Good day… And a Wonderful Wednesday to you! I had someone last week in Bermuda ask me why I have my little sayings like Wonderful Wednesdays, and Fantastico Fridays… I told him that it had to do with my life scare of almost 2 years ago, and that I now celebrate each and every day! (well, maybe when I had pneumonia two weeks back I wasn’t celebrating….)

OK… I hope your Cinco De Mayo fun was… Well… Fun! We went out with some good friends, but was back home before bed time for yours truly… Still fun though!

The currencies, led by the euro have run into a dollar road block… It’s all about the Stress Tests this morning folks… It now appears that Bank of America (BOA) will need approx. $35 Billion, and not the measly $10 Billion rumored yesterday. That’s quite a boat load of money, folks… So… All eyes are on the Stress Tests results which are expected to be released tomorrow. But this kind of rumor regarding BOA (NYSE:BAC), is weighing heavily on the risk assets this morning, with a bias toward risk aversion.

The euro didn’t get any help from the latest print of Retail Sales this morning either… Eurozone Retail Sales in March fell by the largest amount on record… The Eurozone recession is really deepened, doubt about it! But remember this… In 2002-03 the euro ignored the recession that had a tight grip on Germany, the Eurozone’s largest economy, and rallied strongly VS the dollar… It was simply a case of “your car is uglier than mine” regarding the problems that were cropping up for the dollar at that time. And since the euro is the offset currency to the dollar… Voila! The dollar’s car was uglier than the euro’s car…

One thing I also want to mention is that we saw the euro climb back above 1.34 again yesterday morning briefly… It sure seems to me that the euro is performing according to many currencies moves I’ve seen since 1992. What I’m talking about here is the fact that the euro keeps probing higher into the 1.34 handle, only to be knocked back down… This can be good or bad, depending on patient the traders are… Usually, a currency goes above a level that sees a ton of resistance (sells / profit taking), and it falls back. The currency will do this a few times, at which time traders can see this as a challenge, and push the currency higher… Or can grow tired and impatient and give up the rally, thus allowing the currency to drift lower. We’ll have to keep an eye on this in the next week…

One currency that has pushed past a road block, and not given it up is the Aussie dollar (A$), which passed 74-cents the other day… Yes, the A$ has given back some ground following the Big Dog euro… But not below 74-cents, not yet any way! The A$ got a boost overnight as Retail Sales for March reversed the 2% fall in Feb, with a 2.2% rise! Of course, the Gov’t has sent out a round of checks about this time… So, one would expect this to happen… It will be important to see if this is a one-and-done, or if it has legs…

OK… Yesterday, I opened Pandora’s Box of inquiry regarding the Chinese / Argentina currency swap line story I brought to you… Inquiring minds want to know more! Well… I researched this more yesterday, and this is beginning to scare the bejeebers out of me folks… First of all the currency swap line that China and Argentina agreed to, was actually the 6th currency swap line that China has done in the past 6 months… They have in the books, South Korea, Hong Kong, Malaysia, Indonesia, Belarus, and now Argentina… Now, when these other swap lines were announced I didn’t think too much about them… But now… stop for a minute and think back to last month, when we told you that China was calling for an end of the dollar’s reserve currency status…

Now… Don’t these all take on a different meaning now that China has made their intentions known? To me… All these swap lines are like pieces of a puzzle, and are fitting together very nicely for China… 1. I think China is trying to gain wider use of the renminbi in Southeast Asia… And 2. I think China will continue to add pieces of the puzzle, and when all the pieces are in place… China goes back to the G-20 ministers and says… “I want the dollar removed as the world’s reserve currency”

What does this do to the dollar? Well… If we look back at the last reserve currency of the world, the pound sterling, we can see that it was a long slow decline that took years to see any recovery, and then only briefly. And to each and every consumer in the U.S. a weaker dollar will mean a loss of purchasing power, as witnessed last year before the financial meltdown… Remember back around this time last year, I came up with some data that really illustrated the loss of purchasing power of the dollar? Well… It went something like this… In the past 6 years, the price of Oil has rising in dollar terms by 319%, while the rise in euro terms was only 94%, and against Gold it was only 50%… So, that’s what the U.S. consumer can expect… A loss of purchasing power…

That is… Unless they have a “hedge” against this scenario… I can hear you asking right away, “What’s this “hedge” Chuck? Ahhh grasshopper, the “hedge” is to diversify a portion of your dollar denominated investment portfolio out of the dollar!

