Holding Off The Wolves...
Daily Pfennig

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In This Issue..

* Euro rallies on aid package announcement...
* Scandis outperform on the day...
* Debt clock / bomb begins to tick away...
* SEC to look at Moody's...

And Now... Today's Pfennig!

Holding Off The Wolves...

Good day... And a Marvelous Monday to you! I hope all you Mothers had a Super Sunday, Mother's Day! It was a beautiful day here, for the most part, albeit more chilly than usual for May. It was also a Super Sunday according to the currency markets, for the Eurozone... So... For more of this historic announcement, read on...

Well, Front and Center this morning, we're seeing some really big moves by the currencies, up and down... The euro has gapped all the way to 1.3094, and then gapped back down to just over 1.30... But still, doesn't that 1.30 look much better compared to last week, when we actually saw a 1.25 handle briefly? So... What put the tiger in the euro's tank this morning?

The European Union agreed to a ?720 Billion bailout plan in an effort to stanch a burgeoning sovereign-debt crisis that began in Greece but now threatens the stability of financial markets world-wide.

The money would be available to rescue euro-zone economies that get into financial troubles, the diplomats said. The plan would consist of ?440 Billion of loans from euro-zone governments, ?60 Billion from an EU emergency fund, and ?220 Billion from the International Monetary Fund.

Now... That's a LARGE bailout! I don't know if you noticed or not, so I'll make a point of number and who it came from... ?220 Billion from the International Monetary Fund. That's the IMF, folks... Do you know who funds the majority of the IMF? Yes... That's the U.S. And what do I always tell you, besides be yourself? That would be the simple notion that the Gov't doesn't have money, unless they take if from us... So, in the end, who helped provide the parachute for the Eurozone countries that couldn't help themselves and allowed debt to kill the Goose that laid the Golden Egg? That's right, you, me, and all the other taxpayers...

That sure was nice of the Gov't to allow that to happen and not tell us, or better yet... Ask us if that's how we want to spend our taxes! Of course, that's laughable, because they've never asked us... Did they ask us to bail out AIG, GM, Chrysler, Fannie & Freddie, among others? NO!

So... In the end... We just racked up another HUGE number to add to our National Debt...

Speaking of which, I was talking to my oldest son, Andrew, this weekend. Andrew is a high school teacher (water polo and swimming coach too), and a couple of years ago, I gave him the DVD I.O.U.S.A. He now has a section of his curriculum each year on the U.S. debt... I give him HUGE kudos for doing this... Sure, most of those teenagers probably don't have any idea what this is all about, but Andrew tells me that there are some kids that get very upset, and mad about what all this debt will do to their futures... Hey! You gotta start sometime!

OK... Back to the European Union's announcement... The EU has gone beyond what anyone thought they would do, with regards to the size of the parachute... The European Central Bank (ECB) also got into the act by announcing that they would intervene in public and private bond markets to ensure depth and liquidity in those markets which are dysfunctional, and will be determined by the Governing Council...

Hmmm... I'm torn between two lovers... On this folks... On one hand, The EU and ECB have held off the wolves, with this aid package, and brought about some calm to the markets... On the other hand, it's just not what I believe should be done... You know me, debt is debt, and although the EU was in a much better position to go into debt, it doesn't make it completely right... And I do know that this is an aid package for "states", not private corporations... There is a HUGE difference....

The move by the euro to higher ground, was emulated by the Scandis, (Norway, Sweden and Denmark) with all outperforming the euro... And the Canadian dollar / loonie really received a boost, moving almost 2-cents higher this morning... Of course, with the volatility I'm seeing, and the gapping up and down, who knows where this all settles. It could be higher VS the dollar, it could be lower...

Last Monday, I said we would have to wait-n-see what the NY boys and girls thought of the then proposed 110 Billion euro package... You may recall they didn't like it one iota, and took the euro and all other currencies (save yen, renminbi, and francs) to the woodshed for the remainder of the week... Friday, we did see some healing, as there were rumors circulating that an aid package would be announced this weekend.

So... I've just seen the euro slip back below 1.30, but like I said, we'll have to see what the NY boys and girls think of this aid package, to get a final reading on the direction... And HEY! What's not to like, given the calm the markets have come to this morning? And... Could you imagine the profit taking, after a gap up to 1.3094?

Will this package allow the euro to eventually move back to its lofty levels of 1.40 and 1.50? I don't think so... Will this package put a floor under the euro? I think so... But more importantly, and I mean to stress this point... Whether the euro gains or not VS the dollar is not the main concern, for the most part, the Commodity Currencies are where most of the action is these days... Come on... Let me take to where the action is! I can hear Paul Revere and the Raiders singing that!

Yes... You know me... I've long said that I prefer currencies from countries that 1. have surplus or are working toward a surplus, and 2. have "something" that the world wants, and 3. have a central bank that provides price stability...

