Oil held around $40 a barrel on Thursday after U.S. crude stocks swelled to an 18-month high and investors anticipated more bleak economic data out of the world’s biggest fuel consumer.

The outlook for more huge job losses in the United States darkened the demand prospects there.

A global financial slowdown has cut demand and swollen fuel stocks, knocking more than $100 a barrel off the price of crude since its July 2008 peak of $147.

U.S. crude inventories jumped by 7.2 million barrels to an 18-month high last week, data from the U.S. Energy Information Administration showed, twice what analysts expected and the sixth straight weekly rise.

U.S. light crude for March delivery ticked up 2 cents to $40.34 a barrel at 1019 GMT, about $4 below London Brent crude for the same month, which gained 30 cents to trade at $44.45 a barrel.

U.S. crude has been locked between $39 and $49 a barrel for the past two weeks.

“Crude oil markets still seem to be trapped within a trading range, as market anticipation about OPEC cuts — both current and pending — is keeping something of a floor below prices,” MF Global said in a report.

“…The upside is capped by lingering concerns over the macro situation.”

Oil losses have been limited by signals this week from the Organization of the Petroleum Exporting Countries that it may cut oil production further in an attempt to bolster the market.

OPEC, worried that the global economic downturn is reducing oil demand and pressuring prices, has promised to reduce oil production by a total of 4.2 million barrels per day (bpd) from levels seen in September.

LONDON, Feb 5 (Reuters)

“The richest investment opportunities can be found in the fast-emerging alternative energy sector,” says Mike Burnick in The Offshore A-Letter.

“That’s where oilman T. Boone Pickens is putting his money – his company Mesa Power just placed an order for US$2 billion in wind turbines. And there’s much more profit potential in other parts of the alternative energy sector too – especially alternative fuel.

“The market for ALL alternative energy sources grew 40% last year alone to US$77.3 billion and will explode into a US$250 billion industry within 10 years.

“Bio-fuel grew to a US$25.4 billion market last with more than 15 billion gallons of ethanol and biodiesel produced globally – more than double the output of just four years ago. The worldwide Bio-fuel industry will continue to enjoy explosive growth for years to come – expanding into a US$81 billion business within the next 10-years!”

This stuff is the vintage of the famous Napa Valley, California… hand-blended from a noble mix of specially grown Bordeaux vines, the very same stuff served in the White House to the world’s most prestigious guests.

Even so, it’s had a tough time of late. For reasons you’re about to see their share price nosedived a couple of years back.

But they’re back on track and I think they present a golden opportunity for quick-thinking profit seekers.

I’m not kidding… their share price could go BALLISTIC in the next 12 months if everything goes to plan.

How much do I think the share price could shoot up? Find out here.

Behold the power of ‘recovery plays’

I was a wild-eyed trader for Mullens & Co when I first discovered the money-making power of ‘recovery play’stocks…

Situations where, for whatever reason – an unexpected drop sales; the sudden loss of a few major contracts; a management blunder; an accounting cock-up – a firm’s profits (and share price) have taken a major hit.

Take Reuters… the financial info provider was a dead company walking in March 2003 when shares fell 80% to 96p. After serious management surgery, Reuters breathes still – and the shares have recovered 557%.

And what about Next? It was curtains for the clothing retailer in the 90’s when shares slumped to 12.5p. Today a Next share costs £12.27… a miraculous 9,716% return from the grave!

It’s fairly clear… companies in trouble – which are misjudged by the market – can be prolific money-makers if they successfully turn things around.

And that’s exactly why I believe the fine winemaker I’d like to reveal to you today is MASSIVELY undervalued.

After 14 years of sound management, good profits and a £28 million AIM valuation… along comes this company’s ‘annus horribilis’…

In 2006 in steps a new chief exec.

Within one year he managed to wreck relations with their biggest distributors… reverse their record of exceptional growth… and run up a loss of $6 million on sales that were DOWN by 14%.

Today their market cap stands at £3.93 million.

But get ready for the rebound of the century!

I believe we’re about to witness an exceptional comeback with this stock. Okay, it’s a tiny, tiny company. The risks are high. And I would only recommend a miniscule percentage of your capital to be put on this. But if it comes off the rewards could be spectacular!

Investors who buy in now could be laughing in a year’s time!

You see, the original backer of the business has taken back the reins… and boy is he fired up!

