Well… The dollar came back with some vengeance yesterday pushing the Big Dog, euro, back well within the 1.38 handle, and all the other little dogs, other currencies, followed. There wasn’t data to speak of yesterday to push the dollar higher, it was simply a case of fright, as safe haven flows went the dollar’s way after the news of a N. Korea attack warning spread throughout the markets.

Funny thing… I get a daily email from a news source that gives the highlights at mid-day… And yesterday, the email said, well, the email didn’t really “say” anything, it can’t talk! Any way, the email contained these two headline stories… 1. Crude rises for third session… And 2. Gold down for second day… I then glanced at the screen, and saw Crude Oil trading down on the day, and Gold up $5.80 on the day… So much for that news source, eh?

Yesterday, I talked about the high yielders, highlighting Brazil’s return to a Current Account Surplus… But the high yielders have more to say about the dollar’s future value… You see, it’s more than the Commodity Currencies… It’s also the Emerging Markets currencies, which seem to have a life of their own. There was a lot of talk last year about how the Emerging Markets economies had decoupled from the U.S. and a U.S. slowdown would no longer affect them negatively as a U.S. slowdown would have in the past. For a few months there, the decouple story was laughed at, as the Emerging Markets sold off just like everyone else. But then, like the Phoenix Bird, they rose from the ashes… And it’s these Emerging Markets currencies that have taken the biggest bite out of the dollar this year!

OK… This is not an endorsement to run out and buy Chilean pesos! You’ve got to be very careful with these Emerging Markets currencies, as they are smallish, they are illiquid in most cases, and they have wild swings. Take for instance two more “mature” Emerging Markets, Brazil and South Africa… These two do NOT fall into the illiquid category… But currencies like S. Korean won, and Chilean pesos definitely do!

The real point here was to talk about the decoupling… It’s happening just as those that saw that it could, said it would. It just took some time to get legs underneath themselves. Remember last year they called the action from July to December, “De-Leveraging”… This simply meant people were selling everything non-dollar and buying dollars… You might recall me questioning this thinking, but who am I to say this was wrong! Well, I read yesterday that this price action in Emerging Markets is being called the “Re-Leveraging”!

Speaking of an Emerging Markets Country / currency… The Russian ruble (illiquid!) was in the news yesterday… And here’s where, I just didn’t get the dollar strength yesterday… Here’s the skinny… Rumors were flying around yesterday that Russia is planning to revise the weightings in their basket of currencies they use to value the ruble… The rumor had the weighting in euros for the basket, changed from 45% now, to 55% in October, and 60% in December….

Now… If true… This would be HUGE for the euro! Now we just need to all be Sherlocks and find out what’s going on here… The Truth is Out There!

OK… Back to the majors!

The euro has recovered a bit this morning on the news from the European Commission, who, this morning said that European Confidence in the economic outlook increased to a 6-month high this month… The people surveyed repeated the thought that record-low interest rates, and the Government spending plans may be starting to work, and the economy may have bottomed… Hmmmm… I hate to be the bearer of bad news to these people, but I don’t think their economy has bottomed…

I say this because I truly believe there’s another hic-cup for not only the European economy, but the U.S. economy. I see where quite a few economists are now saying that the U.S. recession will in this year… Hmmm… Here’s what I think… I do think that we’ll see a quarter later this year with positive growth… But then I think it’s followed by a negative growth quarter, thus… A bump…

And… Yesterday, I talked about how we might be seeing the end of the link between stocks and currencies, and stocks had gained the previous day, and currencies had not… Well, yesterday stocks sold off, and so did currencies… But this time, I think it had more to do with the N. Korea news than any “link” between the two… I really do think we’re beginning to see a break… Let’s hope so, because that would mean that we’re taking baby steps toward getting back to “fundamentals”…

And these fundamentals include the fact that stocks and currencies have a low correlation to each other, and different pricing mechanisms…

U.S. Treasury yields continue to climb with the 10-year Treasury gaining 19 Basis points in yield yesterday… That pushes the annual climb in yield for this note to 148 Basis points… Hey! You can’t say I didn’t bring this to your attention before it happened!

