Becoming Comfortably Numb...
Daily Pfennig

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In This Issue.

* Dollar rallies as risk is turned off...

* Big Ben confuses the markets...

* China and the renminbi...

* Retail Sales surprise...

And Now... Today's Pfennig!

Becoming Comfortably Numb...

Good day... And a Marvelous Monday to you! Another Fab weekend, weather wise here in the Midwest, led to a wonderful weekend. My beloved Missouri Tigers are ranked #11 in the new BCS poll, and "get" to play the #1 team Oklahoma on Saturday! WOW! More on all that in the Big Finish. First, we've got to figure out what's going on with the currencies and precious metals, eh?

Well... The currency & precious metals strength we saw Friday morning, briefly were added to, but by mid morning, recent gains had been given back. And the overnight markets led to more dollar strength.

First, on Friday, we saw these two asset classes jump higher on news that Fed Chairman, Big Ben Bernanke, told an audience that "There would appear -- all else being equal -- to be a case for further action." That's Central Bank parlance for we're going to implement the next round of QE...

But then some news came out about Bank stocks taking a 2nd day of hits, on the fears that they will sustain huge losses in the foreclosure mess. This triggered one of those "flights to safety", that we're all very accustomed to, since 2008. And dollars got bought by the bushel full. It was a day for the dollar, for sure!

I like this though... Think about the negativity toward the dollar that I told you about last week... For the time being it has been pushed to the side of the road, awaiting confirmation of the pending QE. So, for now, while we're waiting for Nov 4th, the next FOMC meeting, the QE is put on hold. In fact, I read last night that, once again, there are analysts that believe the FOMC is not going to implement QE. But, for today at least, the currencies & metals that people wanted to buy last week, but shied away because of the lofty, all-time record levels we saw, can... Now buy at cheaper levels...

I even read one guy say something like, "The FOMC's QE will only be $1 Trillion"... What? That's 1 Trillion newly printed dollars floating through the markets, and that won't dilute the value of the dollar? I find talk like the "only $1 Trillion" to be in line with becoming Comfortably Numb! (the Pink Floyd version, not the Scissor Sisters version!, just be clear!)

OK... If Big Ben Bernanke weren't so wishy-washy about giving the markets clear signals regarding QE, then we wouldn't have this back and forth going on... But we do, it gives volatility to the currencies and precious metals, and that should make a lot of traders happy... For me, I just pull the car over to the side of the road, and let all this volatility pass me by... Long time investors know this routine all so well, eh?

Hey! Even China didn't allow a large appreciation to the renminbi overnight. Last week I had plenty to say about China and their allowing the renminbi to appreciate at large clips, but then saw some data, and was even more impressed...

The renminbi has been set at a record high (overnight) against the dollar for 15 of the previous 19 days. The renminbi is up 2.6% VS the dollar, from a year earlier, and 24.45% since the peg to the dollar was dropped in July of 2005.

So... Let's go back to 2005... (man a quick look at the Billboard 100 of 2005, leaves me wondering where I was that year! Mario? Kelly Clarkson? No wonder I stick with the classic rock radio stations!) Oh! We were talking about 2005 and the Chinese deciding to drop the peg to the dollar... Before the Chinese dropped the peg, the IMF had made claims that the renminbi was probably 25% to 40% undervalued VS the dollar. Hmmm... Well, the renminbi is now in that 25% to 40% range, and yet, lawmakers in the U.S. aren't happy...

Interesting, don't you think?

Well, the Chinese taking a pause for the cause with the renminbi overnight, didn't stop the Japanese yen from moving even higher VS the dollar. When I came in this morning, and turned on the currency screens, it appeared to me, as if the yen was ready to trade below the 81-handle... WOW! Yen has lost a little ground since I came in, but still remains well bid.

The euro seems to be rallying as I type my fat fingers to the bone this morning. That's one reason the yen has backed off... I've gone through this before, but for those new to class, whenever there's a flight to safety, the two countries with the largest Gov't debts ever, are sought, as investment refuges... Make sense? No! But that's the mental giants we have to work with, folks... So, whenever, there's a concern about risk assets, yen and dollars get bought... When risk is on, those two get sold...

Gold and Silver sold off on Friday and overnight too... Risk assets... Not much else to say there... Gold and Silver's main push in recent days has been derived from dollar weakness, so it makes sense that these two precious metals sell off, when the dollar rallies back... But, just for the record, we've seen these short-term dollar rallies by the bushel full for years now, and like I said above, it simply gives buyers an opportunity to buy at cheaper levels!

Well... The data cupboard was quite busy on Friday, and will continue through this morning. On Friday, we saw the stupid CPI tell us there's no inflation... And we saw Retail Sales tick higher, although lower VS the previous month. Retail Sales apparently saw a huge boost from auto sales... Who knew? Auto sales? 23% of Americans are unemployed, and auto sales are strong? Interesting, don't you think?

