Three reports were unanimous that sales gained, but to different degrees: Market research firm Retail Metrics Inc. said sales rose 1.1% last month, Thomson Reuters tallied a rise of 0.6% and a tally by International Council of Shopping Centers (ICSC) and Goldman Sachs Group Inc. (NYSE: GS) showed a 0.1% increase.

“Let the retail recovery begin,” said Michael Niemira, chief economist at ICSC. “This is the start of a better performance and better fundamentals.”

Retailers such as Target Corp. (NYSE: TGT), Aeropostale (NYSE: ARO) and Kohl’s Corp. (NYSE: KSS) raised their guidance for the current quarter ending October 31. But the encouragement was reserved as it pertains to the fiscal holiday quarter that starts next month for most retailers. Fundamentals key to consumer confidence – particularly unemployment, which rose to 9.8% last month – are still serious concerns.

“While our outlook for the third quarter has improved, we remain cautious in our expectations for fourth quarter results in both of our business segments,” said Gregg Steinhafel, Target’s chairman, president and chief executive officer.

Of course, retailers didn’t have to do much to beat last year’s September, which was relatively poor.

“You want to be careful how much you’re reading into the improved numbers,” Michael McNamara, vice president for research and analysis at SpendingPulse, an information service by MasterCard Advisors that estimates sales for all forms of payment, including cash, checks and credit cards in an interview with The New York Times.

For instance, jewelry sales increased 1.2% last month, McNamara said, “but that is still about 5% lower than we were in September 2007 and about 10% lower than the sector was in September 2006.”

“In some respects the sector has turned the clock back to 2005 sales,” he said.

While the bleeding at retailers may not have stopped, it has likely slowed as leading indicators such as the financial markets and consumer sentiment show improvement. The Standard & Poor’s 500 Index has risen more than 55% since its March lows, while the Reuters/University of Michigan Index of Consumer Sentiment was up to 73.5, its highest level since the start of 2008.

Among the biggest retail gainers on the stock market today (Thursday) from the news were American Eagle Outfitters (NYSE: AEO), which gained 8.88% to close at $18.14 and Abercrombie & Fitch Co. (NYSE: ANF), up 5.51% to close at $34.46.

Source: Will Rise In September Retail Sales Carry into Holidays?

Far be it for us to call an end to the party. We’ve been warning of the dangers of this rally since it began. And it looks like nobody’s been listening: stocks have continued to climb in the most dizzying Wall Street rally since the infamous bear market bounce of 1929-1930. But that’s what we do here at Notes – we bring you the other side of the economic story. So we figure we’ll plow on.

Legendary short-seller Doug Kass called a bottom in US stocks in March. He was dead on with this call. Now Kass is has turned seriously bearish on the prospect – now almost a matter of dogma in the mainstream financial press – of a V-shaped recovery.

Kass’s reasons for being suspicious of the mainstream’s recovery mantra are eminently sensible… which almost guarantees that nobody will pay any attention to them. They’re even (gasp!) realistic and based on observable facts.

1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.

3. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.

4. The credit aftershock will continue to haunt the economy.

5. The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.

6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.

7. Commercial real estate has only begun to enter a cyclical downturn.

8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

9. Municipalities have historically provided economic stability — no more.

10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high health and energy bills also loom.

(Hat tip, MarketFolly.com)

Reason number 10 scares us, dear reader. Kass is really just stating the blindingly obvious: massive deficits will have to be paid for sooner or later, and when they do, they’ll be paid for by higher taxes.

This hike in taxes isn’t lying somewhere in the distant future, either. It’s happening right now. This from Kass:

We have already witnessed the start of what is likely to become an avalanche of changing tax policy. New York City imposed its first sales tax increase in 35 years (rising from 8.375% to 8.875%), and, on the same day, the state of New Jersey imposed an additional tax hike on wholesale liquor distributors’ sales of liquor and wine, which is sure to be passed on to the consumer. In Oakland, Calif., even the “high life” is being taxed as the city has recently passed a tax on marijuana sales and the state of California appears to be close in following Oakland’s example.

