With oil prices cut in half and gasoline near (or below) $2 per gallon, is now a good time for the U.S. to end its century-long addiction to oil?

The topic was raised by none other than the 'liberal bastion' of The Wall Street Journal Monday (subscription required0 with energy analysts and policy makers weighing in.

BloggingStocks Monday asked Energy Trader Jim Dietz to evaluate some of the major recommendations discussed.

• Four-day work week: "It's possible, but the best plan would be voluntary, allowing companies to opt in/out and adopt plans that meet their production needs," Dietz said.

• Mandated higher MPG for vehicles: "This is almost certain to be proposed by President-elect Obama, and will likely pass the Congress. It will reduce gasoline and diesel consumption."

• Mandated flex-fuel cars: "Another measure likely to become federal law and it would take pressure off oil consumption."

• Tax credit for fuel-efficient vehicles: "Another oil saver, and it stands a better than 50% chance of being passed by the next Congress."
  

• Federal funds for next-gen vehicle: "This will likely be included in any rescue package for General Motors, Ford, and Chrysler. A next-generation vehicle would be a game-changer, energy wise, but it's years away."

It should probably come as little surprise that the U.S. trade deficit actually dropped last year, falling 9% from the record all time high set in 2006. I say it should come as no surprise, mainly because you would have to have been living in a cave the past year not to realize that the U.S. dollar has been in free-fall.

While no one likes to see the current shape of the American currency, the one good thing that comes from a weak dollar is that our exports become more attractive to the rest of the world. In 2006, America ran a trade deficit of a massive $811.5 billion. That number shrank to $738.6 billion last year, and should drop even further in 2008 considering the current economic landscape.

So at least we have something to celebrate right? Well, before you go doing cartwheels over the drop in the deficit you should take a second to consider just what it means to run a deficit of $738.6 billion.

The trade deficit declined 6.9% to $58.8 billion in December 2007, as exports rose and imports fell, the U.S. Commerce Department announced Thursday. The figure was below the $61.6 trade deficit estimate.

For 2007, the trade deficit fell 6.2% to $711.6 billion, down from the record $758.5 billion recorded in 2006.

Monthly export record

December 2007 exports rose to a record $144.3 billion while imports declined for the first time in four months to $203.1 billion. Export activity remained strong to China, the Asia region, and South America. Exports of industrial supplies, civilian aircraft, capital goods, and consumer goods were particularly strong.

Economist Steve Affinito told BloggingStocks Thursday that in addition to a weaker dollar, which makes U.S. exports cheaper, the nation's exporters are demonstrating that they can find ways to maintain / increase international sales, even amid more-challenging economic conditions.

Trade: U.S. bright spot

"Across the board, companies are performing well on the export front, as U.S. goods, particularly high-value added items like aircraft, remain very competitive," Affinito said. "For the longest time trade had been a drag on U.S. GDP, but now it's starting to be a positive, which is good news for U.S. companies, employees, and the U.S. economy. The improving trade deficit picture is one of the few bright spots regarding the U.S. economy right now."

In the coming weeks, bloggingstocks.com will review those stocks most likely to benefit under each scenario: a weak dollar or a strong dollar.

Commodities expert Jim Rogers is on-record with where he thinks the U.S. dollar is headed in 2008: down. That, in and of itself, is not news.

"It doesn't take a genius to figure out that it's a currency that's going to be going down for some time to come," Rogers said in an interview with the Financial Times. Rogers added that in his interpretation the U.S. Federal Reserve's and the U.S. Treasury's willingness to print money and drive down the greenback is clear.

Among other consequences of the dollar's continued fall, Roger sees higher commodity prices, a rise in U.S. inflation, and a rise in China's currency, the yuan (if the Chinese government lets it rise more). Rogers, chairman of Beeland Interests Inc., said he is also shorting shares of Citigroup (NYSE: C). [Citigroup's shares closed down $1.92 to $35.81Monday after the company said it will have to write-off $8 billion-$11 billion to account for the reduced value of subprime mortgage-related securities.]

All of which begs a good question by the investor / reader: How did the U.S. dollar drop so much in value?

Commentators note that U.S. investors have poured a lot of money into foreign stock markets in recent few years.

As it happens, the flow hasn't been just one way.

In fact, based on cumulative 12-month totals derived from monthly Treasury Department data, foreigners appear to have invested a record amount in U.S. corporate stocks during the period ending in July, the latest month available.

When was the last record set? In January 2001, just as the dot-com bubble was bursting and the bottom was falling out of U.S. share prices.

Over the past decade, foreigner investors' buying and selling behavior has proved to be a reasonably good long-term timing signal -- in contrarian terms, that is.

In 2002, for instance, when the S&P 500 index began a major upside run, foreigners kept their investment to a minimum for nearly three years. They eventually rejoined the bullish party in late 2005.

A cynic might wonder: now that they have really started piling in, can much lower prices be far behind?

Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle.

