Is the Government Getting Too Desperate in Trying to Salvage the Economy?

On Thursday, the International Energy Agency announced that it would release 60 million barrels of oil into the market. Oil futures spiked lower following the news. WTI Crude fell nearly 5% to approach $90 per barrel. While the release may have caught traders off guard, the U.S. consumes roughly 20 million barrels per day. Thus, a sharp 5% decline may appear too aggressive to be caused by the IEA's announcement alone. Poor economic data released on Thursday may have also weighed on the price of oil. Initial jobless claims rose by 9,000 and new home sales fell by 2.1%. The Dow Jones fell over 100 points, breaching the 12,000 mark. On Wednesday, the Federal Reserve wrapped up its two-day Federal Open Market Committee meeting and released a statement. In the statement, the Fed predicted that commodity prices would continue to decline. Thursday's numbers appear to have validated that prediction. Still, even with cheaper crude, the market appears to be weakening. Less expensive energy may be bullish for the broader U.S. economy, as transportation costs decline. Although the IEA cited Libya as the primary reason for Thursday's decision, investors may be inclined to doubt that explanation. The conflict in Libya has been raging for weeks, so why did the IEA wait until now? Might it have something to do with Fed Chairman Ben Bernanke admitting that the Fed had “no precise read” on why the economy was continuing to struggle? Action Items Bullish: Traders who believe that the economy will rebound on cheaper oil prices might want to consider the following trades:

• Buy ProShares Ultra Dow 30 DDM in a long Dow Jones play. If the economy improves, the Dow may rally and DDM might do well.
• Buy PowerShares DB US Dollar Bearish Index UDN in a short dollar play. As the economy has weakened, the U.S. dollar has strengthened. That trend might reverse if the economy improves.

Bearish: Traders who believe that the economy will contract may consider taking positions in the following:

• PowerShares DB US Dollar Bullish Index UUP is a long dollar play. When the economy has weakened, the dollar has rallied, as it is rallying today.
• ProShares UltraShort Gold GLL is a short gold play. The price of gold may continue to decline if the dollar strengthens on U.S. weakness.

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