He’s already mended relationships with their distributors, which accounts for over 60% of this winemaker’s sales… and he’s shored up the company’s finances with the sale of valuable land and assets in a deal that gives them an option to buy it all back at a cut price five years down the line.

Results from 2007 ALREADY show they are back on track!

The management’s improved no end too… new financing arrangements have reduced debt… and after a strong Christmas period and a good start to 2008 there are NO signs of the wider economic climate affecting sales.

I’ll be revealing the identity of this corking winemaker in my next edition of RED HOT PENNY SHARES, which hits doormats first thing tomorrow.

But you can read about it right away!

To find out what you need to do, and EXACLTY how much I believe this share could make, click here NOW.

Tom Bulford
for The Penny Sleuth

— Here’s a cheery way to start your week: More than two-thirds of American Gen Xers — those aged 27-42 — don’t think they will ever be able to stop working. And don’t think they’ll ever see a dime from Social Security or Medicare.

“The Gen X group is the most anxious about their finances,” Chris Moloney of Scottrade told Reuters last week.

Of the 1,000 people they talked to who were 18 and older, nearly 40% percent said they had saved less than $25,000 for retirement. Conventional wisdom suggests if you want to live for 20 years on about $50,000 per year — whatever that will be worth at that the time — you’ll need to have $1 million stashed away.

“Gen X is in the middle of a ‘retirement perfect storm’ of very high expectations, low retirement savings and massive concern about the future of Social Security,” Moloney says.

Thirty seven percent said they would like to have between $1-5 million saved for retirement — even if their ability to save this money leaves such sums in the realm of wishful thinking.

Not that we want to reignite the debate among readers about which generation is “to blame” for the state of things, but we also note that 64% of baby boomers say they’re ready to retire — and aren’t worried.

Take that.

Worth the paper it’s printed on…

— Retail sales were up in March…but mostly because gasoline keeps costing more.

The Commerce Department says retail sales rose 0.2% in March, a tad more than the flat reading analysts were expecting. But throw gasoline out of the equation, and they were ruler flat, indeed.

If the figures took inflation into account, which they don’t, the outlook for retailers would be even more discouraging. Still, a 0.2% increase in March looks better than, say, the revised 0.4% decline in February…

— U.S. stock markets began the week moving sideways, taking a breather after GE’s earnings disappointment Friday and before Citi and Merrill reveal whatever they’re going to reveal later this week.

But Goldman Sachs isn’t waiting to make its call: Earnings season has had an “awful” start and stocks will head downward this spring.

“Early signs are awful,” says a Goldman report out today. “We expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor’s 500 Index lower in coming weeks,” perhaps as low as 1,160, before a rebound by year’s end to around 1,380 — which would put the S&P down 6% for the year.

That’s a remarkably gloomy call for David Kostin, Goldman’s new chief forecaster — at least compared to his predecessor, the ever-optimistic Abby Joseph Cohen.

— Wachovia needs cash, and quickly. Ho-hum. The bank plans to float $7 billion in new shares and slash its dividend by 41%. It’s the second time Wachovia’s had to scramble for capital just this year.

Wachovia jumped into the adjustable-rate mortgage pool with both feet at the most frothy stage of the bubble in 2006 by purchasing Golden West — whose business was focused on one of the most airheaded states, California.

— But that’s just the beginning of the financials’ pain this week, as many of the top firms reveal first-quarter earnings… and probably more write-downs, too. Citigroup will likely write down $10 billion in debt this week…which would add up to a first-quarter loss of $3 billion. Merrill Lynch will likely write down another $5 billion, for a loss of $2.7 billion.

That’s still a drop in the bucket given that write-downs industrywide total $250 billion to date…and that everyone from George Soros to the International Monetary Fund is forecasting $1 trillion, give or take, by the time all is said and done.

— Citi’s announcement last week that it will unload about $12 billion in debt onto private equity at 90 cents on the dollar highlights another problem — one that’s “entirely separate from subprime mortgage lending,” writes Strategic Short Report’s Dan Amoss. “It’s another symptom of the credit bubble disease.”

The $12 billion is money Citi hoped to raise in the credit markets to finance leveraged buyouts. But when the credit markets seized up last summer, Citi had to take the deals onto its own books.

“Investment banks are stuck with an estimated $250 billion worth of this buyout debt on their balance sheets,” says Dan, “or in off-balance sheet entities for which they’ve made guarantees. Until they get rid of it, credit will remain fairly tight.