My friend, Bill Bonner, had this to say about Treasuries yesterday in the Daily Reckoning (www.dailyreckoning.com) “The US Treasury market is in a bubble. Like all bubbles, it will pop. And as always, when bubbles pop, there are those who get hurt – and those who profit. The difference is how well you’re prepared for it.”

Oh, and one more thing… With Treasury yields rising… Mortgage rates will HAVE to follow… And that’s not going to make Messrs Obama, Bernanke, Geithner and anyone else involved in artificially keeping mortgage rates low, happy… But, that’s fine with me! I don’t really care if they are happy with this development or not! They are responsible for this rise in yields, so they can only be unhappy with themselves!

In New Zealand overnight… The 2009-2010 Budget printed, and showed remarkable restraint (for New Zealand!) The Finance Minister, Mr. English, then spoke about how near term deficits are high, he believes that they are at a “peak”… Which is Finance Minister parlance for: We’ll see our debt to GDP ratio shrink from here on out! That kind of talk is manna from heaven for kiwi investors, and the folks over at S&P liked it too, as they immediately raised the outlook for New Zealand’s debt from negative to stable…

Last week, we had S&P lower the U.K.’s debt outlook and the pound sterling took off for higher ground… Sort of backwards thinking, eh? Any way… Kiwi has responded favorably for the time being, but without the Big Dog, euro, off the porch chasing the dollar down the street, kiwi will have a difficult time adding to these gains…

Someone asked me yesterday why I hadn’t mentioned the Canadian dollar / loonie lately, given my statement that crude oil was rising yesterday… OK… The reader was right! I should have been all over the loonie like a cheap suit! The Loonie has gained 13% since March 1st, and Crude Oil has moved from $40.15 to $63.40 since March 1st…

It was a year ago, that the loonie was basking in the sun of parity with the U.S. dollar… All the talk then was that the loonie could go into uncharted waters VS the dollar… We all know that didn’t happen… And the reason? Oil fell and commodities like Gold fell… But guess what’s happening again? Oil and Gold are rising again… Hmmmm…

I saw something yesterday that hit me as strange… Forbes Magazine had a lead story titled: “Make A Buck On The Rising Euro”… The reason I found this strange, is that I’ve heard Steve Forbes talk the past few years and each time he emphasizes that the dollar is strong and will remain strong… But now his magazine had a story on how to make money buying the euro… Which means, to make money in the euro, (for dollar based investors) the dollar would have be weak! Strange, eh?

Anyway, the writer, Ryan Campbell, goes on to talk about how the euro has risen VS the dollar since March (something I told you weeks ago!), but also adds that the “charts sound the all-clear for euro bulls.” Interesting… I hadn’t heard from my charts guy lately, maybe this will wake him from his slumber!

And Swiss francs continue to defy the Swiss National Bank (SNB)… Francs have pushed to near 92-cents… Recall that the SNB issued verbal warnings pre- 90-cents that they were not happy with franc strength… Well, apparently that’s all the SNB has… Verbal warnings, because they have not stepped in front of this franc fueled bus!

And Swedish krone is seeing some selling pressure this morning, as the old story regarding the Eastern European Banking woes, was brought up again… This is old news! Wrap it up in newspaper and carry it out with the other trash!

