If the dollar continues to plunge against other major global currencies then the Fed will be in the same weak dollar position they lamented about earlier on in this crisis. In other words, if the inflationary effect on oil outweighs the economic stimulus effect of lower long term rates, the oil drag on the US economy could then be headed towards the dreaded stagflation scenario.

Stagflation is a real danger for the Fed and its unending arsenal of money. This is the Fed's biggest gamble. It is like the Feds version of the surge in Iraq. It is make or break time. If the printing of money cannot change the direction of this economy, then get out the wheel barrels to fill up with cash and try to pave your portfolio with gold and oil.

If it works and the economy starts to grow, the Fed will have to put on the breaks and commodities will fall. If commodities stay strong and the recovery does not keep pace, the prices will start to fall again. That is until of course the Fed starts to print again.”

In recent days the inflationary impact of Fed policy is now apparent. We are seeing gold and oil rise. They are rising in part due to expectations of a strong economic rebound and also due to the gearing up of inflation. And despite the economic optimism that has blanketed the marketplace, we are not out of the woods yet.

Some of the concerns that I raised the day after the Fed's move to quantitative easing still stand. For now oil demand is still tepid and the rising prices may still hurt demand. The lousy bond action is once again raising yields. If yields rally too fast it may slow lending and higher commodity prices could hurt consumer spending. Things are looking better yet real risks remain.

We need to see continued strong trends of economic recovery to justify and overcome the inflationary effects of Fed policy. And we should not be surprised if in the short term that oil and other commodities continue to fly.

And as stunning as oil was yesterday, one has to be impressed with the dramatic turnaround in the natural gas market. Natural gas got back above 4400 and plunging rig counts seemed to finally overcome the realities of ample supply. Bloomberg News Margot Habiby and Aaron Clark reported on a Baker Hughes report from that the world's rigs decline for 7th month.

They said that the number of oil and natural gas rigs operating around the world fell 11 percent in April, the seventh consecutive monthly decline, according to data published by Baker Hughes Inc. Rigs exploring for or producing oil or gas dropped by 258 to 2,055. The rig count declined in Canada by 62 percent and in the U.S. by 10 percent.

More than half the world’s operating rigs are in North America. The global rig count has fallen 42 percent from a 22-year high of 3,557 in September, as the prices of natural gas and crude oil have plunged.

That’s the biggest drop since OPEC boosted production amid the onset of the Asian financial crisis in the late 1990s. Operating rigs fell more than 50 percent from December 1997 to April 1999, and oil touched $10.35 a barrel. The consecutive monthly decline in the rig count is the longest since the first seven months of 1986, when production disputes within the Organization of Petroleum Exporting Countries triggered a global supply glut and a price collapse.

Canadian rigs fell by 122 last month to 74, and U.S. rigs decreased by 110 to 995. These kinds of drops in production in response to oversupply are also very bullish when demand starts to improve and usually are indicative of a bottom. Another reason to look ahead and be bullish. Bloomberg News reported that Exxon Mobil shut down a gasoline making unit at its Baton Rouge refinery, the second largest in the U.S.

Here are the recommendations for today

Buy June crude oil at 5500 - stop 4830.
Buy June heating oil at 14500 - stop 13900.
Buy June RBOB at 15000 - stop 14200.
Buy June natural gas at 350 - stop 290.

Courtesy : www.alaron.com

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