CNBC rolled out its one-hour primetime program called “Business Nation” last night and I was impressed. I have been told that I pick on CNBC too much so I thought it was only fair to give them credit for this show. If you missed it, you can click here and see the re-airing dates. It has a long way to go before it becomes the “60 Minutes” of business television but this newsmagazine was entertaining and informative. Kudos to David Faber and his contributing reporters.

The President’s report to Congress on the state of the Union wasn’t too long - maybe the clapping just didn’t take up as much time as in the past. If you missed it, you can go to the Whitehouse site and watch a full length stream. I went there to read the transcript because I was greatly distracted by Speaker Pelosi last night.  What is up with all her blinking anyway? John Stern, Ph.D. and Professor Emeritus of Psychology at Washington University in St. Louis found that “When information acquisition is important, you actively inhibit your blinking.” Enough said.

Now that I am done analyzing blink rates, I’ll tell you that I found President Bush’s address to be very mild and not confrontational - representative of his lame duck status. I am not saying it’s good or bad but the polarization of America is either getting better or it’s just on a dangerous hiatus. His speech had something for both sides at the same time. For example, he wants the government to buy oil for the SPR and simultaneously, wants consumers to reduce their consumption of gasoline, primarily through biofuels and improved automotive fuel efficiency. He even pushed for alternative energy such as wind, solar, battery, etc. and said “..these technologies will help us be better stewards of the environment, and they will help us to confront the serious challenge of global climate change.” They weren’t satisfactory to most Dems, but he even offered up more liberal plans for health care benefits. As I said, the speech was a safe one despite how much some politicians and spinmeisters will try to stir the partisan pot.

Regarding the effect on our markets, I didn’t hear or read much that would provide a challenge or push during his remaining tenure. I just don’t expect much to get done by Congress that he will not veto and anything that gets through will not likely have an impact on the factors that affect stocks.

I am sure you’ve probably had enough of lengthy speeches so I’ll keep this brief. And no, you will not have to endure needless clapping that interrupts every sentence.

Last week’s marginal improvement in the S&P 500 was not representative of the significant changes I saw in the HEDGEfolios universe. YES - for the first time in a long while, I can report that the state of the HEDGEfolios charts improved somewhat. Of course, much of that improvement was short-lived and I imagine that the charts have weakened due to Monday’s decline. Earnings season has been so-so and guidance has not been inspiring either. It’s still too early to evaluate a general theme with the actual numbers, but the market’s response has been pretty clearcut. Good news is being accepted but not applauded… average news is being panned and negative news is being punished. This is a noticeable change in market psychology but as I mentioned earlier, we have a long way to go and this sentiment can change rapidly.

Before Monday’s open, I wrote about the improvement in the energy sector and especially, oil and gas. Yet, I wasn’t expecting President Bush’s request to double the SPR and I wish it would not have happened. The cold weather forecasts for NY City are contributing to a more bullish tone and it looks like a trade is on. Some day I might share an aspect of my technical analysis that I call “Slope” but for now, I’ll just mention that I don’t like today’s move too much. I expect some backfilling here and a more gentle move towards resistance at $58.50 per barrel over the next few weeks. Unless there is a market shock before we get there, I am doubtful that we will break back into the $60’s the first time around. However, my bias has shifted to slightly bullish on oil and I’ll reevaluate as we move forward. As you would expect from an increase in oil, I expect the CRB to lift correspondingly and would not be surprised to see it approach the 310 to 320 range before we hit any roadblocks.

In early December, I gave an outlook for key market forces and expected that we would see ten-year Treasuries approach 4.80% and that has been achieved. However, there is significant resistance from here until 4.85%. If the economic data continues to show strength, I believe we will poke through 4.85% and start threatening the Goldilocks scenario (too hot!) I wonder how Jeff Lacker is feeling these days? Sadly, the hawks lost his vote and now Mr. Moskow is soon to retire. It seems that votes to raise rates are avoided through attrition, but I suspect that the next meeting and accompanying release of the notes will shake out the last rate cut optimists.

