Good day…Chuck has a bevy of doctor’s appointments today, so he decided to let me take over the Pfennig. Unfortunately it will go out a little later than usual, as I always struggle to get all of my thoughts together so early in the morning. Its not that I come in late (I was here two hours before everyone else) but it just takes me much longer than Chuck to get it all on paper. But enough of the excuses, I’ve got to get writing.

Weekly jobless claims released in the US yesterday morning fell below 600k for the first time since January but the continuing claims continue to rise, hitting another record. The slight improvement in the weekly numbers was distorted by the automotive sector. Car companies typically shut down plants in early July in order to change over to the new model year. Bankruptcy forced many of these plants to shut down much earlier than normal, and some temporarily started up production again during the past few weeks.

Chuck would have a field day with the jobless claims, as the government economists were hard at work ‘massaging’ the numbers to give everyone a more ‘clear’ picture of the data (why can’t they just report the actual number of people filing for unemployment?). As Chuck has pointed out, the Labor Department adjusts the figures using seasonal and demographic trends, creating ‘ghost jobs’. Since automobile plants typically shut down in the first weeks of July, the labor department expected a large increase in claims during this time. In order to offset these ’seasonal factors’, the brain trust at the Labor Department added back a number of jobs in order to balance out the expected temporary layoffs in the auto sector. You would think the Labor Department would realize that most of these automobile workers were already idled, and therefore keep the adjustments to a minimum. But that would be too logical, so they just went ahead and ’seasonally adjusted’ the claims as if this was a typical July for the auto sector.

The continuing claims illustrate a much clearer picture of the US job market, with unemployment spiking up to 9.5% in the US. The news from the retail sector was also gloomy, as the ICSC Chain Store Sales fell another 5.1% YOY during the month of June. Inventories also continued to shrink for a ninth month in a row in May to just over $400 billion. This is the lowest level since August of 2007, and raises some longer term inflationary concerns. Some of you are probably questioning this last statement, so I will explain.

Lower retail sales have forced stores to keep inventories down. I was in a local Walmart store the other day and noticed the shelves were emptier than what I have seen in the past, items weren’t stacked 5 deep and didn’t reach toward the ceiling. US consumers have been buying less and saving more, a very good thing! But stores have reacted by dropping the amount of inventory they are carrying (again a smart thing for retailers). Against this backdrop, the US government continues to flood the economy with cash, trying to get consumers to start spending again to jumpstart the economy. For now, the cash has been hoarded by banks and used by consumers to pay down some of their massive debt. Eventually the ‘all clear’ horn will sound, and consumers will start looking to make purchases again, but will find empty shelves. Inflation will follow, as too much cash will be chasing too few goods.

But our government has a much shorter term view, and continues to pump money into our economy with no real regard for future inflationary concerns. And some very smart economists seem to agree with the administration. Both Nouriel Roubini and Robert Shiller, respected economists, are calling for additional stimulus. In a radio interview yesterday, Roubini predicted the US recession will last another six months and be followed by a ’shallow’ recovery. On the same radio show, Shiller said the economic crisis would continue despite the $12.8 trillion pledged by the US government and Federal Reserve.

The BOE shook up the markets with a surprise announcement not to increase its quantitative easing program. The Bank’s Monetary Policy Committee put the program designed to pump extra cash into the markets by purchasing its own debt on hold after announcing it would also keep interest rates steady at .5%. The move was a major surprise to the markets, and sent the price of gilts (the UK’s treasury bonds) falling and the price of the Pound Sterling higher. The BOE was the first of the western central banks to begin the controversial program in which it monetizes its debt; hitting the overdrive button on the printing presses by monetizing its debt. We’ve never been a fan of the Quantitative Easing programs, as they are short sighted with total disregard for the future inflationary pressures the exert on the economy. But several other central banks, desperate for a way to get cash into their economies have followed the BOE’s lead.

The move by the BOE was even more surprising given the fact that the Chancellor has authorized another 25 billion pounds to be added to the program. Perhaps the Bank’s Monetary Policy Committee is finally starting to realize all of the QE which it has done hasn’t really had the desired impact. Much of the extra cash being created by the program is simply being hoarded by banks and is not making its way out into the economy via loans. Sound familiar? We have a similar situation occurring here in the US, with banks sitting on a majority of the stimulus monies which they have received. They have used the funds to shore up their balance sheets, a good thing long term, but not what the central banks intended with the introduction of the QE programs.

But enough of the economic talk, I need to let you know what happened to the currency markets overnight!! In spite of the Labor departments attempts to ‘adjust’ the weekly jobless claims, the economic data released here in the US yesterday was generally poor. This raised further concerns regarding the global economic recovery, and forced investors back into the US treasury market. As typical during these periods of uncertainty, the Japanese yen was the best performing currency. This is due to a general deleveraging as investors purchase yen to pay down debts used to invest into higher yielding assets.

We have seen this pattern repeat several times over the past year. As investors start to see some signs of recovery in the global economy, they invest into the higher yielding currencies, and borrow funds at lower rates available in Japan. But as soon as they begin to question the recovery, they move back out of the higher yielders and pay back these loans in the Japanese yen. Morgan Stanley believes the recent move by the yen is just the beginning of another big move, predicting a move to 85 yen/dollar. The foreign exchange strategists at Morgan Stanley predict the yen will continue to rally through the end of the year as doubts about the global recovery intensify. But their longer term predictions are less enthusiastic, as they feel the yen will weaken throughout 2010.

The commodity currencies took a hit over the past few days as the price of oil and metals continued to fall. Oil fell below $60 per barrel for the first time in a couple of months. Concerns over the global recovery, along with some slight calming of tensions in the gulf states have caused the price to drop. One commodity currency which has been able to hold steady during the recent selloff is the Brazilian real. A report that car sales in China surged bolstered the outlook for the commodity rich country. China’s passenger-vehicle sales rose 48% in June, pushing China past the US as the world’s largest auto market.

Increased automobile demand in China is another sign of their slow move away from an export based emerging market economy to that of a more balanced one. China’s exports tumbled for an eighth month in June, but internal demand helped by the government’s stimulus package is offsetting some of the impact of these falling exports. Imports also fell, but the size of the decrease was the least in eight months. This is good sign for the future of China, as imports are typically a leading indicator for exports in China.

China’s foreign exchange reserves likely topped $2 trillion for the first time, climbing another $67.8 billion in the second quarter. The central bank is predicted to release the number sometime today. The increase in reserves certainly cause concern in the currency markets, as officials in China continue to call for the diversification of these reserves. According to a story in the Financial Times, China launched its highest profile criticism of the dominant role of the US dollar as a global reserve currency during the last day of the G8 meetings in Italy. “We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies exchange rates and promote a diversified and rational international reserve currency system,” Chinese state Councilor Dai Bingguo was reported to say. Western leaders tried to play down the remarks, with Gordon Brown stating that he did not remember Mr. Dai making the remarks.

Separately, Joseph Yam, chief executive of the Hong Kong Monetary Authority, said Hong Kong might consider diversifying more of its $200 billion reserves away from the US dollar. I would expect China to keep the heat on the Obama administration in order to try and get them to reign in some of their ‘quantitative easing’ programs. The Chinese officials continue to be concerned about the future inflationary consequences of these programs. But at the same time, they have to be very careful about the diversification out of the dollar, as they still hold trillions of dollars and don’t want to cause a sudden fall in their value. The big boss, Frank Trotter, constantly reminds us that China has a much longer term thought process, and has an extreme amount of patience. I would expect them to continue to slowly diversify their holdings, adding to the long slow decline of the US$.

With that I will move on to the currency roundup. Sorry to go so long this morning, but I felt like there was a lot of data to get through.

