Brazil Hikes Rates!
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In This Issue.

* A return to an old trading pattern.

* Gold, Silver get taken to the woodshed!

* Peter Orszag on our debt.

* Backwardation.

And, Now, Today's Pfennig For Your Thoughts!

Brazil Hikes Rates!

Good day... And a Happy Friday to one and all! The end of technically a "short week", but what feels like a very long week to me! That's what January, 0 degrees, and snow will do to me! We ended up getting about 9 inches of snow yesterday. I know for people in the northern states, that's chump change, but for us here in the middle of the country, that's nothing to laugh at! The roads were all clear for my drive home though, so no complaints from me! So, hopefully that leads to this becoming a Fantastico Friday!

Well. I think things in the Emerging Markets are just fine these days. Let's take a quick look at what happened in the Emerging Markets this week. First, Poland raised their interest rates, then China reported a better than forecast economic growth (GDP) for 2010, and then yesterday we saw the Brazilian Central Bank raise interest rates 50 Basis Points (BPS) (1/2%). And you can bet your sweet bippie that China will be raising their interest rates soon enough too! Going into 2011, many thought the Emerging Markets would outperform the old stuck in the mud economies of the U.S., Japan, U.K., and Eurozone. We're only 3 weeks into 2011, and right out of the starters blocks we have the Emerging Markets making headlines.

It sure is nice to talk about a sector that's doing well, rather than the same old trip through the junk yard, eh? I find the move by the Brazilian Central Bank (BCB) to be the most interesting, given the fact that just a week ago, they did a $1 Billion sized repo, selling their currency, the real, and buying dollars. Of course, imagine, there's no Central Bank, it's easy to do, the real, would be screaming this morning on the rate hike news. So, the BCB, probably knew what they were doing by selling reals, but come on! I feel like Ace, how long, has this been going on? Too long, I'm afraid.

There always has to be a party pooper though, eh? I'm talking about Turkey, who bucked the trend, and cut interest rates yesterday. What? Yes, they just had to be different, didn't they?

So. as I turned on the screens this morning, I noticed that the euro, once again, was trading above 1.35, just like the past two days. The past two days, however, have seen the euro sell off as the day goes on. We had this pattern a while back, where the overnight markets would mark the euro up, and the dollar down, and as soon as the NY boys and girls arrived at their desks, they would reverse the moves of the overnight markets.

This morning, the euro has pushed higher VS the dollar on the news that German Business Confidence as measured by the think tank, IFO, reached its strongest level in two months, beating estimates for the survey. Back in the day. The euro would be screaming higher on news like this. But, not these days, as the sovereign debt crisis of the Eurozone's periphery countries continues to hang over the euro like the Sword of Damocles. I still am holding out hope that Germany will lead this region out of the debt abyss they have fallen into, and a long term solution can be forged.

I got a kick out of seeing an interview on the Bloomberg TV station yesterday with one of my all-time fave economists, Stephen Roach. We just have the closed captioning, and not the sound, so I had to read what he was saying, which was fine because what he was saying, is BANG ON with what I've been saying for a few years now! Basically, Mr. Roach said that the Chinese renminbi is NOT what ails the U.S.. as politicians here would have you believe. He also made a point to say that, "Threatening China with trade sanctions is particularly dangerous, given that the U.S. depends increasingly on its third-largest export market to help recover from the worst recession in 7 decades."

Roach also believes that China may be ready to speed up revaluation of its currency.

Well. Gold & Silver sure got taken to the woodshed and whacked yesterday! Gold, at one point in the day was down $21, and Silver was down over $1. Those are huge moves folks. I really noticed the move down in Silver, and asked out metals traders, Jen and Kristin, what was going on. Jen, said that she had just gotten off the phone with a metals dealer, and he said it was "backwardation" . Having never heard that term before, in all my years on a trading desk, I was determined to find out what it meant, and why it was weighing heavily on the price of Silver. So, Kristin sent me this note.

In financial terminology, backwardation means a downward sloping forward curve (inverted yield curve). A backwardation starts when the difference between the forward price and the spot price is less than the cost of carry, or when there can be no delivery arbitrage because the asset is not currently available for purchase. The term is sometimes applied to forward prices as opposed to future contracts. For example, if it costs more to lease silver for 30 days than for 60 days, it might be said that the silver lease rates are "in backwardation".

There were tons of rumors of "significant producer hedging". This would cause the backwardation as banks would be scrambling to borrow silver against their hedge.

In other words, folks. someone didn't have the Silver to deliver. Hmm. I know this is all new and confusing, but, simply think of it price manipulation.