This is just the start of a nascent and broad trend toward much higher taxes, a growth-impeding and P/E-diminishing secular development

Kass not only identifies the obvious when it comes to the future of the US tax regime, but he also hits the nail on the head (in our humble opinion, at least) when it comes to the future of US stocks.

The market optimism that we are now experiencing in the expectation of a clean handoff of the baton of stimulation from the consumer (2000-2006) to the government (2008-???) might be more short-lived than many believe, as the price of stimulation, regardless of whether it’s source is the private or public sector, holds the promise of being more of a growth-retardant. With the debt super-cycle continuing apace (but in a public sector context), the fragility and inherently unstable “balance of financial terror” argues for a not-so-benign and extremely volatile stock market future.

Unquestionably, the animal spirits have been in full force as shorts are scrambling to cover and many more are joining the ever more vocal and growing bullish chorus. But to me, the margin of safety is becoming ever more thin as the enemy of the rational buyer – namely, optimism – reaches new heights.

In summary, since a self-sustaining economic recovery appears doubtful, I do not believe that we have started a new bull market. Rather, it is more than likely that economic growth will disappoint in late 2009/early 2010 as the domestic economy confronts many of the emerging secular challenges discussed above.

*** Here’s Kass’s model portfolio as of June 2009. Interestingly, he recommends holding 29% in cash… a very smart move in our opinion, considering the state of the markets right now.

http://4.bp.blogspot.com/_9MYixPWxtF0/SjbACP6_syI/AAAAAAAAAn0/dG_f2yx8p0I/s1600/doug-kass-model-portfolio.jpg

China has once again snatched the leadoff spot in our daily lineup. And once again, they’ve knocked the cover off the ball.

The Chinese economy expanded at a dizzying 7.9% in the second quarter, their government announced yesterday. That far exceeds analyst expectations and China’s still-impressive 6.1% first-quarter growth. Conveniently, the second-quarter jump — plus revised GDP growth expectations of 8% in the third quarter and 9% in the fourth — puts China perfectly on track for the 8% annual growth they promised earlier this year.

Looking through the fine print of today’s data… oy, these are some la-la land numbers:

• New lending in the first half soared 201% compared to the year before
• First-half property sales up 53% per annum
• Chinese home prices are growing at a 10% annualized pace
• First-half auto sales up 17% per annum
• Retail sales up 15% in the first half
• Inflation down 1.1% from a year ago.

Of course, not all is well over there. Exports, the backbone of the Chinese economy, are down 22% so far this year. Construction starts, another staple of Chinese growth, just ended 11 straight months of decline. But still, today’s numbers show nothing short of a V-shaped recovery for China. Too good to be true? Maybe.
But here’s one more amazing Chinese stat for today, one we don’t doubt: China’s official foreign reserves now exceed a record $2.13 trillion. At least $763 billion of this sea of money is pure U.S. debt. In spite of all the global turmoil and market ups and downs, China has remained the world’s steadiest accumulator of sovereign debt — namely American Treasuries… a fact of life that will surely haunt us one day.

Another Chinese debt auction failed this morning. That’s the third time in the last two weeks that the Chinese government was unable to sell as much debt as it planned. In order to continue financing their rabid growth, maybe they’ll have to start selling some assets — like, call us crazy, American IOUs.
By the way, despite China’s unwavering appetite, global demand for American Treasuries fell by the most this year during May. According to yesterday’s TIC flow data from the Fed, the global community was a net seller of U.S. debt back then. Net selling exceeded $22 billion, the lowest demand for American debt since November.

Mexico is in deep trouble. The Mexican economy might shrink 7% in 2009, the U.N. forecasts.