Currencies today 7/10/09: A$ .7760, kiwi .6263, C$ .8596, euro 1.3902, sterling 1.6198, Swiss .9172, rand 8.196, krone 6.5369, SEK 7.9021, forint 199.10, zloty 3.1440, koruna 18.708, yen 92.76, sing 1.4623, HKD 7.75, INR 48.97, China 6.8327, pesos 13.6408, BRL 2.009, dollar index 80.489, Oil $59.66, 10-year 3.337%, Silver $12.64, and Gold… $909.39

That’s it for today… Everyone is limping into the office this morning, as we played a double-header in our kickball league last night. We ended up splitting the two games, but as my wife continues to tell me, kickball is a game for kids, not middle aged currency traders!! One of our team had to go to the hospital last night, as he injured his shoulder diving for a catch in the outfield; I hope Joe B’s shoulder turns out to be ok!! St. Louis is getting ready for the All Star weekend, and I saw one of the blimps floating around last night. My son, Brendan and I are heading downtown to compete in the All Star Charity 5k run which begins at Busch Stadium. It will be fun to be downtown and around all of the All Star hoopla, even though we don’t have a ticket to any of the events. Hope everyone has a fantastic Friday and a Wonderful Weekend!!

Source: Frightened Investors Move Back into US Treasuries

The rumor going around this morning, is that the banks are all right on the night, and not in major deep dookie any longer. Hmmmm… Didn’t I tell you over a week ago that this was going to be the case? I said it because… I just don’t believe the Gov’t is going to “spook” the markets right now and release the “real results”… Of course I don’t know that to be a fact, it’s just my hunch. I could be all wet… But, at least I got the first part correct, if in fact the results print as rumored…

But then, Bloomberg printed a story last night that showed a handful of banks needing between $34 Billion and $2 Billion in additional capital… So… Let’s see which set of books the Gov’t reveals, eh?

OK… So the currencies all sold off on the news yesterday morning that the banks would need more capital, and then came back overnight on the latest rumor… As I said yesterday, the markets are all about the stress tests right now… Actually, I’m surprised the Gov’t didn’t delay them one more day so that the focus would be on the stress tests tomorrow, instead of the Jobs Jamboree!

Speaking of the Jobs Jamboree that will take place tomorrow… The ADP Challenger report printed yesterday and indicated that tomorrow’s Jobs data will show less jobs lost, and a number below 600K for the first time in 5 months! ADP says the jobs lost were 491K… And believe me now and hear me later on this, the media will eat this up, and be all ecstatic about the fall from 600K to 491K… As if… 491K is a “good number”! Well, yes, it’s better than 600K… But the reporting should all be balanced… Like… “Is this the turning point in job losses? Yes, their still almost 500,000 for the month, but that’s a fall of over 100,000. While one monthly report does not make a trend, just like one swallow doesn’t make a summer, this is good news, and we’ll be watching for signs of further improvement in May.”

I’m watching the Big Dog, euro, rally right now, from an overnight low of 1.3250, to its current level of 1.3330… As German March Manufacturing Orders surprised this morning with a rise of 3.3% in March. The European Central Bank (ECB) is meeting right now, and is expected to cut rates 25 BPS to 1.25%… I read a couple of stories yesterday regarding the ECB… The writers were saying how the Eurozone economy is in shambles and needs a larger than 25 BPS rate cut… But, I argue with that… The ECB wants to keep some rate cut arrows in their quiver, in case they need more rate cut stimulus in the coming months… They shouldn’t shoot them all now! That’s what the Fed did, and we know what that led to… Quantitative Easing!

But the Big Winner of yesterday and last night is the Aussie dollar (A$)… It’s on a moon shot, since the Reserve Bank of Australia (RBA) left rates unchanged the night before, and issued a balanced statement afterward, with emphasis on waiting to see the affects of the previous rate cuts. The A$ got an additional boost this morning when it was reported that the unemployment rate in Australia fell for the first time in 8 months! The A$ is 75-cents and change this morning, heading to 76-cents… A 7-month high!

Some commodities have been rising in price recently… I’ve chronicled the rise in the Oil price, but here’s one you don’t hear about every day, except of course if you listen to our friend, Jim Rogers, every day! I can hear Jim Rogers talking about sugar as if he’s sitting right here next to me… Sugar is heading to a 28-year high, as the crop in India fell short of expectations… And Wheat had gained 3 consecutive days now, on low yield estimates for the U.S. crop… I hear you Jim!

I would think that if the bank stress tests “somehow” show no insolvency risk, that risk taking will be back on the table, BIG TIME! So… I would think that if risk taking is back on the table, Gold, currencies and other commodities will be singing a different tune… A tune of Happy days are here again, The skies above are clear again, So let’s sing a song of cheer again, Happy days are here again… OK, admit it, you after singing along with this, you had a vision of Bugs Bunny dancing with a cane singing the song! HA!

Speaking of India… Yesterday, I told you about how the currency was rallying, and how my Currency Capitalist colleague, Ashish Advani, gave the currency the thumbs up in last month’s letter, and how Standard Chartered Plc was now bullish on rupees… Well, now add Society General (SOCGEN) to the list of rupee flag wavers! SOCGEN believes the rate cuts in India are a thing of the past, and it will be all seashells and balloons for the rupee going forward…

And while I’m talking about an Asian currency… I might as well head over to China and talk about how their stimulus continues to hit the nail on the head, and help to bring China’s economy out of their slowdown and doldrums. The Peoples Bank of China (PBOC) issued a report yesterday saying that the economy performed “better than expected” in the 1st QTR. This improved performance is helping the “managed currency” (renminbi) to gain ground VS the dollar once more…

I had a reporter follow up with me yesterday on my thoughts toward what China had on their minds… The reported asked me if I thought the Chinese would be under more pressure to allow the renminbi to float, if they are really pursuing a “wider use of the renminbi”… I said… I thought the Chinese would receive pressure to allow the renminbi to float, but no more than what they received in the past from the combo of Paulson, Schumer and Graham… (the U.S.!)

The Bank of England (BOE) is also meeting this morning to discuss rates… I would think it is almost inevitable that the BOE would leave rates unchanged… This has been the prevalent thought in the markets for a week now, and has led to the pound sterling making a very auspicious rally to 1.5170! What I think the BOE needs to do now, is to sit down with the markets and tell them what direction their Quantitative Easing (QE) is going… Will they limit the purchases, or increase them, etc… Not that any QE is good, but to be honest and transparent with the markets would be a step in the right direction for a central bank!

Yesterday, Norway’s Norges Bank lowered their internal rate 50 BPS to and internal rate of 1.5%. I was hoping they would only cut 25 BPS, but… This has all the makings of “the last rate cut”… You know, one big blow out to end the summer… Or… A star burns brightest right before it burns out… But, I now believe this will be the last cut in Norway…

Recall many moons ago I called this a “race to zero” regarding Central Banks around the world cutting interest rates? Well… It certainly has panned out that way, eh?

Have you ever heard of the book, “Black Swan”? The author Nassim Nicholas Taleb describes his theory of “Black Swan” as a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations. Obviously we’ve had a few “Black Swans” in the past 2 years, eh? Any way, the thing I’m going for here is Mr. Taleb was speaking at a conference yesterday, and had this to say about commodities and Gold… “The global economy is heading into a big deflation though the risks of inflation are increasing as governments print more money. Gold and copper may rally massively as a result.”

Speaking of Gold… It has rallied the past two days, but could be just waiting in the wings for confirmation of two things… 1. the bank stress tests don’t show major problems… And 2. the Jobs Jamboree does show falling job losses… Silver has really gotten on the rally tracks too, outperforming Gold the past two days! Silver is back above $14… And that’s good news… That is unless you’ve dilly dallied your days away, and not taken advantage of the cheaper prices that have been available for some time now!

Hey! Remember last year, when I was involved in the Sovereign Society’s FX University and the Currency Tours? Well… We’re not going to go city to city this year… Instead, we’ll hold an FX University Currency Seminar for 3 days in Scottsdale AZ in Sept! So, if you missed the traveling troupe last year, we’ll be doing it even bigger and better this year! Mark your calendars for Sept. 24-27. You can find out more by visiting www.sovereignsociety.com

No word from the BOE or ECB, so I’ll just head to the Big Finish now… No wait! The BOE’s decision just flashed across the screens… Let’s see here… Oh, the BOE left rates unchanged (as expected, see above), and the announced that they will increase the size of their asset purchase program (Quantitative Easing) by 50 Billion sterling to 125 Billion sterling… Well… Let’s see here, the pound sterling is taking on some water after this announcement, as it should! Too bad for the sterling rally… But increasing QE is not healthy for a currency!