Many years ago, I put together what then was considered the "Prudent Central Bank CD" that consisted of Aussie, Kiwi, euro, and sterling... Well... As time went on, sterling no longer was eligible, due to the quantitative easing the Bank of England implemented... And now the ECB is moving away from proving price stability... I've got to hope, that they don't abandon it altogether...

At least the Reserve Banks of Australia and New Zealand still have their eyes on the road and their hands upon the wheel...

The cartel... I mean the Fed Reserve, announced that they were going to establish temporary U.S. dollar liquidity swap facilities with the Bank of England, the ECB, and the Swiss National Bank... These swap facilities are used to improve liquidity, where U.S. dollar funding is necessary...

You may recall that these swap facilities were in place right after the financial meltdown that was ignited by the collapse of Lehman Bros... And if the price action then, has any indication of the price action we can expect this time... It was pro-dollar... However, it remains to be seen just how much liquidity is needed, or if these Central Banks will even use the swap facilities... Let's hope that they have no need for them at this time...

Then there was this... Last week, I went all postal on the Ratings Agencies, and wondered why they were being allowed to skip to my Lou, right through the financial meltdown... Well, the Wall Street Journal is reporting this morning that the SEC is "considering" taking action against the Moody's for misleading regulators... Hmmm... You don't think the SEC read the Pfennig and then decided to warn Moody's do you? Nah... I'm sure I was late to the party on this one... That the SEC has been all over the Rating Agencies like a cheap suit, all along!

Speaking of Moody's... The Ratings Agency, who has tip-toed around the U.S. Debt picture for some time now, issued their guidelines for debt so that everyone would have a clear idea as to what Moody's was looking at when making decisions about Ratings...

Well... Under their new transparency... It looks like 2018 is the year, that the U.S. loses its AAA rating, for under the Congressional Budget Office forecasts, that would be the year that debt service (interest paid on Treasuries) would reach 18% of Federal Revenue... You may all recall that I told you that the Big Boss, Frank Trotter, usually points out on a slide that the year would be 2017... So... Either year, it's not a good thing, folks...

But is also a scenario, with higher interest rates, that debt service could reach 22.4% of Federal Revenue by 2013!!!!!!!!!

Here's the point of this story that needs to be emphasized... Because debt levels and interest rates can't be lowered overnight, the obvious way of staying with the AAA limits would be to raise revenue... What's the Gov't's revenue? Taxes...

So... Finally, there's someone going around screaming at the walls about the debt and what it was going to do to the tax burdens our grandchildren would have to deal with in the future... Only now... It could actually begin with us!

I shake my head in disgust, folks...

Oh... Thanks to a reader for sending me that story...

And Oh 2, Gold really got smacked with the aid package announcement... Which kind of makes sense, as the "uncertainty" level was certainly knocked down a notch or two... I did say on more than one occasion on Friday, when Gold was up $21... That I wondered when the Gold price manipulators were going to strike..

To recap... The EU announced an aid package for Eurozone states that surpassed any rumored amount, and included 220 Billion euros from the IMF... This news pushed the euro and other currencies higher, and sold off dollars, yen and Gold... And, our debt level is getting out of hand folks, but don't just take my word for it, Moody's is projecting 2018 as the year the you know what hits the fan! But... It could be sooner than 2018...

Currencies today 5/10/10: American Style: A$ .9070, kiwi .7280, C$ .9790, euro 1.30, sterling 1.5025, Swiss .9120... European Style: rand 7.4720, krone 6.0675, SEK 7.4450, forint 210.20, zloty 3.0970, koruna 19.6850, RUB 29.92, yen 93.30, sing 1.3780, HKD 7.7785, INR 44.85, China 6.8266, pesos 12.52, BRL 1.8365, dollar index 83.30, Oil $78.10, 10-year 3.59%, Silver $18.50, and Gold... $1,194.36

That's it for today... Well... Like I said at the top... I hope you mothers had a great day yesterday... Our little office "get together" on Friday was nice... I think back to not that long ago, when we had maybe 10-15 people in the office and did those get togethers... Now we have over 50 people in the office... Amazing... Simply amazing! Got to be outside almost all day yesterday... Before I got sick 3 years ago, and lost my ability to work in the yard, I used to spend most Saturdays and Sundays outside working in the yard... It's strange to say, but I miss it! UGH! I was supposed to be getting on a plane this morning to Las Vegas for the Money Show... But that's not happening, as once again, discretion got the better part of valor on my part! And then next week, it was supposed to be Montreal... Thanks to Chris Gaffney who will be taking my spot at those two shows... He'll be great! And with that, I'll get this out the door... Wait!  I didn't even talk about the Jobs data last Friday... I'll do that tomorrow! I hope you have a Marvelous Monday!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837





Posted 05-10-2010 10:43 AM by Chuck Butler
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