“Mexico is the biggest concern in the region,” said Alicia Barcena, head of the UN’s Economic Commission for Latin America and the Caribbean. “It’s an economy that depends very heavily on exports to the U.S., it’s one of the countries with the biggest fall in remittances and it’s also being hit by swine flu. Recovery for Mexico will be difficult and highly complicated.”
Back in the U.S., here comes another financial systemic risk crisis. The drama du jour is at CIT, a commercial lender not to be confused with Citigroup.

CIT is a small-to-midsize business lender that actually has a lot more in common with Lehman Bros. Like Lehman, the company’s business model is reliant on debt and easy credit — CIT relies on money borrowed from capital markets to finance its loans. And also like Lehman, CIT is saddled with debt of its own — about $35 billion worth.

Having already bailed out CIT with $2.3 billion in TARP bucks, the Obama administration gave the company the cold shoulder (thank heavens) when CIT came knocking for more earlier this week. Evidently, their moronic board was counting on renewed government aid. Now the company has just a matter of days to raise as much as $3 billion. Fat chance, says the market:

This time last week, we compared some eerie similarities between 2008 and 2009… investor attitudes, market behavior and economic indicators are lining up a bit too close for comfort. And now this — what would be the biggest banking failure since Lehman. Oy, could get interesting. Most media outlets are downplaying CIT’s peril, but we’re not so quick to brush it off. Its bankruptcy won’t likely produce a Lehman style meltdown, but on Monday, tens of thousands of businesses might not have a primary source of financing. In this credit environment, do you think it’ll be easy for them to get fast loans from someone else?
CIT’s plight isn’t helping the dollar one bit. Coupled with the stock rallies this week, the dollar index fell as low as 79.3 yesterday, its lowest level since June 11. As we write, it’s at 79.5.
Sounds like a good day to by some gold, eh? You wouldn’t be alone today, or this month, for that matter… the spot price has risen to $935 this morning, up about $30 from early July.
“The idea that Chinese yuan could replace the dollar strikes us as ridiculous today,” writes Chris Mayer. “I am sure the typical British subject in 1922 — when the Empire ruled over 458 million people and a quarter of world’s land area — would have found equally ridiculous the idea that in two decades, his cherished pound would play second fiddle to the U.S. dollar of the former colonies.

“I don’t know what currency will be the currency of choice two decades hence. I will be surprised if it is the U.S. dollar alone. And not knowing is a good reason to own some gold.”
California’s lousy economy and gold’s worthy valuation has caused a second gold rush. We’ve heard more than one report lately of way more prospectin’ activity than normal in Southern California. For example, Keene Engineering, which makes gold-finding equipment for the average Joe, reported recently that business has doubled in 2009.

It makes sense. Times are tough, jobs are sparse, wages are low, taxes are rising… and here’s perhaps the one true “free lunch” in America. Good luck, fellas.
“If you’re American and are going to be storing things,”writes Doug Casey, “you probably can’t go wrong building a stash of cigarettes.” Of course, Mr. Casey advocates a healthy private stash of precious metals, but when pressed for what else we should stockpile, he said this:

“They keep raising the taxes on cigarettes — a pack now costs $10 in some places in the U.S. That’s 50 cents per individual cigarette. Even if you don’t smoke — or perhaps especially if you don’t smoke — every time you return to the U.S., you should buy the maximum amount of duty-free cigarettes allowed and store them.

“The other thing Americans should do is buy a lot of shotgun shells, 9 mm, .45, .223 and .308 ammo. Even if you don’t shoot, you can set those aside and store them too, because they’re going to be taxed and regulated to the nth degree. And properly stored, they keep for a very long time.

“In fact, anything regulated by the Bureau of Alcohol, Tobacco, Firearms and Explosives — one of the most corrupt, dangerous and useless of all federal bureaucracies — is likely to go up considerably in both price and value. It’s perverse that the U.S. has a bureaucracy to regulate the things you need for a hunting trip or a good party. Maybe their next trick will be to convert the DEA into the Bureau of Sex, Drugs and Rock ’n’ Roll.’”