The ECB decision will come in about 45 minutes… I’ll be well on my way to figuring out my currency positions and trades needed by then… So, I’ll just go to the Big Finish now, for real this time!

Currencies today 5/7/09: A$ .7565, kiwi .5935, C$ .8575, euro 1.3330, sterling 1.5085, Swiss .88, rand 8.3440, krone 6.4875, SEK 7.8525, forint 208.75, zloty 3.2325, koruna 19.9250, yen 99.20, sing 1.4675, HKD 7.75, INR 49.27, China 6.8215, pesos 13, BRL 2.1130, dollar index 84, Oil $57.91, Silver $14.11, and Gold… $921.30

Source: It’s All About The Stress Test

A strange thing is happening in the currencies though… While currency investors have had to live with this Trading Theme that rewards the dollar with every deep, dark, dangerous data report, this time it appears to be different. The dollar is getting sold on all corners overnight, and the reason is traders have looked at the size of the forecast for job losses and have run for the hills. The euro is leading the way higher, with a huge gain overnight… As I walked out the door yesterday afternoon, the euro was barely holding onto the 1.25 handle… When I woke up this morning with a wine glass in my hand, what wine, who’s wine, where the hell did I dine? The euro was 1.2675! And we all know what happens when the BIG DOG gets off the porch to chase the dollar down the street… All the little dogs get to chase the dollar too!

And Japanese yen was one of the best performers, which tells me that the risk takers were back!

So… Is this a change in the Trading Theme? Well, one overnight rally doesn’t lend itself to a convincing argument of such, but… It certainly points out that the dollar is vulnerable at the margins, and it once we get back to fundamentals… Watch out!

I came across another story about Europeans repatriating euros ahead of their quarter end, March 31st… Now, that would be interesting… The report didn’t say “WHY” they would be repatriating their euros, but shoot Rudy, the Europeans are apparently doing it, so, again, don’t step in front of that bus either!

Gold had a great day yesterday, rebounding to $940, after barely holding on to $900 earlier this week… I said at the time that I thought $900 or $890 would provide resistance, and for now, at least, that’s held true. Of course having the auditors finally admit that General Motors (GM) is in trouble, didn’t hurt Gold. The safe haven buyers were out in force after this announcement by the GM auditors… In case you didn’t hear… The auditors at GM issued a report questioning GM’s ability to remain solvent, citing recurring losses from operations, stockholders’ deficit and an inability to generate enough cash to meet its obligations. GM already has received $13 Billion from the Gov’t, and is seeking an additional $30 Billion… Of course that $30 Billion isn’t even enough to cover GM’s loss last year of $30.9 Billion! You know me… I say, “stop throwing good money at bad businesses!”

While we’re on the subject of cars… Did you see where Sweden told the SAAB unit “no bailout for you!” Recall, I told you in a letter a week or so ago that SAAB wanted to break away from GM, but needed Billions to do so, and had asked the Swedish Gov’t for the money… And the Swedish Gov’t said NO! While it’s not funny to SAAB, or to GM, it’s kind of funny when you think about the fact that Sweden isn’t exactly your first choice when it comes to picking the democracies in the world… But, here they are holding the flag… And appear to be the only one’s holding the flag, and saying NO!

And I saw a quote yesterday that made me chuckle, not that the subject is funny, because it’s not, but the thought process to come up with the quote is! Let me begin with the backdrop of the subject… Yesterday, Citigroup’s stock fell to below $1… Which prompted the quote from a guy that said… “Now you can finally buy Citi’s stock at the dollar store”

OK… Back to the task at hand… Did you see, wait, of course you probably didn’t see, because I just happened to come across it… What am I babbling about? It’s the data from the Fed that there was a sharp drop in commercial paper issuance last week… Why is that so important, I hear you asking? Ahhh grasshopper, recall that after the initial meltdown of the markets in August of 2007, the issuance of commercial paper dried up, which was an important method of corporations to generate cash and for the buyers to generate above Treasury interest rates. So… A few months ago, the Fed took over facilitating the commercial paper market, to give it the backing of the Fed… And things were beginning to look brighter, until last week… Total commercial paper outstanding fell $44.2 Billion… I think this is another reason for the rally in Gold yesterday…

Yesterday, the Bank of England (BOE) left their rates unchanged, but announced they had adopted quantitative easing… And the European Central Bank (ECB) cut as we expected them to by 50 BPS, to an internal rate of 1.5%… ECB President, Trichet, was very strange in the press conference afterward, and mentioned “touching wood” when he was talking about inflation… Hmmm… Well, for all of you wondering what he meant by “touching wood”… Here in the U.S. we would say, “knock on wood”… You know for good luck!

I think Trichet was being tricky, and trying to tell us that inflation is not a problem right now, but I’m going to knock on wood, because I’m not so sure about the future! It’s like Thunder, and lightening, the way you love me frightening, you better knock, knock on wood, baby, you better knock! Now the horns come in! of course the Eddie Floyd version is in my head, not the re-make years later!

OK… I had a few emails yesterday asking me what “quantitative easing” was… I had explained this all a month or so ago, but for those of you who missed class that day, and are wondering just what the heck I’m talking about…

Quantitative easing is the creation of new money out of ‘thin air’ by a central bank, and its injection into the banking system. The aim is to increase the amount of deposits in private banks so that, by way of deposit multiplication, they can increase the money supply by increasing debt (lending).

‘Quantitative’ refers to the money supply; ‘easing’ refers to reducing the pressure on banks. A central bank can do this by using this new money to buy Treasuries in the open market, or by lending the new money to deposit-taking institutions, or by buying assets from banks in exchange for currency, or any combination of these actions. These have the effects of reducing interest yields on government bonds, and reducing inter-bank overnight interest rates, and thereby encourage banks to loan money to higher interest-paying bodies.

Wow! The Pfennig is chock-full-o-lessons today… Let’s recap… We’ve learned about Commercial Paper, touching wood, and Quantitative easing, all in one day! WOW!

OK, seriously folks… This Jobs report that will print later this morning is a scary thing right now… Sort of like those horror movies, when you’re screaming a the girl to not look in the closet, because you know what horror lurks behind the closet door! You’re screaming, “don’t open the door, don’t open the door”… But she does anyway, and well, you know the “rest of the story”…

Before I head to the Big Finish, I’ll talk about China for a minute… Yesterday, I told you about their leader and his thoughts of a return to 8% economic growth… Well, that was followed up last night by the Central Bank Gov. Zhou, who pledged fast and forceful policies to restore confidence and prevent the global financial crisis from deepening in China… Here’s what Zhou had to say… “If we act slowly and less decisively, we’re likely to see what happened in other countries: a slide in confidence.” and my final thought here is “it’s good to be China in situations like this”… You see, China can do whatever they want to do, and do it NOW! They don’t have to deal with earmarks, pork, and knucklehead lawmakers being directed by lobbyists! Now, I’m not saying that what China does do will be any more successful than our method, I’m just saying they can do what they want NOW! And one would have to think that would help things move along faster…

Currencies today 3/6/09: A$ .64, kiwi .5025, C$ .78, euro 1.2680, sterling 1.4230, Swiss .8670, rand 10.5350, krone 7.0575, SEK 9.2710, forint 249.55, zloty 3.7450, koruna 22.11, yen 96.70, sing 1.5475, HKD 7.7560, INR 51.66, China 6.84, pesos 15.34, BRL 2.39, dollar index 89.06, Oil $44.11, Silver $13.43, and Gold… $940.40

Source: Jobs Jamboree Friday!

We have the Bank of England (BOE) and the European Central Bank (ECB) meeting today. Look for rate cuts from both of them, as recessions are deepening in both camps. The BOE doesn’t have many arrows in their quiver, while the ECB has held some in reserve. I doubt the ECB would go for a “huge honkin’” rate cut today, as they are normally more stick in the mud thinking… The BOE will probably move rates nearer to zero…

The currencies all had a day to bounce yesterday, more on that in a minute… But the day on the trampoline had to end, and as the day turned to night, the overnight market participants took a look at the rate cut meetings and decided to sell… So, last night when I went to bed, the euro was 1.2645… And right now it’s 1.2585… Not a huge change, but one that’s going the wrong way for euro holders.