So… As I get ready to head to the Big Finish, I see that the currencies, led by the Big Dog, euro, are getting off the porch once again to chase the dollar. One currency that’s not participating is the Japanese yen, which has taken a big spill overnight to near 97… However, that bad performance in yen hasn’t spilled over to other currencies…

Currencies today 5/28/09: A$ .7840, kiwi .6255, C$ .8955, euro 1.3895, sterling 1.5960, Swiss .9195, rand 8.0425, krone 6.4730, SEK 7.7690, forint 204.30, zloty 3.2250, koruna 19.2450, yen 96.90, sing 1.4525, HKD 7.7530, INR 47.66, China 6.8289, pesos 13.24, BRL 2.04, dollar index 80.75, Oil $63.43, Silver $14.94, and Gold… $952.10

Source: Russian Rumors

A drop in the price of oil, the war in Georgia, and a gas-export dispute with the Ukraine have put a huge dent in the Russian economy, which now teeters on the verge of recession.  The devaluations reflect the new reality of low prices and falling demand for oil and other exportable commodities.

In order to contain the damage, the central bank is accelerating the ruble’s slide. Policymakers devalued the ruble every trading day last week except for Tuesday (Jan. 13), letting it fall an average 1.7% a day versus a basket of currencies. By comparison, November and December averaged two devaluations a week, according to Bloomberg News data.

In order to cushion the ruble’s fall, Russia has spent $245 billion since August, as policymakers sold over a quarter of the country’s gold and foreign-currency reserves. That has some economists calling for a free-float or a big devaluation to avoid depleting all of the reserves. Russia’s reserves, the world’s third largest, stood at $426.5 billion on Jan. 9, according to BNP Paribas SA.

Russia is intervening in the currency markets to prevent sharp swings that move people to withdraw their savings. Prime Minister Vladimir Putin pledged last month to use the nation’s foreign-exchange reserves to prevent huge moves and to promote calm in the Russian heartland.

Investors have reacted by pulling back from the currency.

“Fear of another devaluation means nobody wants to buy rubles right now,” Lars Rasmussen, an emerging markets analyst in Copenhagen at Danske Bank A/S told Bloomberg News. “The ruble has begun to look more and more overvalued because of the fall in the oil price.”

Meanwhile, downward spiraling oil prices continue to exert pressure on the overall economy.  Russia’s main oil export, Urals crude, has declined 69% to $44.43 a barrel from record highs in July. Analysts estimate the price needs to reach $70 a barrel for the government to balance the budget this year.

The government wants desperately to avoid another run on the central bank, like the one in 1998, when investors fled the market by selling rubles and Russian assets. That crisis forced Russia to spend its foreign reserves to defend the ruble, further eroding investor confidence and undermining the currency. Eventually, the ruble fell 71% against the dollar before finally stabilizing after the government defaulted on $40 billion of debt.

Despite government efforts, there are signs that remembrances of the 1998 crisis are spurring people to sell rubles.

“Of course I have changed my savings into foreign currency. I don’t want to lose my wealth,” Alexei, a Russian banker, told Reuters outside an exchange point in snowy central Moscow.  Others were busy changing money into dollars in anticipation of increasing prices for food and medicine.

Banks and companies are also hoarding foreign currencies, Evgeny Nadorshin, senior economist at Moscow’s Trust Investment Bank, told Bloomberg.

“All the attention of the people is focused on the Forex market,” Nadorshin said. “Companies aren’t buying supplies, they’re investing their rubles in dollars instead because the play is too attractive.”

But some analysts believe the devaluations may soon be over.  As the cost of money rises, and supply tightens, policymakers may be forced to halt the ruble devaluation.  Russia’s Moscow Prime rate, the average interest rate banks charge to lend money to each other, rose to a two-month high of 12.5% yesterday, Bloomberg reported.

Mark Mobius, the well-known globetrotting investor and the executive chairman at Templeton Asset Management Ltd., said he expects Russia’s currency will begin to stabilize, meaning the central bank may slow devaluations as the ruble approaches fair value.

“It’s not as overvalued as it was,” said Mobius, who manages more than $24 billion in emerging-market assets. “I know some commentators think further devaluations can be expected, but I’m not too sure about that.”

Source: Ruble Hits 11-year Low As Russia Accelerates Devaluation

“The key to approaching 2009,” writes Dan Amoss today, kicking off our week of New Year forecasts, “is to view everything form the perspective of the Treasury and the Fed, as distasteful as that may be. Everyone knows that the real economy stinks and we have too much debt. I doubt everyone realizes just how extreme Treasury/Fed will be in using the deficit and the paper money system to stop the Great Depression 2 scenario.

