Another tough day for stocks causes US Treasuries to rally.
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In This Issue.

* Equity markets continue to fall...

* FOMC to the rescue ???

* Rioting in the UK...

* Gold hits another high...

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

Another tough day for stocks causes US Treasuries to rally.

Good day. The equity markets continued to sell off in overnight trading, with Asian investors heading for the exits and looking for shelter. One of the safe havens which these investors have moved to in a big way is Gold which is up an astounding $60 this morning. European stock markets seemed to stabilize a bit in early trading, but riots in the UK and skittish bond markets in Spain and Italy will probably mean more volatility as the day progresses.

Talk of the US debt downgrade overshadowed events in the UK, where gangs of youth fought with police, looted storefronts, and lit many fires around London. A police shooting in the UK was apparently the spark which ignited disenchanted youth in London a few days ago, and the rioting around the UK capitol continued overnight. I was listening to the BBC on the drive to work this morning, and the host had gone 'mobile' to bring the radio show right from the middle of the riots. You could hear arguing and chanting in the back ground as the reporter interviewed some of the youth involved in the mayhem. Most of those interviewed just said they were upset with the rich people in charge of the country, and felt they were not receiving the support they needed from their government.

Amazingly, the pound sterling is one of the currencies which has held its value vs. the US$ over the past five days. I did a bit of research on the pound this morning and came across a story that indicated sterling is apparently becoming an alternative 'haven' currency. As investors flee the euro and are worried about the record levels of the Swiss franc they are turning toward the Pound. A couple of the research reports which floated across my desk suggest the pound was simply at a relatively cheap level and investors were looking for a currency which didn't have the debt problems facing Europe and the US. The UK government was aggressive in their use of quantitative easing, and investors are now confident the UK economy will pull out of the recession more quickly than the other major economies. It is more than a bit perplexing to see a country with rioting youth in the streets of the capitol being touted as a 'safe haven'!!

Chuck passed through the St. Louis area yesterday as he made his way from his vacation to the Money Show in San Francisco. Even though he was enjoying vacation last week, he couldn't help but stay informed about what was occurring in the markets. He was also perplexed with what investors are seeing as safe havens, and sent me this note to share with the Pfennig readers:

Well. I'm sitting at home getting ready to ship off to another shore (San Francisco) with the right side of my face/ jaw swollen from an infected root of a tooth. I sure hope it doesn't affect my speaking this week! There's some pain, but manageable right now. but not nearly the pain that the stock jockeys felt yesterday! WOW! That was ugly. but, as I sat here, working on my presentations, I couldn't help but think back, to how I warned everyone about this kind of stuff once Quantitative Easing was over. and the way the stock markets around the world have sold off, QE 3 can't be that far behind. I had a conversation with someone in Vancouver, who told me that there was NO WAY the Fed was going to go for QE3, unless.. Deflation shows up again. I then reminded him that it just so happens that the last print of the stupid CPI showed a weakening of consumer inflation. (see how stupid the report is?)

The thing I can't get past whatsoever though, is the flight to safety, that includes Treasuries! They were just downgraded! Attention folks buying Treasuries. They no longer have a AAA rating! Treasuries have rallied so strongly, that you would have to go out past 5 years in tenor, before the pound of flesh that a broker takes for doing a trade, didn't make your return negative! 5 years! Serenity Now!

But the Swiss franc continues to be a main beneficiary of the flight to safety, at least that one makes a little sense, much more than fleeing to Treasuries, and Japanese yen! I think the Swiss National Bank (SNB) just wasted some capital last week, when they intervened to stem the franc's appreciation. And I'm sure they'll continue to show that they have learned nothing, absolutely nothing, say it again! From their previous interventions. They didn't work, and the Central Bank lost its you know what!

But look at Gold shine. about 5 years ago, I told you about a song from one of my fave singer/songwriters (we lost Dan Fogelberg to cancer a few years ago) The song was titled. The Power of Gold. I think it needs to be repeated again, as now Gold is flying, no check that, soaring toward $1,800.