OK, back to yesterday… All my troubles seemed so far away… Now it looks as though they’re here to stay, oh I believe in yesterday… Suddenly… NO WAIT! My fingers were going to continue that tangent! UGH! Any way… Yesterday, the currencies all rallied on the news that China was going to introduce a new stimulus package and their leader Wen Jaibao said he believed there would be a return to 8% growth for the Chinese economy. This news got commodities rolling, and risk takers dipping their toes back into the water. But then… Stephen Green, head of China research at Standard Chartered Bank in Shanghai has this to say in rebuttal of Wen… “Every day the world economy gets worse and they’ve probably got two years of very slow global growth to get through.”

So… Either Wen was saying what he truly believed was going to happen… OR… He has taken a page out of the Bernanke / Paulson, un-dynamic duo’s book on how to deceive the public as to how bad things are… Oh, I know the un-dynamic duo eventually came around to say things were bad… But, all you have to do is go back to the last part of 2007, and the first part of 2008, to find all the quotes you need to fill your bag, from these two regarding how things weren’t that bad… It wasn’t a recession… And subprime won’t filter out into the economy…

What I believe is taking place in China is a move away from a dependence of U.S. consumers… Which won’t happen overnight… But, if I’m correct in this thinking, it would eventually lead to a HUGE problem for the U.S. For, if China can make this move, they won’t need to keep buying U.S. Treasuries… Uh-Oh!

There was other news that goosed the risk takers yesterday, and that came from the U.S. as reported by Reuters… “A U.S. House Financial Services subcommittee is expected to hold a hearing on mark- to-market accounting rules, which have been blamed for forcing banks to record billions of dollars in write downs, a source briefed on the matter told Reuters.

The congressional subcommittee on capital markets has tentatively scheduled the hearing for March 12, the source said.  The U.S. Securities and Exchange Commission’s chief accountant and the chairman of accounting rule maker, the Financial Accounting Standards Board, will be asked to testify, the source said.”

So, recall about 10 days or so ago, I told you there was a rumor going around, that someone’s underground, and she will rock you in the, NO WAIT! Darn it! I’m really going off on song lyrics today, because it’s a Tub Thumpin’ Thursday! Any way, I told you about the rumor that was going around about how the dropping of the mark-to-market was being considered… Well, I said then, that I smelled smoke… And when there’s smoke there’s a fire… And here’s the proof in the pudding folks… They congressional subcommittee will talk about this next week!

I can’t believe that they will go through the effort of talking about his, dragging everyone up to Capitol Hill to testify, without suspending the mark-to-market… Now… Talk about unlocking the credit crisis! All those reserves being held to cover the mark-to-markets, could be released on the economy!

But wait! With over 500K being placed on the unemployment rosters every month these days, and most likely a number of 600K being placed on the roster last month, who in their right mind would make loans to consumers in an economy like that? Well, that will be the next hurdle, but don’t tell the markets now, as stocks really liked this news about the mark-to-market, and rallied on the day!

So… Commodities had a day in the sun, much like I will be doing in about a week from now! Or, should I say “hope there’s sun?” Doesn’t matter much to me, as I’ll be in the ball-park next Saturday watching my beloved St. Louis Cardinals with my family at my side… It doesn’t get any better than that my friends! Oh! I was talking about commodities… Well, the commodities that rallied didn’t include Gold, as the shiny metal has seen better days this past week after hitting $1,002… I would have to think that $900 or $890 is a level it will hold. Consider, if you will, the fact that there’s so much uncertainty in the world today… And… Surrounding that uncertainty is the fact that so many Central Banks are near zero with their rates, and have announced quantitative easing as their next move… Recall, I told you a day or two ago that the Bank of Canada has joined the ranks of those employing the quantitative easing measures… The list is getting longer all the time, and now includes the Fed, the BOE, the Bank of Japan, and Bank of Canada… There’ll be more, as we go along… What else can a Central Bank do, after they’ve cut rates to the bone?

So… As I said the other day… I truly believe that Gold is trading at a discount right now… But, that’s just my opinion, not that of EverBank’s, and I could be wrong… I certainly was wrong about the Obama bounce, eh? I wasn’t wrong about calling the end of the Great Unwinding of the Carry Trade, though! Nailed that one to the wall!

Speaking of the end of the unwinding of the Carry Trade (let’s see how would my friend, the Mogambo shorten that… EOTUOTCT!) Japanese yen continues to weaken, after being the best performing currency of 2008, it is now the worst performing currency of 2009! And there doesn’t seem to be any change in that selling patter for yen… In fact, there was a story yesterday on Bloomberg that caught my eye… “Scottish Widows Investment Partnership, which oversees 42 billion pounds ($59 billion) in bonds and currencies, cut its yen-denominated holdings by a fifth because of Japan’s worsening economic situation.”

Before I head to the Big Finish, I wanted to mention the Richard Russell Tribute Dinner that is going to take place in one of my fave cities, San Diego, on April 4… My friend, John Mauldin, is putting this all together, so if your interested in attending, here’s a link to click for more information…. https://www.johnmauldin.com/russell-tribute.html

Currencies today 3/5/09: A$.6425, kiwi .5010, C$ .78, euro 1.2565, sterling 1.4245, Swiss .8510, rand 10.5250, krone 7.1150, SEK 9.1325, forint 247.55, zloty 3.7675, koruna 21.9925, yen 99.40, sing 1.5540, HKD 7.7580, INR 51.70, China 6.8405, pesos 15.30, BRL 2.3680, dollar index 88.98, Oil $44.41, Silver $13.09, and Gold… $916.60

Source: China Announces A Stimulus Plan

Good day… And a Tub Thumpin’ Thursday to you! Day One at the Orlando World Money Show (WMS) went well. My room for the presentation was packed! It was standing room only, and the good part was the fact that there were only about 30 Pfennig readers in the crowd. I say that not because I have something against Pfennig readers, oh Lord, they are dear readers! The reason I say that is I like to know how many of the non-readers I can convert to Pfennig readers!

Well… As you know, when I’m on the road like this, I’m not sitting in the saddle back home, and watching the markets all day long, and reading stories about what’s happening, etc. So, the “road Pfennigs” tend to be a bit shorter. But as my friend, and once editor of our monthly newsletter, David Galland, used to tell me… “you’ve got to get it out every day, no matter what!”

So… From what I can tell this morning, the currencies traded in a very tight range after the sell-off from the previous night that I told you about yesterday. Japanese yen is a bit weaker, from yesterday morning’s currency round-up, but other than that small move in yen, the levels look like they are wearing the same clothes as yesterday!

Today we have the Central Banks of England and the Eurozone meeting to discuss rates. As I said earlier in the week, I truly believe the Bank of England (BOE) to cut rates aggressively once more to bring their internal rate to 1/2% or 50 BPS, just like here in the U.S. The forecast is for the BOE to cut to 1%… But I’ll go out on that limb and say they’ll be even more aggressive. Here’s the thing that just gets my goat though… The more aggressive the BOE is in cutting rates, the better pound sterling will trade. Now this should be the opposite, as a rate cut is a true debasing of one’s currency. But the mental giants in today’s trading world don’t see it that way. They see it as a plus for the economy and so for the currency.

I could really go off on a tangent now about how trading desks are run by Ivy leaguers that got that job right out of grad school and don’t carry the same “valuation tools” as old timers… And quite frankly could very well be one of the reasons we’re in this mess today… But I won’t go there, as that’s too touchy of a subject!

The European Central Bank (ECB) will also meet today, but ECB President, Trichet, has pounded it into everyone’s heads that the ECB will NOT cut rates today, and to look to the March 5th ECB meeting as the next “chance” for a rate cut.

Here’s another example of not carrying the same “valuation tools”… The ECB is being prudent and waiting to see the results of previous rate cuts, so as to not “over cut” and get in trouble with spiraling inflation, etc. Why debase the currency when you don’t have to? But…. NOOOOOOO! The mental giants these days are punishing the euro because they believe the ECB is now “behind the curve” with regard to rate cuts. See how crazy this has all become? Crazy… I’m crazy for thinking about you… I’m Crazy… Crazy for feeling so blue… Ahhh, the soothing voice of Patsy Cline… Now, I can get back to writing without carrying on about “valuation tools”… Or as the kids say nowadays those guys are “tools”… HAHAHAHAHAHAHAHAHAHA!

