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How the New ‘Yuan Carry Trade’ Will Add to China’s Global Muscle, and Possibly Even Accelerate the U.S. Recovery

Keith Fitz-Gerald — Fri, 15 May 2009 15:20:25 +0000

Institutional investors have talked a lot about the so-called “yen carry trade” over the past couple of years. But that’s really just been a warm-up act for a much bigger story. I’m talking about the “yuan carry trade.”

You’re hearing about it here first. But I promise that you’ll soon be hearing about it virtually everywhere.

Let me explain.

China’s New Profit Catalyst

Most investors are aware of China’s massive profit potential. But what they may not understand is this: Before all that potential can be transformed into actual profits, this Asian giant needs to develop a modern, fully functional financial system. That obviously can’t happen overnight, and China’s been smart – and avoided making major mistakes – by not rushing things.

In fact, despite some stinging criticism from the West, Beijing has held its companies and its financial markets in check to ensure an orderly development. It’s even left some protectionist measures in place to make sure that opportunistic foreign firms don’t overrun its markets.

Naturally, there’s been a near-term cost. It’s held some China-based companies back, making them less competitive in such developed markets as the United States and Europe. Chinese firms were severely limited in their access to funding, meaning they were also limited in their ability to capitalize on business opportunities in these overseas markets.

But I could see that the long-term profit potential for these companies was huge – and I’ve repeatedly said so to the audiences that I’ve spoken to at events all around the world, or that I’ve written to via my columns here in Money Morning. In both venues, I’ve told listeners and readers that the day would come when these companies were able to raise enough investment capital at home to finance their forays abroad.

The day that occurred, I’ve said, is the day when the real fireworks would begin.

Beijing finally lit the fuse.

By announcing the launch of a new market for dollar-denominated bonds that are issued by non-financial firms, China has now taken a major step toward modernizing its capital markets. The move hasn’t made much of a splash here in the United States. But I was in China, heading my annual investment tour of that country, when the announcement was made. And believe me when I tell you that China’s company executives, investors and government officials fully understand the implications of what’s just been done.

The move is very shrewd, for it brings about the confluence of highly complimentary trends.

For China-based companies that want to invest abroad, or that want to buy foreign companies, product lines, or other assets, these new dollar-denominated bonds will make it possible to do these deals more easily, and at a much lower cost.
Beijing had already launched an official campaign that urges “Corporate China” to acquire overseas companies and assets. But there had to be a liberalization of the financial system for this to happen. So back in August, in fact, for the first time in 11 years, China’s government eased rules governing its foreign-exchange systems.
These new regulations permit companies to retain foreign-exchange income offshore, if they want, and thus helped pave the way for the new bond market because it stokes potential demand for dollar-denominated investments.
And that comes at a perfect time for – up until now – the ongoing global financial crisis, which has made Chinese investors wary of buying foreign-currency bonds that were issued outside China. But these dollar-denominated bonds will be created inside China, effectively short-circuiting that worry.

Given what we know about China’s global natural-resource-acquisition ambitions, the first entrants into this new market will likely be one or more of China’s huge natural-resource concerns that are presently scouring the globe, creating captive supplies of the very commodities that will be necessary to ensure China’s future growth. My experience here suggests that high-tech and infrastructure companies will follow almost immediately. Many of those firms may head straight for Taiwan, thanks to newly inked agreements that make it easier for Mainland China companies to invest across the Taiwan Straits for the first time in decades. After that, these firms will direct their appetites for acquisitions elsewhere around the world.

Just how big could this new dollar-denominated financing market turn out to be?

At a time when Western debt markets remain mired in muck, it’s too soon to tell for certain. But Bank of China Ltd. analyst Shi Lei estimates that non-financial Chinese firms may issue as much as $30 billion during the next two quarters alone.

That amount tallies closely with China’s estimated $23 billion pipeline of outbound mergers-and-acquisitions deals that have been announced this year, but not yet consummated – especially if you factor in the $9.7 billion worth of deals that were announced in the past three years, but that are still pending, Thomson Reuters reports.

Could New Financing Deals Accelerate the U.S. Recovery?

