Way back a few months ago, I passed on some information that the banks in Western Canada were projecting a drop in the value of oil companies and were adjusting their loans appropriately. [[USO]] was sitting at about $100 where as of yesterday it closed in the $92  range.

Last week I pointed out that Bank of America Corporation [[BAC]] was telling it’s customers to exit their USD holdings because a correction was overdue.

And yesterday I nattered on about a correlated move between USD and [[USO]] that could catch pair traders in an ugly way.

What I’m seeing this morning does not indicate yesterday’s musings yet but here’s some food for thought:

The USD RSI(2) is currently 33.34 and appears to be dropping like a stone.

Bloomberg.com is calling Ag, the ‘dot corn‘ stocks as:

Aug. 20 (Bloomberg) — This year’s drop in agricultural stocks, whose rally since 2003 outpaced the gains in technology shares that preceded the dot-com crash, may deepen as the economic slowdown reduces profits, according to Citigroup Inc.

Levkovich wrote that he’s “worried about what has been dubbed the `dot-corn’ stocks relative to the dot-com names of the late 1990s.”

Low price-to-earnings ratios for agricultural shares “should not provide any valuation comfort since that often reflects the market’s ability to sniff out the likelihood of peak earnings,” the New York-based strategist wrote.

Bennett Sedacca over at minyanville.com writes:

For many regional banks like KeyCorp ([[KEY]]), Zions (Zions Bancorporation [[ZION]] ), Regions(Regions Financial Corporation [[RF]] ) and National City ([[NCC]]), the door is already shut; if they wanted to raise capital in the debt market at the levels at which their outstanding issues regularly trade, they would have to pay 12 to 15% - hardly economic levels. GM (General Motors Corporation [[GM]] ) bonds trade near 27% yields. Washington Mutual (WMU) trades north of 15%.

And then he gives this (somewhat scary) list of an estimated borrowing costs:

• Lehman Brothers (LEH): 11-13%
• Merrill Lynch (MER): 11-12%
• Morgan Stanley (MS): 9-10%
• Citigroup (C): 9.5-10.5%
• CIT Group (CIT): 12-15%
• Fannie Mae (FNM)/Freddie Mac (FRE):15%
• Keycorp: 11-13%
• National City: 13-15%
• Wachovia (WB): 10-12%
• Zions: 13-15%
• GM/GMAC: Not possible.
• Washington Mutual: Not possible.
• Ford (F): Not possible.

and he passes this along:

In fact, it seems like the worse the news, the stronger the rally. I’ll leave it to “conspiracy theorists” as to why this is happening, but markets do eventually find the “right” level. In Atlantic’s case, we believe it’s 30 to 50% below current levels.

But we are due for a bounce considering how ugly it’s been recently - the bulls probably aren’t ready to  hand things over  to the bears just yet - not with the Olympics going on and all.

Commodities

This is interesting reading:

In 1994, the top five oil companies spent 3 percent of their free cash on share buybacks and 15 percent on exploration. By 2007, they were spending 34 percent of their free cash on buybacks — in effect, propping up their share prices — and a mere 6 percent on exploration, according to figures compiled by a team led by Jaffe and Ronald Soligo of Rice University. As a result, some experts warn that supplies will fall short of the demand over the next decade, perhaps sending prices well above today’s levels.

“We are going to depend on the Venezuelan, the Nigerian or the Iranian oil companies for the future of our oil supplies,” said Bruce Bullock, the director of the energy institute at Southern Methodist University. “This is a troubling trend.”

Finally - a good word for the Oil Bulls:

Gary is calling for a bounce in Texas Tea:

I think commodities are probably ready for a counter trend bounce. I’m using oil as an example because the parabolic move is more evident. The weekly oscillators are now oversold. This is the level were I think we can expect a rally. Bullish sentiment doesn’t evaporate quickly, especially after the kind of run we just experienced. The commodity bulls are now thinking they have the buying opportunity of a lifetime.

The Takeaway

[[USO]] long, short [[DUG]] , and long [[FXY]] (because the Bank of japan isn’t chasing the equity market)