Yesterday, I told you about the surprise Pending Home Sales report, and how maybe it’s a sign of better times, but I needed to be shown more before I would commit to saying that it’s a true sign. Well, my friend, Bill Bonner, author, and Daily Reckoning fame (www.dailyreckoning.com) had this to say yesterday about this very subject…

“Our guess is that the little light investors thought they saw will turn out to be another torpedo blowing up. Millions of homeowners and stock market investors have gone down already…but there are many still afloat.
And many torpedoes that still haven’t found their marks.

In Japan, for example, property prices began falling in 1991. They fell for the next 13 years…reaching a low in 2004 equal to where they had been in 1973!

If that pattern plays out in the United States, the housing market won’t hit bottom until 2020…when you’ll be able to sell your house for what you paid for it in 1989.”

Our old Fed Chairman, who is highly regarded for his inflation fighting in the early 80’s, Paul Volcker, spoke last night and he’s none too happy with the delay in starting the economic advisory group that the new President, Obama, set up. Obama picked Volcker, but Volcker isn’t seeing any moving forward with this advisory panel. Volcker wants to help, and I believe we need his voice, but no one wants to “include” him… Hmmmm… I wonder what’s going on there… Does the new administration believe they don’t need Volcker’s voice? I sure hope that’s not true!

In another sign that the German economy has fallen into a recession, German Factory Orders for December fell -6.9% bringing the annual number to a staggering decline of -25%, according to the report I saw this morning… This is just another reason why the euro no longer trades at 1.60…

I saw a report this morning regarding India and the rupee… I don’t talk about India very often, because not much in the way of market moving news comes out of India… But, this report is talking about black clouds hovering over India, so I thought I had better fill you in… An advisor to the Prime Minister said last night that the 2009 Budget “may” reach 7.5% of GDP! The forecast is for 2.5% of GDP. If this is true, the writer believes that the rupee could sell off from today’s level of 48 and change to 52… If that all holds true, then holders of rupees will be thankful for the above market interest rates to cushion that blow… But again, this is all based on a “may” and could turn out to be a boy crying wolf!

I’ll end today’s letter with a “feel good story”… Gold rallied to $915 yesterday… Gold traders say that they believe Government spending will spur inflation, the dollar will weaken, and gold will take off on the strength of its inflation fighting make up.

Goldman Sachs Group, Inc. (which probably has so many research people you can’t count them with stick) said that they believe Gold will reach $1,000 within three months. And a commodity analyst at Dresdner Bank said this, “expectations of future inflation and dollar depreciation are driving the market right now.”

I told the crowd at my presentation yesterday that Gold IS an excellent inflation fighter… And not to listen to those that preach otherwise, as they use the high of the 80’s at $800 and say Gold hasn’t done a very good job of fighting inflation since then! But! Not so fast Tim! I say you have to go back to when President Nixon closed the Gold window, and took the dollar off the gold standard. Gold was trading then at $35 an ounce… Now follow Gold’s price through the years to the present at $915… Now… That’s what I call an inflation hedge!

And finally on Gold… Kristin sent me this note that she came across… “Short term, said Tom Pawlicki, of MF Global in Chicago, “Investment has been a key supporting factor for gold,” and thus “Passage of the stimulus package in its current form would likely be inflationary and bullish for gold while a Senate filibuster would be bearish.”

On to the Big Finish! Wait! There’s been a nice move up in the currencies since I got up this morning! WOW! Alrighty then, let’s go to the currency round-up!

Currencies today 2/5/09: A$ .6485, kiwi .5130, C$ .8125, euro 1.2875, sterling 1.4515, Swiss .8615, rand 9.9765, krone 6.83, SEK 8.2625, forint 230.32, zloty 3.62, koruna 21.98, yen 89.70, sing 1.5050, HKD 7.7540, INR 48.77, China 6.8367, pesos 14.44, BRL 2.3075, dollar index 85.60, Oil $40.44, Silver $12.71, and Gold… $915.80

Source: Gold As An Inflation Fighter!

Good day… And a Wonderful Wednesday to you! The first full day of the new regime… I will say this, it makes one proud to be an American when you can watch a peaceful, even extravaganza, handing over of leadership… It really rips me up when I read that the Wall Street Boys really contributed cash to the inauguration proceedings… Making certain the new President knows who contributed cash to his party… Probably cash they received from the Gov’t in bailout payments! Nah… That couldn’t happen… Could it?

Well… The currencies didn’t really trade outside of a very tight range yesterday, except for the pound sterling, which continues to fall VS the dollar, euro, yen, and probably even the Zimbabwe currency! OK, that’s harsh! But I wanted to paint the picture, so that everyone understood the grave situation the pound sterling is in… The Bank of England has decided to take 70% control of the Royal Bank of Scotland, and nationalization isn’t far behind for that bank, and a few others…

Yesterday, the Bank of Canada (BOC) lowered their official interest rate by 100 BPS or 1%… I told you long ago that the BOC would follow in the Fed’s footsteps, and they have… Canada had it all going for them last year, with gold rising, Commodities like Oil, natural gas, and metals all rising, but that curtain came down hard on Canada and their dollar / loonie. It will be some time before the loonie can recover… but… if my scenario of soaring inflation for the U.S. and rising Commodities again comes to fruition, then it won’t be that long, not in the scheme of things…

There was word yesterday that the Monetary Authority of Singapore (MAS) stepped in to support the Sing dollar after it had fallen to a 6-week low. This kind of intervention works in this case, as the Sing dollar is relatively small in circulation, and the intervention doesn’t have to be of size to stabilize a market… But, they (the MAS) need to know when to get out, and let the markets be… They gotta know when to hold ‘em, know when to fold ‘em….

Gold put in another strong performance yesterday adding $21 as I left for the day. Jennifer asked me during the day if this was a first, with Gold and the dollar rising… I said that I had seen it before, but it certainly doesn’t normally go that way… For Gold is another offset currency to the dollar… Which leads me to believe that it wasn’t so much dollar buying as it was euro selling yesterday…

The Boys and Girls at Morgan Stanley issued a report on Gold recently that called for Gold to reach a new record within the next 3 years. They call for the Gold to “average” higher each of the next three years through 2012, with the average this year to be $900, next year $1,000, the following year $1,050, and $1,075 in 2012… Personally, I believe their call to be quite conservative, something that we’re going to see a lot of in the next few years, as these research teams, back off the “hyper-calls” for assets, as they walk gently over eggshells in an attempt to not garner the spotlight…

At least they’re calling for higher Gold prices… You normally don’t see Wall Street firms going out of their way to talk up Gold… For that thought, you normally don’t see Bankers talking about Gold either… That’s where I’m different! I talk to one radio station quite often and they call me the “un-banker”! That’s right, baby! I’m not even your last choice as a “banker”… I’m a markets guy…

OK, enough of that self-promotion! HAHAHAHAHAHA!

Back to the markets… Well, the Obama bounce didn’t come in the first day of his Presidency, as the Dow sold off by 332 points! UGH! OUCH! That’s going to leave a mark! So far, one piece of the Obama bounce, the dollar, has rallied… But the other, stocks, have fallen on their face…. We’ll have to see what stocks think about the $850 Billion stimulus package that the Obama team is working on…

Here’s the skinny on the package, that could still grow… It certainly isn’t going to narrow! The stimulus plan covers 5 areas of spending and tax breaks… Health, education, infrastructure, energy, and support for the unemployed and the poor. All worthy areas… Unfortunately, we (the U.S.) don’t have the funds to pay for this… Now… If we weren’t already in a huge deficit hole, then a stimulus package to get the economy going might be the answer… But, that’s not the case! I told a radio station a week ago that the Roosevelt plan worked back in 1933, but it could have just as well failed, it was that touch and go, and if it weren’t for the war it might not have… This time, we’re starting in a deep, dark deficit hole… I sure hope it works… I just can’t get my arms around how adding $2 Trillion to our national debt this year helps…

How did I get to the $2 Trillion? Well… The Congressional Budget Office (CBO) has already told us the deficit in 2009 would be $1.2 Trillion. Recall I had a cow over that announcement! Well, the CBO’s budget forecast does NOT include the new stimulus plan of $850 Billion… I’ll tell you what it also doesn’t include… Any new military expenses… And the remaining TARP money that the Obama team just came into…

I just heard, and sang along with, out loud, good thing no one else is here!, one of my all-time face Chicago songs… Hard Habit To Break… Yes, the habit of deficit spending is a Hard Habit to Break apparently… So, where’s the change?

