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Bloomberg has latest story about falling crude oil prices and stronger dollar: Crude Oil Falls on Minimal U.S. Storm Damage, Stronger Dollar

Crude oil fell for a fourth day as Hurricane Gustav caused minimal damage to refineries and rigs in the Gulf of Mexico and a strengthening dollar curbed the appeal of commodities as an inflation hedge.

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The dollar’s gain is also prompting funds to lower their exposure to commodities, and another concern is demand as U.S. refiners are due to shut for maintenance soon.

Crude oil for October delivery fell as much as $1.20 to $108.51 a barrel. Prices are up 48 percent from a year ago. Yesterday, futures lost $5.75, or 5 percent, to settle at $109.71 a barrel, the lowest close since April 8. Oil, down more than $37 from its July record, dropped because Gustav inflicted less damage to states along the Gulf than occurred in 2005 when Hurricanes Katrina and Rita struck.

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Royal Dutch Shell Plc, Total SA, ConocoPhillips and Valero Energy Corp. are among oil and gas producers, and refiners that have started initial inspections of facilities.

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Oil’s 26 percent slide from its July 11 record of $147.27 a barrel is a symptom of an economic slowdown in the U.S. and Europe and may continue over the next six months, investor Marc Faber said yesterday in a Bloomberg Television interview.

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New York crude oil yesterday breached the 200-day average as slowing economic growth and unprecedented fuel costs slash U.S. demand for oil products.

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Oil prices are unlikely to drop below $100 a barrel because OPEC will cut production to support the price, billionaire hedge-fund manager Boone Pickens told CNBC yesterday.

Lower oil prices means up days for the stock market. Transport and retail sectors are benefiting from the drop in oil prices. Airline stocks have been bouncing higher for this reason. JBLU, LCC, NWA have such a surge in their stock prices. How long will the that last ? Its a guessing game.

Nouriel Roubini Professor of Economics at New York University’s Stern School of Business, breaks it up for us as to how ugly it is out there.

1. Initial claims for unemployment benefits now at their recession level signaling the beginning of a serious slack in the labor market.
2. Durable goods order falling – excluding transportation – for 4 months in a row; and non-defense capital goods orders and shipment falling, signaling that non-residential spending will show negative growth in Q4.
3. Consumer confidence still plunging close to recession levels. Polls showing that a majority of Americans expect a recession in the next 12 months.
4. Oil prices in the $90 to 100 range putting a dent to consumer pockets.
5. Retail sales falling in real terms during the holiday seasons. With consumption spending being over 70% of GDP a saving-less and debt burdened consumer that is buffeted by several shocks – falling home values, falling home equity withdrawal, rising debt servicing ratios with ARM resets, rising debt ratios, high oil prices, plunging consumer confidence, slack in the labor market – decided to throw in the towel in December and cut spending in real terms, for the first time since 2002.
6. The worst housing recession since the Great Depression getting worse and uglier with starts, permits, sales, prices, mortgage applications all sharply down and falling more; the only thing going up in housing is defaults, foreclosures and delinquencies.
7. Non-residential commercial real estate in serious trouble as a series of press reports and data suggest.
8. Forward looking indicators of economic activity signaling weakness ahead and manufacturing ISM likely to fall below 50.
9. Corporate earnings falling 8.5% (y-o-y) in Q3 and expected to fall more in Q4 and ahead.
10. Interbank spreads (Libor vs. policy rates, TED spreads, BOR/OIS spreads, etc.) still at very elevated levels in spite of massive central bank injections and policy rate easing by Fed, BoE and BoC.
11. Bond yields curve and credit spreads pricing recession ahead.
12. Credit markets are in turmoil.
1. Unraveling of the $350 billion SIVs and collapse of the Super-Siv scheme forcing banks to bring back on balance sheet SIVs assets, thus absorbing significant capital and liquidity and thus exacerbating the liquidity and credit crunch.
2. Signs of sharply increasing default rates on credit cards, auto loans and student loans leading the spreading of the credit crunch from mortgages to overall consumer credit. Banks and financial institutions have only recognized a small fraction of the total losses.
3. Monoliner bond insurance firms all under review for downgrade and one already downgraded to C and on the verge of bankruptcy. Risk of hundreds of billions of losses for the underlying securities and issuers of insured bonds.
4. Losses and writedowns by financial institutions that will increase as the crisis moves from subprime to near prime, prime, credit cards, auto loans, student loans, commercial real estate loans, leveraged loans, losses on ABS instruments, corporate loans.
5. Pressures, losses and runs on non-bank financial institutions, (hedge funds, money market funds, state funds, investment banks, SIVs and conduits) that borrowed short and illiquid and lent long and illiquid that do not have direct or indirect access to the central banks’ lender of last resort support.
13. US dollar falling and most of the financing of the still massive US current account deficit coming from central banks and SWFs, not private sector investors.
14. Geostrategic risks rising (being the assassination of Bhutto; unstable petro-states; high energy insecurity; political and policy uncertainty in the US as 2008 will be an election year).

All the above points make the possibility of recession much more likely.

A weak dollar could draw more attention in the coming year.

The dollar’s slide against other major currencies in recent years has helped drive up prices for energy and food and in turn contributed to the economic hardship some consumers face. A further drop in the dollar in 2008 could spell more trouble.

Dave Minucci who works at JPMorgan Chase says a recent home heating bill was $120 higher than at the same time last year due to higher energy prices and a weaker dollar. He sees what many Americans may not realize: With commodities from oil to natural gas to grain to meat priced in dollars and becoming more expensive as the greenback falls, consumers have to take more out of their wallets to simply buy the same amount of goods. And a lower dollar can also raise the cost of imported goods.

The dollar has fallen because of concerns among investors worldwide about the U.S. economy, especially since a cascade of home mortgages has soured in the past year. And the dollar’s slide itself has further eroded confidence among some investors who question whether currencies like the euro will be better able to hold their value in the coming years.

Overall inflation is running at 5.6%, largely due to sharply higher energy costs as oil approached $100 a barrel. But the costs of food, clothes and medical care are have also increased.

Minucci thinks people are too quick to blow off concerns about a weak dollar as irrelevant to their daily lives. But considering the numbers can be startling. The dollar has fallen 11% against the euro since the start of 2007 and 24% against the 13-nation currency since the beginning of 2006.

Few Negatives

• Since the start of 2007, milk prices are up 23%, while the cost of a dozen eggs has risen more than 40%.
• Energy and commodity prices become expensive. Imports become that much more expensive.
• US Treasuries become less attractive.
• Traveling abroad might not be as appealing for many American tourists either.
• Investors worldwide have to sort out concerns about the U.S. housing market as well as get a better sense of how many now shaky mortgages will go bad and hurt bank’s finances before they’ll be eager to snap up the dollar.

Few Positives

• Exports have risen as goods made in America are suddenly cheaper in many places outside the country. Plus, with stronger foreign currencies, both investors and shoppers from outside the U.S. see “sale” signs across much of America — on everything from sweaters and iPods to businesses and real estate.
• Foreigners are coming here and buying retail items such as clothes and jewelry and technology.
• Companies with international presence see their earnings boost.

Recommendation: Go long on companies with strong international presence, emerging market funds, commodity sector and energy sector.