The dollar rebounds… Home prices collapse! Consumer Confidence finally rings true… And Now… Today’s Pfennig!
The currencies look like they’ll end the year on a sour note, except Japanese yen, of course. The dollar rallied back overnight after spending most of the day yesterday range bound in euros 1.41-1.42… This morning, as I turn on the screens, and hear one of my all time faves on the radio, Leon Russell, “we’re alone now and I’m singing this song to you” The euro has fallen to 1.3950…

As I explained yesterday, we could see some “book squaring” today, which, depending on which way the “squaring” was going could cause some additional wild swings. The Japanese yen, however, is set to book a performance in 2008 that is the best we’ve seen from yen, in 20 years! WOW! Shoot Rudy, that’s longer than I’ve been writing the Pfennig! Yes, 2009, will mark my 17th year writing the Pfennig… Just think it began with hand written notes, of which I still have every one, and has turned into a letter that is read by 100’s of thousands of people each day! WOW!

But let’s get back to yen… If yen is going well, and the dollar is going well against the other currencies, it tells me that Risk Aversion has slipped back into the markets on a larger scale, which makes sense to me, given the fighting in the Gaza Strip.

The “star” currency yesterday though, was the beaten down Brazilian real. We saw a 6 whole figure move in real yesterday… There was no news, so once again it was thin volumes causing wild swings!

We did see two pieces of data yesterday, in the U.S., that played well with the financial meltdown in 2008… First we saw U.S. Home prices fall 18.% in October, and 2.2% from the previous month! OUCH! The S&P/CaseShiller Home price index showed this 18% fall, which turns out to be a record drop! This, will continue for most of 2009 folks… There’s still just too much inventory out there to deal with, and now, even people with good credit are finding it difficult to get loans… That problem will lessen as we move through 2009, and eventually, this will all get back to normal, whatever that is!

The second piece of data was Consumer Confidence… The Consumer Confidence index came in much weaker than expected in December falling to 38.0 from 44.7 in November. This represented a record low reading for household confidence. The “experts” had thought that the fall in gas prices would give Consumer Confidence a boost… But that failed to become fact! This index is finally about where I believe it should be… Look, I DON’T WANT it to be this bad, I just think that finally people are looking around and have finally taken off the rose colored glasses!

OK… So, we’re heading to the end of 2008… I thought I would share with you some “Chuck Speak”… Thoughts from the Cheap Seats, as I think when I retire, I’ll call my newsletter! So… Here goes…

As we put the finishing touches on 2008, we’ve seen a nice Santa Rally in the euro and other currencies, especially the Swiss franc, will this continue or do we go back to the Trading Theme of rewarding the dollar as things get deeper, darker, and more dangerous?

Well… Here’s what I think… First of all, we could very well see a very nice “Obama bounce” in the first QTR of 2009, as he takes over. This would encompass stocks, and the dollar. But unfortunately, the “Obama bounce” will come to an end quickly, as a touch of reality comes over the markets about June… So, for the first 3 months, we have the “Obama bounce” and the “ding dong the witch is dead crowd” will be coming out of the woodwork. But, as I said, then a touch of reality comes over the markets, as the $1 Trillion stimulus plan is put through. Then we’ll probably see three months of capitulation before the trap door springs on the latest bubble… Treasuries…

More Treasury issuance will glut the market and soon, everyone will be heading to the EXIT door, panic setting in, as Treasury yields go higher and higher, and their bond values go lower, and lower. Why higher and higher? Well, two reasons… 1. there will be so much supply, that the yield will have to go higher to attract buyers of all this debt. 2. Inflation will be returning…

Yes, yesterday I gave you my theory on how the asset price deflation will end, and new buying will take place. Someone asked me a good question, “how will these people get the money to spend?” Well, you see, I’m not talking about the Mom and Pops in the investing world, I’m talking about the BIG BOYS, Institutions, Hedge Funds, Sovereign Funds… OK, so, then inflation sets in and now we’ve really got problems on our hands!

So… By June, we could very well be seeing a true and earnest return to fundamentals, and a much weaker dollar. Recall that when this current Credit Crisis caused dollar repatriation, I said that it could last through the election and on through year-end… Then I revised that, seeing the rot on the economy’s and Credit Crisis vine, to say that it could very well last one year, just like the last mini-dollar rally in 2005… So that would put us around June!

And that’s where the asset deflation probably ends too… So… I’ll trade today, and come back in May, eh? Nah… Just kidding, I’ve got to be here for the fireworks that will go off IF I happen to get lucky enough to have nailed this scenario!

You won’t get this scenario from anyone else folks… Most writers out there are talking about deflation setting in on the U.S. like it did Japan… And I know that I’ve spent a ton of time talking about the similarities between Japan, circa 1990’s, and the U.S. now… But I draw the line at deflation setting in for a decade like in Japan! We, the U.S. buyer, be it consumers or hedge funds, will be experiencing the 7-year itch to buy assets at depressed prices next spring… I just can’t see it any other way!

Currencies today 12/31/08: A$ .6875, kiwi .5760, C$ .8175, euro 1.3860, sterling 1.4590, Swiss .9375, ISK 145.50, rand 9.3850, krone 6.99, SEK 7.81, forint 190, zloty 2.9775, koruna 19.07, yen 90.50, baht 34.60, sing 1.4390, HKD 7.75, INR 48.80, China 6.8275, pesos 13.81, BRL 2.3325, dollar index 81.27, Oil $39.90, Silver $10.85, and Gold… $863.15

Source: The End of 2008!