OK, Whew! I really went off on a tangent there, eh? Oh, some of that was from my radio interview, and some of it was from my good friend, David Galland, who recently put out a piece on the spending… David used to take my Review & Focus draft, and make music with it… What a writer!

I see where Christopher Cox, resigned from his leadership role at the SEC… I think back to the election process when John McCain was asked what he would do about the financial mess, and his first response was to say that he would fire Cox… McCain got all kinds of flak for that… But in hindsight, given the failure of the SEC to spot Madoff’s alleged ponzi scheme, that call doesn’t look so bad now, eh? So… According to Harvey Goldschmid, a former Democratic SEC Commissioner, the SEC was “passive” under Cox… Well, you can expect that pendulum to swing swiftly to the other side… As with all things in life… They go too far one way, and when somebody notices, they swing too far the other way… Never finding a “happy medium”…

Someone sent me a note yesterday and said I hadn’t mentioned the Swiss franc and why it had fallen on hard times, after posting a great 3-month return… I pointed back to a previous Pfennig that pointed out that UBS was involved in a bond scandal in Italy, and it reverberated all the way to the franc… Of course since then the euro has fallen from 1.34 to 1.29, and that has even more to do with the recent movement in francs… Remember… The euro is the Big Dog of currencies…

I’m currently reading a research report on China, in my “spare” time I might add! The research plays well with what I’ve been harping about for some time… And that is rising inflation in China, and how the Chinese officials should use a stronger renminbi to combat that inflation… There are a lot of people, researchers, pundits, out there calling for China to slow down their renminbi appreciation VS the dollar… I’m on the other side of that fence, as usual, right? I think the Chinese WILL use the renminbi as an inflation fighting tool… More later, when I have some “spare” time!

For readers of our monthly client newsletter, Review & Focus, you’re in for a special treat in February… The Big Boss, Frank Trotter, submitted a special report called “The March of the Presidents” which goes back to Nixon, and gives grades based on raw data, not sentimental, of “soft stuff” … Strictly numbers… Inflation, unemployment, etc. Look for it at a news stand near you!

Currencies today 1/21/09: A$ .6510, kiwi .5210, C$ .7925, euro 1.2925, sterling 1.3770, Swiss .8750, rand 10.2725, krone 7.04, SEK 8.3250, forint 220, zloty 3.3660, koruna 21.42, yen 89.80, sing 1.5025, HKD 7.7580, INR 49.11, China 6.8375, pesos 13.95, BRL 2.36, dollar index 86.20, Oil $41.29, Silver $11.40, and Gold… $860.70

Source: Gold Moves Higher With The Dollar

“Obama’s moment arrives,” says the International Herald Tribune.   “World needs Obama to succeed,” begins an editorial in the Financial Times.  “The Hope of the World,” says one Paris-based magazine… with a photo of Barack and Michelle on the cover.

Front and Center this morning, I have two quotes from people I truly respect… first from Jimmy Rogers… second from Stephen Roach…

“If I were you, I would be worried about the U.S. dollar,” said Rogers, 66, in a speech at the Asia Financial Forum in Hong Kong today. “The Americans are printing U.S. dollars. The Americans are going to do whatever they can to revive their economy, even if it means destroying the U.S. dollar.”

And at the same Asian Forum… ” Stephen Roach, chairman of Morgan Stanley Asia Ltd., recommended investors buy “anything to do with the Asian consumer, infrastructure, alternative energy and technology.”

Now… these are people that “know better” and not ones that keep telling you that everything will be OK, if we just all come together, right now, over me… No wait, I mean if we all just come together, and forget about deficits, forget about 2.6 million unemployed in 2008, and another 2 million expected in 2009, forget about the fact that the Gov’t that our forefathers created over 200 years ago didn’t want the Gov’t to get involved in the “free markets”, or build up debts, or all the other things we now do that doesn’t follow the rule of the constitution… and…. go out and get a loan, spend some money, and get this economy going again!

Whoa there partner, you’re quite spry this morning! Must have been that kickin’ bitter cold wind blowing in my face as I walked to the door this morning that got me going!

OK… The Big news this morning is that the dollar has taken another mighty swing at the euro and other currencies overnight. All day yesterday, I watched the euro hold steady Eddie at 1.31, but when I came in this morning, and did NOT turn on the currency screens because somebody messed with them this weekend, and I can’t get logged onto them, but did check the internet, and saw the euro trading below the 1.30 handle at 1.2966… There had to be something I could find on my currency screens IF I only had them available! Geez Louise, why can’t people leave things alone that work?

Alright I’ll stop my whining… Doesn’t do any good any way! So, I see that the German Economic Sentiment, as measured by the think tank, ZEW, improved a bit last month, as seen in the print this morning… That has helped the euro off the mat this morning as it has fallen to 1.2920 before this report. But, this report won’t help the euro too much, as the ZEW think tank report isn’t on the same level of importance as the IFO think tank report…

I told you last week about the rumor that Ireland was seeking funds from the IMF, and that a resident reader there had told me things were getting bad. The rumors were denied at the time, but I told you then, that I truly believe that where’s there’s smoke there’s fire… And so it is with Ireland after all… Now there’s all kinds of rumors running about regarding Ireland and their ability to make debt payments. (Hey!, haven’t they learned anything from the U.S.? Just print the currency to make the debt payment!, but no, wait, they can’t they’re a part of the euro!) This, my friends has to be the reason the euro has sunk to below the 1.30 handle this morning. I’m reading a report from a trader friend in Europe that say there are nervous Nellies over in Euroland, regarding this debt payment… The Eurozone won’t like any debt defaults under their watch, and could slap Ireland pretty hard…

I have to say that this is real folks… And presents the Euroguard in Frankfurt a real problem to deal with… No more of a problem than France rejecting the Eurozone Constitution in 2005, but a real problem nonetheless.

And a real problem for dollar bears… Who would like to beat the dollar like a rented mule (no animals were really hurt here) but the offset currency to the dollar has its own problems at this time… So… What’s a dollar bear to do? Well… There’s always the old offset to the dollar, the Japanese yen, which continues to outperform all the other currencies, and has bouts of real strength followed by profit taking, so there’s opportunities to buy on dips when profit taking comes along… And this ties back to the Stephen Roach comment at the top of the page… To buy Asian… Well, he didn’t say it, but he did in a way… If you buy Asian, you have to convert your dollars to the Asian currency of the asset you’re buying… So, in a way, he’s saying buy Asian currencies…

Another hickey on the euro’s neck this morning is the report that Spain’s credit rating has been downgraded… S&P downgraded them from AAA to AA+… They’re credit rating should have never been that high to begin with, if you ask me… So this downgrade, just puts it where it should have been all along… Spain got “extra credit” for being a part of the Eurozone… My European trader friend said that the euro’s resistance doesn’t come into play until 1.27… So… There’s a gap down that could happen quickly…

Yesterday, the pound sterling was basking in the Trading Theme, after the Bank of England announced a bank bailout plan… That brought out the risk takers for just a brief moment… But they had no lasting power, and the pound began selling off, and didn’t stop until it reached a record low VS the yen, and VS the dollar it fell to below 1.40 for the first time since 2001! I’ve said since this credit crisis began that the U.K. was “into” this problem more than other countries (with the U.S. being the ring leader) and that it would take its toll on the pound… It has, and in a very strong manner…

And down under, the New Zealand dollar / kiwi keeps getting caught up in Commodity sell offs, Reserve Bank of New Zealand (RBNZ) rate cuts, and now… Talk of a downgrade to their credit rating… Commonwealth Bank of Australia (CBA) issued a report yesterday that points out that S&P already downgraded New Zealand’s foreign currency rating to AA+ last week, and that the credit rating “MAY” be cut should the current account deficit cut into growth.

