Yesterday, we had a couple of Fed Heads talking, but the Big Kahuna stood out and moved the markets with his statements… Here’s the skinny…

Big Ben was giving a speech, and said, “The Fed will monitor closely the currencies, and the Fed’s policies will ensure that the dollar is strong.” Now, when he first uttered those words, the dollar got bought and the non-dollar currencies were sold… But then, a few of us had this feeling… It was a feeling that we had heard all this before… And there – in the archives, circa June 2008 – Bernanke said, “In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets.” Wait! We won’t get fooled again!

In June 2008, his statements spooked the markets into believing the Fed was really going to do something to bolster the dollar… But when nothing came along, the dollar REALLY got sold until the financial meltdown of August 2008… I mean… What has the Fed done in the past 1 1/2 years to “bolster the dollar”? Near zero interest rates that will remain in place for longer than they should… Quantitative easing… A bloated balance sheet of toxic bonds.

You could see the V-8 moments on traders’ faces when they realized, yesterday, that all this had been said before, and nothing came of it, so… We won’t get fooled again!

So, then traders reversed their buying of the dollar and sent the dollar to the woodshed. You should have seen the reversal… It was amazing…

Click here to read the rest of Mr. Butler’s article.

The Dow rose again yesterday – up 44 points. Gold went up too – to a new record of $1,114.

Can anything stop stocks and gold?

Trees do not grow to the sky, dear reader. And for every bounce there is a bust.

“It’s amazing, the US is doing everything that Japan did wrong,” said a friend yesterday.

Let’s see… in the 1980s Japan’s corporate leaders thought they were going to take over the world. Investors thought so too. They expanded. They wheeled. They dealed. Prices shot up and they all thought they were geniuses.

In the ‘80s, everyone wanted to be Japanese. Management consultants used Japanese words to describe commonplace insights.

For example, instead of saying that businesses always need to try to do things better, they referred to “kaizen” as if it were the secret of success.

And US economists urged the Reagan Administration to have an “industrial policy” – because that was what Japan had.

Japanese businesses were the envy of the world. Japan was the world’s second largest economy. But in growth and stock prices it was Numero Uno.

It turned out, as it always does, that Japan did not have the secret to everlasting success. Instead, what it had was what comes before a fall.

Click here to read the rest of Mr. Bonner’s article.

On April 20, I recommended the iShares SPDR Gold Trust ETF (NYSE:GLD). Since then, it has surged more than 10%. And while the price of gold may experience some short-term pullbacks, the U.S. government’s overly expansive fiscal policy could lead to a sharp inflationary spike that makes this exchange-traded fund a must-have investment.

Given the “green shoots” of economic growth that have appeared over the past few months, it looks as though the economy has managed to avoid a very dangerous deflationary spiral.

Indeed, last year’s financial turmoil wiped out major financial institutions, left the housing market in shambles, and sucked all of the air out of an outsized commodities bubble.  U.S. Federal Reserve Chairman Ben S. Bernanke was right to fear deflation.

A deflationary spiral like the one that nearly took root the U.S. economy is the worst nightmare of central bankers, because once you fall into it, you can bring your interest rates down to zero and people won’t put money to work by spending or investing in projects at risk.  Investors realize that by simply sitting on their cash they are actually becoming “richer” since their money buys them more and more goods.

Central bankers and governments need to react aggressively and preemptively or else they risk losing 10 years of growth, like Japan did when its real estate and stock market bubbles popped in the 1990s.

That it is precisely why the Fed pursued such aggressive fiscal policy. Of course, prescribing inflationary measures as a remedy for deflation has its own risks, namely “reflation.”   Now, since the problem of inflation seems easier to contain than that of deflation, the great temptation is to put the pedal to the metal with both monetary and fiscal policies in order to ensure that the economy responds vigorously.  But then the trick is trying to coax the inflationary genie back in the lamp, so that the recovery is self-sustained.

Weaning the economy off of fiscal stimulus too fast might kill the recovery, but injecting too much stimulus into the economy will entrench inflationary expectations in the economy.  In the latter case, it would require higher-than-needed interest rates for a longer period of time, curbing output.