Many Americans will clearly view a big uptick in investments from China with significant fear – especially if they remember the late 1980s Japanese shopping spree that sent ownership of Rockefeller Center, Columbia Records, Universal Studios and the Pebble Beach Golf Course back to Tokyo.

This is different. In fact, I think the new rules are likely to create entirely new funding sources that will boost international trade and that could actually accelerate the U.S. economy’s recovery from the global financial crisis. In fact, it’s entirely possible that this new form of financing will help facilitate a post-recovery golden age of expansion led by such as-yet unsaturated markets as China.

Call it the “Mother of All Carry Trades” – only this time it will be yuan-based, instead of yen-based.

A carry trade is an investing strategy in which an investor takes advantage of interest rate differences between two countries. He’ll borrow money in a country where rates are low and invest it in another market where rates are higher, profiting from the difference. The rate disparities are often caused by the respective central banks; one may be trying to combat inflation with high rates even as another is trying to nurture economic growth by reducing rates.

There are no actual examples to point to, yet, since the market isn’t yet up and running, but we can draw some inferences based on who’s filed to issue this dollar-denominated debt, and look at who’s likely to file in the months to come.

According to The China Daily News, China National Petroleum Corp., the Red Dragon’s biggest oil company, is planning to issue $3 billion in dollar-denominated bonds and is planning to auction as much as an additional $1 billion in three-year floating debt, whose rate will be tied to the London Interbank Offered Rate (LIBOR).

Traders familiar with the new market suggest that CNPC will probably pay a coupon of 60 basis points to 80 basis points (0.60% to 0.80%) more than six-month LIBOR – a much lower cost than the 2.8% coupon for the $2.93 billion worth of yuan-based, three-year, fixed-rate, medium-term bills issued back in December.

Last year, China’s yuan had appreciated steeply against the U.S. dollar, meaning funding costs were high for Chinese companies. Now, however, the situation is reversed, and companies can issue huge amounts of expansion debt for comparatively little money.

As a byproduct of all this, companies that take advantage of the new dollar-denominated funding markets help take the strain off of the People’s Bank of China, the central bank that has shouldered almost all of the dollar-based exchange risk to date.

In Shanghai, which is China’s financial capital, my trading contacts tell me that six-month dollars – which were quoted at 0.40% earlier this year in China, now reflect approximately 0.80%, which is roughly in line with onshore-dollar yuan forward rates for the same time period.

By comparison, the six-month implied forward rates hit 15% in March 2008. So you can see why Chinese companies have such a powerful incentive to use this new funding venue – especially when so many otherwise-solid global companies have been brought to their knees by the credit crisis.

The Three Keys for Investors

So what does this mean for investors?

In a word, plenty.

First, it’s conceivable that the sheer volume of dollar-denominated bonds could indirectly prop up the U.S. dollar. Not only would that potentially wreck traders who are betting that it’s headed the other way, it could actually solidify U.S. and global markets that are still searching for an anchor. By implication, this could also wreck the “gold bugs” who are betting the farm, instead of investing in the precious metal as part of a disciplined investment strategy.

Second, for those on Wall Street who continue to believe they are the “masters of the universe,” the strength and ferocity with which China’s dollar-denominated bond market may develop will probably come as a rude shock. Not only are the vast majority of Wall Street firms likely to be cut out of the underwriting process, but chances are very good that they’ll probably be relegated to the back seat when it comes time to pony up in the never-ending game of global one-upmanship.

And third, depending on the ultimate size of this new bond market, the prices of resource-based companies and commodities could go sharply higher as investors realize there is a potentially unlimited source of funding chasing relatively few quality assets. To the extent that Chinese companies mirror Beijing’s plans for the future, the same will be true for technology, medical and infrastructure plays.

Will this happen immediately?

Probably not. Even though the market is potentially huge (like just about everything else here in China), Beijing will almost certainly keep its hand on the throttle, meaning it will grow at a reasonably impressive – albeit measured – pace.

Beijing is very aware that an imprudent use of debt was a key part of the elixir that created the global financial crisis, meaning government officials will work hard to make sure the tiger stays in its tank – so it can’t bite anyone.

