A nasty day in the currencies yesterday, except Japan of course. The Dow jumped 290 points yesterday, maybe an Obama bounce? You all know that I subscribe to an Obama bounce for stocks and the dollar in the first part of this year… But given what I know about, and what you now know about, after I drew it all out yesterday, the additions to the deficit that Obama will make, the focus on the fundamentals should return by late spring, early summer… That’s my story and I’m stickin’ to it!

Well… As I said in the opening, the currencies led by the Big Dog, euro, suffered through a nasty trading day, with the euro touching below 1.29 for a good part of the day. The risk takers are nowhere to be found. Where have all the risk takers gone… Long time passing… A Reuters reporter asked me yesterday if I was still of the opinion that the yen had more to rally or was it overbought? I said, that as long as the risk takers are nowhere to be found, yen should continue on its path higher VS the dollar, euro and sterling. The RSI (Relative Strength Index) for yen, shows that it is a tad overbought, but that’s not enough to change my mind. Nor is it enough to change the mind of a currency trader at the Bank of New York (BONY), who believes yen may rise to 85 VS the dollar by midyear… Another currency trader at the Royal Bank of Scotland (RBS) believes the Bank of Japan will step in and intervene to stem the yen’s rise….

That may be, but there’s been no sign of the Bank of Japan (BOJ) to date… Of course that could be the kiss of death that I just bestowed on yen… But I somehow doubt it… Yen hasn’t been a moon shot since reaching 88… In fact it has bounced between 88 and 91…

In the overnight markets, the euro rallied all the way up to 1.3080, but since I’ve come in it has been falling and now is barely hanging on to 1.30… The rally just doesn’t seem to have legs and is fizzling out…

OK… Our long time friend, Jim Rogers, was talking again about the currencies… Let’s listen in to see what this very well respected analyst / investor was talking about…

“In a Bloomberg video interview, Jim Rogers said the U.K. is “finished.” According to Rogers, oil sales from the North Sea were the only thing supporting its economy, and the oil is running out. London, a global financial capital, is also a “disaster” because many of the current economic problems originated there. Bankers and money managers left the U.S. to operate with less regulation in London. Rogers has sold all of his pounds sterling.

And with the pound and U.S. dollar under scrutiny, where are currency traders putting their money? In the countries with the largest trade surpluses – Japan, Norway, and Switzerland. European banking giant BNP Paribas forecasts the yen will appreciate about 14% against the dollar by June. Norway’s krone is one of Goldman Sachs’ top picks for 2009 (it’s one of Jim Rogers’ top picks, too). And Bank of America says the Swiss franc will gain against every major currency.

Maybe as speculations, these are good ideas. Me? I prefer gold to any paper currency.”

Yes… Gold… The shiny metal broke its recent trend of rallying along side the dollar yesterday, but the sell off was small… Negligible at best… But a breaking of the trend nevertheless. I believe that Gold will get caught up with the currencies in the Obama bounce, but that will be a temporary thing…

OK… I’ve beaten the pound sterling sufficiently for some time now… But a U.K. reader sent me a note that he saw regarding Barclays Bank… He saw this on CNBC… “The Daily Telegraph and Times newspapers reported on Thursday that any attempt by Barclays to raise extra capital could trigger a clause that would deliver control of the bank to Middle Eastern investors. Barclays opted to raise funds privately last year rather than take part in the British government bailout. Qatar’s sovereign wealth fund and Sheikh Mansour Bin Zayed Al Nahyan, a brother of Abu Dhabi’s ruler, invested up to 5.3 billion pounds in the bank.

According to The Daily Telegraph, a clause in the agreement states that if at any time before the end of June Barclays raised more capital at a price lower than 153.276 pence per share, the Middle Eastern investors could take their stake at that lower level.”

Now that would throw a real spanner in the works for the U.K. if they truly want to go down the nationalization path for their banks… They already own majority stakes in Royal Bank of Scotland, and Lloyds… And they had to take over Northern Rock last year…

I don’t know what nationalizing the banks does to the pound sterling, but the image of this happening can’t be a good thing… Not in my opinion anyway…

So, did you see that China’s 4th QTR GDP grew at a 6.8% clip? Now, compared to the plus 10% growth rates China was posting for the past few years, 6.8% looks pretty measly… But! Let’s look around the world right now and see who has a GDP that even compares? Well, that roster would be pretty small… In fact, I can’t think of anyone other than China that has GDP of 6.8%! This 4th QTR drop puts the annual growth rate in China for 2008 at 9%… Again… I’m from Missouri, you’ll have to show me a country, other than China that posts a figure that strong!

