Gold held above $800 (barely) and silver bounced at $14 (barely). As I said in my commentary on Monday night, I was going to be somewhat reluctant to turn on my computer on Tuesday morning. Fortunately, the worst had passed (for the time being?) as both metals rallied from the Hong Kong bear raid…right up until the London p.m. fix. That was the top in prices for both metals…and it was all downhill from there.

Open interest for gold on Monday’s shellacking showed a drop of 9,912 contracts on huge volume. This is not a lot for such a huge price decline. There was probably fresh shorting by the tech funds and more long buying by the bullion banks that blunted this number somewhat. As for silver…for the sixth day in a row, open interest rose…this time by 778 contracts. The boyz are doing an excellent job of keeping the real magnitude of the selloff from prying eyes. Hopefully, all this will be in the COT on Friday, but I’ll bet a ten spot that it isn’t.

Here’s what the usual NY gold commentator had to say yesterday…”Today’s ECB statement of condition reported a drop of €14 million (0.74 tonnes), attributed to sales by one captive CB (central bank). Last week’s quantum was 2.47 tonnes. Clearly the ECB does not want to appear involved in gold at present – one wonders why it was worth bothering with such a small sale. Perhaps it was option related.

“Yesterday’s (Monday) $36.50 (4.2%) loss on Comex saw open interest slip 9,912 lots (2.5%). One might have expected a large drop: probably there was some fresh shorting.

“Today (Tuesday) world gold dropped over $20 on the TOCOM open, despite there having been no recovery since the NY close. This is very unusual. Both TOCOM and Shanghai locked limit down, and a recovery attempt was blocked at the close. The performance reeked of tape painting, especially as local physical demand was reported.

“Last night, MarketVane’s Bullish Consensus dropped to 65%, the lowest in a couple of years.

“A rally on Comex was neatly eradicated going into the close. Volume was again massive: estimated at 206,604, with a switch effect of only 10,000 lots.

“Gold appears firmly clasped by the bears at present. At least the Indians are happy.”

That’s for sure! With gold (and silver) prices this low, the physical off-take is going to be tremendous from everywhere in the world…and I’m sure the bullion banks know that. My coin guy here in Edmonton has been doing great business all month…especially yesterday. Investors have finally smartened up, as more and more are buying the dips, rather than buying when prices are screaming to the up-side. If you check Tulving (and others) these days, you’ll note that they’re sold out of just about all their bread and butter items. The retail market is in a deficit situation in both silver and gold. No one knows what retail demand is right now, because there just isn’t enough supply to fill it. Ted Butler could be right…they’re cannibalizing investment demand to ensure that the industrial users are well fed.

A story that had sort of fallen off the front page of the papers yesterday is the conflict in Georgia, where Russia has invaded to protect its citizens in South Ossetia. Medvedev and Putin are no fools…attacking when the US can’t help its puppet government in Tbilisi. Putin sent one of his economic advisors to GATA’s gold conference in Dawson City, Yukon a couple of years back. Then a few months after that, he was photographed holding a bar of gold in his hands. It’s a pretty good bet that Putin now knows that the western world’s bullion banks have a ‘golden’ problem…but will he exploit it if/when push become shove? However, the picture is worth a thousand words.

The story (with a Western slant) about the current flare-up in the Caucasus is from The Times out of London and is entitled “Analysis: Why the Russia-Georgia conflict matters to the West”. The link is here.

Today’s second story is one that’s been up at Bloomberg for the last couple of days, but I wanted to make sure that you didn’t miss it. It’s another story about the mysterious demise of Bear Stearns (NYSE:BSC). This time it has to do with put options that were placed against the company…a lot of them. One of the commentators in the story said that a way to determine a link to whether the BS failure was premeditated or not, was to “Follow the puts.” My only comment is this: If they “follow the puts” in the Bear Stearns case like they “followed the puts” placed on American Airlines in the week before 9/11, then the BS investigation will peter out, too. The rather longish story is entitled “Bringing Down Bear Began as $1.7 Million of Options”…and the link is here.