So, where are we now?

Interest rates are down to are range of 0%-0.25% and the Fed has implemented a number of inflationary programs, such as the Term Asset-Backed Securities Loan Facility (TALF), to make credit once more available and get the economy moving.  In addition, since the Fed Chairman Bernanke cannot reduce rates any more, he has resorted to a policy of quantitative easing.

Quantitative easing essentially is the practice of issuing money in order to buy assets.  With these programs, the Fed has bought commercial paper, mortgages, and Treasuries.  These programs are all simulative, and thus designed to prevent the deflationary bubble.

Other central banks around the world have taken similar measures to stimulate economic activity.  Throughout the industrialized world, there are different degrees of fiscal stimulus being deployed.  In the United States, Japan, and Europe, governments are saddled with decades of entitlements that cannot be sustained. And, as Milton Friedmanreminded us: “Inflation is a monetary phenomenon.”

In addition to the huge weight of entitlements and negative population growth, governments around the world are facing the temptation of resorting to “competitive devaluations.”  This is a situation in which a government deliberately undermines its own currency in order to make the relative prices of its economy more competitive globally.

A country essentially “borrows” growth from its trading partners with the hidden subsidy of an undervalued exchange rate that fosters exports and taxes imports.  But competitive devaluations do not work long term, because they create local inflation and inflation eventually eats away the competitive advantages obtained. That is, unless structural reforms to solve the underlying economic problems that led to the collapse are taken.

Hence, we have the three advanced economic blocks with fiscal and economic trouble incentivizing their economies with lax fiscal and monetary stimulus, and they all secretly would like their currency to fall against that of their trading partners, but cannot say it publicly.  We indeed have a covert “race to be last” between the U.S. dollar, the Japanese yen and the euro.  There’s also Chinese yuan, which Beijing has kept artificially low for about a decade.

To add fuel to the fire, the Chinese and the Russians have beencriticizing the U.S. Dollar and calling for some change or competition in its status as the world’s primary reserve currency.  Good luck.  The reality is that the flexibility of the U.S. economy allows it to readjust very quickly in a way that no other economy can.

U.S. Treasury Secretary Timothy Geithner hasreassured the Chinese about his intentions to withdraw stimulus from the economy as the recovery builds momentum.  And Federal Reserve Chairman Bernanke has testified before Congress that he is determined to reduce the long-term fiscal deficits.

While I do not for a second doubt their intentions, the reality is that U.S. and global policymakers are navigating unchartered waters, and economies do not change over night. It takes months for monetary and fiscal measures to take full effect.  By the time inflation becomes apparent, it may be too late to change course.

This is why investors must hedge their bets with gold.

Gold meets all the criteria to serve well as a currency: It is a reliable store of value, a medium of exchange, and a unit of measurement.

Gold is an asset that protects from financial meltdowns.  Witness its performance in 2008, when it was up 5%, while the U.S. stock market was down almost 40%.  And this is without any traces of inflation, but deflation, rather.

In the last few years, with the creation of the gold exchange traded funds, it has become even easier to buy gold, since the small management fee and instant liquidity of the ETF avoids the typical high custodial fees and trading costs associated with physical gold.

The market capitalization of the iShares SPDR Gold Trust ETF is hitting record highs.  And with the probability that something could go wrong in the global financial system and the risk that some inflation does indeed creep into expectations before policymakers act, investors need to have gold in a portfolio as a diversification tool.

The main reason, again is to cover ourselves from the unexpected global geopolitical risks, and at the same time ensure that we are prepared if inflation rears its ugly head.

The main risk to our investment is the International Monetary Fund’s  (IMF) commitment to sell gold out of its reserves. In fact, the IMF has already made the small concession to China and the Group 20: The IMF will sell 403 metric tons of gold to “provide $6 billion additional concessional and flexible finance for the poorest countries over the next two to three years.”

These sales will keep a lid on prices for some time and actually create some downward pressure. But that will be precisely the opportunity needed to buy in at a discount.