“Financial stock bulls point to this $12 billion sale as evidence that the leveraged loan sector of the credit markets is thawing. But I remain a financial stock bear, because this sale is only a tiny part of the market and only one of the many other credit-related problems plaguing investment banks.” For ways to play Dan’s skepticism, see the Strategic Short Report.

— Asian stock markets tanked overnight, fearing the worst from U.S. financials this week. Shanghai was down 5.6%, Hong Kong 3.5%, the Nikkei 3%.

This is the view of the group’s secretary-general, Abdullah al-Badri, expressed on Saturday during a visit to Iran.

“Oil supply to the market is enough and high oil prices are not due to a shortage of crude but rather it is because of the decrease in the dollar’s value, shortage of refinery capacity and some political tensions in the world,” said a-Badri, according to the Iranian state news agency.

According to Reuters, his views are in line with those of OPEC officials in Iran, the second-largest producer in the 13-member cartel.

US oil futures headed towards $108 a barrel today following al-Badri’s statement.  Reuters reports that “light sweet crude for May delivery rose $1.31 cents to $107.54 a barrel by 1035 GMT (6:35 a.m. EDT) after leaping $2.40 a barrel on Friday, recouping all of the week’s earlier losses.”

“Oil prices could hit $160 a barrel as soon as next week,” says Dominic Frisby in The Daily Reckoning UK.

“At least, that’s what ‘Zapata’ George Blake, the Texan oil analyst, reckons. ‘Zapata’ George has a habit of making bold calls that often seem to be proved right. He thinks there’s an imminent supply squeeze ahead, which will cause the oil price to spike. Daily consumption is exceeding daily production, he says.”

From Reuters:

The Labor Department revised the first two months of the year’s job losses to a total of 152,000 from a previous estimate of 85,000. The March unemployment rate jumped to 5.1 percent from 4.8 percent, the highest since a matching rate in September 2005.

The March job report was bleaker than expected. Economists polled ahead of the report forecast a decline of 60,000 in non-farm payrolls and a rise in the unemployment rate to 5 percent.

“Asia will not be immune to the global slowdown, neither will it be hostage to it. It remains tied to global activity through traditional trade channels, and increasingly, through its closer integration in international financial markets,” says ADB Chief Economist Ifzal Ali.

Despite government controls, the ADB predicts that inflation will spike to 5.1% in 2008 – possibly hitting a decade-long high – before cooling to 4.6% in 2009. Prices will be highest in central Asia, where inflation will remain in the double digits. China is the country most at risk, as inflation is running at an 11-year high. But economic growth in neighboring countries, such as Vietnam, is also at risk.

The report urges policymakers to tackle the problem at its root.

“For some economies, this may mean a more flexible exchange rate, while in others it may need a scrutiny of fiscal spending and priorities and, in some cases, targeted measures may be warranted to ease supply pressures that are piling on to cost pressures,” the report said.

In an interview with Reuters, Ali took on a stronger tone.

“If this genie gets out of the bottle and inflation becomes ingrained, it could bring the growth process to a grinding halt,” Ali said.

Decelerating Growth

The ADB said that growth in India and China is expected to moderate as their governments tighten policies to control inflation and accommodate “blistering” demand.

India’s economy is expected to expand by 8% and China’s is expected to grow 10%. The slowdowns in the United States, Europe and Japan will hurt China more because it’s more reliant on foreign trade.

East Asia is expected to slow from 9.3% in 2007 to 8.1% in 2008. Southeast Asia will slow from 6.5% last year to 5.7% – among the region’s countries, only Thailand is expected to post higher growth.

Growth in Central Asia is expected to decelerate sharply from double digits last year to 7.5% in 2008 because of weaker expansion in the region’s largest economy, Kazakhstan.

In the Pacific Islands – from Papua New Guinea to Fiji – growth is expected to rebound in 2008.

However, all of the developing Asian countries, collectively and individually, face the task of integrating into the global economy, sharing growth, creating conducive business and investment climates and maintaining macroeconomic stability, Ali said.

“Looking beyond the immediate bumps in the road, Asia’s long-term growth prospects will depend on how successfully countries tackle” those structural constraints facing them, says Mr. Ali.

Headquartered in Manila and financed by 67 countries, the ADB fights poverty with low-interest loans, grants, private sector investments and research about the region that is home to two-thirds of the world’s poor.