In the whole scheme of things, this is pretty significant for China though. And all the reason I believe the Chinese officials will continue the slow appreciation of the renminbi… This is going to put a lot of people, investors, traders, into a lull regarding renminbi, as everything around the world slows down… But in China, inflation is still a problem, and that can be dealt with by allowing the renminbi to continue its slow appreciation…

Well, I came across something yesterday, I saw it, Kristin sent it to me, and then Chris sent it to me, so it hit a nerve with all three of us… Our friends over at Casey Research, did a chart, that I can’t put in the Pfennig, but I can tell you what is showed us…

Since August, banks have built their cash position in the form of Treasuries, agencies and deposits at the Fed by $865 Billion, while their loans and leases have increased by only $325 Billion. So you can imagine the chart with one line for cash position rising, and the other line for loans falling… Here are the people at Casey Research’s thoughts…

“In other words, rather than lending the billions of dollars received from the Treasury’s Troubled Asset Relief Program (TARP), as was originally intended, the recipient banks have squirreled away the bailout funds in order to shore up their balance sheets.

Concurrently, the Federal Reserve is exchanging its excess reserves for toxic waste from the financial institutions.

The combined affect is a “circular bailout” with the Treasury borrowing… in order to lend money to banks… that then lend it back by purchasing more Treasuries. Of course, the expense of this entire bailout scheme ultimately falls onto the back of the tax-paying public.”

>>>> back to me… We finally get a couple of data bones thrown to us today, as the data cupboard gets restocked with Housing Starts, and Building Permits for December, the House Price Index for Nov. and the Weekly Initial Jobless Claims… None of this will be good, bright, or even a warm and fuzzy, so prepare for more rot on the economy’s vine…

And don’t look now, but the price of Oil has pushed higher this week… Now trading at $44.50

Oh, and one more thing… Singapore officials have announced an economic stimulus package, which has been well received by the markets, and has allowed the sing dollar to bounce off the lows we’ve seen this week… Ok! Off to the Big Finish…

Currencies today: A$ .6565, kiwi .5275, C$ .7940, euro 1.30, sterling 1.3785, Swiss .8650, rand 10.0750, krone 6.9625, SEK 8.22, forint 217.85, zloty 3.3390, koruna 21.30, yen 88.80, sing 1.4950, HKD 7.7590, INR 49.16, China 6.8370, pesos 13.79, BRL 2.3190, dollar index 85.77, Oil $44.50, Silver $11.30, and Gold… $850.88.

Source: Euro Rally Fizzles Out

Geithner, currently the president of the Federal Reserve Bank of New York, is viewed by Democrats and Republicans alike as probably the most qualified candidate to succeed current Treasury Secretary Henry M. “Hank” Paulson Jr., since whoever fills this post will have to be able to step right in and make whatever moves are needed to fix a financial system that seems to get worse by the week. Geithner is actually viewed as perhaps the one candidate with the qualifications, personality and personality needed for success.

But there’s a problem.  The man chosen by President-elect Obama to run the U.S. Treasury failed to pay $34,000 in taxes over several years in the first half of the decade. This oversight, which relates to a period when Geithner worked as a senior official with the International Monetary Fund (IMF), will complicate a Senate Finance Committee hearing into his nomination as U.S. treasury secretary, the online edition of the London (U.K.) Times reported. That issue – as well as a second, regarding the employment of a housekeeper without a work permit – emerged in papers released last week by the Senate Finance Committee.

Lawmakers on both sides of the aisle were saying last week that they were still hoping Geithner could be confirmed, but with each passing day there are a growing number of critics, many of whom are calling for him to withdraw. The days ahead will tell us whether Geithner will be able to assume the post so many believe he’s just right for, or whether President Obama will have to settle for a less-than-perfect replacement.

As Obama prepares to take the historic oath of office as the 44th President of the United States tomorrow, he faces the worst financial and economic crises since the Great Depression.  He intends to hit the ground running and put his personal touches on the much discussed stimulus package.