The Gold Trust ETF has appreciated some 10% in past three weeks, but ideally we need to see some more consolidation, down to perhaps the $900 levels before we continue to purchase up to our maximum of 5% or 10% of the portfolio, depending on your risk aversion.

Recommendation:  Hold existing gold positions in the iShares SPDR Gold Trust ETF (NYSE: GLD) and add to a maximum of 5% or 10% of the portfolio if we see gold-price retrenchment down to the $900 level (**).

(**) - Special Note of Disclosure: Horacio Marquez holds no interest in iShares SPDR Gold Trust ETF.

Source: Buy, Sell, or Hold: iShares SPDR Gold Trust ETF ]]> http://www.contrarianprofits.com/articles/buy-sell-or-hold-ishares-spdr-gold-trust-etf/17619/feed 0 http://www.contrarianprofits.com/articles/housing-back-in-the-news-more-retailers-report-earnings/16768 http://www.contrarianprofits.com/articles/housing-back-in-the-news-more-retailers-report-earnings/16768#comments Mon, 18 May 2009 13:00:11 +0000 Christian Hill http://www.contrarianprofits.com/?p=16768 On the earnings calendar, as you can see from the ones I have listed there is a significant amount of retailers reporting this week. That’s only a partial list, here’s the rest: ANN, BJ, APP, DDS, HOTT, DKS, ARO, GPS, PSUN, NWY, ROST, and TJX.

Earnings Announcements: BKS, FL, GME

Monday

Earnings Announcement: LOW

Tuesday

Economic Reports: Building Permits, Housing Starts

Expectations are for both of these reports to show a modest improvement versus the previous month. With the deteriorating housing market, I don’t think these reports will meet expectations. Until the existing inventory is whittled down, these reports should show a drop in permits and starts. Of course, I have been wrong before, but I can’t imagine any builder wanting to add more inventory to…

Total American consumer debt stands at $2.564 trillion. It had gone down three months in a row before expanding by $1.8 billion in January.

The consumer credit report comes out today and demand for credit is expected to resume its fall. Total debt is expected to decline by $1.5 billion in February.

Consumers are certainly feeling the pinch. Equifax reported last month that…

• Total personal bankruptcy filings rose 25 percent in January from a year ago
• Almost 40 percent of homeowners with subprime credit scores of 619 or lower were 30 days or more behind on their loans
• The number of credit cards fell by 30 million since the July 2008 peak to 408 million in January.
• 18.8 percent more auto loans were 60 days behind on their payments compared to the January before.

Despite all these headwinds, a small uptick in big ticket orders recently may indicate that lower interest rates on mortgage loans are loosening up consumers’ wallets.

I’m looking for the February consumer credit report to beat expectations. But consumers aren’t out of the woods. As long as home prices continue to decline and the economy continues to lose over 600,000 jobs a month, consumers will be reluctant to spend on credit.

Source: Consumers Are Still Playing Defense

That’s why the greatest inflation fighter in the world is under stress. Of course, we’re talking about gold. Gold is– and always has been– the safest place to put your cash. It has been traded as currency, stockpiled to backup paper money (think Fort Knox), and hedge spend-happy governments. Today, its hedging attribute is important.

Over the past few months, it’s become more and more difficult to buy physical gold. Even if you do locate it, what you actually pay is quite a bit more than its spot price.

In many cases, these buyers were willing to spend up to 25% more for gold than its value. That’s like your broker taking a quarter for every $1 share you buy.

So, if gold is too expensive, where can investors turn? Well, there’s always gold’s little brother…

Silver is not commonly thought of as an inflationary hedging tool. That is, until times get tough. And I don’t think you can find too many times tougher than right now.

Silver is often referred to as “the poor man’s gold”. We call it opportunity. You see, during the 1978-1980 precious metals rally, silver showed up late. Almost all of the large gains in silver came in the last few months.

We see the same events unfolding this time around. As we pointed out in the past, gold has always traded for about 16 times as much as silver, until the past few decades. Currently, the ratio sits around 71. When this number falls, silver booms.