That’s vintage Doug, for sure. Hearing him talk about stockpiling cigarettes reminds us of last year’s Investment Symposium, when Mr. Casey lit up during his presentation — not because he really wanted to, but because the (very accommodating) people at the Fairmont told him he couldn’t. What followed was an onslaught against Uncle Sam, the TSA, investment bankers and others who likely deserved it. We expect no less from Doug when we meet next week… stay tuned.
But market makers aren’t too concerned about all we’ve mentioned above. Earnings season is front and center, and blue chips are beating expectations left and right.

Most indexes climbed over 1% yesterday, driven mostly by an earnings beat from JP Morgan. Their $2.7 billion in profits gave hope to Bank of America and Citigroup — which both topped earnings estimates before the opening bell this morning. We also saw GE, Google and IBM print better-than-expected earnings after the bell. Most of their earnings beats look to have been priced in yesterday. Thus, the market is at a standstill as we write.
Stocks also got a boost yesterday from the latest jobless claims report. New claims fell by 47,000 last week, says the Labor Department, to 522,000. That’s the lowest level since January. Continuing claims fell by a whopping 642,000, to 6.2 million… a record decline so large, it’s hard to believe.
Oil’s back on the rise, thanks to this week’s sudden stock optimism. Light sweet crude is at $62 a barrel as we write.
“I am sick and tired of people going on and on about the poor and health care,” writes a reader of our recent health care debate. “I’ve been poor. I’ve been ‘trailer trash.’ And you know what? I even got sick a few times. For the most part, unless you have a bone sticking out, blood gushing or some terminal illness, a person generally gets over it. Most anyone, even with a government indoctr- , er, education, can figure out to take some NyQuil, eat the lost days’ pay and sleep it off. On the rare occasion I had to see a doctor, I worked (what a concept!) and paid cash for the office visit. And if I had been unfortunate enough to be in a traumatic accident, the hospital would have patched me back together, insurance or not, because they have to by law. Granted, I might have still been working to pay off the debt even now, which is why I found myself being really freakin’ careful not to put myself in any accidents. Funny how that works.

”If people feel so obligated to help the poor, by God, give to charities. I, like most people who are grateful for the opportunity to earn a living, believe firmly in tithing and giving to charities regularly, even in this economic misallocation. Yes, that’s right. I didn’t say crisis, or downturn or anything else. Every problem we are now facing can be narrowed down to two things: the government legislating activities counter to what the market would normally do and the people who took advantage of it.”

The 5: It’s been fun bouncing these reader mails back and forth this week. Per usual, we’ll bump this one to the blog to make space for whatever evokes rabid response from you next week. If you’ve got more to say on health care, take it to the blog.

Source: China Booms, The CIT Crisis, A Bizarre Commodity Worth Stockpiling, Vancouver and More!

Good day… And a Wonderful Wednesday to you! Another All-Star Game, another win for the American League… I truly believed that with Tim Lincecum going for the National League, that we would win this year… But that didn’t work out… I did truly enjoy the game though, and got to experience it with sons, Andrew, and Alex, with Darling Daughter Dawn’s husband, Jerry… A truly memorable night…

The currencies slowly moved a bit higher yesterday, and the euro is back to 1.40 this morning… The move came as stocks rebounded some, after reports of a better than expected earnings report for Goldman Sachs. Hmmm… Now, doesn’t that just tick you off a little? Here’s Goldman Sachs who just months ago, changed to a Bank Holding Co, so it could take TARP money, then paid it back a month ago, and now, prints a Moon Shot profitable earnings report… I guess I should be happy for them… Unfortunately, I smell a rat…

It’s as if the Risk Aversion crowd just took their dollars and yen and went home! They are nowhere to be found this morning! The euro is pushing toward 1.41 again, which… Lately has been a tough row to hoe for the euro… Every time it gets close to 1.41 or even past it, albeit briefly, it comes back… So, it will be interesting today to see if the euro can add to the overnight gains.

