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In This Issue.
* Currencies remain in a tight range.
* Will ECB do 25 or 50 BPS?
* RBNZ leaves rates unchanged buts goes dovish.
* Jim Rogers on what the Fed's doing.
And, Now, Today's Pfennig For Your Thoughts!
One Eye On ECB, One Eye On Eurozone Summit.
Good day. And a Tub Thumpin' Thursday to you! Well. I have a couple of corrections to some things I said yesterday, and we'll go through them later in the letter. Winter is here! I know not calendar wise, but cold weather wise, it is here! And you know what that brings. Lots of complaining from me about cold weather! HA! But, just for the new readers since last winter, let me make one thing perfectly clear. I've gotta go where it's warm! Oh well. the good news is that pitchers and catchers report for spring training in 2 months!
Well. no "real news" from the Eurozone yesterday. The markets are still waiting to see the color of the Eurozone Summit, which begins tomorrow. Well, they have one eye on that, and one eye on the European Central Bank (ECB) meeting today. The euro remains in a very tight trading range (1.3350-1.3450), which ties all the other currencies to the porch.
As I mentioned yesterday morning, the Aussie dollar (A$) was allowed to gain on the day yesterday after posting a strong 3rd QTR GDP report. The A$ is closing in on $1.03. but keep in mind that a star burns the brightest before it burns out. There are very troubling reports out of China, that are pointing to a further moderation of their economy, which in turn weighs on the Aussie economy, and the A$.
But. having said that, there's no reason to become Chicken Little either! Because, haven't we heard over and over again for the past 2 ½ years that China's economy was going to collapse? I have to remind everyone that China is a different dog. This dog has a treasure chest of reserves, and they can flood a slowing economy with money. They can direct their stimulation to areas that are needed the most. This is what they did in 2008, and they were the first country to come out of the global recession. Long before the U.S., which I'm still convinced never really did come out of their recession/ depression.
Yes, we stopped losing 500,000 jobs a month, and the GDP turned from negative to positive, but. Think about that for a minute. A Company can only cut so many jobs before they have to just shut the doors, so the jobs losses were bound to hit a bottom. The problem is that they have not rebounded very quickly. And then I have my observation that I've shared with you on several occasions, and that is. The appearance to the general public is that "all's well" because they don't see people standing in soup lines, like in the pictures from the Great Depression. But if you pull the curtain back, you'll see the checks, the direct deposits, the credit cards, all representing unemployment payments. That's right, the "soup lines" have changed to today's method of "keeping everyone thinking all's well".
Ok. I did go off on a tangent there. Before I move along here, I want to point out that China's main problem is housing. and that's something they can fix. The other problem, is centered around exports to a slowing global economy. But here's where China has already made steps to insulate themselves from the dependency on exports, and they began to stir the drink of domestic demand. So, this will be the test to see if their domestic demand experiment can hold water.
BTW. The People's Bank of China raised the reference rate for the renminbi for the first time this week. The percentage move in the renminbi was large for Chinese moves.
I had a great talk yesterday about whether China will move to help the Eurozone. Let me set this up. Our Elite Plus group at EverBank got to listen in on a conversation moderated by Frank Trotter, with yours truly, Byron King, and Olivier Garret, all discussing things that will affect investments. So. I explained the history of the U.S. gaining the reserve status for the dollar, and brought that forward to today, to explain why while I think the Chinese will become a financier of the Eurozone, just not to the degree they have with the U.S.
OK. The ECB meeting this morning. Well, I've already told you that I believe new ECB President, Mario Draghi, will follow last month's rate cut with another one. Last month, the cut was 25 Basis Points, or 1/4%... In the past couple of days, there has been a grassroots effort by the markets to get the ECB to be more aggressive with their rate cut today.
While I didn't think Draghi would be so bold to cut rates at his first meeting, given the inflation ceiling target rate was above the ECB's tolerance level. But he did. and now I'm of the belief that he'll stick to the plan of reversing out last year's two 25 Basis Points rate hikes. But, what if he does get aggressive and decide to go for 50 Basis Points (1/2%)? Well. that would certainly tell the markets that things are going sour very quickly.
And in opposition to the pattern that has held in place since the financial meltdown of 2008, which is to reward currencies from countries that cut rates to promote growth, I think an aggressive rate cut by the ECB would push the markets to sell euros.
However, like I said, I don't think that will happen today. Instead, I believe a 25 Basis Points cut will take place, along with. An announcement from the ECB that they are going to begin to make 2-year loans to Eurozone banks. The markets have been waiting for the ECB to help out, and this could help. But in the end, the Eurozone leaders need to hit the ball out of the park at the Eurozone Summit.