Macroeconomics and ratios aside, there is one final reason we expect an enormous silver rally…

About 3 out of every 5 ounces of silver come from base metal mines. Roughly 28% of all silver comes from copper mines and another 32% comes from lead/zinc mines. Both of these sources are decreasing — and in some cases, completely shutting down — production due to the overall commodity market.

Only 10% of all silver comes from gold mines, which leaves just 30% of the total market to pure silver plays like Coeur d’Alene Mines Corp. (NYSE:CDE), Hecla Mining (NYSE:HL), and Pan American Silver (NASDAQ:PAAS). These serious cuts in production, gives us pure silver investors the inside track to cornering the silver market.

We are seeing a perfect storm brewing in the silver market. If you get in now, you might just beat the rush…

Sincerely,

Jim Nelson

Source: How You Can Win with Silver

One of the most pervasive answers I hear about why people aren’t saving more, is that savings “just sit there.” They don’t do anything. With the many classes and the lectures I do, it never ceases to amaze me when I hear that.

And while other excuses run the gamut from the high cost of living to sheer apathy – the fact is, most Americans don’t really understand saving. Many believe that it’s just too risky to put your money in the market right now. On the other hand, if it’s in a CD, money market or savings account their money isn’t doing anything.

They aren’t too far from the truth.

Even the best interest rates on cash are yielding less than 2.5%. And while inflation was been down in January, it’s averaging over 3% for the last 12 months.

But right beneath our common savings misconceptions is the very way we can do it better.

Compounding Your Interest – How To Grow Your Savings

Many know that they can grow their savings with simple reinvesting and compounding your interest.

But how much more… you might be surprised.

The amount of interest earned on a $1,000 savings deposit over five years that compounds annually at a 5% rate is $276. But if we compound it for another five years that same account grows at more than twice the amount earned after the first period. It’s earned interest of $629 instead of $276.

Why the big difference? It’s because of compounding.

Compound interest is literally interest on interest. So, after one year you earn $50 in interest (5% X $1,000); after two years you earn another $50 in simple interest plus $2.50 in compound interest (5 % X $50); after three years, you earn another $50 in simple interest plus $5 in compound interest (5 % X $100), on and on.

Simple interest is the amount of interest earned on the original principal, while compound interest is earned off the reinvested interest.

The Raw Power of Compounding Your Interest

Over many years the raw power and impact of compounding your interest is huge…

It doesn’t sound like much but a husband and wife contributing $5,000 each to a retirement or savings account would have $50,000 in five years and $100,000 in 10 years.

But with a return of just 5% it would grow to $68,019.13 in five years, and $142,067.87 in 10. That’s $42,067.87 of interest in just 10 years – and more than double their $18,019.13 five-year interest earnings.

The more frequently interest is compounded the higher the effective rate. You end up making more interest!

Now, imagine that a husband and wife saved up for 10 years starting at age 30 at 5% in two Roth IRA and stopped contributing at age 40. They just let the $142,067.87 sit and compound for another 25 years until they retire at age 65.

That pile of cash would grow to nearly half a million…

Compounding Your Interest – Watch The Rising Interest Rate

But the interest rate would also be higher the more you compound. See in the table below, where FV represents future value.

You should be interested not only in the nominal or stated rate of interest, but also the effective rate.

The effective rate of interest is the interest actually earned for a period of time, based on both the nominal rate of interest and the number of times it is compounded annually.

Compounding your interest is an easy way to increase your savings’ return and should give you fewer excuses why you aren’t saving.

And the sooner you start, the larger your returns will be.

While we’re going through more than a rough patch in our economy, it doesn’t mean we should stop good habits that will eventually make us millionaires. Let compounding do the work for you.

Source: Compounding Your Interest: How To Increase Your Saving’s Return

Here he explains how the recently signed U.S.  government bailout “will make corporate bonds the place to be for a very long time.”

As the stimulus and banking packages unfold, there is one thing that we know for certain, there will be one hell of a lot of money printed and pumped into the system. The success, or degree of success of these programs is still up in the air, but we know for certain that we will have a lot of new money out there.

