Existing home sales rose 7.2% to a 5.24 million annual rate in July, the most since August 2007 and the fourth straight month the figure increased, the National Association of Realtors (NAR) said Friday. Year-over-year sales grew 5%, the increase since September 2007, just before the markets came crashing down the following month.

“The housing market has decisively turned for the better,” said NAR chief economist Lawrence Yun. “A combination of first-time buyers taking advantage of the housing stimulus tax credit and greatly improved affordability conditions are contributing to higher sales.”

Rising sales numbers in the past few months may have triggered previously discouraged sellers to re-list their homes, according to Yun.

Total housing inventory at the end of July grew 7.3% to 4.09 million existing homes available for sale, representing a 9.4-month supply at the current sales pace. However, the raw inventory totals are 10.6% lower than they were last year.

Sellers are responding to rising inventories accordingly: The national median existing home price was $178,400 in July, 15.1% lower than a year ago. But the fact that buyers are dipping their toes back into the murky depths of the housing market doesn’t necessarily mean the sector is trending toward a full-blown recovery.

Turn of the Year Makes for Uncertain Future

One in three homes sales last month came from first-time buyers who benefited from the Obama administration’s $8,000 tax credit, which ends after November. First-timers accounted for almost the same amount in June with 29%. That means there could be a significant drop in purchases when that program expires.

The real estate industry is lobbying Congress to extend the first-time buyer tax credit, and Nevada Democratic Senate Majority Leader Harry Reid told reporters earlier this month an extension is “something we can get done.”

With or without a tax break, consumers in this economy are looking for a bargain much like they are with retail sales and auto sales. The bulk of the first-time tax credit sales have come from lower-priced homes, and NAR data supports that. Sales of homes that cost less than $250,000 were up almost 17.8% year-over-year through June. Meanwhile, sales decreased 13.3% in the $250,000-$500,000 bracket, 18.6% in the $500,000-$1 million range, and 32.7% in the $1 million – $4 million range.

Lost pricing power in the more expensive homes wasn’t lost on Pulte Homes Inc. (NYSE: PHM), which last Tuesday finished its acquisition of value-priced homebuilder Centex Corp.(NYSE: CTX), making Pulte the largest homebuilder in the United States.

“I’m not seeing a tremendous amount of good news on the job or economic front, so I do think it’s important that the [tax] credit get extended,” Pulte Chief Executive Officer Richard Dugas told The Associated Press.

The turn of the year isn’t likely to yield much good news on the job front. Most economists are expecting the unemployment rate to top out around 10%, and although July’s rate dipped one-tenth of a percentage point, the latest weekly initial unemployment insurance claims were discouraging, rising 15,000 to 576,000 for the week ended August 15.

“The improvement in the labor market has stalled,” Scotia Capital Inc. economist Derek Holt told Bloomberg News following the latest jobless claim figures. “Consumer spending will be pushed back on its heels for a longer time than markets are expecting.”

When the bleeding of jobs does peak, an upturn in employment could take some time as the United States experiences a jobless recovery. With an unemployment rate at or around 10%, home inventory levels could creep back in to 2008 territory.

“[The unemployment rate projection] indicates that the level of labor market slack would be higher by the end of 2009 than experienced at any other time in the post-World War II period, implying a longer and slower recovery path for the unemployment rate,” Fed economists wrote.  “This suggests that, more than in previous recessions, when the economy rebounds, employers will tap into their existing work forces rather than hire new workers. This could substantially slow the recovery of the outflow rate and put upward pressure on future unemployment rates.”

Source: Home Sales Will Struggle to Rebound Without Tax Credit Extension

Good day… And welcome to another week, the last one in August! The weather here in St. Louis has shifted toward fall, which is my favorite season. Chuck is flying back home from San Francisco today and will be back in the saddle tomorrow. Both he and the big boss, Frank Trotter, sent me some great Pfennig pfodder over the weekend so lets get right to it.

The dollar continued to drift lower throughout the trading day on Friday, with the commodity currencies of Australia, South Africa, and New Zealand leading the way. Confidence is returning to the markets, and investors are once again moving out of the ’safe havens’ of the Japanese yen and US dollar. The reports coming out of Jackson Hole indicate that central bankers believe chances for near-term growth appear good and recent data seem to support this conclusion.

European industrial orders increased more than economists forecast in June rising 3.1% from May. This was the largest gain in over a year and a half, and is the latest sign that the European economy is starting to climb back out of recession. But many economists question the strength of the recovery, saying the pick up in economic growth was mainly due to government programs. ECB President Jean-Claude Trichet sounded cautious after the report. “We see some signs confirming that the real economy is starting to get out of the period of freefall,” Trichet said in Jackson Hole. But this “does not mean at all that we do not have a very bumpy road ahead of us.”

The home sales data released in the US on Friday were surprisingly strong, with existing home sales increasing 7.2% month on month. We get a bit of a break in the data releases today with just the Chicago Fed index; but the rest of the week will give us plenty of data to digest. Tomorrow we see the S&P/CaseShiller housing data, US consumer confidence, and ABC consumer confidence numbers. Wednesday will bring Durable Goods orders along with New Home sales. Thursday will give us another look at the estimate for 2nd Quarter GDP here in the US along with the weekly jobless claims. And we will close out the week on Friday with the release of Personal income and spending for July.

Should be a busy week ahead, and I would expect for most of the data out of the US to continue to confirm a government led recovery is underway here in the US. In particular, the consumer spending and durable goods orders should show a nice uptick on the back of the cash for clunker program. But Chuck sent me a note over the weekend which questions the ’success’ of this program. Is it really what the US economy needed? Here are Chuck’s thoughts from San Francisco:

“I was sitting here thinking about something that had flashed across the TV screen here in my room, and that is the “Cash for Clunkers” program… I blasted this program two weeks ago, and now that it’s finally done with and $3 Billion was spent to artificially boost auto sales, I will put my final thought on this… Of course I already talked about the obvious things wrong with this program. But here’s my final thought, and that is… I believe the program is going to end up hurting the most vulnerable consumers in the U.S. Middle Class buyers, traded in their “paid for” cars, and leveraged up to buy a new car, when they probably shouldn’t have done so, given the rot on the economy’s vine.

So… Once again, I’m reminded of the words that President Reagan said were the scariest words that could be spoken… “I’m from the government, and I’m here to help”…

The reason I’m all over this program today like a cheap suit, is that this weekend, I heard that Big Ben Bernanke made a claim at the Jackson Hole boondoggle, that “we saved the world”… Oh, Come on Big Ben, isn’t that just a bit dramatic? Does this statement have anything to do with the fact that you are up for re-appointment in January, and you would love to have that thought of you “saving the world” on the minds of the administration?