Over the long haul, however, there’s no question that this new market is an important – and much-needed – step in China’s continued development into a global financial juggernaut that investors cannot afford to ignore.

Source: How the New ‘Yuan Carry Trade’ Will Add to China’s Global Muscle, and Possibly Even Accelerate the U.S. Recovery

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever.

Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this; "New Reality"; will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as"The Golden Age of Wealth Creation" The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and on this new market environment.]

It’s Not My Fault, It Must Be Yours!

Chuck Butler — Thu, 12 Feb 2009 15:12:33 +0000

What’s $78 Billion among friends? Currencies fade with bias to buy Gold… Could the Carry Trade Unwind be done? And Now… Today’s Pfennig!
Good day… And a Thunderin’ Thursday to you! Well… Front and center this morning, I’m going to tell you something that will surprise a few and make a few happy. I’ve had my say on the Bailouts, TARP, Stimulus, and spending. I’ve beaten them to a pulp, and some readers have expressed their contempt with me carrying on with this beating. So… Unless something cracks, I’ll just leave it all as it stands, and go on with life. This all has been too much for my blood pressure to take! I’ll report the facts on this stuff, and leave the commentary for people that think they “know better”…

For instance, it was reported the other day that the Treasury Dept. has overpaid for stock received from TARP recipients by $78 Billion. You see, for every $100 given in TARP, the Treasury was to receive $100 in stock / assets, but when all the beans are counted, the Treasury is $78 Billion short on stock /assets… But, what the heck, what’s $78 Billion among friends?

I was totally amused at the lawmakers grilling of Bank CEO’s yesterday. In going along with the general practice that exists today… “It’s always someone else’s fault for it can’t be my own fault” The lawmakers pointed fingers and blasted these CEO’s for “earning a living”… This is dangerous ground folks, as it speaks of doing away with the way businesses have been run for eons, and shakes the very foundation of Capitalism… If the lawmakers had stopped and thought about their TARP money before they began to hand it out with no accountability, and lending requirements, maybe things would be moving in the right direction by now… And I know… This is getting to opinionated and I’m not going there anymore.

Oh! And one more thing… Please no more emails blasting me for taking the new administration to the woodshed so early in their rein… It’s NOT A POLITICAL THING! For any reader that was around in 2001 when the then new administration had just taken over, and their first order of business was to place tariffs on Steel imports, I came out with both guns a blazin’ that this was protectionism and had no place in free markets and Capitalism… I ranted and railed on this new president for this move. Funny, I don’t recall receiving the nasty emails I get now for doing the same thing to this new president back then.. Hmmm…

OK… The dollar was in the driver’s seat yesterday, as the risk takers have all gone home… A heading on Bloomberg this morning tells it all… “Stocks fall worldwide on concern stimulus plans may fail” The Stimulus they are talking about is the “new and improved” Stimulus package that the Senate approved yesterday, which came in lower than the previous package. This version’s total comes in at $789 Billion.

Yesterday’s potential market moving data didn’t materialize, as the Trade Deficit did not narrow as much as forecast, and last month’s number was revised upward. For the record and for those of you keeping score at home, the Trade Deficit for December printed at $39.9 Billion, and November’s Deficit was revised from $40.4 Billion to $41.6 Billion. Exports have fallen off the cliff as 1. Global demand is waning, and 2. the dollar is overvalued and too strong to allow U.S. exports to be competitive.

Today, we’ll see Retail Sales for January. The BHI (Butler Household Index) tells me that we should look for a very disappointing number from January. We’ll also see the Weekly Initial Jobless Claims that continue to show more rot on labor’s vine. Last week, the Initial Claims showed a record of 626K filed. This week, the “experts” are looking for 610K… I’ll go out on the limb and say it will be even more disappointing. UGH!

