Bias to sell dollars fades away…  Trading in yesterday’s clothes…   More thoughts on China…   Shadow Inventory…
And Now… Today’s Pfennig!
Good day… And a Wonderful Wednesday to you! Tuesday ended up being a very nice day, except for the currencies. After signing off yesterday and telling you how I had watched the euro climb back to 1.4025, it just couldn’t hold that figure or add to 1.4025.. And all the thoughts that had held the dollar hostage earlier that morning, being the China going to G-8, and so on, just faded like a black shirt put through 100 washes!

So… When I came in on Tuesday, the euro was 1.3920… When I came in this morning, the euro was trading 1.3925… Trading with yesterday’s clothes on. Back and forth, back and forth, the currencies seem to be in a rut… So, what happened to all the thoughts yesterday that China was making its first of many baby steps toward removing the dollar as the reserve currency? Well… They had the cold water of denial thrown on them… And the fact that apparently traders out there don’t believe the “China story” that I put on the table yesterday.

That, and the fact that U.S. stocks saw selling to the tune of -161 points in the DOW… I saw a story last night that came from a report by UBS, that said the euro will suffer in the coming weeks because of the U.S. earnings season putting pressure on stocks… Now, I agree with that statement sort of… I agree that right now, currencies are tied to risk assets like stocks, all thrown in the barrel like some college fraternity drinking party mix.. Not that I would know anything about that… But I’ve heard about it for sure! So, any way, back at the ranch… And I agree that the Corp earnings season in the U.S. is going to be very disappointing, causing stock prices to be weaker, and that will put pressure on the other risk assets, like currencies, and commodities…

But it doesn’t have to be that way! For as long as I could remember, well, back to 1992, when I began dealing currencies, I have not seen stocks, currencies and commodities all tied together for any long period of time… Whey they are thrown together now, has not been rationally explained to me by any one! But they are… The markets have done this, and the markets are “never wrong”… And once again, my thought that the markets always do what they are supposed to (which in this case would be a split of currencies and commodities from stocks), just not “when”!

So… Even though we’ve seen signs of the “break-up” the link / tie is still there, maybe not as strong, but still there…

So… I can hear you asking… “Hey Chuck, what’s it going to take to get these asset classes to break the link to each other?” Whoa there partner! You’ve learned well grasshopper, what a wonderfully crafted, and well thought out questions! Thank you sensei… You’ve trained me well!

OK, enough of all that! Let’s see… What’s it going to take?… Hmmm… Well, it will take a return to fundamentals… And I don’t think we’ll see that in earnest until the U.S. shows some life, and all the talk about additional stimulus goes away… The more we put 100 miles of desert between the financial meltdown and where we might be going, the better the chances of a return to fundamentals.

OK… There’s a BIG debate going on with the two sides in completely different colored corners… In the Blue corner we have those that fear the $1.1 Trillion in money supply that the Fed has put into the economy, and the fear that the Fed will leave rates too low for too long, thus creating inflation on the other side of this current phase of asset price deflation… In the Red corner, we have those that are true believers of the Fed and that they will be able to remove the stimulus of money supply and low interest rates without even a hint of inflation…

In the Blue corner is where you’ll find me… John Williams… And Morgan Stanley among other notables… In the red corner is where you’ll find a handful of economists, and Goldman Sachs… Speaking of Goldman, you wouldn’t expect them to say anything else but to support the Gov’t / Fed on this would you? I mean, it’s almost like they are related to each other! It gets a little creepy for me… But I think you get what I’m saying here…

And down south in Brazil, where one piece of good news from the country is followed by another, as witnessed by yesterday’s announcement that Moodys was going to review Brazil’s ratings for a possible upgrade, which was followed by a research report from Merrill Lynch. The brokerage that owns a bull, but is now owned by Bank of America, issued a research report saying that “Brazil’s real may gain the most among Latin American currencies in the 2nd half as a rebound in prices of the country’s commodity exports buoy the trade surplus.”

Well… The 1st half wasn’t so darn shabby for the real, as it gained over 16% VS the dollar in the 1st half of 2009… But we must temper this euphoria with the real with a dose of “reality” (get it?) This real is one volatile currency! The wild swings are enough to give the faint of heart a need to grab the heart pills! And… It IS AN EMERGING MARKET! And we all know that EMERGING MARKETS can be trying on one’s patience…

OK, having said that… You can’t deny that Brazil has really turned things around from 8 years ago… And now they’ve teamed up with heavyweights Russia and China, and brought along India, to form the BRIC’s, which have been giving dollar bulls major headaches in recent days as they demand to be a part of the world’s financial discussions, and work together to bring an alternative currency to the world’s stage…

The G-8 meeting that has been on most currency traders’ minds is going on as I write… At this point, China has not been allowed to speak, but they will be given that chance soon enough… Right now, the discussion is going on about how to make oil markets more stable… Hmmm… I’ve got the answer to that one… Find an oil reserve in your country, and then forget about everyone else’s oil problems! HAHAHAHAHAHA!