OK. let's move on. there's nothing to see here. move along.

The data cupboard here in the U.S. is empty today, which is always good on a Friday, given the lack of volume once London heads to the pubs. The Canadian data cupboard will yields November Retail Sales (seems like that's so long ago, why would anyone care what the results were?) Oh, well, it's nice have confirmation, eh?

Yesterday, in the U.S., the Weekly Initial Jobless Claims took a huge move down when 37,000 less claims were filed last week, than the week before. The total remains above 400,000 though. And the number of Continuing Claims remains quite high too. 3,861,000. (but as the claims benefits run out, this number drops. )

Existing Home Sales printed a very strong number (on the outside) increasing 12.3% in December. when you look under the hood, you see that Home Sales were actually 2.9% lower than in December 2009. and. it took home prices falling by 1% last month to spur this kind of activity. So, all-in-all, that's a mixed bag of nuts in my opinion. and nothing to think that the Housing sector is recovering.

Yesterday, I received an email that made me laugh out loud, making everyone wonder what I was drinking! Recall, me talking about the "bottom in home prices"? a reader sent me a note telling me. "The only way to reliably predict bottoms is to go the beach - lots of bottoms of all shapes & sizes." LOL!

Ok. from that to my repeating talk on "Inconvenient Debt".

A reader and someone that sends me stuff all the time, Scott, sent me this note, and he's right. after reading it, you will want to scream at the walls. OK. so let me set this up. Peter Orszag, used to be the Budget Director in Washington D.C. So. I would guess, that he "knows where the skeletons are buried", eh? So, here's Peter Orszag on our debt.

"The bottom line is that there may well be US public debt tremors this year, both during federal debate over raising the debt ceiling and with at least a limited number of crises in local and city governments. The bigger problem, though, lies beyond 2011, as the unsustainability of the federal government's fiscal trajectory becomes increasingly clear. I hope it does not ultimately require a crisis to restore fiscal sustainability at the federal level, but I fear it will."

Then there this. Reuters is reporting this morning that: quietly, congress is looking to allow states to file bankruptcy.

"No legislation has been drafted, but congressional members are cautiously looking into rewriting U.S. law to let state governments file for bankruptcy protection. If approved, states will be able to walk away from overwhelming debt, including state-issued bonds and pension funds' obligation to pay retirees."

Chuck again. Geez Louise, that's the chicken way of doing things, eh? Who would ever buy that state's bonds again? I would certainly think that there are better ways of dealing with their debt. Like cutting spending! Oh, but we can't do that, what would the "fill in the blank" do without state funding?

To recap. The euro is stronger again this morning, on a very strong IFO Business Confidence report from Germany. The recent trading pattern is buy euros overnight, and sell them during NY trading hours. So, look for that today. Brazil hiked rates 50 basis points (1/2%), and Turkey cut rates! UGH! Canadian Retail Sales for Nov. prints today. Gold & Silver got taken to the woodshed and whacked yesterday. A new technical term was used to describe what was going on in Silver. backwardation.

Currencies today 1/21/11. American Style: A$ .9890, kiwi .7570, C$ $1.0040, euro 1.3525, sterling 1.5935, Swiss $1.0375, . European Style: rand 7.0975, krone 5.8425, SEK 6.6275, forint 202.85, zloty 2.87, koruna 17.9480, RUB 30, yen 82.80, sing 1.2845, HKD 7.7880, INR 45.61, China 6.5870, pesos 12.05, BRL 1.6715, dollar index 78.58, Oil $89.92, 10-year 3.43%, Silver $27.26, and Gold. $1,344.25

That's it for today. The NFL League Championship Games are this weekend. Should be a couple of good games. If go back to a couple of weeks ago, when the playoffs started, I said that the Patriots and Falcons or Packers would be in the Super Bowl. Well, only the Packers are left standing. So Go Pack! I was really belting out the words to Johnny Nash's great song. I Can See Clearly Now, this morning. Like I always say, good thing I'm here by myself this early! More snow is expected on Sunday, so our Monday commute could be interesting. And then next Friday, the blessed day of Chris Gaffney's birthday, more snow! This is amazing, and reminding me of at least 3 decades ago, when this was the norm for a winter. Did you see the video of the woman texting in a mall, and not paying attention to where she was going, and fell into a fountain? She was fine, and got up and walked away. Now, that was funny! And on that thought, I think I'll sign off for the week. I hope you have a Fantastico Friday, and a Wonderful Weekend

Chuck Butler

President

EverBank World Markets

1-800-926-4922

1-314-647-3837





Posted 01-21-2011 10:45 AM by Chuck Butler