Last year, at a meeting of the Committee for Monetary Research and Education, I said that if a world-wide nuclear war broke out and only one financial market in the world was still functioning in a city that had escaped destruction, what remained of the U.S. Federal Reserve and Treasury Department would find that market and sell promises of gold, and gold would go down, at least for the day, lest any financial market people who had survived the war think that anything was wrong. – Chris Powell, Secretary Treasurer, GATA

So…are we done? Is this the bottom? I’m too gunshy to say yes. Let’s see how the next 24 hours go…and then we can talk about it.

I hope your Wednesday goes well, and all of us at Casey’s Daily Resource Plus look forward to seeing you on Thursday morning.

Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.

Source: And Then There’s This…Wednesday, August 13th,2008

British Airways (LON:BAY) CEO Willie Walsh says it’s “the worst trading environment the industry has ever faced.”

But crude oil’s retreat from its early-July peak has led investors back into the industry, says Martin Denholm in The Smart Profits Report.

And Martin’s colleague Marc Lichtenfeld has given potential investors two stocks to watch should the uptrend continue. Here’s more from Martin…

If the world’s airlines were on the singles scene, looking for potential mates, many of them would be out of luck.

Having dressed themselves up as best they can, slapped on their best deodorant and after-shave, you can picture them at the end of a night of unsuccessful bar-hopping, looking drunk and desperate.

After all, what do they have to offer? It’s a grim business at the moment, with oil prices having pushed companies to breaking point and fuel prices now sucking up the bulk of annual expenditure.

Take British Airways, for example. The company reported a 90% plunge in its first-quarter profits, as fuel costs soared by 49%. BA projects a meager 3% rise in revenues this year in what CEO Willie Walsh calls “the worst trading environment the industry has ever faced.”

What’s This? A Pleasant Airline Experience?

For all its British charm and tagline as “the world’s favorite airline,” BA hasn’t helped its cause this year, thanks to the PR disaster around the opening of its swanky new Terminal 5 at Heathrow Airport in London.

Computers crashing. Thousands of bags lost. Hundreds of flights delayed or cancelled. The terminal resembled more of a campsite than anything else, as passengers lay around, increasingly not expecting to fly, but hoping to.

I’ve flown BA many times. They’ve always done the job pretty well. But over the past few years, the company’s higher prices (relative to other airlines – and especially in terms of taxes) have put me off.

Still, I chose BA for my recent trip back to Britain – and was impressed. Yes, BA ticket prices rose 7% over the past quarter, due to its fuel surcharge increase. But I nipped in ahead of the most recent hike.

Besides, the height of summer means there’s little difference between airlines’ overall prices. Plus, it was a direct flight from Baltimore, with the best departure and arrival times. Not to mention… free booze! As most other airlines charge for drinks, BA has maintained its free alcohol policy on international flights. And I’m not ashamed to say that I took full advantage! There was also a plentiful and diverse selection of in-flight entertainment. And no charge for checked bags or headsets. We Brits can be a generous bunch!

Consolidation Amid Chaos

It’s transatlantic routes that BA is depending on to generate a sizeable chunk of its revenue, and it seems the airline will take another stab at arranging a mega-alliance with American Airlines.

With the Open Skies transatlantic agreement having increased competition, the current state of the airline industry means that more co-operation is probable. Airlines cannot afford to get into a cost-cutting war with each other at a time when profits are elusive anyway.

Last week, BA detailed plans to merge with Spain’s Iberia, but its proposed alliance with AA (in conjunction with Iberia) will have to satisfy authorities that it doesn’t break antitrust laws. While not an official merger, complete with costs and bureaucracy, it allows airlines to split routes, charge the same prices, and share profits and costs.

Northwest and Delta have already succeeded in this type of deal with Air France-KLM (EPA:AF), but the BA-AA agreement might be harder to push through, as it would create a “dominant mega-power on transatlantic air routes from two of the largest EU members,” according to a spokesman for Virgin Atlantic.

This isn’t a new development for BA and AA. The two firms originally applied for antitrust immunity in 1997 and again in 2001, but BA refused to bow to regulators demands to give up what it thought were too many landing slots at Heathrow.