Chris again. Thanks to CHuck for that contribution to this morning's Pfennig, I sure hope his tooth ache gets better.

I snuck into the gym this morning for a quick workout, and the conversation in the locker room was all about the markets. The crowd in the gym is pretty evenly split between academics (Washington University is just blocks away), stock & insurance brokers, and regular business folks. The conversation was all about the markets and where to put money. Two of the guys are brokers from Merrill, and both were encouraging everyone to 'turn this market around' and 'take advantage of the bargains out there'. What was most interesting was that currencies and precious metals never even entered into the conversation. They spoke about stocks, treasuries, and even insurance products but not one of them mentioned any currency beside the dollar nor was gold or silver discussed. I had to get back here and get the Pfennig out the door, so I didn't wade into their discussion. But I can see I have more than a few potential customers at my local gym! I think I'll start bringing in copies of the Review and Focus and leave them in the lobby of the locker room.

The ECB continued to support the bond markets in Spain and Italy by directly purchasing sovereign bonds in the open market. The hand of the ECB was forced after EU officials went on 'holiday' without approving a bailout package for the latest focus of the global bond vigilantes. Italian and Spanish economic growth remained sluggish and domestic demand doesn't seem strong enough to convince investors these two can avoid the path of Greece and Portugal. Gross domestic product in Italy rose just .3% in the second quarter after growing .1 percent in the first three months of 2011. Spanish GDP expanded at .2% in the recent quarter after posting a .3% increase in the previous one. Industrial output fell in both countries as it did in Germany during the month of June. The debt problems of Italy and Spain are much more concerning than those of their smaller neighbors, not because their economic conditions are worse, but because of the overall size of their debt.

The Swiss franc continues to be the belle of the ball in Europe, moving to another record level vs. the US$ in early morning trading. The SNB definitely wasted money last week with their solo attempt at currency intervention. The Swiss just don't have the firepower to fight the markets, and should probably just step aside and try to figure out how to deal with what looks like a permanently higher trading level for the Swiss franc. While a quick solution to the European debt problem, and significant cuts to US spending could turn the tide on the Swiss franc, the chances of both of these events happening in the next few months are not good. The Swiss will continue to rally as the 'safe haven' currency of choice for international investors.

The FOMC will be meeting today, and while rates will certainly stay where they are, the markets are looking to Ben Bernanke for some clues about what the Fed is going to do to help our economy. As we have been telling our readers for some time now, the Fed will probably bring back another round of quantitative easing to try and stabilize the equity markets and keep the US economy from slipping further into the second trough of a double dip. With rates near zero, and borrowing somewhat constrained by the recent debt ceiling debate, the Fed's most logical tool is their soapbox. I would expect Chairman Bernanke to announce the Fed is prepared to keep rates near zero for an extended period, and to let everyone know he and his colleagues will continue to look for new ways to stimulate the US economy. While the discussion at the beginning of the year centered on an exit strategy for the stimulus which was pumped into the global economy, the recent slowdown will force the Fed into keeping all the stimulus money sloshing around in the economy, and there are many who want to see them inject even more liquidity into the markets.

While the global economy has certainly slowed, Asia and the emerging markets still have fairly impressive growth rates. While Europe and the US have to concentrate on debt problems, inflation pressures in the rest of the world continue to ratchet up. The easing in the price of oil will help, but food prices, industrial metals, and costs of other major commodity groups continue to march higher. Inflation may take a short pause, but it hasn't been whipped, and the massive amounts of liquidity which has been injected into the markets will eventually cause a spike in overall inflation.

I had a reader ask me to write something about the Canadian dollar, as I haven't mentioned the loonie in a couple of days. Canada's dollar dropped again yesterday, completing 7 straight days of decline. The loonie slid to a four month low vs. the US$ mainly due to a drop in the price of crude oil. Oil is Canada's biggest export, and with the price of oil falling below $80 for the first time since October of last year the Canadian dollar is down. Canada's largest trading partner is the US, so the downgrade of US debt and the questions regarding the US economic recovery have also weighed on the loonie. There just doesn't seem to be much good news out there for the Canadian dollar right now, so I would expect to see continued selling pressure in the near term. But fundamentally, Canada is in a much better place than the US and Europe, so once the markets calm, the loonie could start to move back up. Parity with the US$ seems to be a natural level for the loonie, so I expect we will see the currency track in a fairly narrow band.