Congressional Democrats revealed plans for the new administration’s stimulus, which has grown to $825 billion and which includes $275 billion in tax cuts.  For good measure, the Senate approved the release of the next $350 billion of Troubled Asset Relief Program (TARP) money, but only after Obama pledged to place restrictions on banks that will be receiving funds.

Market Matters

A light week on the economic calendar gives way to more earnings reports as investors move beyond (depressed) financials and focus on other key corporate releases, including:

• International Business Machines (IBM) (Tuesday).
• Google Inc. (GOOG) (Thursday).
• Microsoft Corp. (MSFT) (Thursday).
• General Electric Co. (GE) (Friday).

Expectations are incredibly dire so any positive earnings surprises (no matter how low) should be well received.  The new Citigroup Inc. (C) will be worth watching as some analysts expect its downward spiral to continue and anticipate a similar fate as the bankrupt Lehman Brothers Holdings Inc. (LEHMQ).

Amid all the talk of recession and bailouts, foreclosures and bankruptcies, unemployment and deflation, bear markets and capitulation, there was actually an airline-related story that actually was the feel-good story of the week last week – and it involved perennial also-ran US Airways Group Inc. (LCC). On Thursday, in an incident that the New York governor has labeled as “Miracle on the Hudson” – and in a story that finally lifts the human spirit above the “gloom and doom” of the ongoing financial crisis – U.S. Airways Capt. Chesley “Sully” Sullenberger III made a series of split-second decisions and heroically ditched his Airbus jetliner in the Hudson River after a dual engine failure, saving the lives of all 150 passengers and crew.

Many folks didn’t even get their feet wet. The National Transportation Safety Board (NTSB) said it will be studying this case as an example of all the things to do “right” during such a crisis – in stark contrast to most of its investigations, which look at the sometimes scandalous events that went wrong. Sullenberger, a former U.S. Air Force fighter pilot is also a skilled glider pilot, and is also the airlines’ expert on safety.

So while Vikram S. Pandit (Citigroup), Kenneth D. Lewis (Bank of America Corp. (BAC)), John Thain (Merrill Lynch & Co. Inc. (MER)), G. Richard Wagoner Jr. (General Motors Corp. (GM)), and many others, shirk responsibility over corporate (and shareholder) losses, let’s not forgot that true heroes still exist and their leadership is not measured by the value of their stock options or investment portfolios, or the size of their (missed) bonuses. Thank you, Sully.

Bank of America, fresh on the heals of its first quarterly loss in 17 years, emerged as the initial beneficiary of new TARP dollars (and loan guarantees) to help absorb Merrill into its corporate umbrella (where it joined forces with another failing institution, (Countrywide Financial Corp). While BofA seemed to be embracing the “financial supermarket” concept made famous by Citigroup, the latter took the opposite approach and sold part of its Smith Barney brokerage unit to Morgan Stanley (MS) and divided its remaining operations into two entities (See related stories on both Citi and BofA in today’s issue of Money Morning.)

Citi lost more than $8 billion last quarter, despite its personal government bailout and initial TARP money.  Deutsche Bank AG (DB) warned of a $6 billion quarterly loss of its own, revealing that the financial debacle is not limited to the United States.  JP Morgan Chase & Co (JPM) recorded a slight profit last quarter, but added to its loan loss reserves as CEO James “Jamie” Dimon expressed “disappointment” over the results.

While the financials reported earnings (losses) early to avoid the painful waiting, the news from other sectors was not any better. Alcoa Inc. (AA) kicked off the earnings season by announcing worse-than-expected results, while Intel Corp. (INTC) lived up to its dire outlook by reporting a 90% drop in profits.

Though Thomson Research predicted a 14% decline in Standard & Poor’s 500 Index earnings for the quarter, that forecast may look optimistic after the initial reports.  In other corporate news, Nortel Networks Corp. (NT) filed for bankruptcy; Yahoo Inc. (YHOO) found a new CEO; Circuit City Stores Inc. (CCTYQ) moved into liquidation mode; and Apple Inc.(AAPL) will continue without Steve Jobs for the foreseeable future.