Now, that’s all fine and good, as I’ve been harping about New Zealand’s Current Account Deficit for a couple of years now… But, what? S&P only looks at the “little guys” that they can handle? I mean, for crying out loud, have they taken a peak at the U.S. Current Account Deficit as a percentage of growth? OMG! What? Are they afraid of the Big Bad Wolf? I’m afraid so… They don’t have the cajones to take on the U.S. and their debt problem… So… They go around kicking sand in the face of the 90-lb weaklings around the world…

So… We start this week on a down leg for all currencies… Shoot Rudy, even the Japanese yen, is a bit weaker than it was last week, when it hit 88 at one point!

Gold had a very strong showing on Friday, going up $30… But is seeing a softer tone this morning…

All eyes will be focused on the inauguration of the new president here in the U.S. today, so don’t look for too much to happen… But, I’m reminded of the words I wrote a couple times a couple of weeks ago about an Obama bounce, which would help stocks, and the dollar… Could this be happening as the inauguration is about to happen? I’m sure a lot of investors and traders will be swayed today when President Obama talks about change and hope… He has a tough row to hoe, folks… He’s going to need more than words to get us out of this mess, and carrying on with the same policies as before with bailouts and stimulus packages isn’t change… I wish him good luck, as this is my country, and I sure don’t want to see us like this…

I have a good friend that gives me trouble all the time, (he reads the Pfennig) saying that I’m responsible for these problems because I “root for them” … (he’s kidding folks!) And I have my standard reply… I don’t “root for them”, I point them out, and try to warn people that these things will affect their investment portfolios… It’s all about diversification…

OK, on Friday, (seems like a long time ago but still important) we saw the color of the latest Industrial Production, Capacity Utilization, and the stupid CPI (consumer inflation)… Here we go with a recap…

Industrial Production for December printed much worse than expected, and it fell -2% (expected -1%) and the previous month was revised downward from -.6% to -1.3%… For the year, Industrial Production fell -7.8%, the worst performance since 1975… Capacity utilization also fell sharply from 75.2% to 73.6%, matching the low at the end of the 2001 recession. You can go back all the way to 1967, to see that this data has only dropped lower during the 1982-83 period…

Long time readers know my affection for the Capacity Utilization data, as it is one of the few pieces of data that is “forward looking”… And if this report is right… We don’t have much to look forward to in manufacturing…

The stupid CPI report showed that Consumer inflation came in at .01% for December… Which is pretty strange, as it was forecast to go into the negative. Annually CPI rose just 1.8%, an annual low since 2004… Of course if you believe that YOUR inflation experience only saw a 1.8% annual increase, then you don’t understand why I call this report names… If you’re like me, and 1.8% is a bunch of baloney… Then you know why! But… Given that my forecast has inflation rising rapidly next year, this report tells me that the inflation wolf is always at the door!

Not much on the data cupboard’s calendar this week… So, let’s go to the Big Finish!

Currencies today 1/20/09: A$ .66, kiwi .5280, C$ .7915, euro 1.2975, sterling 1.3960, Swiss .8775, rand 10.3350, krone 7.1030, SEK 8.3930, forint 221.87, zloty 3.3620, koruna 21.51, yen 90.25, sing 1.5080, HKD 7.7590, INR 49.22, China 6.8385, pesos 14, BRL 2.36, dollar index 85.92, Oil $39.78, Silver $11.08, and Gold… $831.90

Source: Inauguration Day 2009

There’s a rumor going round, that’s someone’s underground, no wait, there’s a rumor going around that Ireland had requested aid from the IMF… Whoa there Partner! I know that things in Ireland have turned around on a dime from boom to bust, but I wasn’t aware of a problem that would run that deep… The rumors were denied, of course, but you know me… Where there’s smoke, there’s fire… I’m reminded of an email I received 2 weeks ago from a reader in Ireland, that talked of a major slowdown in the economy. The writer, was very adamant about how bad things had gotten that he compared Ireland to a banana republic! I responded to him, and said, no… That can’t be, because we’ve got a corner on being a banana republic right here in the U.S.A.!

You should have seen the sell off in euros when this rumor hit the streets! It was scary how fast a currency could lose a handle! But, after the rumors were denied, the single unit rallied back nearly as fast as it fell, and is now trading, as I write at 1.3225. The dollar is swinging a mighty hammer once again…

Talk about a flight to Risk Aversion! This rumor has the Risk Aversion campers battening down the hatches and heading to the cellars! Risk Aversion is NOT good for currencies and commodities.

Another reason for the Risk Aversion campers to batten down the hatches is the report from yesterday that Citigroup is going to sell their brokerage arm, Smith Barney, to Morgan Stanley for $2.7 Billion in cash… This to me, sounds like a fire sale, and that Citigroup is in deep dookie once again… Citigroup has already received $45 Billion from the Gov’t in TARP money, much more than any other bank has received, for sure!

This news scares the bejeebers out of me, as Citigroup has always prided themselves on the fact that a customer could do “one-stop investing”… I guess, we’ll have to wait-n-see if Citigroup announces a sale of another unit somewhere down the line, eh? But for now… This news is not good for any asset!

Well… Today, we’ll see the color of the Retail Sales for December. We all know that December Retail Sales should be kicking rear and taking names later… But… And that’s a BIG BUT… Not last month, unfortunately. As we get ready for the printing of Retail Sales, the experts say that Retail Sales will have fallen -1.2%, following a -1.8% in November. The Butler Household Index (BHI) tells me that while Christmas shopping was good, it wasn’t on scale with other years, and I believe the Retail Sales will be very disappointing this morning.

OK, what do we have here? A Fed Head talking about our ZIRP (zero interest rate policy). I know, we’re not quite at zero yet with the official rate, but the Fed Funds people would tell you differently! So, in my book, I say ZIRP! Well, this Fed Head, Lacker, thinks that interest rates will stay very low for some time… Say it ain’t so, Joe! I don’t want to see rates at zero for a long time, folks! That’s part of the reason we’re in this mess to begin with!

Oh, and yesterday, Big Ben Bernanke, was speaking over in London, and kind of threw some cold water on Obama’s $800 Billion stimulus plan… I can hear Obama saying… “Hey! He backed all the other stimulus plans, but now he’s throwing cold water on mine!” Well… I said “kind of threw” I didn’t say he DID throw cold water on the plan… I’ll let you decide… Here’s Big Ben… Fed Chairman Ben Bernanke said the “stimulus package being crafted by Barack Obama and Congress could provide a “significant boost” to the sinking economy. But he warned that such a recovery won’t last unless other steps are taken to stabilize the shaky financial system.” And what is he talking about in the “other steps”?

Here’s more Big Ben… “There will be no lasting recovery without further government action and funds to strengthen the financial system, with the timing of an economic recovery “highly uncertain.” OH GREAT! More Government action! That’s Central Bank parlance for “we’re getting our hands deeper into the cookie jar”!

OK, I’ve gone this far, and have not mentioned the huge drop in the Trade Deficit that showed up in the print yesterday… The Trade Deficit fell from $56.8 Billion in October to $40.4 Billion in November! WOW! This fabulous! Or is it? Let’s take a closer look at the numbers… U.S. exports fell $8.7 Billion and imports fell $25 Billion. Lower oil imports accounted for more than half of this drop, but ex-petroleum imports also fell $10.5 Billion.

So… Here’s the problem folks… As I tried to explain yesterday… A narrowing Trade Deficit because of less spending and larger exports would be manna from heaven… But a narrowing Trade Deficit because spending was slashed, and exports also fell, is not a good thing for the economy. It simply means that 1. The U.S. consumer has dried up and with consumption at least 70% of GDP, we’re in for a long recession… And 2. that the dollar is too strong, otherwise exports wouldn’t be so far off too. Yes, I’m quite aware of the fact that the recession is hitting all over the globe, but come on, we still buy Chinese and Japanese and even German exports even in a recession don’t we? These same countries would be doing the same with U.S. exports…

And then there’s this… News of the weird… Chris Gaffney saw a story yesterday that he sent to me, that qualifies for this category… Here’s a snippet of the story… “The Bank of England will be able to print extra money without having legally to declare it under new plans which will heighten fears that the Government will secretly pump extra cash into the economy.” Oh boy! Just what the pound sterling needs as a stabilizer eh? NOT! This is awful news for the pound folks…

I’ve said for months now that the Bank of England (BOE) was following in the Fed’s & Treasury’s steps, which could be to ruin, but following nonetheless! This is just another step in the Fed’s & Treasury’s direction. The free use of a printing press… The story went so far as to say “this will spark comparisons with the Weimar Germany and Zimbabwe, were uncontrolled use of the printing press ultimately caused hyperinflation.” This is where they’re getting a little out of control with the sensationalism… I prefer to say that it should compare to the U.S…. Which may still see hyperinflation in the future… But not the kind of Germany and Zimbabwe! YIKES!

