I am still predicting a correction in Crude Oil futures in the next 6 weeks. Last week I believe we saw a blow off top move, most likely to $150/barrel. After that, it will grind downward to test the $122/barrel area and perhaps (just maybe) carve thru that level to the $110/barrel level by mid august. For this to happen we will need some help from the beleaguered dollar.

Trichet indicated on Thursday that his hike to 4.25% in the euro area might be one and done. I think he is trying to encourage Bernanke to get off his ass and show that he has a spine that is stronger than a salamander. Get those US rates up a bit and show the markets (stocks have already collapsed) that yes, credit will be tighter and more expensive in the future, a necessary move to stabilize the dollar and lower oil prices. However, Bernanke is such a worry wart about the Depression of the thirties that he might be frozen here for months, letting the dollar drift lower, oil prices ram higher to the $175/barrel level creating the depression that he fears so much. Not getting out in front of the inflation story (as he is right now with negative real rates in the US) he risks allowing inflation expectations to ratchet up . . . this is already beginning to happen if you look at certain statistics.

$145/barrel oil is close to the prediction of one large investment house on Wall Street for the July 4th weekend. Pretty good call since it was made 3 weeks ago when crude traded down to $122 back then. We really will need a move thru the 1.53 level in the Euro to get any kind of big correction going in oil, but I believe this will happen as demand destruction for gasoline will come to bear on traders in the next several weeks, and the Fed does its part by jawboning some near term future rate hikes. Even a currency intervention by the Treasury could happen as a symbolic move if the dollar started to rally. These guys cannot continue to sit around and say they are a “strong dollar” administration while the whole world of currency traders laughs at them like hyenas. If the dollar does strengthen, expect all commodities to pull back some but remember, with the grains, they will only correct so far . . . big dogs will still eat.

Starbucks is closing 600 stores in the next year. I didn't understand the explosion in Starbucks cafes when it happened but I guess people have started to make their own coffee in the morning. Coffee has been rallying lately but not so much to cause this change in Starbucks strategy. When a cup of coffee costs the same as a gallon of gasoline, well, guess what . . . consumers will make that trade. You can make a coffee for less than 50 cents a cup at home, so we can see how discretionary income is being sucked away at the gas pumps.

In some places like Texas in the US, people spend up to 20% of their income on gasoline . . . and natural gas is not much cheaper with futures trading in the 13.5 area, nearing those Katrina highs again. One vicious hurricane, an attack on Iran by Israel, or a terrorist attack on the Straits of Hormuz will send energy prices into the stratosphere. The brown bag lunch and vegetarianism has to be making a comeback as well. Americans need to buy a bread-maker, a cookbook and start clipping coupons for their local supermarkets. Its gonna be a tight second half of 08 and a rough 2009 for consumers. Time to suck in the gut and tighten the belt a couple of notches.

The June 30th crop report showed that this years crops are up 5% for wheat, up 17% for Soybeans, and down 15% for cotton. Soybeans will remain in short supply but you have to think that farmers want to get these crops in the ground now and into the future to take advantage of these higher prices. The adjustment to prices was severe as corn and wheat fell while soybeans rallied a little. Its amazing to see soybeans trading around $16/bushel now . . . they used to hover around $6 a couple of years ago. I will be looking to sell some soybean November calls soon.

For the 6 months ending June 30th, all commodities are up nearly 30% on average, the most in 35 years! That is astounding considering the markets are all off their highs by nearly 20%, or down 12% ytd for the S&P 500. This year we have seen the steepest combined drop in stocks and bonds in 14 years. This again points to the need for investors to have at least a 10% allocation of capital to commodities which will cushion the pain they feel in down stock and bond markets . . . "all aboard".

Both Gold and Crude are the golden boys of the commodity world right now. I expect crude will go back and test the $122/barrel level by the middle of August (contrarian) but a move below that to say $110/barrel or to $100/barrel seems like a pipe-dream. The evil speculators just won’t allow this to happen, including all the pension fund money that is now entering the game.

Forget about buying gold below 900/oz now . . . you had your chance as it traded down to 870/oz during the past few weeks. The Fed’s hawkishness isn’t scaring anybody, especially not currency traders who have slammed the dollar again.

The dollar/euro looks to be heading to 160 again as Trichet will probably raise rates on Thursday July 3rd. Bernanke will be once again stone-faced as he re-considers why he dropped rates to 2% when all the smartest hedge fund managers laughed at him. With the S&P 500 back down to its crisis lows of 1275 you have to wonder whether dropping rates as he did has done anything at all other than reduce the credibility of the Fed as they continue to just steal money from savers to bail out the risk-laden banks.

The major stock market indexes dropped like anvils this past week as investors fled the associated problems of Obama as President, earnings estimates that are at least 10% too high, and the thought that oil will go to $150/barrel or higher.

On the Obama front, he enjoys a big lead in the polls and promises to crush equity investors with an assortment of higher investment taxes, not to mention his brilliant windfall profit corporate tax on oil companies or anyone else the democrats believe make too much money. This has taken the Dow through the old lows of 11,600 down to an intra-day low of 11,300. Eleven thousand seems likes a likely place for the Dow to soon test. Ten thousand in the Dow could represent a yearly low and a great place to bounce from come October.

The sell-off has been quite orderly so far . . . very little panic with the VIX volatility index peaking out around 24 right now. Last time we were down here it was trading in the mid-thirties. July will bring in the earnings adjustment to the market which of course has already begun. Another 10% drop in the market averages seems likely based on the ensuing downward ratcheting of earnings by 10-20% for 2008 and 2009.

If crude stays above $122/barrel into the fall, I suspect we will hit bottom come October at 10,000 in the Dow and 1175 in the S&P 500. Until then it will be quite whippy with short covering rallies that rip your face off and brutal plunges that leave you wondering why you aren’t short. If crude oil has a mini-crash we could see a nice temporary recovery and short squeeze that would be eye-popping. Better strap in for this one, its gonna be rough. Bear market rallies are vicious and tend to carry everyone out in a body bag.