 years old…another 10% of pipes are over 80 years old. As a result, about six billion gallons of treated water leak from American water systems every day.

The global water crisis may soon end up grabbing the headlines away from soaring food prices and sky-rocketing energy costs. This will result in an unprecedented spending boom of more than US$5 trillion over the next 20 years, according to estimates.

That’s about US$250 billion in water-related spending every year – a very big opportunity to profit if you know where to invest…

I’ll be watching this trend very closely over the next few months. Please stay tuned for updates.

MIKE BURNICK, Senior Editor & Global Markets Analyst

P.S. In my research, I’ve discovered one fund that invests in 50 different water treatment and infrastructure companies. In my opinion, it’s the absolute best way to profit from what’s quickly becoming a global issue. Look for full details on this dynamite play coming in the July issue of The Sovereign Individual. Don’t receive our members-only newsletter? Click here to sign up for the next 12 issues – for pennies a day.

Source: Why This Scarce Resource is Also the #1 Investment Opportunity of the 21st Century

GM and the other big-three Detroit automakers have feasted on the fast-growing market for pickup trucks and SUVs for years. But with gas now above US$4 a gallon and climbing fast, big-rig drivers are mailing their keys back to the auto finance companies today.

I’ve talked to a half-dozen people in just the past few weeks who are ALL trying to unload their big gas-guzzling trucks or SUVs. One friend of mine drives a Chevy Suburban: GM’s top-of-the-line road hog. She’s had it for sale over a month now…No takers. In fact, even the local Chevy dealer won’t take it!

Anyway, back to the GM shareholder meeting…In its quest to stop bleeding red-ink, GM is backing-up its entire business plan. The company is shuttering four U.S. production plants – all of which built trucks or SUVs.

“Higher gasoline prices are changing consumer behavior, and they are significantly affecting the U.S. auto industry sales mix,” says CEO Rick Wagoner. Imagine that!

Now that US$2 gas is gone forever, GM has very high-hopes for its plug-in electric hybrids. GM should have made that switch years ago, rather than being asleep at the wheel and building Hummers instead.

You may not find these battle-ready Hummers on GM car lots much longer – but be sure to look for sleek new plug-ins coming to a dealer near you for the 2010 model year.

MIKE BURNICK, Senior Editor & Global Markets Analyst

EDITOR’S NOTE: The days of $2 a gallon gas may be gone forever. As this crude-reality sinks in, you’ll see a major switch toward hybrid cars, and other alternative energy investments. In fact, it’s already started. Read our special report: How to Profit from the Great Fuel Revolution to find out where this investment money is headed now.

Source: No More Hummers in America – Shocker!