So… As I get ready to head to the Big Finish… It looks as though that Trading Theme is back in force again, and the dollar will benefit any time the data shows the recession to be deeper, darker and more dangerous… Makes no sense to me! But that’s the work of the mental giants these days… So… If Retail Sales is as disappointing as I suspect it to be in about 15 minutes, then the dollar should be supported today…

Currencies today 1/14/09: A$ .6670, kiwi .5440, C$ .8185, euro 1.3190 (slipped back again), sterling 1.4535, Swiss .8925, rand 10.0450, krone 7.14, SEK 8.30, forint 210.20, zloty 3.1420, koruna 20.42, yen 89.45, sing 1.4920, HKD 7.7570, INR 48.83, China 6.8350, pesos 13.83, BRL 2.3140, dollar index 84.15, Oil $38.87, Silver $10.76, and Gold… 826.50

Source: The Dollar Swings A Mighty Hammer!

You see, there’s a bond scandal that was uncovered in Italy, with Italy losing large sums of money, and some major banks like Deutsche Bank and UBS are right smack dab in the middle of the investigations. With Deutsche Bank in Euroland, and UBS in Switzerland, there you have the story behind those two currencies taking a beating from the dollar the past two days. There are other banks like JP Morgan Chase reportedly involved, but the majority of the problems resides in Europe… Let me try to explain the problem, as I know it to be from reading the story in the U.K. Telegraph last night.

Investment bankers, many based in London, spotted a major opportunity in the 1990s. Italian cities and regions wanted to borrow money. In order to avoid ballooning debt, the central government required local authorities to put away a percentage of the loan every year in a “sinking fund” so that when it was time to repay the full sum, they would be able to do so.

Investment banks offered to manage the sinking funds. While the funds initially had to be invested in Italian government bonds, the criteria were widened to include other government debt within the European Union. This could include debt from countries seen as more likely to default, such as Greece, as long as it was triple-A rated.

The banks took a fee to manage the sinking funds. They argued to the Italian authorities that as well as saving the money to repay their initial loan, they might also make some money from the investments. Many did when the global economy was booming.

All of the contracts were different. But critics have said some contained a “sting” which was not properly understood by some of the Italian authorities. While the local authorities only earned a return on the money they put aside, the value of their total loan was at risk. The banks could invest all of the money the authority had borrowed through bonds. If everything went well, the bank would pay a return based on the incremental amounts the local authority was putting into the sinking fund, and keep the rest as profit.

If things went badly, it was the local authority which would have to pay for the loss – and then also have to pay off the bond when it became due.

And THAT my friends is the big bugaboo right now… Things have not gone well, and the local Italian authorities (like cities) are left holding the bag, and they have no way of paying this debt! It’s a remake of: The Italian Job!

OK… That was a long explanation, but one that was needed, I believe, to explain this mess… One thing that I did notice in the story is that a Japanese Bank (Nomura) was involved, and this is the first instance of any involvement of a Japanese Bank in any of the mortgage bond meltdown and now this. Could be why the Japanese yen has seen a removal from terra firma the past couple of days.

There’s also the euphoria going on from the Obama Bounce… I’ve explained this a couple of times now in the first few days of 2009, so I won’t go there again, but when the President-elect goes on TV to discuss is “stimulus plan” the “bounce” gets magnified. There’s a lot of euphoria being built up for this plan. My problem is the size that it will end up being once the lawmakers get their hands on it, and begin hanging other spending bills on the plan. That just adds to our National Debt, folks… And that, in a nutshell, is a BIG Problem for me…

The euphoria is spilling over to the risk takers, as I explained yesterday. The Big Winner yesterday was the Brazilian real, which last week had a full 6 figure move higher, followed that yesterday with a full 8 figure move higher! WOW! OK… Before we get too excited about reals, let me point out that this huge rally in the past week, has left reals about at November’s levels. It’s still got a long way to go, to get back to last summer’s levels… But, Shoot Rudy! Why throw cold water on this move? 14 figures higher is better than 14 figures lower!

OK… Have you been following this Madoff stuff? So… I hear that the lawmakers are going to grill the SEC… As if! As if the lawmakers, save for Ron Paul, could have figured out what Madoff was up to if they were the SEC! But, it’s interesting anyway… The thing that ticks me off about the Madoff meltdown is that his people pulled the wool over the SEC’s eyes, even though there had been 8 probes by the SEC in the past 16 years…

Other lawmakers expressed concern about the make up of the SEC and even whether it should exist. Rep. Ron Paul, R-Texas, said he believes Congress should eliminate the agency, which he argued gave investors a false sense of security about Madoff and other problematic investment vehicles. “Investors should be self-reliant,” Paul said.

Did you see the collapse of Auto Sales yesterday? YIKES! Where have all the car sales gone? Long time passing… Shoot Rudy, even Toyota has announced that they will shut down their plants for 11 days in Feb and March… Now, that’s should tell us something… Here’s what the Wall Street Journal printed… “GM posted a 31% drop in U.S. light-vehicle sales for December, while Ford reported a 32% fall. Toyota saw a 37% decline, and Honda saw sales drop 35%, closing out the auto industry’s worst year in more than 15 years.”

Of course one might think that there would be some “real” sales for autos, eh? And not that cheesy “you get what we pay” promotion… I mean something with some real meat to it! Better to sell than to see it rot on a sales lot!

Well… The European Central Bank (ECB) and the Bank of England (BOE) both meet this week to discuss interest rates. There’s some speculation out there that the ECB will cut rates, especially after it was announced this morning that inflation for the Eurozone has fallen to lowest level in 2 years… Of course oil prices are behind that fall in inflation, but still… The ECB has done a marvelous job of providing price stability, even when Oil prices were shooting for the moon… Of course, I’m of the opinion that we’ll see Oil prices shooting higher again, and this is all great right now, but it won’t last.

Inflation for the Eurozone hit 1.6% in December, down from 2.1% the previous month… Now that inflation is back under the ECB’s 2% ceiling target for inflation, we could very well see them cut rates this week… But, I’m going to go out on a limb and say they will be prudent and wait… But then, I don’t know about any smokey back room deals between the Fed and ECB…

The BOE will also meet, and I DO expect them to cut rates this week… The BOE is cut from the same cloth as the Fed, and believes that lower interest rates are the way to a Lender’s heart… I would argue that the way to a lender’s heart is through their stomach… They need to be fed tons and tons of cash, which is another arrow in the Fed’s quiver that they are using… But not the BOE at this time…

Today, in the U.S…. We’ll see Factory Orders for November (pretty long lag, I agree!) which I believe will follow up the previous month’s rotten print of -5.1% with another negative print of -2.3%. We’ll also see Pending Home Sales for Nov. , and later today, we’ll see the color of the last Fed meeting minutes, when they cut rates to .25%… These ought to be good!

The ISM (non-manufacturing) Index, which covers the Servicing Industry, will print too… And I don’t normally give two hoots about the Index, except for the employment component of the report, which is normally where I get my thoughts about where the total Jobs Jamboree will print. There, I just gave away one of my secrets! And you didn’t have to pay a penny for it either! WOW! What a guy! OK, stop it Chuck! Seriously though, I do use the employment component of this report to give me a clue about where the National jobs will print… So, here’s a key to look for!

Currencies today 1/6/09: A$ .7115, kiwi .5870, C$ .8405, euro 1.3350, sterling 1.46, Swiss .89, rand 9.31, krone 7.0420, SEK 7.94, forint 200, zloty 3.04, koruna 19.79, yen 94.10, sing 1.4790, HKD 7.7535, INR 48.69, China 6.8363, pesos 13.35, BRL 2.1820, dollar index 83.81, Oil $49.66, Silver $10.87, and Gold… $841.55

Source: Italian Job