“I expect the inflationary bailout initiatives to start attacking deflationary forces from the ‘flank,’ to use a military term. The banking system destabilized because its collateral — houses and mortgage backed securities — collapsed in 2008. While the authorities may not be able to reinflate old bubbles, I’m betting they can employ cheap Treasury financing to cushion the decline. This involves refinancing homeowners out of toxic mortgages into conventional mortgages. They’ll also find some way to deal with the problem of negative home equity, even if it involves highly inflationary tactics like Treasury assuming losses from principal reductions via Fannie and Freddie, and if foreigners balk at absorbing new Treasuries, the Fed will monetize them. If so, we could see a fast track to the gold and oil bubbles that I predicted last year.

“In markets, it’s far too easy and popular to be bearish on everything but Treasury bonds, so odds favor a sharp rally in early 2009 — a rally in the S&P 500, led by stocks with the most sustainable fundamentals, including energy, commodities and infrastructure. Stocks with weak fundamentals may participate, but quickly roll over as economic reality sets in. Many will go to $0 in bankruptcy.”

The Fed’s latest bailout target? GMAC, the financial arm of GM. Bernanke and company granted GMAC the mythical status of “bank holding company” late last week. Like Goldman Sachs and American Express, GMAC is set to join the group of about-to-fail financials given last minute access to the Fed’s discount window, and potentially TARP funding.

That’s great news if you’re in GM’s corner. GMAC handled roughly 35% of GM’s retail loans in 2007. Thus, a GMAC failure would be, umm, less than ideal for the doomed automaker. Shares of GM popped 13% Friday on the news.

But GMAC isn’t an official bank holding company yet. Part of the Fed’s deal stipulated that GMAC successfully conduct a complicated debt-for-equity exchange by midnight Friday. Long story short, that deadline came and went, and GMAC spokespeople won’t say if they pulled it off.

Twenty-five banks went under in 2008. We’re surprised to report the FDIC had a quiet Christmas weekend, without a single last-minute financial failure. And given their propensity for weekend takeovers, we’ll guess that there will be no more bank closures in 2008.

Granted, 25 is the most since the S&L crisis that plagued the ’80s. We set some records in 2008 too, like Washington Mutual, the biggest bank failure ever. But still, just 25 banks… doesn’t that feel a little too easy?

The FDIC thinks so — 171 institutions remain on their “problem list.” They’ve already doubled the budget for 2009, to $2.2 billion. According to American Banker, most of that money is headed to the FDIC’s “resolution and receiverships” division, which plans on hiring another 800 bean counters to help deal with rising bank failures.

We expect a healthy share of retail failures in 2009 too. The latest shred of evidence: From Dec. 1 to Christmas Eve, total retail sales (excluding autos) fell 8% year over year. That’s even worse than November’s 5.5% plunge.

We admit, these MasterCard stats are skewed. If you factor out gasoline, retail sales are down “just” 2.5% in November and 4% in all but the last week of December. But even without gasoline sales… once the final tallies come in, we suspect this Xmas retail activity will be declared the worst on record.

And if you thought wealthy shoppers and high-end retailers were immune to this holiday funk, you were wrong. Check out this interesting breakdown from today’s WSJ:

No surprise, the National Retail Federation is the latest group to beg for a government bailout. The country’s largest retail trade organization petitioned Barack Obama last week to add a series of tax-exempt shopping days to his “New New Deal” stimulus package. The NRF wants three 10-day periods of tax-free shopping in 2009, which the group estimates would save consumers up to $20 billion.

As evidenced by our coverage above, consumers failed to open their wallets when retailers offered huge, desperate holiday discounts… why would they rush into stores for a 6% tax break?