The Dow Jones Industrial Average took 208 point nosedive today as investors' confidence, which already was shaken by the subprime mortgage meltdown, further eroded after Wal-Mart Stores Inc. (NYSE: WMT) Chief Executive H. Lee Scott said people will face "difficult pressure economically."

But wait, there's more.

The world's largest retailer also slashed its earnings forecast for the year. Facing panicky investors, money manager Sentinel Management Inc. asked for permission to halt withdrawals by investors. Financial stocks including Citgroup Inc. (NYSE: C), Merrill Lynch & Co. (NYSE: MER), Fortress Investment Group LLC (NYSE: FIG) and Goldman Sachs Group Inc. (NYSE: GS) took a beating.

Prices paid to producers rose 0.6% in July, higher than the 0.2% gain forecasted by analysts surveyed by Bloomberg. The trade gap narrowed 1.7% to $58.1 billion in June, according to the U.S. Commerce Department. Unlike in previous trading days, the Fed didn't pump more money into the market.

But by about 1:20 p.m. Eastern time, the Dow fell more than 125 points to 13,111.27. The NASDAQ Composite Index was at 2,521.99, down 20.9 points. The S&P 500 dropped 15.47 to 1437.45. These dire numbers make it tough to forget that the market is still up for the year -- at least that's the case for now.

Stocks are poised to open higher this morning as investors awaited key economic reports and held its breath for more bad news about subprime mortgages.

Bloomberg News reported that the trade deficit narrowed in June as exports hit a record and that the inflation rate excluding food and energy was less than forecast. Markets in Europe and Asia, which also have been tanking lately, were mixed today.

Bad news continued to hit Wall Street. Citigroup Inc. (NYSE: C) may lose as much as $3 billion because of loans to buyout firms and subprime mortgages, according to a report by Sanford C. Bernstein. Members of Congress are investigating the methods hedge funds use to avoid paying taxes, according to the Wall Street Journal. (subscription required,.

Meanwhile, Wal-Mart Stores Inc. (NYSE: WMT) reported higher quarterly profit but slashed its forecast for the year to $3.05 to $3.13 per share. That sent shares of the world's largest retailer tumbling in pre-market trading. Home Depot Inc. (NYSE: HD) earnings fell but were better than what Wall Street had expected.

This was the easiest forecast of a Fed rate decision that I ever made. The Fed seemed to follow my script to the letter. There was no rate increase or cut. The inflation bias remained the same. The Fed recognized the impact of the housing slowdown on the economy but gave no indication of a future rate cut.

In summary, more of the same! Wall Street seemed to be hoping for some indication of a rate cut. I do not understand the reasoning behind that. Wishing for something does not mean that you will get it. It is the holiday season, but there is no Santa Claus.

The economy continues to move along as indicated by the positive report on the Trade Deficit today. The inaction by the Fed is not hurting the economy. On the contrary, I remain cautiously bullish for the stock market in 2007.

Remember to separate the news from the noise, and Follow the Fed!

Doug Roberts is the Founder and Chief Investment Strategist for FollowtheFed.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.

We've all been watching oil and its recent fall from grace since this summer's highs, and today it became clear what impact the falling prices has had on the American economy. According to the Commerce Department today, falling oil prices helped push the trade deficit down a pretty remarkable 8.4% from September, the biggest one month drop in nearly 5 years.

As of the end of October, the trade deficit is reported to have been sitting at $58.9 billion. This is a very encouraging sign for the American economy, which was facing the largest monthly trade deficit ever back in August of this year, when the total deficit came in at an amazingly high $68.5 billion. The biggest factor in the pull back of the deficit was the much lower foreign oil bill that the country had to endure during the month. During October the total tab for our foreign oil consumption fell by 17.1% to $21.8 billion, which is still a scary number, but the lowest we have seen since mid 2005.

But not all facets of our overwhelming deficit improved during the month. Our deficit with China once again stepped a little higher and set another monthly high (for the third straight month in a row). We are now looking at an annual deficit rate of $229 billion with China as Americans continue to buy up huge amounts of toys, televisions and computers this holiday season.

If the Democrats are going to be able to take a bite out of the deficit once they assume control of Congress, they had better keep their fingers crossed that oil continues to trade around its current levels if not a little lower. We should get a better idea of where oil prices are headed later this week, as OPEC members meet to discuss further production cuts.

Okay, so my title is a bit misleading. No, I don't mean a bigger trade deficit is a good thing. What I'm getting at here is that bigger thinking could help lead us down a better road. Beginning with the introduction of transistors in 1947 and then progressing from transistors to integrated circuits and on through to today's computer chips, the trend in electronics manufacturing has been to make things smaller and smaller. While this shrinking of electronics has been an overall good thing, the concept has crept into nearly every class of consumer merchandise. This has made the manufacturing, shipping and importation of foreign manufactured items that much more lucrative.