I see a bullish tone on gold and a bearish trade approaching on the dollar. Retesting 82.50 on the US Dollar index seems like a likely move and I have no idea what will suppress the continuing upward trend in gold.

That’s the end of my speech. There will be no rebuttal from the other side.

It was just leaked that President Bush intends to recommend a doubling of the US Strategic Petroleum Reserve in his State of the Union address. I hope that is not true but fear that it is. A doubling of the reserve over the next two decades would take us to 1.5 billion barrels and approximately 125 days of current net imported oil. I can understand why President Bush might want to fill more tanks at a time when oil prices are relatively low. However, I am “Dubya-ous” about this “strategery.” You would think that he would like to avoid the inevitable and repetitive claim that he is in the pocket of the US oil industry and handholding the Saudis. This SPR doubling will fuel those suspicions once again and have the potential to spike oil prices, which are up $2 per barrel on the news. While I am concerned about the impact of higher oil prices in general due to demand from BRIC and emerging market growth, it is understandable. What I am struggling with is a curious interpretation of this policy. Currently, the IEA suggests that countries maintain reserves equal to 90 days of net imported oil. As I previously calculated, the President’s new target would give us 125 days worth of reserves (based on current consumption.) I am concerned why we need that much. You either have to assume that we will be consuming much more oil over the next two decades or we will have some need to have excess days of reserve. At the 90-day reserve level, the math implies that we will be consuming 16.67 million barrels per day by the time the reserve hits 1.5 billion barrels. That is a 40% increase in our consumption and I am “misconfused” about how that squares with another comment he is expected to make tonight - that we cut our gas consumption by 20% over the next 10 years. So if he wants us to cut gas consumption and reduce our dependence on oil, why do we need more oil in reserve? I can imagine why that would happen in a world where many oil producing countries have an increasing hatred towards the US and may want to use their oil as an economic weapon. But I really hope that is not why we need to increase the reserve.

A month ago and in previous semiannual pronouncements, the US Treasury department failed to tag any of the United States’ major trading partners as a “currency manipulator”, but all we really focus on is China. Since Secretary Paulson was confirmed, the Chinese currency (Renminbi or Yuan, take your pick of terms) has appreciated slightly, but I doubt fast or far enough for Senators Chuck Schumer (D-NY) and Lindsey Graham (R-SC) who have been leading the revaluation fight for several years.

With all this concentration on China and currency manipulation, there is a potential to disregard another form of manipulation that might exist. How about commodity manipulation? With all their demand for natural resources, China is creating rapid and dramatic increases in everything from oil to zinc. Commodity inflation makes all of our companies less competitive and I suspect it has caused much more damage to jobs and our economy than the currency peg.

The proceeds from China’s trade growth has allowed them to purchase about $1 trillion in US Treasuries but it has also allowed them to stockpile physical commodities and financial contracts for the same. It would be easy to say that they need all of that to supply their growth needs but I doubt it’s that simple. How tough would it be for them to manipulate commodities? When you think of oil prices today - who is controlling the situation more: OPEC(supply) or China(demand)? What about their influence on metals? China’s impact on commodity prices has been understandable, but have all the price swings been unintentional?

In 2001, China’s plan was to create a reserve of 6 million tons by 2005. Now the goal is to create storage capacity of 12 million metric tons in the first phase, 28 million tons more in the second phase and another 28 million tons in the third stage. Currently, the International Energy Association recommends reserves equal to 90 days of net imports. For January to June 2006, China had net imported oil of approximately 2.85 million bpd. That would equate to an IEA-compliant reserve of 35 metric tons or 250 million barrels. Note that this is a fraction of the US Strategic Petroleum Reserve which had 688.5 million barrels as of December 1, 2006 and a target of 1 billion barrels. US SPR inventory data is published monthly and it would be neat to see China’s reserve data in similar fashion, but don’t count on it.