These bailouts will result in a series of events that will make corporate bonds the place to be for a very long time. In fact, bonds may be the only place you will make money in the next few years.

The first event is already in progress, printing lots of new money to finance the bailouts. Let’s ignore the cost of financing these bailouts and just look at the effect it will have on inflation.

Unavoidably, inflation will be primed to take off.  It’s like pouring gasoline on a fire. You pour enough money on the economy and the flames will get bigger. This is the second event.

As we all know, too much inflation is death for our economy and the stock market. It’s like not being able to get your in-laws to go home. Life is awful. You have to have lived through the late ’70s and early ’80s to appreciate this fact.

Are double-digit interest rates like the early eighties possible? Considering the amount of new money being pumped into the economy, it is more likely than most can imagine right now.

The third event, the Fed will have to raise interest rates to control inflation or hopefully stop it before it can do its damage to the economy and the stock market.

Look back to 1994 and see what multiple interest rate increases did to the stock market in a normal economic environment. The average stock was down at least 30%. I can’t imagine what will happen in the already challenged economic environment we have now.

The fourth event will be for bond prices to drop as the Fed increases rates. How the Fed’s actions affect bond prices is not a complex relationship, but it would require too much space for me to explain here, so you’ll have to take my word for it.

These interest rate increases will create one of the best buying opportunities in bond history. Using a simple strategy, you will be in a position to buy up discounted bonds at higher current yields than they were paying last year.

Discounted bonds not only pay you a higher current yield than the coupon of a bond, it also pays you capital gains at maturity. In the past six months, I have taken capital gains on these same types of bonds as high as 97% in less than two months.

If you are a person that buys long maturity bonds to get the highest interest rate you can, you may want to pay particular attention to the rest of this article. Long maturity bonds will be crushed in what appears to be all but a guaranteed high interest rate, high inflation environment.

Here is a simple and safe method for beating the market for the next five years. Invest in ultra short term, investment grade corporate bonds on an averaged and staggered basis. Here are the particulars.

Investment grade only. Junk bonds have earned their name. Does this mean you can never have a BB bond, investment grade are BBB to AAA, no. There are some exceptions, but staying in investment grade bonds gives you an 80-year documented success ratio of 99%. That means 99% of the time investment grade bonds pay off. Junk bond payouts are significantly lower.

No matter what is happening in the economy, quality is always your safest bet in investments.

Short term, staggered maturities of three years or less. This is the key to the success of this approach. It will sound very foreign to most bond investors, but give it a chance.

Long maturity bond prices are crushed by interest rate increases. Short maturity bonds, in this strategy that means six months to three years, will drop in price but much less. Since they mature sooner they also allow you to buy back into a rising interest rate market and take advantage of the price drops.

In long bonds, you’re stuck. The ultra short maturities give you as much protection as possible from getting stuck in bonds that you will have to take a loss on to get out of in the coming inflation.

There are two more techniques you need to use to add a little more security to this method: staggering and averaging in.

Staggering your maturities will give you an extra edge. It’s accomplished by buying into the market in small amounts, five or ten bonds at a time and plan on having 10 to 25 different bond positions added to your portfolio over a 12 to 18 month period.

This does two things. It averages you into a market over time, which will typically give you a better average cost, and it staggers your maturities so you will have several bonds coming due every year. This gives you fresh money to reinvest as bond yields go up and prices come down with the rate increases. Staggering and averaging in will also give you better diversification, which is always a good thing.

No matter what you choose to do, never load up on a few bonds because the coupons look to be good at the time. This is the oldest trap in the money business for conservative investors. It will end up costing you.

Don’t let your lack of familiarity with bonds keep you from using this technique. Take a look at the Bond Trader, it does everything I have described here and uses a few additional techniques to give its investors the long-term returns of the stock market without stock market risk. To date it has not had a single loss.