So… In the end, we’ll see if “he saved the world”…”

I’m with Chuck on this one. It seems the US government is intent on getting consumers to go back to their borrow and spend habits. This is what created the bubbles, and the administration seems intent on creating another bubble economy. US consumers have made some historic cut backs on the amount of debt they are amassing (whether or not these cutbacks are by choice). The US government should not be encouraging these consumers to go back to their previous ways, but should instead be trying to use the funds to educate and train consumers and to encourage new and innovative companies. Use this downturn to correct some of the bad habits which we had gotten into. Yes, it will be painful, but breaking an addiction is always hard and painful. US consumers need to break our addiction to easy credit and massive debt. This recession/depression has given consumers a much needed wake up call, hopefully the administration won’t be able to push consumers back into their old habits.

I went running with my wife and her friends over the weekend (trying to take it easy on the back) and got into a discussion about the US economy. One of my wife’s friends had heard an interview on MSNBC in which an economist stated we were in a classic V shaped recovery. I let her know that I think the economist was one letter off, and that instead we will see the recovery shaped more like a W. The green shoots and recovery we are seeing right now will die out as government stimulus slows. High unemployment, a long slow housing recovery, commercial real estate woes, and rising personal bankruptcies will force the economy into another dramatic downturn. Central banks who have ‘juiced’ their economies with unlimited credit will have to decide whether to continue juicing, or pull back from the table.

Nouriel Roubini wrote a commentary in today’s Financial Times which agrees with my thoughts. Roubini said the chance of a double dip recession is increasing because of risks related to ending global monetary and fiscal stimulus. He believes the global economy still has further to fall, and will bottom out sometime during the second half of 2009. While some economies such as China, Germany, Australia, and France will likely recover; others such as the US and UK will double dip with another leg down. “There are risks associated with exit strategies from the massive monetary and fiscal easing,” Roubini wrote. “Policy makers are damned if they do and damned if they don’t.”

Oil traded up to a 10 month high over the weekend, and carried the commodity based currencies of Canada, Mexico, Norway, and Australia with it. Oil will continue to run up as confidence in a global recovery strengthens. Another factor which has helped boost demand for Australian dollar investments was a move by the Aussie govt. which removed interest withholding tax on federal government securities. This made these investments more attractive and spurred additional demand for the currency.

The Hungarian central bank will meet today and is expected to cut their benchmark interest rate. Rates in Hungary are the highest in the European Union, and lower growth combined with low inflation will spur the cut. The Hungarian forint weakened from the strongest level in a week on the interest cut speculation.

The dollar’s role as the world’s reserve currency has been a continued topic among scholars and was undoubtedly discussed out in Jackson hole last week. China and Russia have both been adamant about discussing the possibility of moving toward a new reserve system to replace the greenback. Since no single currency is strong enough to replace the dollar in today’s global economy, most discussion has centered around the idea of creating a ‘reserve currency’ which is comprised of a basket of the world’s largest currencies. This idea is supported by Joseph Stiglitz, a Nobel Prize winning economist and Columbia University economics professor. “The dollar’s role as a good store of value is questionable and the currency has a high degree of risk,” Stiglitz said at a conference last Friday. “There is a need for a global reserve system. The currency reserve system is in the process of fraying,” Stiglitz said. “The dollar is not a good store of value.”

Frank Trotter was thinking about the same thing as he sat and watched a musical over the weekend. Frank is a real thinker, and I really enjoy it when I get a chance to have a good economic discussion with him. Luckily for all of you Pfennig readers, he decided to send me a note on his thoughts during the performance. So here they are:

“Went to the touring musical Mary Poppins Saturday night; it’s always great to see a play about a run on a bank. While the books were written in the 1930’s and beyond most of you will remember the Disney film set in 1910 – before the Great War when England ruled the waves and empire was returning untold dividends to the mother country. At that time of course there was no questioning the power, status and earning capacity of the British Empire. As George Banks replies to Admiral Boom in the movie, “Credit rates are moving up, up, up. And the British pound is the admiration of the world.”

Well that was then and this is now. Soon after, in 1914 England suspended the conversion of Bank of England notes to gold for the period surrounding World War I, and the on again off again slide into today’s fiat currency world began. Over the next 100 years England has leaned the lesson of empires that came before. That extending the resources of a country in non-producing capacity leads to the decline of the currency and a fall in the economic power of the country and the economic wellbeing of it’s population. In 1910 it took 4.25 pounds to buy an ounce of gold, and 0.2056 pounds to buy a US dollar. Today of course the price of gold has risen 13,447% for British buyers, while the price of a greenback is only up 195%. We are uncomfortably comfortable in feeling that the carabineers have given way for the good old USA in a parallel fashion.

We’ll freely admit that there has been a slow motion slide going on in the US dollar since establishment, and especially since the removal from the gold standard and the Bretton Woods Agreement in 1971. But we feel even more strongly that the fiscal and monetary policies put in place starting in 2001, accelerating through the 2000’s, and now amplified since January 20th have left us with no legs for our stool. Fiscal policy has been and continues to be out of control. The Federal Reserve policy of the 2000’s created the credit bubble and now stands to create the largest monetary inflation experienced in a first world nation. Both political parties have determined that no one can be an adult in government by slashing spending or raising taxes to cover our exploding gap (mathematically the only two options), and instead are hiding behind the invisible tax of currency depreciation. For a country we conclude that a strong currency is essential to long term well being, and by extension that our government has given up on the dream in exchange for election and reelection.

So what’s to be done? If you are a believer that the political process can sort things out and return our wonderful nation to fiscal prudence and steady governance go ahead and stay the course. For the rest of us who like Margaret Thatcher believe that “the problem with socialism is that eventually you run our of other people’s money”, we’ll be letting our “tuppance safely invested in the bank” seek diversification across the globe in countries and markets with more opportunity and prudence. We couldn’t agree more with the Mary Poppins conclusion, re-written for modern times that “Where stands the banks of [the USA], America stand. Oh, oh, oh, oh! When falls the banks of [the USA], America falls!”

Leave it to Frank to use Mary Poppins to give an economics lesson! And with that, I will close this out and head to the currency roundup.

Currencies today 8/24/09: A$ .8400, kiwi .6845, C$ .9251, euro 1.4308, sterling 1.6492, Swiss .9424, rand 7.7805, krone 6.045, SEK 7.0496, forint 187.60, zloty 2.8755, koruna 17.775, yen 94.86, sing 1.4396, HKD 7.7505, INR 48.5575, China 6.8314, pesos 12.7805, BRL 1.8299, dollar index 78.17, Oil $73.98, 10-year 3.56%, Silver $14.42, and Gold… $953.85

That’s it for today… Thanks to both Chuck and Frank for giving me so much good stuff to include in today’s Pfennig! Kristin Kuchem sent me a note and told me she got stranded in the Chicago airport on her way back from San Fran last night. It is her son Jack’s first day of Kindergarten so she was pretty bummed out that she couldn’t get home to send him off. Flying just isn’t much fun anymore, as the airlines overbook most flights and any kind of weather can royally screw up your best laid plans. Hopefully Kristin can make it back down from Chicago in time to pick Jack up from school. John Smoltz had an impressive first outing for the Cardinals yesterday, setting a club record with 7 strikeouts in a row! Sure looks like this is going to be a fun October here in St. Louis. Hope everyone has a Marvelous Monday and a great start to your week!