The boys & girls over at Morgan Stanley believe like I do, that small rate cuts in the Eurozone will be seen by the markets as promoting growth and not hurt the currency, like a rate cut should if we were pre-financial crisis. So. little old me, and my thought process sees a Big Dog firm with a "research division" agree with me. Hmmm.
I saw a story this morning on the Bloomie, that just cracked me up, and illustrates quite well, the fickleness of investors. A year ago, the Fed and Big Ben Bernanke was persona no grata by investors after all the stimulus, and two rounds of Quantitative Easing. And the ECB, with its leader, Jean-Claude Trichet, had the admiration of the investment world for his ability to provide price stability.
Well. a year later the roles are reversed. the story title on the Bloomie goes like this: "Bernanke Favored by 71% in poll preferring Fed over ECB".
I'll bet a dollar to a Krispy Kreme that in a couple of years, when the you know what hits the fan here in the U.S., the roles will be reversed again. And. I'll also make another bet that investment guru, Jim Rogers was on the list of people favoring the Fed. I have a quote from Jim Rogers this morning regarding the Fed. Here's Jim.
"What the Federal Reserve is doing now is ruining an entire class of investors. By forcing rates down and keeping the economy on a flat line, the Fed could cause another lost generation of investments. Suffice it to say, vaporizing those who faithfully accumulated savings over the years is no way to restore confidence in our financial markets."
Enough of that! Well. The Reserve Bank of New Zealand (RBNZ) did leave rates unchanged, as I thought they would, yesterday. However, RBNZ Gov. Bollard once again made it his mission in life to dump on his currency, kiwi. Bollard delivered a very dovish statement, and dropped the reference, he made at the last meeting, regarding rates rising.
The New Zealand dollar / kiwi, took the statement in stride, but still saw some weakness, as it now appears to me that the rate hike I saw coming in the first 1/2 of next year, getting pushed back.
OK. in the errors and omissions. first of all, yesterday I gave you a link to the 5 Minute Forecast. I told you to sign up for the e-letter while you were there. Well, unbeknownst to me, you have to subscribe to one of the Agora Publications to get the "5". So, I apologize. And then there was the talk about Brazilian Finance Minister, Mantega, dropping the 6% tax on foreign investment. He didn't drop it altogether. it was dropped for certain maturities. so again I apologize.
Then there was this. OK. you may recall me telling you about the rumors coming from Switzerland that surround the idea of charging negative interest rates on franc deposits, in an attempt to push away foreign franc depositors. The idea here is that foreigners buy francs for deposit, but the buying pushes the franc higher and higher, which is a no-no for the Swiss National Bank.
Well. I had a reader respond to that talk and tell me that his wife, who is from Switzerland, but they live here in the U.S. maintains an account in a Swiss Bank. Well, she recently received a notice from the Swiss bank that said they would begin charging 30 francs a month maintenance on all overseas accounts. So, the SNB is already charging negative interest!
And then there was this too. Jon S. Corzine: (former CEO of MF Global). "I simply do not know where the money is".
I just shake my head in disgust.
To recap. The currencies remain range bound, with the markets keeping one eye on the ECB meeting today, where I expect a 25 Basis Points rate cut, and the other eye on the Eurozone Summit which begins tomorrow. I also expect the ECB to begin to help by making 2-year loans to Eurozone banks. The RBNZ left rates unchanged, but dropped their reference to raising rates, and sounded very dovish. Leave it to RBNZ Gov. Bollard to dump on kiwi.
Currencies today 12/8/11. American Style: A$ $1.0295, kiwi .7815, C$ .9915, euro 1.3385, sterling 1.5715, Swiss $1.0820, . European Style: rand 8.10, krone 5.7440, SEK 6.7335, forint 224.90, zloty 3.3415, koruna 18.8480, RUB 31.36, yen 77.35, sing 1.2875, HKD 7.7745, INR 51.75, China 6.3624, pesos 13.53, BRL 1.7955, dollar index 78.45, Oil $100.70, 10-year 2.03%, Silver $32.69, and Gold. $1,739.70
That's it for today. Our Employee Appreciation Day was nice. a great lunch was brought in, and all organized by our Danielle. I hand wrote a special note on cards for each person. I do have a great group of people here. Hotel California is playing on the I-Pod this morning. what a great song! I'm now 1-week away from my winter vacation. I wish I could say I was heading to warmer weather, but I can't. I go back to the radiation doctor tomorrow. I can't wait to tell him just how horrible that whole thing was! But it's almost over now. still waiting though to see if the lump in my gums goes away. I can talk now. still can't whistle though. and if you know me, you know I love to whistle. And. so with that. Let's get this Tub Thumpin' Thursday going!
EverBank World Markets
12-08-2011 11:21 AM