Source: How the Stimulus Will Drive Bond Profits To New Highs

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

The currencies had a split personality while I was gone too… At first, they rallied like there was no tomorrow, but then sold off, and then range traded. So, we’ll finish the year on a down note for most of the currencies, but knowing all too well that the markets are beginning to realize that the debts the U.S. is chalking up are not going to go away, and in fact they’re just going to get worse, and that spells bad times for the dollar… Eventually…

I did a lot of reading on my vacation, and the book I read the most was one by Christopher Wood, titled: The Bubble Economy… Now, on first take you would think that he was talking about the U.S…. But that would be wrong… This is an old book, and was written about Japan’s economy in the 90’s… I’ve spent a ton of time talking about the similarities between Japan then, and the U.S. now. And this book, just brings those thoughts even closer! For instance… In the book he quote the Levy Institute circa 1991… “monetary policy would not, on its own, be able to restart a depressed economy suffering from asset deflation and widespread financial crisis, for lower interest rates cannot motivate fixed investment when the market is glutted with existing assets worth much less than it costs to replace them.”

Oh my! We’re turning Japanese, I really think so!

So… Then this weekend, a Pfennig reader sent me a link to a story on Bloomberg regarding the Japanese… Here’s a snippet… “Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.

The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.”

Well…the “rest of the story” can be read by clicking here.

As I write, the euro is back on the attack VS the dollar, with it trading above 1.43 once again. There has been a 2 figure move up in the euro from just last night, as it appears that the markets are running from the dollar with the Israeli / Gaza thing going on. The Swiss franc is back above 95-cents, and so on… I also noticed, while on vacation, that the Aussie dollar bounced nicely off its 65-cent level. And Commodities staged a nice rally / comeback while I was gone. Gold is trading around $880 again…

When I left, I had told you about a Santa Rally for the euro, and it did just that, even with the profit taking after reaching 1.45, it’s still much higher than it was when I said that we should look for a Santa Rally. I also was hinting that the Trading Theme that we’ve seen in place since July, was beginning to show chinks in the armor. Those chinks are becoming major exposed areas, as the markets are returning to focus on the fundamentals the hang over the U.S economy and dollar like the Sword of Damocles.

So… I see that the Fed has opened the door to grease the tracks to make GMAC a “bank-holding company” Why? Ahhh grasshopper… If GMAC is a bank holding company, they would be eligible for TARP funds, which would put them on the fast tracks to obtaining taxpayer bailout funding.

The thing I see happening now is that “everyone and their brother” is going to line up for taxpayer bailout funding… We’ve already set the stages for car loans, and student loans, and next we’ll get real estate guys and who knows what else! Everyone is lining up at the Government bailout trough…

So, thanks guys… Thanks for running up the taxpayer costs… Thanks for making it possible that my grandchildren will be burdened with these unbelievable financing costs of all this debt we’re building… Thanks… But no thanks!

It’s all sort of like Humpty Dumpty isn’t it? You know, all the king’s men and all the king’s horses couldn’t put Humpty Dumpty back together again. All the Big Ben Bernankes and Henry Paulsons are trying to put the economy back together again, but it “ain’t happenin”! Just shows to go you that they should have left it all alone… Let it fail… Then pick up the pieces and begin again… I’ve had a few people along the way that tell me that I don’t offer solutions all I do is pick at the wounds… But they just don’t read into what I’m typing each morning… I’ve said all along that we would end up in a debt ridden society if we didn’t stop spending… So, there’s one solution… STOP SPENDING! And then I warned that these bailouts that began last spring with the $150 Billion in checks to consumers, was going to put us on the road to turning Japanese, and we should have let things go their normal business course… There was another solution!

Now, that we’re here in this quagmire of debt and there’s more coming folks… I recall telling Chris while I was gone that there are rumors that the next bailout amount could reach $1 Trillion! But now that we’re here, what’s a poor boy to do? Well… For me, it’s called savings… And when things look really bad, and prices have fallen to the core, then I’ll put those savings to work, and if everyone does the same, the economy will grow once again, but from a lower base, which is a good thing. Of course, should everyone begin to spend their savings at once, this will bring about inflation that comes out our ears, but let’s worry about that then, eh? Besides, like no one really thinks that with interest rates near zero, and all this money going into the system, that eventually we won’t have an inflation problem do they?