Source: European orders support the Euro

Take two days off and look what happens… the recession has bottomed.

At least that’s what “they” would have you believe. While we locked ourselves in our bimonthly editorial meeting the last two days, we missed some new “the worst is over” calls. Here’s the rundown:
“The pace of economic contraction is slowing,” declared the Federal Open Market Committee yesterday after emerging from a two-day meeting of their own. Even though Mr. Bernanke and his brood say, “economic activity is likely to remain weak for a time,” the vibe from the FOMC statement was decidedly rosy.

Of course, inflation “will remained subdued for some time” and the group will leave rates near zero “for an extended period.” Same old story at the Federal Reserve. The rest of the Fed announcements were nonevents… new age lending programs and quantitative easing will neither increase nor decrease before their next meeting in August.
Despite all the data out this week — new and existing home sales, GDP, jobless claims — only one has given the Street a jolt: durable goods.

Orders for items meant to last a few years increased 1.8% from April to May, smashing Wall Street’s expected 0.4% growth. Never mind that orders in the first five months of 2009 are down 27% compared to 2008… May’s number is another green shoot! Hooray!

“I get figures on 70-odd businesses, a lot of them daily,” said Warren Buffett yesterday. “Everything that I see about the economy is that we’ve had no bounce. The financial system was really where the crisis was last September and October, and that’s been surmounted and that’s enormously important. But in terms of the economy coming back, it takes awhile. There were a lot of excesses to be wrung out and that process is still under way and it looks to me like it will be under way for quite a while. In the [Berkshire Hathaway] annual report, I said the economy would be in a shambles this year and probably well beyond. I’m afraid that’s true…

“I had a cataract operation on my left eye about a month ago and I thought maybe now I’ll be able to see green shoots. We’re not seeing them. Whether it’s retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we’ve never seen it for a simple thing like electricity. So it hasn’t happened yet. It will happen. I want to emphasize that. But it hasn’t happened yet.”
Speaking of Buffett, his annual charity lunch auction is proving to be an annual sign of the times. Last year, the oversized $2.1 million winning bid for a lunch with Buffett came from a Chinese fund manager — three times the previous year’s winning bid. This year, with only one day remaining, bids for the eBay auction are up to “just” $350,000.
The U.S. economy didn’t contract quite as much as reported in the first quarter, the Commerce Department announced today, adding to the optimistic mood. The government arm finalized first-quarter GDP numbers today. Their initial report detected a 6.1% contraction. The first revision was a 5.7% fall, and now Commerce claims the economy shrank just 5.5% in the first quarter of the year.
The OECD has drastically revised its growth expectations for the U.S.

“Signs have multiplied that U.S. activity could bottom out in the course of the second half of this year,” said Jorgen Elmeskov, the OECD’s acting chief economist. The group now forecasts a 2.8% U.S. economic contraction in 2009 and 0.9% growth in 2010 — a huge revision from their most recent call of a 4% decline this year and zero growth in 2010.
As far as the stock market goes, we timed our two-day break well… since Monday’s swift sell-off, major indexes have gone nowhere. Despite all the data and the latest FOMC meeting, the Dow sank 0.2% Tuesday and 0.3% yesterday… yawn… stretch.
“This sideways trade for the last few weeks is typical of summer markets,” writes our commodities trader Alan Knuckman, “even in an anything but a typical year for investors. Everyone is so conditioned for strong moves in either direction it has left many unable to handle an undefined trend.

“The stall has disappointed many market watchers — with some calling for a new downturn. Over my years I have found it better to follow the trend without trying to catch the turn. Don’t be too proud to miss some of it. Most of the money is made in the middle of a trend, and that’s where we’ll stay here at Resource Trader Alert.

“Volume seems light and something is needed to spark movement after the large bull run. The S&P 500 channel — with lows last week at the 899 level (as a support level) and highs at 925-plus — is an area to watch closely for future clues. At the same time, Treasury bond futures weekly highs at 117 and lows at 114 have held traders in check. The breakout for either asset class will light the way down the future path for the markets.

“For now, let’s wait and see what trend develops. Have some wine, and let the market sort things out.”

When the next trend emerges, will you know what to do? Have Alan be your guide, here… at Resource Trader Alert.

(For a closer look into the psyche of our resource trader, be sure to check out today’s P.S.)
Commodities have succumbed to selling pressure. Since peaking at $987 in late May, gold has been in a state of steady decline. It found a temporary bottom early this week at $919 an ounce and has since inched back up to $935.

Oil fell from a recent high of $72 a barrel to as low as $66 this week. While the front-month contract has recovered to about $68 this morning, we detect a dark cloud forming over the sector.
“Oil had a strong climb,” reports Byron King, “and pushed up over $70 per barrel just a few weeks ago. Then oil met with market resistance. So the price of oil retreated into the current $60 range. Could oil go lower? Yes, at least in the short term. Oil could drop back into the $50s, despite its traditional strength during the summer driving season. You might see gasoline prices pull back 10-20 cents per gallon, which will make that trip to the gas station a buck or two cheaper.

“A pullback like that in oil prices will take the steam out of recent stock market gains for oil producers and oil services. So if you want to take any oil profits, now is probably a good time.

“No, this is not a sell recommendation for the oil sector, or any company in the energy side of the Outstanding Investments portfolio. What I’m saying is that we might have a pullback in an otherwise long-term, generally rising trend for energy. Thus, if you are of a trading mind, then take your recent energy gains now. Book some profit, and hold onto the cash for later buying opportunities. Otherwise, don’t be shocked if the energy stocks take a summer swoon.

“Longer term? Oil is headed upward in price. That’s just plain baked into the cake. Half of the world’s daily oil use is now going to developing countries. And by definition, developing countries are… developing. They are using more and more oil, or how else do you think they are developing? So even if oil use in the developed world just stays flat, that oil will still find a market.”

Outstanding Investments remains one of the greatest values of our industry. If you’re not a subscriber, get with the program,here.
The U.S. housing market is back to underperforming expectations. We saw the latest existing home sales and new home sales numbers this week — both failed to meet the Street’s forecast.

The National Association of Realtors reported 2.4% growth in existing home sales Tuesday, to an annual rate of 4.7 million. The stock market — no longer satisfied with meager housing growth — wanted a rate of 4.9 million and suffered a small sell-off.