Another currency which I haven't written about much is the Russian ruble which is also closely linked to the price of oil. The ruble fell to the weakest level against the dollar in six months as oil extended its decline. With most of the oil based currencies selling off, the Norwegian krone has bucked the trend. Fundamentals in Norway make it one of the strongest economies in the world, and a natural safe haven for those wanting to diversify their European currency exposure. Norway's economy is dependent on oil, but strong economic fundamentals have kept the krone from slipping like the rest of the oil based currencies.

I have mentioned Gold a couple of times today, but the price move overnight is certainly worth another mention. Gold was up over $60 at one time this morning, hitting a high of $1,780 per ounce. This is a massive move, and all indications are that we are going to hit $2,000 sooner rather than later. Asian investors have been a major factor in the quick rise, as they look to diversify their portfolios. There is a cultural factor at work here. As I mentioned earlier, none of the individuals in the locker room of my local gym even mentioned precious metals as an investment alternative. But the precious metals are much more widely accepted as an investment choice through the Asian and Indian regions. With volatility in the equity markets, I would think we will continue to see lots of buying in the precious metal markets.

Comments in yesterday's Pfennig certainly generated a flood of emails, and I appreciate every one of them! I forwarded a few of them to my wife (all of them nice) and they brought a smile to her face, but she still was embarrassed and a bit upset I shared our Sunday morning conversation with the world. One thing I do want to clarify: both my wife and I are big supporters of the men and women of our military. I had a few emails telling me I should be happy I have my freedoms here in the US and believe me I do appreciate what our service men, both past and present, have done for this country. What my wife was questioning yesterday is why so much of our money is being spent overseas while we have so many problems right here at home.

To recap. Equity markets across the globe got hit as investors rushed into the 'safe haven' of US Treasuries, the Swiss Franc, and Gold (I agree with 2 of these 3!). Riots in the UK were all but ignored by investors as they took the pound sterling higher. The ECB had to step in to the bond markets in order to support Spanish and Italian debt, and worries continue to push investors into the Swiss franc. The FOMC will be meeting today and are expected to announce another round of quantitative easing. I wrote a bit about the Canadian dollar which looks as if it has settled into a fairly narrow band, but is at risk with falling oil prices. And finally, gold hit another record, and doesn't look to be slowing down.

Currencies today 8/09/11 American Style: A$ $1.0177, kiwi .8172, C$ $1.0048, euro 1.4253, sterling 1.6372, Swiss $1.3489. European Style: rand 7.3624, krone 5.4943, SEK 6.4962, forint 194.50, zloty 2.8836, koruna 16.9455, RUB 30.10, yen 77.08, sing 1.2146, HKD 7.8085, INR 45.2137, China 6.4309, pesos 12.609, BRL 1.6263, dollar index 74.396, Oil $79.13, 10-year 2.37%, Silver $38.405, and Gold $1,770.50

That's it for today. We had one of the busiest trading days of recent memory yesterday as investors are rushing into the currency and metals markets. I was surprised to look out and see a fully staffed trading desk over an hour after the phones were turned off. The tropical storm in the Gulf has broke the heat wave here in the Midwest, and temperatures are supposed to stay in the 80's today. The cooler weather is certainly welcomed by my son who continues with two a day football practices. I will close today's Pfennig with a Happy Birthday wish to Kristin Kuchem. I worked with Kristin for a number of years (all the way back to the Mark Twain Bank days), and she is truly of the nicest people I know. Hope everyone has a Terrific Tuesday, and a Wonderful Week!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 08-09-2011 10:41 AM by Chuck Butler
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