OK… Now, that was a lot to get off my chest on my first day back, eh?

We didn’t see any economic data on Friday after Christmas, so one would think that there’s some catching up to do this week to end the year. But the data cupboard is empty today too! And it looks like those that are responsible for restocking the data cupboard, have taken this week off too… One piece of data we will get is the ISM (manufacturing) Index for this month… And remember when this index was hovering around the contraction/ expansion level of 50 and I kept saying that it was going to go below it and fall? Well, the index number in Nov. stood at 36.2, that’s a long way from 50, eh? And the “experts” have forecast another fall to levels not seen since 1980! UGH! Now… Early last fall I fretted about the reversal in the weak dollar and its affect on manufacturing… Exports had just posted a strong performance in the 2nd QTR, boosting GDP, because the dollar was so darn weak! Well, I said then, that those wishing for a stronger dollar had better be careful for what they wish for…

So, with the trading desks still undermanned the volumes will be thin for the most part, unless… We see a ton of “book squaring” today, to settle before the end of the year… Either way, we need to be aware of the fact that thin volumes can cause wild swings in the currencies… Take last night’s action for instance. When I went to bed the euro was trading 1.4130, and that looked pretty darn good to me… But when I turned on the screens, here in the office, this morning, what did my wondering eyes did appear, but the euro trading at 1.4350!

This rally means the euro is only down 2.5% from a year ago, which is far better than it was showing a month ago! And the best performer of 2008? Like you didn’t know! It was Japanese yen, up 24.7% since last year! WOW! Of course there are some real “problem children” in the currency performance roster… Aussie, kiwi, pound sterling, loonies, and krone are all showing pitiful performances for 2008… But, if the recent price action is any indication of what could happen in 2009, if we return to the fundamentals, then these pitiful performances might get put in the rear view mirror…

U.S. Treasury Sec. Henry Paulson is just about at the end of his “tour of duty”, and you’ve got to think that he can’t wait for the new administration to take over! I don’t doubt for a minute that the new Treasury Sec. will pull back on the bailouts… But what I do question, with Paulson leaving, is what happens with China? Paulson didn’t make the progress with China that he set out to make, but what he did do is keep the knuckleheads in D.C. from slapping trade tariffs on China… I have to wonder if that will be the direction of the new Secretary… If it is, then that won’t be good for the dollar, as protectionism is never viewed as a positive for a currency. So, those questions and more are on the docket for 2009…

I received quite a few emails from readers while on vacation with a question about something that another newsletter writer wrote about the euro / dollar… The writer believed that deflation was going to be a big problem for the U.S. next year, and that would be a good thing for the dollar, thus pushing the euro to parity. Hmmm… Well, that may be true, for I don’t know what’s going to REALLY HAPPEN! But! I would just have to say that since we’re mirroring Japan so much, let’s go back and look at what deflation did for the yen in the late 90’s when deflation was so prevalent… Oh, it doesn’t look like deflation did yen any favors then… And I doubt it will do the dollar any favors this time around… So, there’s my answer to that call by someone else… To me, though, this is all good, as it still means that there is a two-way trade, and that not everyone is on the same side of the ship!

So… Before I head to the Big Finish, let me re-cap today’s action so far… The dollar has been hammered overnight on fears that the Israeli attacks on Hamas in the Gaza Strip will disrupt oil supplies to the U.S. This has driven the price of oil higher to $40.40, and has caused a traders to unload dollars… The data cupboard is empty today, and trading desks are undermanned, which could cause wild swings in the currencies this week.

Currencies today 12/29/08: A$ .6965, kiwi .5850, C$ .8210, euro 1.4355, sterling 1.4670, Swiss .9585, ISK 143.20, rand 9.55, krone 6.95, SEK 7.67, forint 186.10, zloty 2.9050, koruna 18.54, yen 90, baht 35, sing 1.4370, HKD 7.6710, INR 48.42, China 6.8525, pesos 13.46, BRL 2.3450, dollar index 79.70, Oil $40.40, Silver $11, and Gold $885.80

Source: A HUGE Currency Rally!