So who will thrive in this retail apocalypse? If you insist on consumer names, the people at breakingviews.com might be on the right track. Behold its “Poor Getting Poorer Index.” As the site describes it, “a basket of 22 equal-weighted stocks that includes the retailers, white-label manufacturers, repossession agencies, dollar stores, pawnshops and other public companies poised to capitalize on rising poverty.”

Over the last 12 months, this motley crew index is up 9%. Considering the S&P 500’s 40% fall over the same period… not too shabby.

Stocks muddled through last week, ending down just a bit. Low volume and more weak economic news pushed the Dow down 0.7% for the week. The S&P 500 fared worse, down 1.7%, and the tech-heavy Nasdaq kept with its volatile ways, falling 2.1%.

This morning, it’s looking about the same. Stocks are slowly drifting down, led mostly by this bit of news:

The government of Kuwait backed out of a $17 billion deal with Dow Chemical today. The Kuwaiti Cabinet said they feared the worldwide slowdown could bring “unpredictable consequences to any global firm” and that the deal was just too risky. Now that oil’s under $40 a barrel, we suspect they’ll be spending petrodollars a bit more thoughtfully.

The two groups were planning to establish the world’s largest maker of polyurethane.

The price of oil soared 8% this morning after Israel’s somewhat-surprise attack in Gaza over the weekend. While Israel and Hamas renew their battle over the holy land, oil traders are a bit worried about Middle Eastern supply chains. Oil was due for a day up anyway… this morning’s rally snapped a nine-session losing streak.

Thus, light sweet crude popped to just over $40 a barrel.

Gas prices, on the other hand, have found a new credit crisis low. The national average fell for its 10th consecutive day this morning, to $1.61. You’d have to travel back to February 2004 to find gas that cheap… amazing. Prices are down over 60% from July’s record high of $4.11.

“The U.S. Energy Dept. statistics state,” writes Byron King, “that the nation burns about 9.4 million barrels of gasoline per day. That’s about 395 million gallons (at 42 gallons in a barrel). Let’s say a gallon of gasoline is $2.75 cheaper than it was back in July, when I was paying $4.40 per gallon. Take 395 million gallons per day times $2.75 savings per gallon. That’s almost $1.1 billion PER DAY that U.S. consumers are saving at the gasoline pumps. That’s over $32 billion per month of savings, or about $200 billion over six months. “$200 billion? As the saying goes, ‘Show me the money.’ In a sense, the world oil industry has given the American people a huge tax cut. Or call it a ‘bailout bill’ for consumers, except that Congress did not borrow the money to fund it. And that $200 billion is not just money coming out of the hides of Big Oil and those betes noires like Exxon Mobil or Chevron. No, this is a $200 billion cheap-oil tax cut paid for by the sheiks of Araby, Mr. Putin of Russia, Generalissimo Chavez of Venezuela and Mr. I’m-a-Dinner-Jacket of Iran. Could not happen to a nicer bunch, eh?

“So American consumers are receiving a benefit that could be worth, say, $200 billion over six months. But there’s no addition to the national debt, and it’s being paid for by people we don’t like very much. Win-win, right? That’s the best kind of tax cut.”

Of course, cheap oil and gas have downsides too. For Byron’s full account, read your latest Outstanding Investments alert.

The violence in Gaza gave traders another reason to sell the dollar today. As we write, the dollar index is down a full point, barely clinging on to 80.

The Russian ruble remains the currency headline of late. Last month, the Russian government snipped the trading band between the ruble and a basket of other currencies… considering the crashed prices of oil and gas, the ruble deserves to be taken down a few notches.

The Russian currency has since plummeted to a four-year low versus the dollar and an all-time low compared to the euro. This morning, it’s down another 1.5%

The sum of today’s entire issue equals a nice day for gold. For all that we’ve mentioned above, the spot price is up $30 from Friday’s close, to $880 an ounce.