Oil plunged below $35 a barrel for a bit as the Organization of Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) each reduced their projections for global demand in 2009.  Stocks resumed their downward spiral (before rebounding slightly late in the week) as the banking sector proved that TARP was no easy fix and that the earnings season could be disastrous.  A horrific retail sales report (see below) added to the economic woes as investors searched long and hard for something to believe in.  Thanks again, Sully, for the welcome relief (no matter how temporary).

Weekly Economic Calendar

Alas, a Ben Bernanke sighting.  During the week, the U.S. Federal Reserve chairman expressed his concern that a new stimulus package might not be enough to provide a “significant boost” to the economy and confirmed that policymakers will “do their part” to promote recovery.  The Fed’s Beige Book depicted a domestic economy growing weaker by the day as conditions deteriorated within virtually all sectors across virtually all regions.  Fearful of a weakening labor picture, consumers disregarded the available (deep) discounts provided by the nation’s retailers and contributed to a very dismal holiday season.  In fact, retail sales plunged by 2.7% in December, more than twice the expected decrease in activity, and suffered the first annual decline on record (since 1992).

While the trade deficit dropped to its lowest level in five years, exports also fell as our international trading partners have lost their unlimited appetites for U.S.-made goods and services.  This bad news for domestic manufacturers will surely be reflected in corporate earnings in the quarters to come.  On that note, industrial production dropped by 2% in December, a far worse showing that analysts expected.  On the housing front, 30-year mortgage rates fell below 5%, though home purchases are still rare and borrowers with less than stellar credit face difficulties in refinancing loans in this environment.

The inflation picture offered a bit of a reprieve from the negativity (though naysayers continued touting deflation or worse).  Wholesale prices plummeted for the fifth consecutive month and experienced their first annual drop since 2001.  In December, gasoline prices fell by another 25% and even food costs suffered their largest decline since early 2006.  The less volatile core producer price index (PPI) – which excludes the “volatile” food and energy components – rose slightly in December, though most economists expect that the lower energy costs will soon impact other sectors of the economy, as well.  Consumer price index (CPI) data reflected another large decline in retail prices, and the smallest increase in annual inflation since 1954.

Unfortunately, few analysts even speak of the stimulus package that Americans have received at the pumps over the past few months as gas prices have plummeted far more than 50% since mid-summer (and this one won’t cost taxpayers a penny down the road).

Source: Could Tax Problems Trip up the Confirmation of the Best Candidate for Treasury Secretary?

The buck’s performance was tempered by an announcement that German retail sales fell 1.7% in April, vs. consensus expectations for 1.4% growth. That curbed talk that the European Central Bank might raise interest rates, making it even more competitive with the dollar.

It also provided evidence that the slowdown already being felt in the southern European economies is beginning to make itself known in core countries.

Meanwhile, the dollar actually strengthened against the Canadian loonie after Canada reported the first quarterly decline in economic growth since the second quarter of 2003. March growth declined 0.2% from the previous month.

“The renewed deterioration in GDP suggests that the Canadian economy is being more greatly impacted by the U.S. slowdown than earlier thought,” wrote Michael Woolfolk, of the Bank of New York Mellon.

And the U.S. Commerce Department reported that nominal personal incomes, nominal consumer spending and consumer prices all increased 0.2% in April, suggesting the economy weakened further in the second quarter of the year, even as the first tax-rebate checks began arriving.

Source: Dollar Slides – But Retreat is Capped by Weak German Sales Data 

Traders responded positively to the Conference Board’s index of leading economic indicators, which rose for a second straight month—up 0.1%, matching March’s gain—after falling for the five previous months.

“These data certainly reflect a weak economy, but not one in recession,” said Conference Board labor economist Ken Goldstein. The small increases in March and April “could be a signal that the economy may not weaken further.”

“The U.S. dollar rally looked increasingly at risk in overnight trading action. However, the unexpected reaction to this morning’s leading indicators report indicates a willingness to continue buying greenbacks on positive U.S. news,” said Michael Woolfolk, of the Bank of New York Mellon.

But Marc Chandler, currency strategist at Brown Brothers Harriman, disputed that interpretation of the reason for the buck’s rise, saying that, “we suspect it is more a question of positioning.”

Source: Dollar Firms as Leading Economic Indicators Eke Out a Small Gain