Well… As I told the interviewer the other day… I believe what we’re seeing right now is a general increased concern regarding fiat currencies, which has Gold on the rally tracks once again. Yesterday, Gold soared upward and onward by $23… And it has already added $3 since the London Morning Fixing earlier… As my friend, the Mogambo Guru, tells his readers… Everyone should own Gold… “see how easy this investing stuff is? Whee!” And let me repeat something I said before. My friend, Bill Bonner of the Daily Reckoning, www.dailyreckoning.com coined this saying for his “trade of the decade” at the turn of the century… “The trade of the decade is to sell the DOW and buy Gold on the dips”… WOW…

And now that Central Banks all over the world are having a race to zero… Deposit rates no longer hold the hammer over Gold’s non interest bearing status. So… When Gold is on one scale, and cash (like dollars!) is on the other side of the scale… Guess what happens! I was surprised that I didn’t get any comments yesterday from the media or readers about what I said Gold was… “An Uncertainty Hedge”… Are you uncertain as to what all this that’s going on is going to bring us?

An ECB minister, Papademos, was speaking overnight about how “a further easing of the Eurozone monetary policy may be appropriate as risks to growth and inflation are to the downside.” Then another ECB minister, Liikanen, said that “at the next meeting it is possible we could move.” No dookie Sherlock! Your leader, Mr. Trichet, has all but told us to look for lower rates at the March 5 meeting…

Lower interest rates in the Eurozone won’t necessarily hurt the euro, as they sure haven’t hurt the dollar! There’s a whole trading pattern that deals with a currency not losing value even after a debasing rate cut… I’ll put that all together, and bring it to you probably next week, as we’ve got time before March 5 comes around any way!

Instead, the market movers for euros this morning has been 1. risk aversion in play 2. more flight to the safety of Treasuries, and 3. recession type data, like this morning’s December print of Industrial Production for the Eurozone, which fell -2.6% for the month, and moved the annual year-o-year figure at -12% OUCH! Now, that’s recession type data! And something that really brings that thought I’ve made a few times now, about the move to Gold…

Pound sterling has gone back on the slippery slide downward, after a brief rally last week. I was getting a little hot under the collar with the sterling strength last week, but, as with all things, patience is a virtue… Sterling is showing its true colors again, and the folks over at BNP Paribas say that the “downside risks for pound sterling VS dollars have increased”… Hmmm… That’s big time research dept there… I could of, and in fact I already did all by my lonesome, tell you that!

The Aussie dollar (A$) just won’t go away quietly… Yes, I fully understand that it has fallen from the lofty level 98-cents to present day levels of around 65-cents… But since it got to this mid-65 cent range, it has held steady Eddie. Now, of course I realize that I just gave it the kiss of death, but really this is worth pointing out. And with yen now stalled out around 90, it kind of makes you wonder if the Carry Trade unwind is over… Makes you stop to think doesn’t it? Australia keeps cutting interest rates, and it remains in the mid-65 cent range… Yen has had every opportunity under the sun to go further to 85, and can’t seem to find any terra firma below 90… Therefore, I’m pronouncing the unwinding of the Carry Trade as a done deal… This is where the munchkin coroner comes out and proclaims the Carry Trade as truly dead… As Coroner , I thoroughly examined her And she’s not only merely dead She’s really most sincerely dead…

Well… At least we can hope so! This would be a good indication that risk aversion is dying out… Although I’m truly aware that this risk aversion has a ways to go, we have to get to this place before we can begin to make plans to send risk aversion to a state run home…

On a sidebar here… Whenever I used to sit around late into the night with my friends, they would invariably get me to do my imitation of the Lollipop Guild… HAHAHAHAHA! Of course this is when they also would have me play my guitar, which I now haven’t picked up in some time…

OK… Enough of that silliness! Your Pfennig writer has really gone out on a limb this morning with the Carry Trade thingy, eh?

I’m out of ideas for today, so with no further ado…

Currencies today 2/12/09: A$ .65, kiwi .5195, C$ .8045, euro 1.2855, sterling 1.4230, Swiss .8610, rand 10.0950, krone 6.8735, SEK 8.4050, forint 232, zloty 3.58, koruna 22.29, yen 90, sing 1.51, HKD 7.7515, INR 48.84, China 6.8340, pesos 14.59, BRL 2.2870, dollar index 86.14, Oil $35.53 (the price of oil just keeps falling!), Silver $13.45, and Gold… $944.44

Source: It’s Not My Fault, It Must Be Yours!