Even though sales managed to increase in back-to-back months for the first time since 2005, existing home prices are still plummeting, distressed sales are still booming and the market is still saturated with a 9.6-month supply of homes… a positive sign that the free market still works, but hardly reason to call a bottom.
And new home sales are still slipping into the abyss.Sales of new houses fell another 0.6%, to a 342,000 annual rate, the Commerce Department said yesterday. That’s down 32.8% from last year — we hasten to add, a time when the housing market was already in the dumps. Making matters worse, Wall Street analysts were calling for a 2% rise in new home sales. And like existing home sales, the price of new homes is still falling (down another 3%, to $221,600), and inventory is still at a lofty 10-month supply.

Check out this chart of new versus existing home sales. Both have historically moved in near lock step, with the exception of last two years. If this trend is destined for a “regression to the mean,” we wouldn’t be surprised to see new home sales level out and existing sales take a turn for the worse.

The dollar’s still stuck in a range. The dollar index took a quick trip below the infamous 80 score yesterday after the FOMC’s announcement, but has since climbed back up to 80.6… not far from where it’s been for the last two weeks.
Today’s “take it for what it’s worth” dollar quote, from IMF chief economist Olivier Blanchard:

“For the U.S., it is absolutely no question that a sustained recovery has to come from a large increase in exports, that may not be very easy to do. This may require fairly substantial adjustments in the dollar.” Hmm…
“I’m a raving fan of The 5, but come on,” writes a reader, referring to Monday’s issue, “couldn’t you muster a better defense of capitalism to the latest apologist?

“It is not capitalism that allowed derivatives and excessive debt levels. It is the distortion of a fractional reserve fiat currency system that is a statist addition to it that did. In a free market with a gold standard, every security bought must be funded with actual value, rather than leverage levels being allowed to explode. It is the printing press, credit creation and the statist monetary system, and not capitalism, that is the source of this crisis.”

The 5: Heh, well, there you have it.

P.S. We feel obligated to share this photo with you, if only to legitimize Addison’s recent iPhone purchase. During our marathon editorial meeting yesterday at 14 West, the fire alarm sounded. The whole building cleared out to a nearby park. Most were content with a break… we’d been vetting our ideas nonstop for the last few hours, and the alarm was a welcome excuse to relax, grab some coffee, have a smoke, etc.

Not for Alan Knuckman, editor of Resource Trader Alert. We didn’t ask how many trades he managed to fire off during the 10-minute alarm, but it was quite clear that he was in the zone. You can take the man out of Chicago… but don’t expect him to stop trading:

Curbside commodity options, fueled by Big Gulp

P.P.S. Did you learn from 2008? If so, you’re actively seeking ways to hedge your portfolio from another market fall. We’ve gathered our favorite strategies for playing the next bear market here, in our latest special report.

Source: Bernanke’s Forecast, Buffett’s Green Shoots, Can’t Miss Data, Taking Oil Profits and More!

Good day… And a Tub Thumpin’ Thursday to you! Yes, I know the currencies and commodities got whipsawed yesterday, and my Cardinals got spanked, but that’s no reason for us to not enjoy a Tub Thumpin’ Thursday! Every day is a gift, and it has nothing to do with stocks, bonds, currencies, and commodities!

OK… Not that I try to be philosophical, sometimes it just comes out that way! Besides, you don’t want to think that I’m just a smart *** all the time! HAHAHAHAHAHA!

Well, as I said in the open, the currencies and commodities got whipsawed yesterday, and the culprit was the FOMC minutes… You see, the Fed Reserve met to discuss rates, and other items. And what they said just blew away the bond vigilantes, and really ticked off the Hawks, but in the end, what they said, was really that things will remain status quo…

Their announcement of bond buying didn’t measure up to what the bond folks wanted to see, and their announcement that interest rates won’t be going up for some time, didn’t measure up to the inflation Hawks, who wanted a comment about fighting inflation. Instead, what they received was more Alfred E. Newman on inflation… “What, me worry?” That’s how ridiculous their statement was folks… The Fed still looks for inflation to “remain subdued for some time”… Although… Their outlook for the economy was slightly upbeat…

So… If your confused about what the Fed is thinking… Then join the rest of us! The markets spent the day trying to sort it out, and when it was all said and done, they couldn’t, so they sold risk assets… So… The 1.41 level the euro enjoyed yesterday morning when I signed off, is now 1.3945…

On top of all this, the Swiss National Bank (SNB) has issued a communiqué’ that talks about their “new aggressiveness” toward Swiss franc strength. Now, isn’t that just one of the most ridiculous things for a Central Bank to say about it’s currency! Would someone over there at the SNB, please think about what you’re saying!

Oh well… This is all I’ll say about the SNB… It’s hard to soar with the eagles when you have to work with a bunch of turkeys! OH! And it’s also reported that this “aggressiveness” showed up as intervention by the SNB yesterday… They sold francs in the markets… UGH!

OK, let’s get back to the Fed, and their bond purchase program / Quantitative Easing / monetizing the debt / money printing… It’s all the same… Oh, one more thing, it’s the road to ruins, but don’t let that get in the way of the Fed Party! You see, the Fed didn’t announce anything this time, because all the world was watching and waiting for them to announce a “mega-buying program”… I told you earlier in the week to NOT expect the Fed to announce any changes to their road to ruins at this meeting, but instead the August meeting, when during the dog days of summer, when almost every #1 trader on earth is on vacation…

So… The bond vigilantes who want bond yields low realize, with the amount of supply that the Treasury is issuing these days, that the only way to get those lower yields is to have the Gov’t buying bonds!

I came across something yesterday, that I yelled across the desk to make certain everyone knew… Recall at least a month or so ago, I told you how China had called for a new reserve currency, replacing the dollar with SDR’s (special drawing rights), which would be a basket of currencies. This news received a ton of publicity… But one thing that didn’t receive a ton of publicity was the fact that President Obama agreed at an economic summit in London that SDR’s should now be used to help stabilize the balance sheets of nations struggling to combat the current crisis.

Now… On the outside that looks harmless right? Just helping these struggling nations… But! Could this also be a baby step toward a global currency? Could this be a baby step toward a further devaluation of the dollar, and it’s signed off on by the President?

OK, now here’s the thing that really caught my eye… The IMF is going to issued $300 Billion worth of SDR’s. That’s 10 Times… That’s right, I said 10 Times the amount of SDR’s that CURRENTLY EXIST!

Could this be the facility for China to quietly exchange dollar reserves for SDR’s? Come on! Somebody has got to see this the same way I do!

I mean, it was just LAST WEEK, that the countries of Brazil, Russia, India and China (BRIC’s) called for a “more diversified international monetary system?” Why, yes, Chuck, it was… Just last week! And then this week, the IMF “just happens” to be issuing 10-TIMES the amount of SDR’s that CURRENTLY EXIST! Hmmmm…

I probably should stop there… I’ll be accusing people of all sorts of things if I continue on this path… But there’s some food for thought, eh? You won’t see this on TV… They have more important things to show you and talk about, like… The President killing a fly! That’s a really sad thing, to think that our news has come to that!