Whew! That was a lot of typing all at once, and I’m worn out! Be right back…

OK, I’m back, bet you didn’t even miss me. HA! I’m still waiting for the news from Norway’s Norges Bank regarding the size of the rate cut that has been forecast… Most observers believe it will be 50 BPS… I think they will opt for a smaller cut of 25 BPS… But given the strange things that are valuing currencies these days, a 50 BPS cut would probably help the krone more than a lesser cut of 25 BPS. Not exactly the “fundamental” way of valuing a currency, but in these strange days, it seems to be the norm.

News from Switzerland this morning has the Swiss National Bank (SNB) watching the advances by the franc very closely… Hmmm… Recall that I explained to you that the SNB was NOT going to allow the franc to get too strong VS the dollar, as the SNB wanted a weaker currency to bring inflation into their economy… The SNB is scared to death about the prospects of deflation getting a grip on their economy… But debasing the currency to achieve this? I don’t think this should be their route… I’m not a fan of the SNB right now…

And tomorrow is meeting day for the European Central Bank (ECB)… ECB President, Trichet, is between a rock and hard place… He wants to continue to provide price stability, but his economy is diving deep into a recession… What’s a prudent Central Banker to do? The markets believe he will cut rates at this meeting, which is also a weight on the euro this morning… I’m on the fence with this one folks… I know in Trichet’s heart of hearts, he wants to keeps rates unchanged… But I don’t think he’ll be able to follow his heart…

My friend, Ashish Advani, made a call to buy Indian rupee last month, in my “paid subscriber” newsletter, The Currency Capitalist (shameless plug!) … And this morning, Standard Chartered Plc said that, “India will be a growth outperformer this year because it is relatively insulated to the global recession and the trade deficit has been narrowing quite rapidly. The Indian rupee will rally as India’s Trade Deficit narrows and the economy expands faster than most Asian nations.”

The data cupboard will produce the ADP Challenger employment report this morning… Recall, that this is the report that tried to emulate the Bureau of Labor Statistics’ (BLS) methodology, but has failed in past months to be a solid indicator of what the Jobs Jamboree will hold in store for us. Nevertheless, the ADP report will give us an “idea” of what to expect, so, it is worth the couple of minutes it takes to review it when it prints this morning.

OK… Before I go to the Big Finish, I wanted to share something with you… In these times when Banks all over are having a rough go of it, EverBank continues to steer the ship in the right direction… I’ve been highlighting the 2008 annual results at the top of the Pfennig for some time now, to drive home the point… But now, I have even more ammo… Our 1st QTR 2009 results saw a press release yesterday, and I believe I can now share them with you…

Net income of $14.4 million, a 65% increase from the first quarter of 2008
> Asset growth of 28% over the same period last year, to over $7.6 billion
> Deposit growth of 42%, or $558 million, to over $5.6 billion

In addition to producing solid earnings and growth in our core businesses, we further strengthened our capital and liquidity positions and significantly increased our loan reserves. EverBank’s total equity rose to over $541 million, a 49% increase over the first quarter of 2008 and more than $170 million above the amount required by the FDIC to be deemed “well capitalized.”

YAHOO!

Currencies today 5/6/09: A$ .7422, kiwi .5822, C$ .8480, euro 1.3320, sterling 1.5090, Swiss .8830, rand 8.5240, krone 6.5740, SEK 7.98, forint 214.20, zloty 3.30, koruna 20.08, yen 98.30, sing 1.4750, HKD 7.75, INR 49.49, China 6.8215, pesos 13.27, BRL 2.1350, dollar index 84.05, Oil $54.17, Silver $13.47, and Gold… $905

Source: Opening Pandora’s Box…

This from Money Morning:

There clearly are countries – such as the United States and much of the European Union – that are going to collapse into recession, even if only unofficially. But this doesn’t necessarily have to evolve into a global recession – a position that most of the traditional Wall Street establishment disagrees with, by the way.