The negativity toward the U.S. dollar and the so-called green shoots is really building steam once again.

We saw Retail Sales for June yesterday… The “experts” believed the report would print at a positive .4% gain, following up May’s .5% gain… And that’s exactly what it did! Just goes to show you that no matter how many people are unemployed, and how bad the recession / depression is… Consumers still spend! And that’s what makes the world go around, as my dad used to say! The Butler Household Index (BHI) was a little fuzzy this month, as I haven’t exactly seen the shopping bags come into the house, but I have a funny suspicion that they were there! Lots of UPS Deliveries for sure! So… The BHI believed that June Retail Sales would be probably better than expected… ( I wrote that yesterday when I thought Chris had bailed on me… Only to find out he had already written the Pfennig! UGH!)

The German Economic Sentiment, as measured by the think tank, ZEW, printed weaker yesterday for the current month… This report had trended upward in recent months, but with the recent loss of momentum in stocks, you can understand the reason for the weaker print.

And down under… Reserve Bank of New Zealand (RBNZ) Gov. Bollard, gave a speech Tuesday night, that, as far as I’m concerned pretty much drives the final nail in the New Zealand rate cut coffin… Bollard’s speech was titled, “Savings, Investment, Funding Markets Are Key To Recovery.” In the speech, Bollard really made a point of expressing his fear of reigniting the housing market… Therefore, I was sure after reading the speech that the RBNZ will NOT cut rates further, since the Gov. fears reigniting the housing market! And… We all know, even if Big Al Greenspan still doesn’t admit to knowing, that those low interest rates ignite housing bubbles!

You know, I just won’t let Big Al Greenspan off the hook will I?… NO! Never! You can’t make me do it! Pink Floyd said that money is the root of all evil today… But… I believe that Big Al Greenspan is the root of all evil today!

OK… On to other things!

There are reports this morning of a major earthquake hitting New Zealand… 8.2 magnitude, I believe I heard… If so, it would cause a short-term loss for kiwi, but afterward, it would probably be a springboard for the currency, given the re-building needed… More importantly though, I truly hope this isn’t as bad as first reported and that there isn’t any loss of life.

Aussie dollars are back to 80-cents again this morning… I’m sure there was some moves from kiwi to Aussie on the earthquake news…

Chris talked a bit about this yesterday, but I thought it was very important to give it to you again…

With three months left to go in the budget year, the U.S. government’s deficit has hit an all-time high of $1 trillion. The Congressional Budget Office predicted that by the end of the year, the deficit will be 13% of the country’s GDP. That compares with a recent high of 6% of GDP in 1983 during the Reagan administration and 30.3% in 1943, when the U.S. spent a huge amount of money to fight World War II. OUCH! But, that’s nothing folks! This budget Deficit is going to get larger and larger! And IF all the beans are counted… This will be quite ugly!

But, that just means more supply of Treasuries that will have to get auctioned folks… More and more… And it just scares the bejeebers out of me, what will take place…

OK… Before I go to the Big Finish… I want to talk to you about two things that hit the newswires yesterday… I get a lot of flak from some readers whenever I talk about the direction the U.S. Gov’t is taking our “republic”… But that doesn’t stop me, no sirree Bob!

Here’s the first one…

Increased taxes for households with an annual income of more than $350,000 could pay for an overhaul of the U.S. health care system, according to a plan supported by House Democratic leaders. Proposed measures include a 5.4% surtax on couples earning more than $1 million a year. Charles Rangel, chairman of the House Ways and Means Committee, said the wealthiest Americans were singled out to pay the extra taxes because that option imposes “the least amount of pain on the least amount of people.”

I guess it all depends on who you are talking about with regards to people experiencing pain!