That’s what happened to Swiss bank UBS yesterday. “So this is good news?”, asks a bemused Lex in the FT. Also, Deutsche Bank writes down $3.9bn and its stock goes up nearly 4%. American investment bank Lehman Bros, a suspected Bear Stearns Mark II only a few short days ago, announces an additional $1bn capital raising. Its shares leap 18%.

But then stocks everywhere had a positive day yesterday with the rally continuing into a second day this morning. “Stocks rise in spite of fresh bank woes,” reads the FT headline headline. Reuters calls it the “Write-down relief rally”. The S&P 500 was up more than 3.5% on Tuesday, the FTSE 100, 2.6%. The Nikkei rose 1% on Tuesday and another 4% today.

Why is Mr. Market now laughing in the face of adversity? Are we seeing a dead cat bounce? The FT considers the possible impact of short sellers scrambling to buy back positions when the market goes against them so intensifying the buying. The possibility too, is that investors are beginning to think the eye of the storm has now past. The banks are coming clean, maybe, though we’ve yet to hear from subprime gorgers Citigroup and Merrill Lynch. Kevin Gardner, head of global equity strategy at HSBC tells the FT it’s too early to call a turning point for stock markets. Though after a credit crunch, a US investment bank failure and a mortgage bank failure here at home a “heck of a lot” of bad news is in the price.

Continues below …

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Well the bad news may or may not be all in the price. But this one-time financial sector problem is more and more showing up as everyone’s problem, as it ripples out into the high street. The rate at which banks lend to one another is still a lofty 6%, and daily there is less money available for funding debt-driven lifestyles – mortgages, personal loans, credit cards.

Lending rates are being hiked wholesale and mortgage offers withdrawn, sometimes with brutal haste: this seems counter-intuitive against a backdrop of interest rates trending down. Nationwide building society, Halifax, NatWest and its parent RBS are just some of the major names that have increased their lending rates. Those left standing with a good deals are being inundated. Yesterday First Direct, part of banking giant HSBC, suspended new mortgage lending after it was “swamped” with mortgage applications for its highly competitive two-year fixed deal at 4.95%.

From a highly competitive mortgage market place where lenders – pre credit crunch – were prepared to lend below their cost of funding to maintain market share, we are now in a market where lenders don’t want to lend whatever the central banks do with interest rates. George Soros explains to the BBC’s Robert Peston:

“You can’t rekindle the willingness to borrow and the willingness to lend because the balance sheets of the banks are now over-burdened and there are all kinds of risks that have become apparent. And they haven’t yet fully worked themselves out, so there’s a great deal of unknown credit risk in the system. And as a result, the banks are husbanding their resources because they’ve actually lost a lot of money…”

As for the UK’s interest rate outlook it remains murky, in spite of anticipation of a further 0.25% cut this month or next to take us down to 5%. Factory gate inflation hit a new high as manufacturers passed on higher energy costs with higher prices. And, ominously, problems appear to be brewing in public sector pay. The National Union of Teachers has voted to strike for the first time in more than 20 years – a one day strike on April 24th for more money. They want a 2.45% pay rise increased to at least inflation. CPI is currently 2.5% but RPI is 4.1%. They want to see their pay, at least in real terms, maintained. Understandable but it adds to the difficulties facing Mervyn King and the Bank of England Monetary Policy Committee in balancing the need for lower interest rates with the inflation fight.

As more liquidity gurgles out of the system, and mortgage rates go up talk of a house price crash comes to the fore. “London House Prices: Slump Starts”, screams the London Evening Standard from its front page last night after Land Registry figures recorded a 0.4% fall in February. My thinking we’re looking at a stagnant housing market over a slumpy one is taking a lot of heat these days. 6% LIBOR…vanishing credit…dearer credit…few buyers (even fewer first timers)…plenty of stock…possibly even more after April 6 if buy-to-let investors decide to cash in under the new capital gains tax regime. I have to admit, it’s not looking pretty…

*** More on the food crunch. “Countries rush to restrict trade in basic foods”, reads the FT headline. Tariffs on food imports are being scrapped and tariffs on exports hiked as the developing world responds with alarm to the urgent and potentially acute problem of food shortages.

“World food stocks have never been lower,” India’s trade minister Kamal Nath tells the FT. Saudi Arabia announced they would cut import taxes on a range of foods yesterday as did Egypt. India did much the same on Monday and banned the export of some rice.

Regards,

Rob Mackrill
The Daily Reckoning

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