But with Iberia now on board (pardon the pun), the two hope for a positive outcome. They already have strong links through the One World Alliance and Iberia’s inclusion would give BA and AA a route into the Latin American market, where neither holds a dominant position. In addition, the firms argue that recent consolidation has already strengthened the position of some of its rivals.

And now that the Open Skies agreement has made Heathrow available for other airlines – rather than the previous arrangement, whereby just four transatlantic carriers could fly in there (BA, AA, United and Virgin) – the deal has a better chance of success.

Relief… From Oil

In addition to its transatlantic alliance efforts, BA (and indeed other airlines) is enjoying some much-needed respite from the oil market’s recent decline. With prices having slipped from $147 to around $119 in the space of just a few weeks, my colleague and commodities expert Lee Lowell said in his “Commodities Corner” column yesterday that the next support point could be $107 if the current downtrend continues.

Once upon a time, that price would have caused heart attacks among airline executives, but after this year’s brutal price runup, they’d gladly take it now.

Seems like a drop in oil demand from businesses and consumers alike because of the high price is finally leading to some air being let out of this blown up market. Having fallen for four straight weeks, gasoline prices are down 6% from their peak in July.

And the drop is helping the airlines…

Go Contrarian… It Works

Take a look at this chart…

It’s a yearly chart of the AMEX Airline Index (XAL). Note how the drop in oil prices over the past month has led investors back towards airline stocks.

Back on June 3, my colleague Marc Lichtenfeld highlighted XAL and pointed out that the industry may well be in line for a rebound if it could shrug off its two-year downtrend and form a “basing” pattern. Here’s what he said:

“Keep an eye on the XAL chart. Should the index “base” (stop going down and then flatline), or even reverse the downtrend and head higher, the market is likely signaling a recovery.

“I wouldn’t necessarily get into airline stocks for the long term, as I believe the business model is flawed, but an intermediate-term trade seems quite reasonable once the bleeding stops.”

In the column, Marc gave two airline stocks for potential investors to watch – Alaska Air Group (NYSE: ALK) and Southwest Airlines (NYSE: LUV). Alaska Air has edged down just 2.7%, while the ever-popular Southwest has reaped better rewards, jumping 21%.

And as Marc noted from his own recent flying experiences, flights remain very full – a trend that held true on my Baltimore-London round-trip, too. The depressed dollar and lousy exchange rate certainly didn’t seem to put many folks off a jaunt to England. Not a spare seat to be had. Same story on the way back, too.

Don’t get me wrong… airlines remain in trouble and a return to profitability seems a very long way off for many of them. But if oil prices continue to fall and stabilize, it can only spell good news for this most beleaguered of industries and gives it a chance to get back on its feet. Or, more appropriately, take off.

Source: As Oil Goes Down, Airline Industry Rebounds

Two things are obvious here. One, American thinks they’ve raised prices as much as they can without causing customers to bail out on them in droves. Two, they’re either clueless or clearly out of options.

The airline industry is long overdue for some serious consolidation. And it’s finally beginning to happen.

In April, Delta and Northwest decided to hook up. And now talks are heating up between United Airlines and Continental.

But despite all the time airlines have spent in and out of bankruptcy, it’s still the same old talk about cutting costs, cutting corners and raising prices when the market allows.

For example, here’s the brilliant strategy that Delta’s president, Edward Bastian, articulated in response to high jet fuel prices: “We have moved quickly to mitigate the short-term impact of higher fuel prices by further reducing domestic capacity and taking a disciplined approach to costs and cash flow.”

YAWN.

It doesn’t take a genius to figure out how airlines are doing. All you have to do is follow crude prices. The airline stocks move more or less in the opposite direction.

The U.S. Oil Fund (USO), the dark blue line in the chart, tracks the spot price of West Texas Intermediate (WTI) light, sweet crude oil. When it was going down in the second half of 2006, airline shares were going up. With oil taking off in 2008, the shares of airlines have plunged.

The problems plaguing U.S. airlines should be well-known by now: unionized pay scales, legacy health and pension obligations, and a bloated and demoralized work force.