And then there was this…

U.S. government officials are weighing a plan that would let borrowers who have fallen behind on their mortgage payments avoid eviction by renting their homes instead, sources familiar with the administration’s thinking said on Tuesday.

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes but would continue to live in the property for several years, the sources told Reuters.

Officials are also considering whether the government should make mortgage payments on behalf of borrowers who cannot keep up with their home loans, tapping an unused portion of a $50 billion housing aid kitty.

As part of this plan, jobless borrowers might receive a housing stipend along with regular unemployment benefits, the sources said.

Remember the famous line by President Reagan when he said the scariest words someone could hear… “I’m from the Government and I’m here to help”…

I see that Gold has finally shown some life this morning, adding $12 overnight… A reader sent me a link to a story about the manipulation of the Gold price, which I truly believe has been going on for years, but keep it in my back pocket only to bring out when it makes sense to do so… Here’s a snippet of the report by GATA (Gold Anti-Trust Action Committee Inc.)

New York and Tokyo commodity exchanges have been permitting their gold futures contracts to be settled not in real metal but in shares of gold exchange-traded funds (ETFs). This essentially allows the gold shorts (and the exchanges themselves, which guarantee futures contracts) to transfer their obligations to third parties that may not have the metal they claim to have and that, in any case, are operated by the investment banks running major short positions in gold.

Thus it is likely that the paper claims to the world’s supply of gold are greater than even GATA has suspected — that the gold supply is even more oversubscribed and that “paper gold” is being created at an ever more frantic rate to suppress gold’s price.

OH BOY, now that should stir up the drink, eh?

Currencies today 7/15/09: A$ .8030, kiwi .6475, C$ .8910, euro 1.4090, sterling 1.6450, Swiss .93, rand 8.1550, krone 6.3965, SEK 7.7820, forint 193.75, zloty 3.0425, koruna 18.38, yen 93.60, sing 1.4515, HKD 7.75, INR 48.60, China 6.8317, pesos 13.66, BRL 1.9460, dollar index 79.41, Oil $60.50, 10-year 3.50%, Silver $13.34, and Gold… $936.95

That’s it for today… A late night for yours truly, got me into work later than usual this morning, thus the lateness of the Pfennig! There was a very interesting moment in the pre-game ceremony last night, that took me by surprise… It occurred during the talks by the past Presidents… I was also very disappointed in the way our Greatest Cardinal, Stan, the Man, Musial was presented… This was our chance to show the world what an unbelievable talent he was on a ball field, and off the field as a gentleman… We blew it! Can’t go back and correct it now! A great moment by our catcher, Yadier Molina, getting a two-out RBI hit… And some spectacular defense by all-world player, Albert Pujols, but after a first inning error. UGH! OK. It’s over… The All-Star week is over… Time to go to Vancouver! See you there! Wait, I don’t leave until Monday! OK… Then let’s make this a Wonderful Wednesday!

Source: Currencies Rebound

Source: Investment News Briefs Wednesday, July 15, 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Frightened Investors Move Back into US Treasuries

Source: Investment News Briefs Friday, July 10, 2009

Source: Investment News Briefs Thursday, July 9, 2009

Hmmm… Is this the beginning of the end for the “sucker’s rally”?

Mr. Market’s suffered two rough days in a row. Since Monday, the S&P 500’s down 3.5%. The Dow has fallen two days in a row as well — its worst two-day streak since the March bottom, in fact.
Best Buy — of all places — currently offers the best look into the market’s mood. The purveyor of plasma TVs and other adult toys revealed a 15% drop in quarterly profits yesterday. While the loss wasn’t as bad as Wall Street expected, Best Buy refused to brighten forward guidance, admitting “limited visibility to consumer spending in the back half of the year.”

Traders punshied Best Buy’s realistic approach with a 7% sell-off.
“A recovery requires rising, not stagnant, retail sales,”notes our macroeconomic sage, Rob Parenteau. “Flat sales revenue is not going to get retailers to expand — in fact, to make promised earnings targets, they will have to keep cutting costs, which reduces household incomes.

