Risk Aversion Reigns Supreme!
Daily Pfennig

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In This Issue..

* Currencies under dollar pressure                     
* How strong can yen get?                  
* TARP...                         
* ECB rate questions...                                   

And Now... Today's Pfennig!

Risk Aversion Reigns Supreme!

Good day... And a Terrific Tuesday to you! I'm draggin' the line this morning, but will get through this with my usual you know what and vinegar! The euro is trading at a one month low this morning, and the high yielders are getting stepped on again after enjoying a month a risk taking in the sun. That about explains everything, so I'll go the Big Finish now... Gotcha! Let's see what else is up on this cold and blustery Terrific Tuesday...

So... It looks as though Risk Aversion is reigning supreme once again. I just don't buy into the dollar being the "safe haven" with all that's going on here. But, that's the way it is, and I can't change it. On a side bar, I used to have a customer that was convinced that I could move the markets with the Pfennig... I always thanked him for his complimentary remarks, but would hang up and have a chuckle, as IF I could change the way things are with my simple, humble little newsletter!

OK, enough of that! Yesterday, the data cupboard was empty, but gets restocked today, and it starts with a bang right out of the starters blocks this morning with the Nov. Trade Deficit. You may recall that in December, the Trade Deficit was forecast to narrow, based on the collapse in Oil prices, but instead, the Trade Deficit widened, surprising even yours truly. Well, the song remains the same, as most "experts" believe the Trade Deficit will have narrowed in Nov. due to the collapse in Oil prices. I guess, since I'm from Missouri, I'll have to be shown! But, really... I don't see how the Trade Deficit doesn't narrow, given the state of the recession in this country!

This is a double edged sword for the dollar... On one side, the dollar should gather steam on the fact that the Trade Deficit is narrowing... On the other side, the dollar will see some that want to sell it, based on the fact that if the Trade Deficit is narrowing, and exports aren't the main reason, it means that Consumers aren't buying... And when you have an economy that is driven by consumer spending... That's a problem folks... A real problem....

Now... If the Trade Deficit were to be narrowing because of exports, now then we'd have lightening in a jar! Of course if that were happen, we would be seeing a much weaker dollar... But then, look at Japanese yen... One would have to wonder if that currency can get any stronger VS the dollar! Japanese yen traded briefly yesterday with an 88-handle... It's hovering just above 89 this morning.

I've see it trade down to 85, in my years as a currency trader... Before the Asian crisis of 1998... So... It's not like these are uncharted waters for yen!

Recall last week, when I told you that the pound sterling's rise after their rate cut was, in my opinion, a short term trade? In fact, here's exactly what I said on Friday, Jan. 9th... "But in my humble opinion, I would view this rally as an opportunity to look to sell at these higher levels, because my view on the pound is not good..."  Well... That certainly looks like I nailed it, eh? As pound sterling traded Friday morning at 1.5260, and this morning it is 1.4635! OUCH!

Well... We're supposed to follow Big Ben Bernanke's words as he speaks in London this morning... He'll even have a Q&A session following his speech... The markets will be hanging on every word to get an idea of what's on Ben's mind... Me? I already know what's on his mind... He's on a mission to defeat deflation... And he'll do anything to defeat deflation, and worry about the consequences like stoking inflation problems, later...

We'll also have the Fed Vice Chairman, Kohn talking about TARP today... I'll be following this one, as I'm interested in what Kohn has to say about the over $500 Billion already spent and nothing to show for it... I saw yesterday, where the President-elect wants control of the remaining $250 Billion that was earmarked for TARP... For new readers, TARP, is: Troubled Assets Relief Program... This was supposed to be money spent on toxic bonds that banks had on their books that were keeping them from making loans, because so much capital was tied up in reserves VS these toxic bonds...

Then King Henry (U.S. Treasury Sec. Henry Paulson) changed horses in the middle of the stream, and decided that he wasn't going to buy toxic bonds, but instead, put money in banks with bank preferred stock as collateral... And all the while I kept arguing that this was a BIG mistake! Letting the Gov't get involved in banks... I warned everyone what would happen, and then this morning I saw a heading go across the screen that illustrated what I was talking about months ago... The headline said, "Gov't wants control of executive pay and dividends in exchange for TARP funds"...