In the 1970's we were faced with much screaming and yelling about how crude oil was going to run out in 20 years. There was a world wide mad dash to do something to prevent that from happening. The mantra for auto makers became "if it's not a compact car it'll be a subcompact car." People didn't like those cars much but they were sold to us as fun and practical. At .95 cents a gallon for gas, people were eager to use less oil in order to help save the world. Chromium steel was replaced with ugly black and gray plastic. Roofs were lowered to eliminate glass. Tires had their sidewall area reduced and tire widths began to narrow. Japan began to salivate as the proposition of exporting cars to America became lighter, leaner and cheaper. .

(photo courtesy of: www.njscuba.net/ )

Yesterday I was raked over the hot coals by several readers that feel we are doomed by a housing bubble that I would not accept. See: Housing Truth from Main Street; which turned out to be quite a controversial post.

I stand by most of what I wrote. However, there were plenty of valuable insights that are worth reflection among the ranting and raving. A particular comment by David Gross, although not very deep is important for its simple summary of many comments. It stimulated a response from me that I thought was worthy of a separate post and further discussion.

David's Comment

China may be kicking our collective butts regarding our colossal trade deficit, but it is also doing its fair share of spending too. Spending by China has affected commodity prices (metals, concrete), energy prices (oil & gas), construction service prices (design, planning, engineering, management), shipping, housing, clothing, electronics, you name it. The Chinese have been spending with reckless abandon -- all the time buying our treasury notes and expanding their economy at the rapid pace of 8% to 10% GDP annually. Read the Economist for more, China forecast

Growth in China has spurred the U.S. and the global economy. Reading the comments I have received to yesterday's post Venice Beach as economic indicator: Consumer spending slows, there seems to be plenty of negative sentiment out there about the U.S. economy. Making the case for recession is not hard to do. One could simply look at our run-away trade deficit and Federal spending. With a minimum of economic understanding, you could get scared to death.

My "favorite feature" of the U.S. budget (deficit) is the cost of the Iraq war which is an "off-line" item -- meaning they do not count it in their figures. That's hysterical. Let's all just take our mortgages and rents and put them off-line. Then we won't have to worry about them and no one will notice. The Feds should have a "Department of Pretending". EVERYONE WOULD UNDERSTAND THAT PERFECTLY.

I think the Federal branch learned this trick from Wall Street. It's called a "one-time expense" and since it's not a "recurring expense," analysts just set it aside when determining the value of a company. That stinks, but it will have to be the subject of another story. The problem is we have had this one-time expense (Iraq) for several years and we can anticipate several more.

But I have digressed. The main point I wanted to make here is that we can all make the case for a recession. Trade, debt, spending, energy, housing and numerous other areas support the case. Commenter's have raised these issues and see bad times in the next few years.

While I agree that is a possibility, I think that global recession will be postponed at least until the Chinese have their BIG OLYMPIC SHOW in Beijing, regardless of any other factors. I believe the Chinese government has been postponing numerous "pipers they have to pay" because of the upcoming Summer Olympics. This has been a major focus since they won the right to be the host in 2008. Some of their early and rapid economic expansion can be traced to this effort. When it is over they will utter a collective (leftover communist term) sigh of relief. When that happens, spending will slow, interest rates will be allowed to rise and only firms specializing in the clean-up of the environment will be popular.

China has not only been slow to curb its unsustainable growth, but one of the pipers they will have to pay will be for cleaner water, air and city streets and farmland. The first part to any clean-up campaign is to stop doing those things that are causing the problem; which is everything, in this massive national expansion.

I do not see the same doom that many see. But when China takes that HUGE sigh of relief, then we may have a recession.

Sheldon Liber is the CEO of a small private investment company and the vice president for Design and Research of an Architecture & Planning firm.

The current account balance is a broad measure of foreign trade that includes trade in goods and services, investment flows and foreign aid and is regarded as the best measure of America's international standing.

The trade deficit was down 6.5% to a $208.7 billion gap in the first three months of this year. This comes after a significant narrowing at the end of 2005, when the Commerce Department reported a record trade deficit of $223.1 billion.

While this is encouraging, the deficit is still near its all time high and analysts believe this quarter will prove to be another record, as will this year.  This could explain why the markets didn't react much to Friday's favorable news (that included a second report indicating that consumer sentiment in early June rebounded after its big drop in May), especially in light of continuing high oil and commodity prices.

The market is also still getting to know Bernanke.  Other than Greenspan's "irrational exuberance" comment from which the market still hasn't fully recovered, Greenspan used discretion in his comments.  Bernanke, on the other hand, seems to have a looser mouth which caused one of the most volatile weeks in the market in years.

The yield curve continues to be inverted, indicating that the market expects a rate hike not only in the June's FOMC meeting, but also another quarter-percentage-point at the beginning of August.  An inverted yield curve preceded each of the past four U.S. recessions.

All this begs the question whether the latter part of the past week in the market is sustainable.  Since nothing has changed fundamentally and since this week's volatility definitely showed fears of higher inflation and further tightening, it is possible that the market isn't showing sustainable strength.  Investors might soon be looking at safer instruments such as cash and commodities if inflation keeps ticking higher.  Perhaps a look north of the border at the commodity heavy Toronto Stock Exchange is something worth considering.