“We suspect the fiscal stimulus is just offsetting the deflationary pressures that were unleashed in the second half of last year and have subsequently left nominal retail sales at 2005 levels. Stabilization is not yet apparent in some of the most cyclical parts of retail sales — big-ticket items like furniture, home furnishings, electronic and appliance stores — and we suspect private debt deleveraging is still taking priority over consumer durable spending. Even realizing financial asset prices anticipate the future, we find it hard to step into consumer discretionary stocks knowing dollar sales revenue in this category has been deflating for a year and a half — that is, falling in nominal dollar value terms — to the point the sales level in this category is below where it was in 2004!

“Stagnant sales can, indeed, stick around for months on end, as this was the case in the last recession from Q1 2000 into Q3 2001. This time around, the fiscal impulse is larger, but so too is the damage to household balance sheets. Not an easy situation to evaluate, but we believe equity investors need to see something better than stable retail sales if they are to take equity indexes appreciably higher.”

(BTW, The Richebacher Society is currently accepting new member applications. Rob has been doing a great job carrying the late Dr. Richebacher’s torch… see how you too can be a part of his legacy,here.)
“Japan’s Nikkei 225 index rallied more than 40% on 10 different occasions during the last two decades,” The Rude Awakening’s Eric Fry is quick to remind us. “And yet, the Nikkei remains more than 50% below the all-time high it established in 1989.

“Could a version of this sorry scenario unfold here United States? Sure. Why not?

“The nearby charts place the recent rally on Wall Street in a “Japanese context.” The chart above compares the first 20 months of our current American bear market to the first 20 months of the Nikkei’s bear market. The chart below places this 20-month period in a 20-year context. If the American stock market were to have the misfortune of mimicking the Nikkei, the road ahead would be long and painful.

“Your California editor is not predicting such a scenario. But neither does he believe that ‘Happy days are here again.’ The road ahead — both for the economy and for the stock market — is likely to be long and painful. How long and how painful is anyone’s guess. Our guess would be: Not as bad as Japan’s experience, but much worse than most Americans currently expect.”
“People talk about green shoots, I see many yellow weeds instead,” the famously bearish (and famously right) Nouriel Roubini told Reuters yesterday, taking the popular cliché to the next level. “ When I look at the data… I see [problems with] consumption, retail sales, production, investment, housing, employment conditions, etc.

“So I expect the recession is going to last at least another six months… given the imbalance of the economy — the weak position of households, consumers, banks, financial institutions, corporates — they all have too much debt… I see a period of two years of low economic growth in the U.S.”
When the recession is over, how will we know? Last month, we explored the idea of peaking initial unemployment claims being the canary in the coal mine for economic recovery. While it’s worked in the past… we’re not convinced.

Today, check out this D-list data point — Capacity Utilization.

It’s a simple concept that’s hard to track. Capacity utilization measures what percent businesses are using existing capabilities. 100% marks an economy “firing on all cylinders,” as the corporate catchphrase goes. When consumer demand drops, so too does capacity utilization… and since 1970, it hasn’t picked up until the worst is over.

Yesterday, capacity utilization in the U.S. found a record low of 68.3%. The Federal Reserve said utilization fell another 0.7 percentage points from April to May, to the lowest score since at least 1967, when they started keeping track. Factory output is down 13.4% over the last year, the biggest drop since 1946.
The return of market pessimism has given the bond bubble a stay of execution. After skimming 4% this time last week, the yield on a 10-year note is all the way back down to 3.65% today. Traders are using the same playbook from late 2008 — sell stocks and commodities, buy Treasuries and dollars.
But despite the bond bust’s reprieve, mainstream media are finally cluing into our nearly bottomless pit of debt.Exhibit A, this week’s Economist cover:

Exhibit B: “America’s Sea of Red Ink Was Years in the Making,” headlines a recent New York Times article. “This debt,” reads the Old Gray Lady, “will constrain the country’s choices for years and could end up doing serious economic damage if foreign lenders become unwilling to finance it.