OK… New Home Sales for May dipped lower, but the inventory of homes for sales also dipped… And, we got the surprise of year when Durable Orders for May showed an unexpected and very strong gain of 1.8%… While I think this is wonderful news, I have to question it… I mean, with the automobile industry basically shut-down, one would think this number to be quite lower… However, I’m told… That non-defense aircraft orders more than offset the auto losses. OK, so, this is NOT a green-shoot folks… This is a One-and-done!

OH! And to follow up on yesterday report regarding Existing Home Sales… I totally forgot to mention that Foreclosure Sales are soaring, and thus a big part of the rise in Existing Home Sales… So, no green-shoot here either!

Today, we’ll see the Weekly Initial Jobless Claims, and… The Final print of 1st QTR GDP, which will remain at -5.7%…

So, once again, not much on the data watch for today.

Before I go to the Big Finish… I want to follow up on the news I wrote about yesterday regarding the European Central Bank’s (ECB) EUR 300 Billion injection of liquidity out 12-months… The total came in at a higher figure than that, at EUR 442 Billion… Still, much lower than the forecasts, which had seen some call for a number as high as EUR 1 Trillion! And… This morning, the Eurozone announced that Industrial Orders fell 1% in April… So that data isn’t helping the euro any either!

And then there was this from the NY Times this morning… “The U.S. House Oversight and Government Reform Committee will question Federal Reserve Chairman Ben Bernanke about his role in Bank of America’s acquisition of Merrill Lynch. While Republican lawmakers are launching an attack on Bernanke, who is Republican, Democrats are defending him.”

Man, is that all mixed up! But… A week ago or so, we were getting reports about the Bank of America (BOA) purchase of Merrill Lynch… And now, nothing, absolutely nothing, say it again! Any wonder why? Well, maybe it will come out in the U.S. House Oversight and Government Reform Committee questioning, although I doubt it…

And the State of California… The largest economy in the U.S. and in the top 7 economies of the world (used to be 7th, but with their recession, who knows?), announced that they were going to pay their bills with IOU’s… The state’s controller said. “Next Wednesday, we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression.”

And… The Fed believes the recession is easing? Hmmm… Maybe they are too far away from the California books and records!

I’m on a roll here, somebody stop me! OK, I’m stopped!

The Treasury will auction $27 Billion of 7-year Treasuries today… Just keep the supply spigot open must be the Treasury’s motto these days!

Currencies today 6/25/09: A$ .7955, kiwi .6360, C$ .8605, euro 1.3940, sterling 1.6280, Swiss .9095, rand 8.0775, krone 6.5170, SEK 7.9350, forint 199, zloty 3.24, koruna 18.72, yen 96.40, sing 1.4575, HKD 7.75, INR 48.65, China 6.8345, pesos 13.27, BRL 1.9705, dollar index 80.78, Oil $69.05, 10-year 3.69%, Silver $13.86, and Gold… $934.20

That’s it for today… Draggin’ the line today, late night with my little buddy Alex’s baseball game. A ringing double and single with two RBI for Alex last night, in his last game of the year. HEY! How about the U.S. National Team, beating Spain in soccer / football? WOW! It’s been a while since the U.S. beat a ranked national team. So good for them! No breakfast sandwiches today for the boys and girls, as out little Christine is on holiday… Yay for her! She normally picks them up and I buy, but I forgot to do both this morning! UGH! 11-0 spanking by the Mets last night, leaves the Cardinals only 1 game in front in their division… Well… I’m going to attempt to have a Tub Thumpin’ Thursday, I hope you do too!

Source: Increasing SDR Issuance

Monday
Earnings Announcements: Walgreens (WAG)

Tuesday
Economic Reports: Existing Home Sales

Earnings Announcements: Oracle (ORCL)

Wednesday
Economic Reports: Durable Orders, New Home Sales, FOMC Rate Decision

Durable Orders are expected to fall dramatically since last month. I am not sure if this is due to no more income tax refund checks to spend on big ticket items or not, but with Personal Spending for May expected to increase, a drop in Durable Orders is surprising.

New Home Sales are expected to climb this month, and after last weeks surprise in Building Permits and Housing Starts, I have a hard time trying to figure out the New Home Sales report. If I had to pick, I would expect the report to meet or beat expectations. Just a gut feeling.

The FOMC Rate Decision is announced at 2:15, and I don’t expect a change to be made to the current 0.0-0.25 percent rate

Earnings Announcements: Monsanto (MON), Rite-Aid (RAD),

Thursday
Economic Calendar: Q1 GDP Final

Expectations are for no revision to the first quarter GDP figure. At this point, I doubt there would be a surprise showing improvement. If anything, the report may show a tenth of a point or so larger contraction for the first quarter GDP.

Earnings Announcements: Con-Agra (CAG), Palm (PALM)

Friday
Economic Reports: Personal Income and Spending, Michigan Sentiment

As mentioned earlier, Personal Income and Personal Spending for May are both expected to show an increase. I guess the surprise is that the expected increase in spending is larger than the expected increase in income. With money tight for everyone, an increase in spending is quite surprising.

The Michigan Sentiment reading is expected to show no change since the last report, which is about what I expected. With rising gas prices, uncertainty about the economy and slowing  job losses, the consumer has many offsetting considerations.

Source: Will Housing Continue Its Uptick? GDP Could Scare The Market on Thursday

• Existing home sales in the United States ticked up 2.9% in April, according to the National Association of Realtors. The report suggests the housing glut is turning around, but from the bottom up. “Most of the sales are taking place in lower price ranges and activity is beginning to pick-up in the mid-price ranges, but high-end home sales remain sluggish,” NAR chief economist Lawrence Yun told reporters, Reuters reported.

• Malaysia’s economy shrank 6.2% in the first quarter on slumping exports, making for the country’s first contraction since 2001. “We expect the first quarter to be the worst in terms of the contraction,” Suhaimi Ilias, an economist at Maybank Investment Bank Bhd., told Bloomberg. “The strong fiscal impulse will lift the economy, especially in the second half of this year and 2010, with the implementation of the annual budgets and the two economic stimulus packages.”

• Office supply retailer Staples Inc. (Nasdaq: SPLS) slightly beat first-quarter earnings, though still reported a loss. Net earnings fell $147 million, or 20 cents a share, in the quarter ended May 2, Reuters reported.

• Slumping property prices, falling stock markets and shrinking bonuses have more than halved the amount of millionaires in the United Kingdom, the Centre for Economics and Business Research said. In last year’s report, the CEBR said there were 489,000 people in Britain with assets of at least 1 million pounds ($1.6 million). Now, that number is 242,000, Bloomberg reported.