Chuck Butler

A HUGE Currency Rally!

Chuck Butler — Thu, 11 Dec 2008 14:54:22 +0000

Another currency rally…. SNB cuts another 50 BPS! Budget Deficit continues to widen! Treasury yields go south for the winter! And Now… Today’s Pfennig!Good day… And a Tub Thumpin’ Thursday to you! It’s been quite the rally this week in the currencies led by the euro, which is like old times, eh? The Big Dog on the porch finally gets to stretch its legs and chase the dollar down the street! It’s been a long time since we’ve seen this go on for more than a day. Yes, we’ve seen one day spikes, and even two day rallies turn into false dawns, but this one has lasted about a week now. Ever since last Friday’s awful Jobs Jamboree, the tide has turned, and the Trading Theme that has held the currencies in a full nelson since the end of July, could very well be on the way out the door. I said that about the Trading Theme earlier this week, so I just wanted to repeat that to emphasize the point!

So… Yesterday, we saw the euro lead the currencies higher all day, with the single unit finishing the day in the 1.3050 area… I turned on the currency screens this morning, and what did my wondering eyes did appear, but the euro trading at 1.3170, and others bringing up the rear!

The Swiss National Bank (SNB) cut rates further this morning, bringing their internal rate to 1/2%, 50 BPS, that’s it… So, one would think that bringing your interest rates to near zero, would NOT be a good thing for the currency, right? Well, in this day and age of rewarding a currency for lower interest rates to promote growth, that’s not the case. The franc has rallied on the news… Of course it’s probably just caught up in the euro’s move higher.

Looks like the U.S. House of Representatives approved a $14 Billion package for GM and Chrysler, but the Senate has put some roadblocks out on this deal, and that puts the whole deal in jeopardy… A Final Jeopardy if you will for the contestants Gm and Chrysler! Notice I didn’t include Ford. The people at Ford, backed out, and tried to put a 100 miles of desert between them and GM & Chrysler. Good for them!

Well, earlier in the week, the glimmering light of the bailout for the Big 3, helped the currencies… But now that the Trading Theme seems to be taking its last breaths, the news of the bailout in jeopardy, has helped the currencies, as this would mean that we could finally be back to focusing on fundamentals! Could we really? Is it possible? Well, maybe if you’re real good and take a nap… No wait, that’s what I used to tell the kids on Christmas Eve! It IS possible… But we need a few more days of what we’ve seen so far this week to confirm the Trading Theme to be a thing of the past.

Speaking of things of the past… A Bank of New York (BONY) strategist, issued a statement saying the, “Carry Trade is Dead and Buried.” Hmmm… I beg to differ with him on that, for if we get investors and traders focused on fundamentals again, and the risk takers come out of the woodwork again, the Carry Trade could very well be on the burners again… But then, I do see his thought here and that is (I think it is) that if every Central Bank is cutting interest rates to the bone, there won’t be any “high yielders” left to buy on the buy-side of the Carry Trade. Well, let’s see now… Aussie and New Zealand were the BIG WINNERS of the last Carry Trade craziness, and their rates are lower, but still 3 and 4 hundred basis points above those in Japan, Switzerland and the U.S.! But, the Carry Traders might have to look further, and do some additional leg work this time to find the “high yielders” like… Brazil, and India…

OK… I came across this story yesterday and really had my blood boiling… I wanted to talk to the Big Boss Frank Trotter about it and get his thoughts, but the poor guy was tied up on the phone all day, well, all day that is, until I left to go home! Anyway, here’s the base story, that the entire piece can be read here.

The U.S. Federal Reserve is considering issuing its own debt for the first time, the Wall Street Journal said, citing people familiar with the matter.

“Fed officials have approached Congress about the move, which could include issuing bills or some other form of debt and would provide the central bank with more flexibility to tackle the financial crisis.”