In many ways, the airlines have been their own worst enemy. They’ve cut back and cut back on services and perks, that they’ve essentially commoditized themselves.

How do you distinguish one airline from the other? One serves crackers and the other serves peanuts? That’s sure to cultivate customer loyalty.

They have only one trick in their bag of goodies which saves them from being completely commoditized. And that’s their frequent flyer plans. But you know what? It feels more like blackmail than a perk.

I’ve stacked up a couple hundred thousand frequent flyer miles with Northwest. But I don’t care anymore. I hardly fly Northwest. Their service is mediocre and their tickets are expensive. I go mostly with the newer low-cost carriers.

Have I made my case? There are plenty of reasons to hate airlines. As a passenger and a consumer, I’m not going to make you fly on any airline that is pissing you off.

But, as an investor, I’d like you to reconsider your feelings about the airline industry…

First of all, in terms of affordability, air travel has flown in the opposite direction of things like higher education, houses, and designer jeans.

When I first flew to England back in 1973 to attend Lancaster University, the two-way flight cost me around $525. When I flew Rachie – my daughter – to England last year to attend Norwich University, the round trip cost $600.

That’s nothing short of astounding. Taking into account inflation, the $525 price would have more than quadrupled. In real money terms, that ticket now would cost $2,444. It may not feel like it, but flying is a ridiculous bargain.

People have to fly. And, globally, it’s inevitable that they’ll be flying in greater numbers. Higher prices may slow this trend, but it won’t reverse it.

Flying is already taking off in Asia. For example, China’s domestic airline industry is just a fifth of the size of the U.S.’ domestic market, but it’s growing much faster. In 20 years time, it’ll be about half the size of the U.S. market.

• Crude oil for July delivery rose $4.33 to $133.38 a barrel yesterday (Wednesday) after U.S. stockpiles showed an unexpected decline. Supplies fell 5.32 million barrels to 320.4 million last week, the biggest drop in four months, according to the Energy Department.

• Time Warner Inc. (TWC) announced yesterday (Wednesday) that it plans to spin off its cable-television unit and receive a $9.25 billion windfall in the transaction, Bloomberg reported. The move will let the company focus on its cable network, entertainment, and publishing operations rather than distribution – something investors have been clamoring for.

• The Boeing Co. (BA) said yesterday (Wednesday) that it would lay off 750 Southern California employees after losing a lucrative military satellite contract and seeing a dip in demand for the technology, the Associated Press reported. The cuts involve engineering staff at plants in El Segundo and Seal Beach.

• Swiss bank UBS AG (UBS) yesterday (Wednesday) sold subprime and other mortgage-based securities to a newly created investment fund run by U.S. asset manager BlackRock Inc. (BLK) for $15 billion, the Associated Press reported. The securities had a nominal value of $22 billion but have been listed with a book value of $15 billion as of March, according to UBS.

• American Airlines, a subsidiary of AMR Corp. (AMR), announced yesterday (Wednesday) that it was taking drastic measures in the face of escalating oil and fuel prices, Reuters reported. The world’s largest airline will cut thousands of jobs, reducing capacity by 12%. American will also charge $15 for passengers’ first checked bag. AMR stock dropped 25% with a $1.98 decline to close at $6.22.

• Shares of corporate debt rating agency Moody’s Corp. (MCO) dropped over 15% yesterday (Wednesday) after a computer glitch mistakenly issued “Aaa” ratings for Constant Proportion Debt Obligations, commonly referred to as CPDOs, Reuters reported. Moody’s stock lost $6.99 to close at $36.91 yesterday (Wednesday).

• The U.S. House of Representatives passed legislation yesterday (Wednesday) that would allow the Department of Justice to sue the Organization of Petroleum Exporting Countries (OPEC) for limiting oil supply and price-fixing, Reuters reported. The measure still needs to be approved by the Senate, but President Bush has already threatened to veto the bill.

• Inflation fears were blamed for the Bank of England’s 8-to-1 decision to hold interest rates steady yesterday (Wednesday), MarketWatch reported. “For most members, a reduction in Bank Rate this month would make it more difficult to keep inflation expectations in line with the target,” the minutes said. For April, consumer inflation clocked in at 3%, above the BOE’s preferred 2% target.