In Australia overnight, Consumer Confidence is on the rise, even if the currency has taken a step back… Consumer Confidence is up 9.3% in the recent month, following the 12.77% gain in June… Unfortunately, as I said the currency has taken a step back… The A$ has lost not only the 80-cent handle, but the 79-cent handle too, in the last two trading sessions…

All the March through June euphoria regarding a global recovery is getting dragged through the mud right now, and the U.S. earnings season won’t help matters any either… So, watch this currency as a proxy for world economic recovery… It will all be on the sleeve of the Aussie dollar…

Do you know what “shadow inventory” is? Well, it’s the new buzz-word that’s getting quite a bit of attention… Shadow inventory comes in several forms. It includes homes in or close to foreclosure but not yet put up for sale — a number that’s increasing. It also includes homes that owners want to sell but are waiting to put on the market until it improves.

Well… I told you a year ago that the housing problem was being made worse by all the inventory of houses that needed to be sold… And even our Mr. Magoo, former Fed Chairman, Big Al Greenspan, noticed the inventory as being a problem… Well, this shadow inventory could be adding to the already too big inventory… It’s like this “inventory” is hanging over the housing market like the Sword of Damocles!

So according to the data I saw… 3.5 million homes are now for sale… This Shadow Inventory is larger than that! The result, as this inventory comes into the market? Well… It will continue to put pressure on home prices downward… Oh boy! Just what house prices need, more downward pressure!

As this housing meltdown drags on… (and I might add, for those that were drinking the kool-aid, and wouldn’t listen to me when I kept harping about the housing bubble bursting, this has got to be very painful) you can see why there are those (and I’m one) that believe the housing recovery won’t come for some time… Maybe not until 2012! But probably 2011…

And then there was this… Google has announced that they will be selling an operating system to compete with Microsoft… I guess they didn’t take too kindly to Microsoft’s entry into the search engine arena! HA! I say that in jest, as these things take long periods of time before bringing them to the markets, obviously! I just found this story to be interesting…

And did you hear about how the Swiss government said Wednesday that it was prepared to seize UBS client data rather than allow the bank to hand it over to the United States to settle a tax case? Another interesting story…

And finally… The Eurozone printed 1st QTR final GDP results at a negative -2.5%… So… Again, we go back to the conversation regarding who’s car is uglier? The U.S. contraction in the first quarter was -5.7%… And in the Eurozone it was -2.5%…

Oh… And one more thing… I get people all the time telling me that China is fudging the numbers with their growth figures… Well, that may be, but it’s all we have to work from, we don’t live there, we don’t have any idea but what the Gov’t tells us! And the Gov’t told us in April that it was +6.1%, and I fully expect for them to tell us it will have risen to 8% in the 2nd QTR… Just go with it… It’s all we know… It’s not like here in the U.S. where we can see the difference from the reports the Gov’t tells us are true…

OK, on to the Big Finish… This has dragged, uh, I mean carried, no, I mean moved along so nicely that you don’t want it to end… Yeah, that’s the ticket!

Currencies today 7/8/09: A$ .7865, kiwi .6285, C$ .8590, euro 1.3920, sterling 1.6090, Swiss .9185, rand 8.1315, krone 6.5290, SEK 7.6575, forint 199.25, zloty 3.1780, koruna 18.68, yen 94.30, sing 1.4615, HKD 7.7505, INR 48.89, China 6.8325, pesos 13.42, BRL 1.9975, dollar index 80.63, Oil $62.47, 10-year 3.47%, Silver $13.07, and Gold… $921.65

That’s it for today… A crazy day in the currencies yesterday… Glad that’s behind us! Had a nice long talk with my economist friend yesterday. She is always so upbeat about stuff, and I’m always so reality based that we even out the conversation! I look forward to these conversations that take place about twice a year… I wish it were more, but she’s busy, and I’m busy, and there just aren’t enough hours in the day sometimes! I asked the question… If the Gov’t thought AIG was too big to fail, how can they sit there and watch what’s going on in California, the world’s 7th largest economy falling deeper and deeper into the abyss? We came to the conclusion that the Gov’t probably won’t watch it too much longer without reacting… So, there! You were a part of an economist discussion! Made your day, I’m sure! OK… Time to get to work… Let’s say this over and over again this morning… It’s going to be a Wonderful Wednesday!

Source: Back and Forth We Go!