• The yield spread between two- and 10-year Treasury notes widened to a record on Wednesday as concern about mounting sales of U.S. debt will overwhelm the U.S. governments efforts to keep interest rates low, Bloomberg reported.  The so-called yield curve widened to 2.75 percentage points, surpassing the previous record of 2.74 percentage points set on Aug. 13, 2003. Ten-year note yields have risen more than 100 basis points since Fed officials started buying up to $300 billion of U.S. debt in March to drive consumer rates down and lift the economy from recession.
• Seeking to reassure investors, Intel Corp (Nasdaq: INTC) said it will not cut its dividend or slash capital spending despite being fined a record $1.5 billion (1.06 billion euros) by EU regulators for antitrust violations. “There’s still plenty of cash flow from operations to invest in our business, pay the fine and pay the dividend,” said Stacy Smith, the chief financial officer of the world’s largest chipmaker at an analyst event in London yesterday (Wednesday), according to Reuters.

• Moody’s Investors Service reaffirmed the U.S. government’s Aaa credit rating is stable “even with a significant deterioration” in the nation’s debts, bolstering confidence in a rebound from the recession. The rating is supported by “a diverse and resilient economy, strong government institutions, high per-capita income, and a central position in the global economy,” New York-based Moody’s said in a statement, according to Bloomberg. But the firm warned that any “reassessment” of long-term growth prospects could put pressure on the rating.

• Crude oil prices rose to a six-month high yesterday (Wednesday) after Saudi Arabia’s Oil Minister Ali al-Naimi said the global economy is now strong enough to deal with oil prices of $75 to $80 a barrel, Reuters reported. U.S. crude oil for July delivery rose $1.00 to settle at $63.45 a barrel, after earlier reaching $63.82, the highest level since mid-November. London Brent crude gained $1.26 to settle at $62.50 a barrel.

Source: Investment News Briefs Thursday May 28. 2009

Next week we will find out how Existing Home Sales and New Home Sales fared in April (as of writing this article, Existing Home Sales are expected to increase, New Home Sales are expected to stay flat from last month).

• The Dow Jones Industrial Average remained steady above 12,000.

• The leading indicator of existing home sales was down over 21% from the previous year, and the official unemployment rate was just beginning its upward creep by crossing the 5% mark.

• The first official admissions of the “R” word. In early April 2008, the International Monetary Fund (IMF) declared a 25% chance of a global recession, and Federal Reserve Chairman Ben Bernanke told Congress that gross domestic product “could even contract slightly.”

• The novelty of bailouts began. Bernanke also assured Congress that the Fed’s emergency authorization of a loan against $29 billion of Bear Stearns assets wasn’t putting taxpayer money at risk: “I feel reasonably confident that we’ll be able to recover all the principal and indeed some interest, and there is some chance of even upside beyond that.”

• The dollar’s six-year slide against the euro, hitting its lowest ever at $1.60 in late April. It also fell below the 7-yuan mark in China for the first time.

• And oil, comfortably above $100/barrel, was heading for its summer crest of $147.

A scant 12 months later, the Dow is trying to stagger back from a plunge to 6,500. Home sales are hinting a possible turnaround, unemployment (even the official, conservative figures) is expected to reach double digits before long, “recession” and “bailout” are household words (often accompanied by four-letter ones), the dollar is recovering… and a barrel of oil is worth half that hundred dollars. Hardly worth pulling out of the ground.

What happened? And even more important for us as investors, what’s going to happen?

The Casey Energy Opportunities team pulled together the pieces of the oil sector picture that other sources tend to scatter or ignore. We’ll give you a broader understanding of the drivers within the oil industry, the markets in which they operate, and how you can use that knowledge to push your profits upward.

The Oil Industry Now: A Rock, a Hard Place, and a Supply Glut That Isn’t

Everyone who drives a car or heats a home with petroleum has welcomed the fall in oil prices from their high in the summer of 2008.

While it’s hard to argue that filling your tank at $2 per gallon is a lot easier on the wallet than $4 or $5 per gallon, the broader economic effects of such low oil prices are troubling.

Leading the concerns is the drop in oil exploration and drilling that accompany a drop in price. Below the $50/barrel mark – and for many companies the bar is closer to $65 even for conventional fields – oil producers typically spend more money getting oil out of the ground than they can recoup by selling it. At the same time, turbulent financial markets have tightened credit. These two factors have pressured producers to allocate exploration budgets away from drilling projects and toward meeting debt obligations and day-to-day operating costs instead.

The plunge in prices has consumed the cash buffers of even the major oil companies. ConocoPhillips, for example, announced in January that along with eliminating 1,300 jobs and writing down $34 billion in assets, it was also planning to cut its 2009 investment budget by 18%. Exploration projects are part of both writedowns and spending cuts. The results of curtailed exploration are two-fold. First, some oil companies will be simply unable to survive the economic crisis. Second, supply in the longer term is being sacrificed to stay afloat now.

Storage facilities are bulging. The chart below shows the contents of the Cushing, OK, storage facility — where NYMEX deliveries take place — have recently doubled from their average 2008 volume. Along with a host of other facilities around the world, it got this way because of an unusually dramatic contango at the beginning of 2009. (A contango is a kind of market inversion, when the current [spot] price dips lower than the future price.)

In January, the spot price of oil plummeted as low as $37/barrel, while futures for July delivery were trading for $52. That meant if an oil company could buy and store product for seven months, it could lay out $37/barrel and be guaranteed a profit of $15 – or 40%, minus costs – in July. And indeed the buying frenzy took off, reinforcing the decision to turn off the drills.

So for the moment, we are artificially flush with oil, and demand has dropped as the global economy will likely shrink for the first time since World War II. It’s no surprise that oil prices have been staying down.

Many analysts say we won’t feel the effects of declining exploration for a few years. But the numbers are emerging already. According to the U.S. Energy Information Administration (EIA), non-OPEC countries demonstrated an average annual growth in supply of 570,000 barrels/day from 2000 through 2007. In contrast, they recorded a drop last year of some 300,000 barrels/day.

At the same time, OPEC appears to be conforming to its production cuts of 4.2 million barrels/day, begun in September 2008. The oil cartel is known to announce cuts that its members don’t actually follow; it’s in their economic best interest, if only in the short term, to sell all they can. But this time, oil has plunged far below levels to sustain their economies. Even Saudi Arabia expects to run a budget deficit this year.

OPEC, which produces about 40% of the world’s oil, would like to see prices around $75/barrel, at least. But the fragile global economy would have a difficult time absorbing such a price at the moment, and the cartel decided against further production cuts when it met in March. In fact, some three weeks later, Saudi Arabia actually announced a price cut on all its grades of crude to European, North American, and Mediterranean markets – a dramatic attempt to spur demand amidst high inventories.

So, entwined as it is with the economy, the oil industry is currently in a conundrum. The fix it requires – higher prices for its product – will choke the framework in which it operates.

At the same time, we’ve got supply problems ahead.

How Did We Get Here Anyway?