Source: Global Investing Roundups:Thursday, May 22nd, 2008

The nation’s largest airline has now canceled a total of more than 2,400 flights since Tuesday, after FAA regulators implied that nearly half its airplane fleet could violate a safety regulations.

Shares of AMR stock fell more than 11% on Wednesday, recovering over 6% in morning trading on Thursday.

The fallout of the outages for AMR’s second-quarter financials should be even greater. In times of high fuel cost, airlines must cram each plane as full with passengers as they can, scrapping under-booked flights. Assuming just 100 passengers on each of the 2,400 canceled flights, over 240,000 people, each spending just $100 per flight, gross revenues would take a hit of a minimum $24 million — not counting vouchers for meals and accommodations.

With a price-earninge ration of just 5.47, AMR would now qualify as a “value stock” to those cherishing arbitrary numbers fetishes as salutary indicators of a stock’s inherent value. Indeed, given today’s impressing rebound in the face of more bad news (and medium-term fall-out), there seem to be plenty of traders who consider the recent low of $8.10 a bargain for a company that hit $34 just a year ago.

But given the outlook for U.S. consumer spending (especially on travel) and soaring gas prices, I believe the airline industry as a whole will dive-bomb into a sea of red ink by summer. (I said this much in the upcoming TFN 60-Second Buzz… which I taped before the AMR troubles hit.)

Unless you’re shorting the stock awaiting further bad news, I’d not put a dime into airline stocks just yet. No matter how cheap, you can always lose another 90% of principal…

• Boeing Co. (BA) delayed the delivery of its 787 Dreamliner again yesterday (Wednesday), this time until the third quarter of 2009. It’s the third postponement in six months. The company said it would deliver just 25 planes next year, less than a quarter of what had originally been planned.

• Citigroup Inc. (C) is planning to sell $12 billion of loans at a loss to Apollo Management LP, Blackstone Group LP and TPG Inc., a person briefed on the matter told Bloomberg News. The loans are part of the $43 billion in financing that Citigroup agreed to provide for leveraged buyouts last year before credit markets froze.

• United Parcel Service Inc. (UPS) cut its profit guidance for the year from between 94 and 98 cents a share to 86 or 87 cents. The company, which carries products that amount to about 5% of gross domestic product each year, cited lower volume and higher fuel costs as the biggest reasons for declining profit.

• The world’s largest air carrier, American Airlines – principal subsidiary of AMR Corp. (AMR) – canceled 1,000 flights yesterday (Wednesday) to reinspect jets. The cancellations affected more than 45% of its scheduled flights, Bloomberg reported, and stranded an estimated 11,000 travelers. The company said to expect more flight cancellations this week.

• Citing rapid growth in China and increasing demand for loans, Industrial & Commerce Bank of China (IBCB) said it expects first-quarter profit to soar 50%. IBCB is the world’s largest bank by market value. So far this year, ICBC has gained 5.2% in Hong Kong this year, compared with a 13.8% drop in the benchmark Hang Seng Index, Bloomberg reported.

• Hershey Trust Co., primary shareholder in The Hershey Co. (HSY), announced its Chief Executive Robert Vowler would retire in April 2009, Bloomberg News reported. Vowler has held the position for 12 years. Vincent Rudisill, the trust’s chief investment officer, will assume CEO duties.

• Crude oil for May delivery hit a new intraday high yesterday (Wednesday). It increased $2.37, or 2.2%, to close at $110.87 on the New York Mercantile Exchange. Earlier in the day, it hit a new intraday high of $112.21 a barrel after the Energy Information Administration announced U.S. stockpiles of crude fell to 316 million barrels in the week ended April 4, MarketWatch reported.

• U.S. wholesale inventories increased 1.1% in February, more than had been forecast. The increase was due to a 0.8% decline in sales for the same period. “Supply is starting to run ahead of demand and that could mean slower growth and also slower inflation further on down the line,” Jonathan Basile, an economist at Credit Suisse Holdings in New York, told Bloomberg News.