Let’s take a look at several of Wall Street’s current misconceptions – and see why I’m selectively bullish:

• The Red Dragon (China) is ready to hibernate: Wall Street is worried that a U.S.-induced recession will slay the Red Dragon. There’s no way. If a country can fall into a recession when its economy (as measured by gross domestic product, or GDP) is advancing at a 9.6% clip – at a time when its U.S. counterpart will be lucky to eke out a 1.0% growth rate – well, I’ll eat my hat. The Armani Army, in its infinite wisdom, is worried about a recession in China even though its $1.9 trillion in foreign reserves are more than 32.10% of GDP and external debt is a miniscule 7.6% of GDP (external debt is defined as the amount of debt that China owes external creditors, including consumers, central governments and commercial institutions, according to the CIA Fact Book). By contrast, the U.S. reserves are 4.84% of GDP, while external debt is 84%. The United Kingdom and Switzerland are in even worse shape, with external debt of 382.2% and 279.1%, respectively.
• China won’t be able to survive a drop-off in exports to the United States: Then there’s the myth of China’s export economy. The last time China took a header and export business dropped by 35%, its GDP dropped by less than 1%. I’m betting it will be an even smaller bump this time around, especially since China’s middle class now is increasingly responsible for internal growth – independent of what China exports to the rest of the world.
• The Asian economies are an economic train wreck just waiting to happen: This was true a decade ago, when the United States and Western Europe held all the cash. But no longer. Today, nations such as Singapore, Thailand and Malaysia are running trade surpluses. So is Canada. That suggests that the currencies of these countries are significantly undervalued at a time when their economies are increasingly tied to that of China. What does that tell us? Today, China is the growth engine of Asia; tomorrow, it will be the growth engine of the world.
• The U.S. economy remains the financial center of the world: Today, an estimated 78% of global economic activity takes place outside U.S. borders, which means that even in a recession, an increasing amount of capital circulates beyond the U.S. shores. Indeed, the U.S. stock market now represents less than 30% of total world market capitalization, down from roughly 45% as recently as 2004. Don’t be surprised to see the United States continue to decline in economic relevance. One day, the lion’s share of the financial trades will take place beyond U.S.  borders.
• Because it’s a developed market, the United States remains the world’s safest and most promising place to profit: In the 1980s, the United States accounted for one-third of the global economy; by 2030, that ratio will be cut in half. The reality is that U.S. investors who want to be successful in the years to come will have to learn all they can about markets whose names they can’t yet pronounce.

Wall Street may not agree, but the real adage to embrace and remember is this one: It’s easier to become No. 1 than it is to stay there.

There’s no doubt that the “experts” who are projecting that the world markets will decline further and perhaps even collapse will take issue with my analysis. But it’s important to note that I agree with you – at least in the near-term. Barring a governmentally induced Hail Mary, I think there’s no question that the worst remains ahead of us.

But longer term – I’m talking three, five to 10 years – I am intrigued by the fact that so many emerging markets have collapsed in the chaos, even though the underlying economies haven’t really changed. Everything we know about financial markets history and changes in market behavior suggests that countries backed by high cash reserves tend to emerge from periods of market chaos faster – and stronger – than the economies that had been at the top of the heap when the crisis first struck. [For some insight into which countries have the biggest reserves as a percentage of GDP, take a close look at the accompanying chart].

Where does that leave us? Well, in spite of what Wall Street would have us believe about the Red Dragon, this cash-reserves indicator suggests that China – and countries that have close economic ties with that country – may actually be getting more attractively valued (and not less) by the minute. That’s especially true for longer-term investors.

As for the types of investments that seem most promising, given the troubled times we live in, keep focused on the simple ones. As I’ve long suggested, such simple profit plays have always played well during periods of similar market turmoil. So there’s no reason to believe it will be any different this time around.

After all, the financial history books are filled with notable examples of real earnings and real products enjoying success over long periods of time. Particularly when those profits are being generated by companies focusing on such basic societal needs as energy or infrastructure. Barring a complete collapse in the oil business (or any perfect substitute that’s eventually developed), energy, commodities and infrastructure companies will continue to offer solid upsides.

Source: How to be “Selectively Bullish” – Even in the Face of Financial Crisis