“The solution, though, is no mystery. It will involve some combination of tax increases and spending cuts. And it won’t be limited to pay-as-you-go rules, tax increases on somebody else or a crackdown on waste, fraud and abuse. Your taxes will probably go up, and some government programs you favor will become less generous.

“That is the legacy of our trillion-dollar deficits. Erasing them will be one of the great political issues of the coming decade.”

“Who would have thought?” asks Addison Wiggin, clearly trying his hardest to stifle a cynical rant. “That’s practically the verbatim conclusion of our film, which finished shooting over a year ago. Funny, it’s also the core thesis of a book called Empire of Debt, which we published in 2006.

“For our efforts, we endured years of being called ‘gloom and doomers’… alarmists not connected with the reality that ‘deficits don’t matter.’ And now these two rags think they’re breaking news about how debt grows over time and will one day cripple our economy? Heh… really?
“There’s no doubt that we’ve got a serious problem in terms of our long-term deficits and debt,” President Obama added yesterday. Very good, Mr. President… admitting you have a problem is the first step.

“I am concerned about the long-term issue of our structural deficit and our long-term debt,” he added in a separate interview, “because if we don’t get a handle on that, then there’s no doubt that at some point, whether it’s the Chinese, the Koreans, the Japanese, whoever else has been snatching up Treasuries are going to decide that this is too much of a risk.”

Yet the president is sticking to his guns… just like those before him: “I make no apologies for having acted short term to deal with our recession.” Once his agenda is accomplished, he assured CNBC, “we’re going to have to close that gap between the amount of money coming in and the amount of money going out.” Right… save that crisis for another day.
Consumer inflation fell 1.3% over the last 12 months,claims the government today, the biggest decline since 1950. According to Commerce Department data, energy costs are leading the way, down 27.3% annually. Like yesterday’s PPI, the consumer price index actually inched up last month, by 0.1%. That was still notably less than the 0.3% the Street anticipated.

Thus Uncle Sam can still claim inflation is out of the picture… and the printing presses can keep rollin’.
Last today, an opportunity:

“Phones and mobile devices are still growing explosively,” notes our breakthrough tech analyst Patrick Cox. “About half the world hasn’t even got phones yet. Those that do have mobile phones will be upgrading regularly as more functionality becomes available. In the process, personal computing and the Web will come to most people first through their phones.

“Rather than ‘phones,’ perhaps I ought to use the term used in tech circles: ‘mobile devices.’ In fact, the word ‘phone’ seriously understates the functionality of new mobile devices like the iPhone; Google’s Android; and my favorite, the multi-tasking fully Web-integrated Palm Pre. These devices incorporate powerful multimedia players with room for more video and music than I would even want to have cluttering my house on physical discs. More importantly, they are platforms capable of running increasingly sophisticated software, ranging from productivity to GPS devices.

“We know, pretty much, where this is leading. We will carry, in a mobile device, the computer processing chips that run and integrate all our electronics. This includes phones, computers and televisions, as well as various appliances like home security systems and Kindles. Eventually, your robotic business and domestic assistants will also be part of this system.

“Accelerating efficiency in chip performance, of course, will make this possible. As I wrote recently, that acceleration is not slowing with the overall economy. Chip makers are forging ahead, realizing that the downturn will end. They well know that those who are not prepared for renewed growth will fall behind and fail. This is also true, by the way, for investors. You need to be prepared for the recovery. Even if the debt drag prevents optimum economic growth, there will still be sectors that do spectacularly well.”

Patrick’s Breakthrough Technology Alert readers are aptly prepared… are you? Check out his latest special report, here.

Source:  Death of the Sucker’s Rally, Spotting the Recession’s End, A Rapidly Growing Sector and More!