NOW WAIT JUST A MINUTE THERE BIG BEN! This is the bailiwick of the Treasury Dept, issuing debt! You’ve already got the printing press for currency, and now you want to issue your own Debt? This is complete madness I tell you, complete madness! I think the Fed is thinking of ways to deal with deflation…

Oh well, apparently, Big Ben can do whatever he pleases these days, the new President has named an “energy Czar” and the automakers might get a “Car Czar”, the new President had better think about naming a Fed Reserve and Treasury dept Czar!

OK, yesterday’s printing of the Monthly Budget Statement saw the monthly deficit not “as bad” as forecast, with the figure posting a $164.8 Billion deficit, instead of $171 Billion as forecast… That’s still really bad folks, let’s not get caught up in the media spin of talking about how it “wasn’t as bad as forecast”! Let’s focus on the fact that for the second consecutive month the Budget Deficit widened… And this month it went from $98 Billion in October to $164.8 Billion in November!

Of course you know why this is happening, right? No? Ahhh grasshopper… Recall the bailout money? Well, whenever any of it is spent, it will show up here! Want even further bad news here? Government revenue fell 4.2%, while spending soared 24%!

The Treasury Dept has written checks on all but $15 million of the first half of the $700 Billion allocated to help financial institutions.

So, as I said the other day when I mentioned that the President-elect’s plan to spend more money on infrastructure since 1950 might be the right thing to do at the wrong time… We’ve got the deep, dark recession going on, the Credit Crisis and this collapse of revenue… But don’t let that stop him! Why would we want to stop with the deficit spending here? I shake my head in disgust!

Today’s data cupboard has the Trade Deficit for November, which should narrow, given the collapse of the Oil price. That and the recession should allow the Trade Deficit to narrow… But, let’s not get caught up in the media spin on this too… You see, the Trade Deficit is still $53 Billion, which annually is $636 Billion… Which is probably right about where it will end out this year…

And… $53 Billion still needs to be financed! Let’s not forget that little ditty!

I just watched the euro gap up to 1.32… This is a rout like I’ve not seen since last summer! And wouldn’t you know it, here it is, and I’m going on vacation! Oh well, maybe the old adage that the currencies rally when Chuck’s away, will come back!

I just can’t pass up on this one though… And I know the legal beagles will be all over me on this, but here goes… This certainly looks like the Santa rally that I talked about earlier this week, eh?

I know, I know, it could all be reversed in a New York Minute, but you’ve seen these types of routs before…

Another currency on the rally tracks this week is the Chinese renminbi… After all the “bad talk” about China last week, the Chinese have said, “you’ll be sorry”! What I’m talking about here is the fact that everyone is dissing the renminbi right now, and selling it, and pushing forward contracts down in value… And the Chinese, because they can, have moved the renminbi higher VS the dollar this week! There! In Your Face, disgrace!

So… What’s everyone thinking these days buying Treasuries? I mean, the yield on a 3 month T-Bill is 1 BP! You have to go out 30 years in a Treasury Bond to get 3% yield! OUCH! But, investors keep buying! Well, I think what you’ve got going on here is simply the fact that all this repatriation of dollars has investors with tons of cash, that they don’t want to put into banks, (for a number of reasons, like FDIC insurance limits, shaky banks, etc.) So, they put the cash into Treasuries, realizing that they may not earn any interest, but it will be there when they want it at some point in the future. And this “point in the future” is what scares the bejeebers out of me! Because when the icing is off the cake here, there will be a swift exodus from Treasuries, as no one will want to be the last man standing here… UH-OH! Just be careful folks…

The weekly Initial Jobless Claims will also print this morning. We’ve seen a huge increase to average above 500K in the Weekly Initial Claims, and that should hold true today. This isn’t a good thing folks…

Well, the rally this week hasn’t been cornered by currencies… The Commodities have come back too! Oil is up $2, but the real meat here is the rally in Gold! Gold this morning is perched above $827, when it was sitting at $770 just a week ago!