Like many aspects of the markets, movements in price are driven partly by real factors and partly by perception. Rags-to-riches-to-rags-to-riches Texas oilwoman Sue Sanders summed it up when she noted wryly in her 1940 autobiography that “nothing succeeds like reports of success.”

Last year’s run-up of oil was no exception: part real, part report. Some of the real factors:

• The weak U.S. dollar. The United States is not the only country that buys oil in U.S. dollars. The price per barrel is pegged to it, in fact. When the dollar is weak, the cost of U.S. exports drops; and indeed by December 2008, the U.S. trade deficit had fallen to its lowest in nearly six years ($39.9 billion, according to U.S. Commerce Department data). However, a weak dollar means it takes more dollars to buy a barrel of oil. Global concerns over the strength of the U.S. economy, including America’s ever-rising level of debt, had undermined the dollar to the point that OPEC members began to murmur about dumping it for the euro or a basket of currencies.

• Geopolitical turbulence in oil-producing countries. The Iraq war, oil-related militancy in Nigeria, and Iran-Israel-U.S. posturing over nuclear issues were hotspots in the first half of 2008. The average nightly news covered casualties in Iraq, but industry watchers tracked attacks on pipelines and oil facilities. Likewise, in Nigeria, sabotage and oil worker kidnappings by militant groups such as the Movement for the Emancipation of the Niger Delta (MEND) regularly shut down facilities to repair, negotiate, or improve security. And as spring warmed up, so did the war of words between Iran and Israel. By early July, Iran had gone so far to indicate it would move against shipping in the Persian Gulf if attacked. The United States would have moved next, of course… thus driving up the price of oil in the jittery oil markets, which depend on Persian Gulf shipping lanes.

• Unusually low crude and gasoline supplies entering the 2008 summer driving season. In early April, the EIA reported significant drops in supply – gasoline declined by 4.53 million barrels and crude oil by 3.2 million barrels, a one-two blow that surprised and worried industry watchers. Behind the gasoline slump were lower refinery margins, called crack spreads. In mid-March, when refineries would normally be coming off their maintenance schedules to churn out gasoline for summer driving, the margin for turning a barrel of crude into gasoline was negative for the first time in three years. Refineries sought profits in other oil products, and the markets responded to the expected imbalance in supply and demand.

• High demand. China is a stand-out here, and for more than its usual energy appetite. China has a penchant for aiming to break records – from its goals in five-year plans and building projects to its haul of Olympic medals – and in the first half of 2008, it was visited by some dramatic examples: a great earthquake and major snowstorms, events that disrupted the country’s energy industry. Combine that with the fact that China was also preparing for the Beijing Olympics in August, and it’s easy to understand why it was buying oil very heavily until mid-summer.

On the perception side of price drivers, it’s hard to overlook the fact that the market push stayed strong in the face of increasingly gloomy economic data. Casey Research was earlier than most in predicting the economic crash (we published reports such as “The Coming Currency Crisis” in June 2006), but by spring 2008, even officialdom was dancing around the word recession.

Normally, news of burgeoning foreclosures, plummeting home sales, spiking personal and business bankruptcies, rising unemployment, and other economic indicators would tend to exert a bearish influence. After all, consumers generate 70% of U.S. economic activity, and if they stop or cut back on driving to work or the shopping mall, telephone relatives or business partners instead of flying out to see them, reduce purchases of items containing plastics, turn down the thermostat, and other weather-the-storm measures, oil consumption should decline.

It took months for all these drivers to realign – but as we all know, they did, and then some. The chicken-and-egg debate, whether oil’s sky shot triggered or portended the economic debacle in the closing months of 2008, will require more distance and data to resolve. But it’s true that the dollar had started its comeback by mid-summer, supply had caught up, geopolitics had settled a bit, China backed off on its buying, no major hurricanes hit – but economic realities did.

Meanwhile, Congress jumped up and down and cried “Speculators!” “OPEC!” “Oil producers!” in tidy sound bites.

The Next Big Plays: Where You Need to Be

Oil companies are influenced by the range of market drivers and economic conditions according to size. The junior oil producers, those with market capitalizations of $250 million or less, have the small-business advantage of flexibility when times are good. These times aren’t good, of course, and even well-managed juniors with good projects are in trouble. Their vulnerability is in the credit market. You’ve likely heard of credit lines being revoked and refinancings denied to people with impeccable credit. Now imagine pitching a drill project without a wallet full of assets ready to lay on the table.

Mid-tier producers, with market caps between $250 million to $2 billion, will look to mergers and acquisitions to survive. The majors ($2-20 billion market cap) and Big Oil (over $20 billion) will also be shopping. With low oil prices shutting down exploration, development, and even production, these companies will be looking to replace their reserves instead by purchasing smaller, solid companies with proven production. It’s simply cheaper.

We see two ways to profit from this trend.

First, we buy shares in undervalued, producing companies that are profitable even below $40/barrel, are best of peer, and own large reserves. These are the companies that Big Oil will be looking to acquire. One such company, an oil sands producer, is currently a part of the Casey Energy Opportunities portfolio.

Second, we believe that owning a potential consolidator is the best position. As debt load and low commodity prices overtake them, junior producers will be forced to consolidate their projects. We currently own one such candidate, and are scouting for others with such muscle. Consolidators will be purchasing projects from the bank at 25 to 30 cents on the dollar.

Our tactics have already paid off handsomely in the last six months: all our recent recommendations have been on fire. A few tripled their value, and one generated a return of 540%.

As we’ve seen, supply problems are looming, no matter what timetable of Peak Oil you may believe in. With increased demand inevitably come higher prices. Our approach at Casey Energy Opportunities positions us to take advantage of the trend in both the short and longer term. And we guide our subscribers not only when to buy or sell, but also when to take profits and a “Casey Free Ride” to eliminate risk.

We’d like to offer you the opportunity to kick the tires of Casey Energy Opportunities RISK-FREE for 90 days, with 100% money-back guarantee. Click here to give it a try.

Source: The Price of Oil

Last week, the February Housing Starts report handily beat estimates. While this may only be a temporary spurt, it was a positive surprise. The growth was primarily focused in the Northeastern states, but again, any increase in this dismal sector is a positive.

On Monday, I surmised that the Existing Home Sales report for February would beat estimates when announced, and sure enough it did. Foreclosures are driving down prices to the point that the market is now ‘affordable’ again to first-time buyers.

This past weekend I spoke with my father. He is a realtor in Ann Arbor, Michigan, and he mentioned something that is being overlooked, the first-time homebuyer tax credit. This year the rebate doesn’t have to be re-paid, and is worth up to $8,000. The company he works for feels this will be a significant driver of sales this year, as homes are finally affordable again to those priced out a few years ago, and the tax credit makes purchasing all the more appealing.

Something else I thought about too: with the moratorium on foreclosures and the Obama administration’s never-ending search for a solution, we may see the number of foreclosures slow significantly. This means less inventory, a slowing in the price declines, and eventually, an up-tick in prices.

