Bad GDP numbers are overshadowed by a jump in housing...
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In This Issue..

* GDP comes in lower, but is overshadowed by housing numbers...                              
* IMF predicts debt problems for advanced economies...                                   
* French consumer spending falls...                                         
* Gold is cheap below $1,100...                                                                                                  

And Now... Today's Pfennig!

Bad GDP numbers are overshadowed by a jump in housing...                                     

Good day...The currency markets were a bit more volatile yesterday, as we got some surprising data releases here in the US.  But after the dust settled, the dollar closed out the day pretty much right where it had started vs. most of the major currencies.  Gold and silver continued to slide, but the price of oil moved up a bit.  Today we will get another big round of economic data, which could cause some more volatility in the markets.

The driver of the currency markets yesterday was the economic releases here in the US.  The morning started off with the Commerce Department's final reading of GDP for the 3rd quarter of 2009.  The final figure showed an increase of just 2.2% for the third quarter, well below the consensus estimate of 2.8%.  The report illustrates just how optimistic (and some feel unreasonably so) the folks at the Commerce department are.  Their first estimate of 3rd quarter GDP was 3.5%, but after further evaluation they lowered that figure to 2.8% for their second estimate.  And after a further review of the data, they settled on the 2.2% figure, a full 1.3% lower than their original estimate.  This is a downward adjustment of close to 40%!  I'm sure there wasn't any pressure on the Commerce dept to inflate the first couple of estimates.

And even the 2.2% isn't a sustainable figure.  Much of the growth which occurred in the 3rd quarter was due to the cash for clunkers program and the housing incentives.  So government stimulus accomplished what it was supposed to do and pushed GDP up a couple of percentage points.  But what happens when the stimulus programs end?  Is the economic recovery strong enough to last without the huge government cash infusions?  And how are we going to pay for all of these stimulus programs? 

A chart in this weeks Economist magazine does a great job pointing out the legacy of the financial crisis.  The accompanying paragraph explains that the developed countries of the G20 have aggressively stimulated demand by loading up on debt.  Even with these aggressive stimulus programs, the advanced economies are forecast to experience weak GDP growth next year.  In contrast, G20's developing countries were less aggressive with their stimulus, but are still on track for strong growth.  The IMF forecasts that gross government debt among advanced economies will continue to rise until 2014, reaching 114% of GDP, compared to just 35% for developing nations.  Rich countries have put themselves in a much riskier position going forward, with lower expected growth and higher debt levels than the less advanced developing nations. 

The lower GDP number caused a sharp drop in the value of the dollar, but the sell off only lasted an hour and one half.  This is when the National Association of Realtors released their existing home sales figures.  According to the report, purchases increased 7.4%, easily exceeding the highest estimates.  This surprisingly strong number made investors forget the lower GDP and stocks and the dollar rallied.

Today we will get a look at consumer spending and New Home sales.  If it is anything lies yesterday, the first set of numbers will show consumers have slowed their purchases, which would drop the dollar's value.  But then New Home sales will come into higher, rallying the dollar back up.  We will also see U of Mich. Consumer confidence which is predicted to rise. 

French consumer spending unexpectedly fell in November as employment concerns trumped France's version of cash for clunkers.  The drop put pressure on the Euro which was already sliding vs. the US$ on sovereign credit concerns.  In an interview on Bloomberg, Goldman Sachs Chief Global Economist Jim O'Neill warned the euro's stability could be jeopardized if the budget concerns in Greece spread to larger economies such as Spain.  "If you start having serious problems credit wise with the likes of Spain, then the issue for the euro's credibility and its pricing against other currencies becomes a much bigger issue," O'Neill said.  But he went on to say that much of this is already priced into the euro, so unless we see additional downgrades, the euro should hold its value.

The Pound sterling sold off and traded within half a cent of its lowest level in tow months after the release of the BOE's meeting showed policy makers were unanimous in backing a continuation of quantitative easing.  Some members questioned the effectiveness of the QE programs in getting funds into the real economy.  The program, which is pumping money into banks through the purchase of bonds, hasn't increased the money supply as banks have simply sat on the additional liquidity.  UK's Quantitative Easing program has been copied by the Fed here in the US, where it's impact is also being questioned.  The program of monetizing the debt is risky, as it is seen as one of the most inflationary actions a central bank can undertake.  But inflation is currently being held in check; the bit question is just how long inflation will stay hidden.

With the dollar moving higher, the price of gold has been falling.  The shiny metal has given back almost all of the gains it booked during November, and continues to trade below $1,100.  With growth returning to the economies across Asia, commodity prices should rebound.  Also, the QE programs and loose credit policies will ultimately lead to inflation which will be another item supporting higher gold prices.  I have to believe in a few years time, the current prices of gold will be seen as good entry levels.

Currencies today 12/23/09: American Style: A$ .8770, kiwi .7012, C$ .9529, euro 1.4274, sterling 1.5956, Swiss .9578, European Style: rand 7.6339, krone 5.8527, SEK 7.3185, forint 191.68, zloty 2.9221, koruna 18.4913, RUB 30.248, yen 91.69, sing 1.4107, HKD 7.7543, INR 46.875, China 6.8283, pesos 12.8681, BRL 1.776, dollar index 78.074, Oil $74.91, 10-year 3.73%, Silver $16.995, and Gold... $1,118.02

That's it for today, had a great time at the ball last night; my daughter Lauren looked like a princess and my wife looked pretty good also!  We got the promised thunderstorms overnight and the rain is continuing today.  I'm told Chuck stopped in yesterday, but I missed him.  I think he came by to pick up some Christmas gifts which were shipped here to the office.  Phones have been pretty light, as most everyone seems to be concentrating on the holidays instead of their investment portfolios.  Hope everyone has a Wonderful Wednesday!!
Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837





Posted 12-23-2009 9:14 AM by Chuck Butler