“I think 2009 will be a wall-to-wall year of pain and languor,” writes a reader offering his New Year forecast. “But I can’t imagine how the bottomless bailouts and desperate war against deflation don’t undo the dollar to even greater levels. Gold will come back more than it has by the fall, if not a little earlier, when the Obama “honeymoon of hope” starts to wane.

“It will take longer for oil to rebound, because that needs the economy to look like it’s warming up again. But the Peak il problem is still out there unresolved. And even though this would be the right time to invest in a disciplined way in energy alternatives (when there’s some breathing room in the energy prices), we will face that issue again, and even more bluntly than before. Buy oil now while it’s cheap.

“Likewise, I can’t help but think that as much as the “E” in P/E is going to suffer over 2009, those companies that have the cash and business advantages will rise once again. Buying now might be buying before a further drop. But prices on a lot of stocks are already good. Catching a lot of future upside would be worth, probably, even a little more of the more immediate downside. If you’re buying with your eyes open.”

The 5: Sounds about right.

If you would like to share your 2009 outlook, send it on over, here: 5minforecast@agorafinancial.com

“So your parent company’s home office,” writes our last reader, referring to last Tuesday’s issue , “is two blocks out from the red-light district… Am I the only one saying, ‘Now that explains a lot’?”

The 5: Heh. Well, it was our first headquarters here in “Charm City.” We’ve since moved to a slightly more comfortable locale. And that same red-light district is about one block from the mayor’s office, most of the city government and courts and police HQ. That should “explain a lot” about Baltimore too.

Source: 2009 Forecast, More Banks to Fail, Retail Disappoints, Recession Stock Picks, Huge Tax Cut and More!

This from Today’s Financial News:

If you think the situation is bleak here in the United States, you would wet your pants if you took an in-depth look at Russia’s economy.

Its stock market seems to be closed more than it is open. Its currency is plunging. And its government is running out of options and money to fix the situation. Russia makes America look like we are sitting atop a booming economy.

Putin’s downturn could lead to some easy profit potential. But more on that in a minute.

For nearly all of the last decade, Russia’s economy has been based on the country’s ability to sell its natural resources to Europe and countries all around the world at a steep premium. Its Urals blend crude is not the best oil on the market, but it is all over the place in Russia and buyers once lined up to get their hands on it.

But now that the line has all but vanished and Urals blend is worth less than $53 per barrel, the Russian government has seen its revenues slashed in half. The country’s 2009 budget depended on its oil selling for $95 per barrel. But as of today, the country was forced to revise its estimate to $50 for 2009 and $55 for 2010. That leaves a significant hole in the Putin’s financial plans.

Running out of rubles

To make up for the deficit, Russia is forced to tap its rainy-day fund, consisting of billions of dollars of tax revenues from the oil industry. It is a serious blow to a country that was finally started to regain some of its global superiority.

Even worse than the country’s budget problems is the severe drop in its currency. Even with key central bank interest rates at 12%, the value of the ruble continues to fall. For foreign investors measuring their portfolios in rubles, the losses are stacking up quick.

Investors cannot pull their money out of the Russian markets fast enough and have created a run on the Russia markets. It is creating a whirlpool of problems for the country, forcing it to consistently close trading on its major exchanges.

Unless Russia makes dramatic political moves to drive up the price of its natural resources, it is in serious financial trouble.

This is where your profit potential comes in.

We already know President-elect Obama is widely expected to be tested during the first few weeks of his term. The worse Russia’s economy gets, the more likely it is we will see trouble from Moscow.

Just a day into Obama’s transition Putin and Medvedev promised to move its short-range missile armory into an offensive position if America’s missile defense system in Poland is not dismantled. It is a sure sign of political pressure to come.

And now, Medvedev is calling to extend presidential terms to six years. Do you think that has anything to do with his goals of getting Putin and his offensive goals back in power?

I have been working overtime to find ways to profit from this Russian hostility and desperation. I found some surefire winners. I am putting the finishing touches on my full report, right now. I should have it online within a few days.

Source: Russia’s financial desperation will lead to trouble