And... Then finally on TARP, this is the thing that gets me the most, folks... The money was given with the wink and nod that the Banks would loan it out... The Gov't put nothing in the agreements that REQUIRED banks to make loans! DOLTS! But, it is what it is... And now the banks have taken the cash and stored it away for a rainy day! But I'll tell you this now, so you can hear me now and listen to me later... Banks HAVE to make loans... It's in their constitution!

This is where I get all buggy eyed when I hear people that should know better, say "there will be no inflation from the injections of cash into banks, because they aren't loaning it"... Well, that's quite the "short term" view on things isn't it? I told the radio listeners on the Financial Lifeline Radio Network yesterday, that eventually, banks will have to make loans... It's how they make their profits! And without profits, the shareholders will be screaming, and then the bank has got real problems! So... When the banks decide to put this cash to work, and I can't help but think that it will be in the next 3 months, the loans will fly out the door, and the cash will multiply and chase goods that are no longer out there, because Corporations have slowed production during the recession... And what do you have then? Inflation...

And then there was my friend, the Mogambo Guru's take on all this... Here's the Mogambo! "This is all, apparently, part of the new Targeted Investment Program, which is government-speak for "new giveaway program that will end up costing the nation whole multiples of actual dollars expended when measured in the sheer tonnage of misery and suffering, or its equivalent; inflation/loss of buying power that all that new money and credit will create, which is not to mention the further cancerous distortion of the economic fabric by the government being an even bigger piece of the economy, especially now that the total amount of government (local, state and federal) spending is already over half of freaking GDP to start with!"

OK, back to me... I just love the way the Mogambo writes!

Well... All that work in charting the highs and lows of Gold last week, went in the dumpster, as Gold has gone down instead of up... But, that shouldn't do anything but give people a chance to buy Gold at cheaper levels! Speaking of Gold... I didn't see the article that I interviewed for in the Wall Street Journal... I guess, it just didn't make the cut!

So... We're one day closer to the European Central Bank (ECB) meeting, which takes place on Thursday. The question in the markets is whether the ECB does 50 or 75 BPS... I'm on the fence with this, as one day I lean toward 50, and the next toward 75... On one side of the fence, a 50 BPS rate cut would allow the ECB to take advantage of the drop in inflation, but not go on a rate cut binge... On the other side of the fence, a 75 BPS rate cut would allow the ECB, in their minds I'm sure, to keep the euro where it is, weaker that is, and helping the economy at the same time. As we draw closer to Thursday, I'll probably make a decision, but now... I just can't come to one!

And then, finally before I go to the Big Finish, really, this time... Economists here in the U.S. have cut their forecasts for GDP growth in 2009. These mental giants have decided that the U.S. recession, that they kept telling us last year didn't exist, is going to dig deeper and that for the entire year, U.S. GDP will be negative -1.5%... Of course, I've gone on record as saying that I believe GDP will hit a low of -5% before it turns around. So... We've got that going for us... NOT!

Currencies today 1/13/09: A$ .6685, kiwi .5545, C$ .8175, euro 1.33, sterling 1.46, Swiss .8965, rand 10.1150, krone 7.1250, SEK 8.2170, forint 208.90, zloty 3.1150, koruna 20.1380, yen 89.15, sing 1.4870, HKD 7.7555, INR 49.10, China 6.8345, pesos 13.82, BRL 2.3120, dollar index 83.66, Oil $36.56, Silver $10.62, and Gold... $819.65

That's it for today... Well... It is down right cold outside today, and forecast to be even colder tomorrow and Thursday! UGH! I had a reader send me a note about how cold it is in their neck of the woods... Alaska! I have my 3 month scans this Friday, this gets a little old, having to go through the worrying about what the scans will show every three months... But it sure is weight off my shoulders when they are clean! I also go back to the eye doctor tomorrow... I have already warned Jen and Chris that if I get another shot / injection in my eye, I will NOT be here on Thursday! I can't even begin to explain how unpleasant that procedure is... But it is what it is, and if it saves my vision in the my left eye, then so be it! So, I'll write the Pfennig from home tomorrow, and then might not be back to work until next week, as Monday is a national holiday! But I won't be having fun, trust me! OK, enough of that... Let's get this Terrific Tuesday going!

Chuck Butler
EverBank World Markets

Posted 01-13-2009 10:35 AM by Chuck Butler
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