Currencies today 12/11/08: A$ .6660, kiwi .5525, C$ .8015, euro 1.3235, sterling 1.49, Swiss .84, ISK 215.50, rand 10.13, krone 6.95, SEK 8, forint 199, zloty 3.01, koruna 19.64, yen 91.30, baht 35, sing 1.4890, HKD 7.75, INR 48.30, China 6.8515, pesos 13.30, BRL 2.3950, dollar index 84.33, Oil $45.50, Silver $10.46, and Gold… $832

Source: A Huge Currency Rally

The Worst Jobs Report Since 1974!

Chuck Butler — Mon, 08 Dec 2008 14:36:07 +0000

Will -533K turn to -600K? … A glimmer of light brings back risk takers… Another week of data… Fedspeak today… And Now… Today’s Pfennig!
OK… Did you see the rot on labor’s vine Friday? The Jobs Jamboree was very unkind to many, with a 533K jobs lost in November. That number was the worst figure since 1974! The tally of 1.9 million jobs lost this year surpasses the losses of the past two recessions, and according to the Wall Street Journal, signals that the current downturn could be the worst since the years immediately following World War II.

The unemployment rate ticked up to 6.7% from 6.5%, a separate Labor Department survey showed, the highest rate in 15 years. But the jobless rate — which is based on figures of people looking for work — was contained by the ranks of discouraged job-seekers giving up their searches. A broader government measure of unemployment, which includes those who want to work but are no longer actively seeking positions, jumped to 12.5% in November from 11.8% a month earlier.

Now… The thing that really ticks me off folks, is the fact that the October figure saw a major revision. You might recall that the September figure which was bad enough, was revised up by over 100K… Then last month we saw a negative -240K figure, which was bad enough, but one month later the figure is revised up to -320K… So, in my mind, the -533K figure reported this month for November, will probably be revised upward to the -600K figure… UGH!

So… All that rot, and the currencies hardly noticed! The trading range for the day was very tight, with a bias to sell dollars. In the overnight markets, the bias to sell dollars has really caught some wind in its sails. I’ll tell you this, so hear me now and listen to me later… But the markets are really becoming predictable. You see, any time it appears there could very well be a light at the end of the tunnel, the fundamentals come back into focus (somewhat, because if they really came into focus, we would see dollars selling like funnel cakes at a State Fair), and the dollar gets sold.

The markets think they see a glimmering light this morning, as it appears the Big 3 will get some cash from the Gov’t… Probably not as much ($40 Billion) that they wanted, but more than they originally asked for ($25 Billion)… I heard that they were bickering over whether they would accept having an “Auto-Czar” named by the Gov’t, placed over them and to allocate the money… They should simply take the funds and be happy they got them!

This glimmering light always bring with it a chance for the high yielders to rebound, as risk takers stick their toes back into the chilled waters of Carry Trades. And that’s exactly what we saw overnight, with the Aussie, kiwi, real, and rand all with strong rebounds VS the dollar. The glimmering light also lets Gold shine. So, the Commodities and the Commodity currencies all look better this morning. But, while I was typing the above, I had to laugh at my reference of Aussie and kiwi as “high yielders”… The way their Central Banks have been slashing rates, it amazing they can still hold up the “high yield banner”… But with the Big 3 of U.S., U.K., and Japan all with either zero rates and rates falling to zero, 3&4% yields look pretty lofty, eh?

And speaking of the risk takers coming back into the markets… It is really illustrated with the Japanese yen falling from 91 to 93 since Friday morning… I’ve explained all this before, so I won’t bore every day readers with that again… If you want more info on this, you might want to check out the Pfennig’s web site: www.dailypfennig.com where you can find today’s letter, along with 6 months worth of archives… You’ll probably find lots of Pfennigs that have full disclosure of what’s going on here…

I saw this story on Reuters that really caught my attention… “One of the top managers of China Investment Corp, (CIC) the country’s $200 billion sovereign wealth fund, reckons current dollar strength is temporary and he would like to bet that the U.S. currency is headed lower.

CIC President Gao Xiqing said in an interview with monthly U.S. magazine The Atlantic that,” Everyone is saying, Oh, look, the dollar is getting stronger! I say, that’s really temporary. It’s simply because a lot of people need to cash in, they need U.S. dollars in order to pay back their creditors. But after a short while, the dollar may be going down again. I’d like to bet on that!”