Anyway... Today, the Data Cupboard will yield two of my fave data prints, Industrial Production, and Capacity Utilization. (Cap Util. is one of the few data prints that is forward looking)... There's been nothing to look at here for months, so just move along... And the TIC flows... Remember these?

Remember when the markets waited each month for the TIC flows (new security purchases by foreigners)? The reason? Well... Foreign purchases of securities (mainly treasuries) are what finance the deficit... It has long been the mantra of what the great Richard Russell, calls "dollar bugs" that the deficits don't matter as long as foreigners continue to buy our debt... So, this set of reports each month would give us a report card on the financing of the debt...

The questions on the Treasury purchases circles around who's doing the buying?

Hmmm...

OK... Enough with the data... That stuff begins to get boring, eh?

The Reserve Bank of Australia (RBA) will print their latest meeting minutes this week, and the markets will be looking for clues as to the reason the RBA left rates unchanged at that meeting, when most of the world was in agreement that rates would be hiked...

In New Zealand overnight, they saw the latest print of 3rd QTR CPI (consumer inflation), and here, inflation rose by 1.5% in the 3rd QTR. I don't believe the Reserve Bank of New Zealand (RBNZ) will think that a 1.5% rise in the 3rd QTR is acceptable. The RBNZ will add this to their list of reasons for their next rate hike...

The New Zealand dollar / kiwi, should have rallied on this data, given the rate structure in the New Zealand, but the "risk off" status overnight and this morning, is keeping a governor on the currency.... For now that is!

Well... I read, this weekend, that Brazil's Central Banker, Mantega, is ready to take on the markets regarding real strength... Hmmm... He believes he can defeat the markets' will to take the real stronger... I just shake my head in disbelief, for when will they ever learn? What his statements and actions do though is to weaken the real for short-terms, which means if you are wanting to sell reals when Mantega is weakening the real, you might have to hold on to your real a bit longer... But think of it like this, reals have a 6.14% APY, which just happens to be about 6% higher than you can get in the U.S.! (except at EverBank!) So, why not hold it longer and wait out Mr. Mantega, the mad central banker?)

So... One more time with the QE and what the markets are expecting at this point. As I told you above, the thought is $1 Trillion... And like I told you last week, we may see a case of buy the rumor sell the fact, with all the dollar negativity building up last week because of the thought of QE... When the QE actually takes place, if it's not larger in size than $1 Trillion, we could very well see a sell off of the currencies and precious metals, with profit taking squeezing these asset classes.

Then there was this... Long timer readers will recall how I've said for years now, many years that is, that the U.S. was following Japan, and even used the 80's song by the Vapors, about turning Japanese... Well... I saw this story, and it played well with those thoughts... Economists increasingly are pointing to Japan's generation of slow growth and falling prices as a sign of what is to come for the U.S. and several other developed nations. A huge budget deficit and loose monetary policy have been powerless to save Japan's economy, they said. This concern is being raised even as Federal Reserve Chairman Ben Bernanke gets ready for another round of stimulus to fuel economic expansion in the U.S.

Chuck again... I found it very interesting that the NY Times, which I don't read, but saw that they had this headline, would write about this Japan, U.S. thing...

To recap... The currencies and precious metals get taken to the woodshed on Friday and overnight in Asia, with some recovery going on, in Europe, as I write. The thoughts about the FOMC doing a head fake with the QE have crept back into the markets... And in a case of becoming Comfortably Numb, the markets are OK with $1 Trillion of QE? Sounds a bit far fetched to me, but appears to be the reality...

Currencies today 10/18/10: American Style: A$.9865, kiwi .7530, C$ .98, euro 1.3905, sterling 1.5885, Swiss $1.0435, ... European Style: rand 6.8675, krone 5.8575, SEK 6.6760, forint 199, zloty 2.82, koruna 17.6530, RUB 30.48, yen 81.25, sing 1.3025, HKD 7.7580, INR 44.37, China 6.6441, pesos 12.48, BRL 1.6740, dollar index 77.30, Oil $81.15, 10-year 2.54%, Silver $23.98, and Gold... $1,359.60

That's it for today... Our Rams won their 3rd straight home game for the first time since like 2004 yesterday! WOW! And an old Missouri Tiger, scored for the Rams! And those Missouri Tigers went to Texas A&M and dominated! WOW! I have really been remiss in not acknowledging my oldest son Andrew's new job, as the Head Water Polo Coach, at his alma mater... Way to go Andrew! And for all you Facebook users, the WSJ is reporting that popular applications are transmitting your information and your friends' information to advertisers... Hey, it was in the Wall Street Journal! So... My beloved Missouri Tigers are #11 in the country... Now comes a HUGE game against #1 OU... I sure hope my Tigers can play with the mighty OU... And on that note, I'll get this out the door... I hope you have a Marvelous Monday!

Chuck Butler

President

EverBank World Markets

1-800-926-4922

1-314-647-3837





Posted 10-18-2010 10:05 AM by Chuck Butler
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