Last July, Xu Yongsheng, deputy director of the energy bureau under the National Development and Reform Commission, China’s top economic planning body was discussing their plan to stockpile oil and said “Of course we have no intention of starting the filling process now, when oil prices are above $70 a barrel.” Since then, the price of oil has declined about 30%. HMMM? Maybe China likes $50 per barrel better to fill its reserves. There is a lot of hype over OPEC’s oil price targets and yet, they are not being achieved. I am much more interested in trying to figure out China’s oil price targets, aren’t you? And while we are at it, how about their price targets for copper, steel, zinc, aluminum, etc. etc.  China may or may not be a currency manipulator but I think it’s much easier for them to be a commodity manipulator.

Despite the US oil inventory data last week and the resulting dip beneath the psychological $50 per barrel level, I saw a broad improvement in oil and gas stocks when I reviewed the charts this weekend. I am not entirely convinced that the decline is over, but there was significant firming in the sector. Some commentators are suggesting that Friday’s gains were largely due to short covering and buying ahead of the February contract expiration. That may be true and it might have something to do with winter weather finally matching the calendar in the Northeast (NYC), but whatever the cause - prices started to stabilize. There appears to be a more neutral trading environment so this week looks to be pivotal in reestablishing a direction. Sideways wouldn’t be bad but if it heads lower, I see no support until $47 and if it heads higher, we now have some substantial resistance at $58 - $60 per barrel.

I was wrong about Ben Bernanke’s appearance before the Senate committee yesterday.  Other than a marginal amount of political grandstanding, it did not get ugly.  It’s tough to take socialist Senator Sanders (VT) on this committee but I didn’t find his rants on the wealth and income gap to be any more ridiculous than if any other senator had spoken them.  I was expecting the Dems to throw some tough shots at the chairman, but instead they just lobbed in softballs and of course, the Republicans did the same.  For his part, Bernanke handled it all very well.  I don’t know if this is part of the “new kinder gentler” Democrat-controlled Congress or if they were setting him up for some future bashing.  Time will tell - but this time I have to give them credit and admit that I was wrong.

Controlling your emotions is critical to successful portfolio management. We’ve all heard that before, but it really is tougher to do than to say. If you look at the performance of HEDGEfolios right now, you’ll probably be able to identify a few of the emotions I am currently experiencing. I am frustrated, angry, disappointed - you name the negative and I’ve got it bad. It’s very rare for me to have the percentage of winning signals less than 68% and this week, I am posting 57.5% winners. Fortunately, 53% of the losers are less than 5% wrong and a market decline will reverse these figures very quickly. But that rationalization is not helping me right now. Having emotions like greed, fear, regret, and even anger are normal, but denying their existence is the first step towards failure. If you cannot recognize them, you cannot control them.  However, just because you are humble enough to identify your weaknesses, doesn’t mean you will be successful managing them.

Each week I review all these 4000 charts and it’s painful to see so many that I disagree with. Then I look at valuations and it usually makes me feel even worse. Now that I have 60% DOWN signals, any upward move in the market tightens the screws even harder. I just don’t see what the bulls are spewing these days in the underlying technicals or the valuations. So I am sticking with the HEDGEfolios Timing Indicator and working on my emotions. As I have previously written, the HEDGEfolios Timing Indicator typically is a leading warning sign by about 1 to 5 weeks. Given that it gave a bearish signal on 11/27/06 when the S&P was at 1400.18, we are 8 weeks into it and the market is still 2.1% above that level. If it sounds like I am hoping for a decline, you are correct. Satisfaction with being right is a huge trading emotion for me and I am looking forward to it.

Part of Speaker Pelosi’s agenda for the “First 100 Hours” included freeing the country from its dependence on foreign oil. Sounds ambitious and I know she didn’t think she could just wave her magic wand and solve our energy problems. Instead, it’s going to take a long time and we need to make proactive steps in Washington and in the oil patch. Immediately after Katrina there was a lot of talk about nuclear and ANWR and alternative energy and new refineries. What have we done since then? Not much in my opinion. We may have increased corn-based ethanol production but as I have previously written, that’s a small benefit with significant costs. No amount of additional subsidies over the current 50 cents per gallon will make corn an efficient or economical energy source. But that’s what we’ll probably get.