Combine all of this with mortgage rates that are the lowest since WWII (albeit difficult to qualify for) and we may be starting to see the light at the end of the tunnel.

Source: Is The Porch Light On In The Housing Market?

But the housing numbers really caught me off guard. Existing home sales jumped a tremendous 5.1% in February, clearly above all expectations. But Chuck pointed out that the almost 1/2 of the sales were either foreclosures or short sales, hardly what you would call a “rebound” in home sales! And these additional existing home sales came at deep discounts. The median price for an existing home fell 15.5% in February 2009 to $165,400 as compared to $195,800 in February of 2008.

Investors are desperate for any sign the housing crisis may be coming to an end, so the housing report was greeted with enthusiasm in the markets. This is the second positive report for housing in the past two weeks, as Mike reported housing starts for February came in much better than expected last week. I don’t mean to rain on everybody’s parade, but this is looking a lot like a sucker’s rally to me. Traders had become overly pessimistic, and traders who don’t want to miss out on the next big rally jump back into the market on the smallest kernel of good news. Unfortunately, I don’t think the good news will continue.

I don’t expect today’s housing data to surprise the markets, as we will see the House price Index which is expected to have fallen by almost 1% MoM. We will also get the ABC Consumer Confidence number which will likely show a another drop. Tomorrow will bring more negative data with the release of Durable goods orders here in the US which is expected to show a drop of 2.5% in February after a 5.2% fall in January. More housing numbers will be released on Wednesday which could confirm yesterdays surprise uptick in the housing market. Thursday will bring us the big kahuna for the week, with the release of 4th quarter GDP along with the weekly jobless claims.

I got a call mid morning from another WSJ reporter by the name of David Gaffen who wanted to know what the new Tarp plan meant for the dollar. In particular, he wanted to know why the dollar was rallying at the same time we were seeing a major rally in stocks and a sell off in bonds. I explained to him that today’s movements just didn’t fit the ‘normal’ trading pattern which we had established for the dollar. The equity markets looked like investors were confident that the Geithner plan would finally thaw the credit markets. But if investors confidence was returning, why was the dollar strong? Well the explanation was pretty simple: investors were taking profits from last week’s dollar weakness, and moving these profits back into the stock market. I explained that this move wouldn’t have legs, and the dollar will likely see more selling over the next few days. You can read the entire article by David Gaffen at http://blogs.wsj.com/marketbeat/2009/03/23/the-new-tarp-good-or-bad-for-the-dollar/.

Yesterday afternoon I spoke to a gentleman who is a ‘workout’ expert for commercial real estate. Banks seek out his expertise in turning around failed or near failing commercial properties. Needless to say, business is booming, and in his opinion it will only get better. He says banks have been knocking down his door to try and help them ‘work out’ of some major commercial projects. He predicts that during the next several months we will begin to hear about some major commercial projects going belly up. I know commercial real estate is already starting down in the St. Louis area, but he claims this is only the beginning. Many of these projects have been just hanging on, hoping consumers will return with Obama’s second stimulus. But the newest stimulus doesn’t put money in consumers hands, so these commercial projects will have to fold.

While the housing market is showing some indications that a bottom could be near (not in my opinion, but some data does look positive), the commercial real estate market is just beginning its dive. Banks who are finally ridding themselves of toxic home mortgages will now have to deal with even more toxic commercial loans.

So what did all of this new found excitement on Wall Street do to the currency markets? As I mentioned earlier, the dollar began the day weaker; probably due to profit taking. As the day wore on, investors started to return to the higher yielding currencies, with Australia topping the return charts again. This was the 10th day in a row for gains in the AUD$ vs. the US$, its longest winning streak since October 2007. The relatively high yields available in Australia combined with improved commodity markets are the major reasons for the continued strength of the Aussie dollar.

Both the New Zealand dollar and Swedish Krona were also stronger, rising over 2% in the past 24 hours. The Canadian dollar extended its two week advance vs. the US$ jumping up an additional 1.5%. Even the Brazilian real, which had been slipping lately enjoyed a day in the sun. Much of this recent strength is related to the beginning of a commodity rebound. Precious metals and oil have both rebounded recently with the prospect that global demand will begin to pick up later this year. Continued investment into infrastructure improvements should help revive demand, as the US and China have announced plans to spend $1.4 trillion on roads, bridges, schools, and hospitals. Crude oil has rose to the highest level in almost four months, another good sign for commodity based currencies.

But commodity prices are the only thing stoking this latest commodity currency rally. With the Fed turning toward additional stimulus in the form of quantitative easing, currency traders are looking toward countries who are maintaining current interest rate levels. With deflation seemingly taking a back seat, and inflation coming back into the picture, countries which have resisted dropping rates to near zero have much better prospects. These include some of our favorites including the Australian dollar, Swedish Krona, and Norwegian krone.

An associate of mine, Keith Rigdon, sent me an article which appeared in the online version of Time magazine yesterday. The article’s title says it all: “Why the Norwegian Krone is the World’s Safest Currency”. The article, written by Adam Smith, draws heavily on research done by HSBC. The main reasons given by HSBC are well known to Pfennig readers. “Norway’s budget and current-account surpluses are the biggest among nations with the 10 most traded currencies. Factor in the country’s $350 billion sovereign wealth fund pumped full of the country’s oil revenues, and the cost of insuring against government default in Norway – a key measure of a currency’s safety – is the lowest of those countries” writes Smith.

According to the article, the series of interest rate cuts over the past several months have started to work. This “makes it unlikely Norway’s central bank will need to revert to quantitative easing, the modern day equivalent of printing money that’s currently in fashion from the US to the UK.” According to HSBC, “the Norwegian krone is probably the best currency in the world.”

You can read the full article at the following URL: Http://www.time.com/time/business/article/0,8599,1887090,00.html

China’s central bank Governor Zhou Xiaochuan was in the news again yesterday. He suggested the IMF should look to create a ’super sovereign reserve currency’ that is not connected to any individual nation. Sounds like China is continuing to look for alternatives for their $1.95 trillion of reserves. They will present their proposals to reform the IMF at next month’s Gorup of 20 meeting. While a super sovereign reserve currency is probably a ways away, it is obvious that China is wanting to find alternatives to their huge investments in the US$. Not a good sign for the green/peachback.

Going a little long this morning, so I’ll get to the currency wrap up now:

Currencies today 3/23/2009: A$ .6994, kiwi .5654, C$ .8160, euro 1.3535, sterling 1.4666, Swiss .8878, rand 9.4611, krone 6.3442, SEK 8.0223, forint 222.38, zloty 3.3544, koruna 19.8690, yen 98.07, sing 1.5097, HKD 7.75, INR 50.66, China 6.8295, pesos 14.247, BRL 2.2449, dollar index 83.84, Oil $53.40, Silver $13.51, and Gold… 930.43

Source: The Treasury Secretary Rides to the Rescue