Sounds like Mr. Gao and I would be good drinking buddies, as we think the same way! I wonder if he would like to take on the Cardinals as his baseball team?….

Speaking of drinking buddies… Here’s another one that would probably fall into that category… Here’s another story on Reuters… “Foundations for the dollar’s recent rally have not been solid. The result of repatriation, deleveraging, quantitative easing and a major scarcity of dollars,” said Bob Sinche, head of global FX and rate strategy at The Bank of America in New York. “But now we are bound for a correction.”

Now, if you ask me (and I know you didn’t, but you probably would if you ran into me, and I said, Hey! Would you like to ask me a question? HA!) but if you ask me, it sure seems as though these two guys could be Pfennig readers! But it would be better if they are not… For if they are not, then that means they’re seeing things the same as I do, and not just using the Pfennig for their fame and fortune! HAHAHAHA HAHAHAHAHAHAHAHAHAHA!

So, after all the rate cuts last week, the Fed still gets their turn at the rate cut table next week, and I don’t expect the Fed Heads to disappoint the rate cut campers in any sense of the imagination! And this could be the one that really brings the fact that yield differentials “SHOULD” be in play, and that the dollar “SHOULD” be in trouble… I’m really thinking that we could see a Santa rally for the currencies from here to the end of the month… Now… That’s just me thinking out loud… I did NOT tell anyone, nor give advice to anyone to go out and buy euros today because I said there was going to be a rally! Of course, I could give you the wink and nod, but then you wouldn’t see it because I can’t physically wink and nod here in the Pfennig!

OK, I carry on, but it just gets me to no end… Advice… Yeah… Well the only advice I do give people is to love their families and friends, for in the end, that’s all you’ve got! That, and the fact that investors should diversify their investment portfolios, so that not all of their investments are dollar denominated. Just like real estate’s key word is “location”… Investing’s key word is “diversification”…

In the “sign of the times” that I’ve been detailing lately… The Wall Street Journal reported that Merrill Lynch’s CEO, John Thain, has suggested to directors that he get a 2008 bonus of as much as $10 million, but the battered securities firm’s compensation committee is resisting his request.

And… The Tribune Company is preparing for a possible bankruptcy-protection filing as soon as this week. (I could say that I guess this isn’t a good time to bring up all the millions they spent on Kerry Wood and Mark Prior… ) (and yes, I know, that wasn’t playing nice with my Cubs friends)…

And… U.S. President-elect Barack Obama’s pledged to create the largest infrastructure spending package since the 1950s to revive the economy.

The data cupboard will yield some interesting data this week for us to chew on… Like the Monthly Budget Statement (deficit), and the Trade Balance (deficit), and Retail Sales… The Retail Sales figure should remain pretty disappointing. A quick check of the BHI (Butler Household Index) tells me that! I tried to help the BHI, but that was last week, in December… So, in the end, there’s more awful data to deal with, and by the time the Retail Sales figures are printed on Friday, this week, the glimmer of light provided by a deal with the Big 3, will have faded, and we could begin to feel pretty gloomy and doomy again.

But not me! I begin my Winter vacation on Friday… And I can guarantee you that I will not be checking on Retail Sales on Friday, as this is our “guys shopping day”… All the “guys” read the Pfennig, so I hope they are ready to go this Friday!

We get some “Fed Speak” today from Mssrs. Kroszner, Rosengren, and Kohn… They’ll most likely be setting the table for the FOMC meeting next week…

Currencies today 12/8/08: A$ .6635, kiwi .5435, C$ .80, euro 1.2865, sterling 1.4865, Swiss .8250, ISK 261, rand 10.24, krone 7.08, SEK 8.12, forint 205.70, zloty 2.4450, koruna 20.02, yen 93.26, baht 35.54, sing 1.5090, HKD 7.7510, INR 49.59, China 6.8808, pesos 13.47, BRL 2.4410, dollar index 86.08, Oil $42.75, Silver $9.76, and Gold… $769.88

Source: The Worst Jobs Report Since 1974!