Pelosi’s first action plan is to renege on oil lease commitments and she is in familiar political territory. US history is full of examples of reneging on contracts - just look at how many times we renegotiated reservation boundaries and treaty agreements with Native Americans. It was shameful then and it is shameful now. Forget about the fact that the Clinton administration negotiated the terms that the Dems feel are unfair. At a time when politicians act with indignation towards Venezuela’s President Chavez for reneging on contracts in his country, our hypocrisy is pathetic. The Interior Department had the power to negotiate these contracts in 1998 / 1999 and now the Congress is unhappy with their progress in renegotiating the contracts voluntarily. So they are using their legislative power to usurp another part of the government - nice! The real message is that the Dems’ plan seems to rely on punishing big oil to solve our dependency on foreign oil. If that wasn’t so stupid it would be funny.

I know it’s easy for politicians to play on the hatred of Exxon by gas guzzling consumers, but is it really going to reduce our dependence on foreign oil? It may get votes, but it will not energize the companies those voters get their paycheck from or the car they drive to work or the house they heat. The plan calls for raising $12 billion dollars to fund alternative energy projects. Sounds noble but how do we pay for it? Get $6 billion by reneging on the oil royalty contracts and $6 billion from the “tax breaks” given to big oil and the problem is apparently solved. It may be politically wonderful but it’s economically ignorant. If you want a good summary of the details without much spin, read this article.

We need to take a harsh look at this energy crisis and do more than punish big oil by reneging on royalty contracts, removing “tax breaks” or imposing “excess profits” taxes. As for this new concept of “a conservation fee” on oil and gas from the Gulf of Mexico - I’ll keep my opinion on that brief - it’s stupid and it will cut production, not increase it. The bill calls for $9 a barrel fee on oil and a $1.25 per million BTU fee on natural gas for Gulf production as long as market prices remain at more than $34.73 a barrel for oil and $4.34 per million BTU for gas. I guess if you use precise numbers like $34.73 versus $34.75 or a round number like $35.00 it makes you sound smarter! Actually, it’s no coincidence that the bad royalty contracts failed to trigger at a threshold of (you guessed it) roughly $35.00 per barrel. Does any of this sound like a good way to increase domestic oil production? Or does it just sound like a good way to get votes and generate taxes to spend?

Don’t confuse the slogan of “reducing our dependence on foreign oil” from either President Bush or Speaker Pelosi with cheap energy or environmentally-friendly energy. Isn’t that what we really want? I don’t think people would care about our dependence on foreign oil if it was trading at $10 per barrel. And I think they would care less if oil wouldn’t cause pollution and greenhouse gases even if we had to pay $34.73 a barrel. We want cheap energy regardless of where it comes from and we want it to be environmentally friendly. Don’t confuse that with a generic desire to be free from dependence on Chavez and Imanutjob(Iran’s prez.) The bad contracts will cost the government about $10 - $35 billion in lost payments over their life depending on oil prices and the person making the estimate. The tax breaks cost us about $1 billion. You never know, but solving the energy problem will likely require more than $35 billion. This is the key point for me. We need to spend a lot of money to generate inexpensive and clean energy. We need to do it now. If punishing the oil companies is the best we can do, we will fail.

When Chairman Bernanke appears before the Senate Budget Committe this morning, it will be his first official go around with the Dems in charge. I expect it to get ugly as usual and more political posturing than economic policy. In this case, we should expect him to get hammered about the Fed’s efforts. The Dems want him to concentrate more on the mandate for creating full employment, but I find that funny in light of the current unemployment rate and the fact that companies create employment, not governments. The next course of action will likely be focused on setting the stage for the minimum wage battle. We will hear how much Dems hate defining inflation largely by looking at wages and they will bait him into social policy discussions. Inevitably we will get a healthy dose of discussions on personal saving, budget deficits, trade deficits, social problems, etc. The Q&A will be a fun one to watch. A bad performance here will set the stage for Ben getting booted in 2010 so he needs to be on guard. The Fed is supposed to be a non-partisan group but that won’t stop the partisan Congress from doing their thing.