Greece Disappoints Again!
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In This Issue.

* Huge Currency rally Friday gets reversed!

* Latest German proposal is rejected by Greeks.

* Fed is still concerned about deflation.

* China returns by marking down renminbi!

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

Greece Disappoints Again!

Good day. And a Marvelous Monday to you! Here we are. the last couple of days of January. So the first month of 2012 is just about over, and already, we've heard the Fed push their rate forecast for near zero rates out further, and the Fed laying the groundwork for another round of QE. But. when we began the month/ year, everyone was pounding their chests, and talking about what a great year 2012 would be (economic wise). Talk about deflating the balloon in the first month of the year!

And. Hello! I bet you didn't think I would get right into that did you? On a side bar, my beautiful bride, and family tell me that they only read the first and last paragraphs of the Pfennig each day, so just for grins I thought I would mix it up a bit today! HA!

Well. on Friday, I told you that the "experts" were forecasting 3% growth for the U.S. economy in the 4th QTR of the year just passed. I told you that I did not expect this 3 % growth rate to be sustainable into 2012. Then I was sitting at my desk, feeling very satisfied having just polished off some veggie pizza and salad, when I looked up and saw a news flash on one of the TV screens. NY Fed Head, Dudley, who's always got some Aaron Neville in him, and tells it like it is, told reporters that the "4th QTR economic boost was temporary growth and will not carry over." He went on to say. "that the U.S. economy will probably slow this year while confronting risks skewed to the downside. It is unlikely that the faster growth experienced in the 4th QTR of 2011 will be matched in the first half of 2012."

So. there! The legal beagles, who cringe every time I mention a Fed Head, in fear that I'll say something I shouldn't, won't believe their eyes when they see that I commend Fed Head Dudley for telling it like it is!

Oh. and 4th QTR GDP didn't print at 3% after all! It did muster a 2.8% growth rate, which isn't shabby. but. a large portion of the increase was a 1.9% add to growth from inventory adjustment. Consumer spending grew 2% in the Quarter, funny though, the Christmas sales were negligible at best, but consumer spending grew 2%... The big hit to GDP was Government spending, which is about time! However, unless Consumer spending really takes off, the absence of Gov't spending is going to a real drag on the over economic growth.

Not that I want to see the Gov't spending to underpin economic growth. But, I find it curious that the Gov't spending began to back off, during an election year. Someone will notice that, and correct that, I'm sure!

So. when the U.S. 4th QTR GDP printed on Friday, we saw the currencies rise and bring Gold & Silver along for the ride. The euro printed above 1.32 on Friday, and the really interesting thing that caught my eye, was the fact that U.S. stocks were getting sold like funnel cakes at a state fair, while the currencies were rallying! WOW! Could it be? Could we really begin to see a return to real fundamentals, and risk asset valuations based on those fundamentals and not just the stuff we've had to live with since 2008, which is simply throwing all risk assets in a barrel? Could it be? Well. as I always tell you one swallow doesn't' make a summer. and so, one day of "the way it used to be", doesn't turn things around for good. But I'll be watching this, you can bet your sweet bippie!

Well, all that currency frothiness on Friday, was wiped out last night, and in the morning session. the Euro has led the currencies and metals lower this on the heels of yet another disappointment from Greece. Greece was supposed to have reached an agreement with the private creditors yesterday, but once again it got postponed. But that's not the biggest thing that happened this past weekend to deep six the euro.

Late Friday the Financial Times (FT) leaked a news of a German proposal to get tougher on Greece. They would do this by appointing an external 'Budget Commissioner' who would have an ultimate veto on Greek fiscal decisions. The proposal also suggests Greece should legally commit itself to servicing its debt before spending money on anything else.

Hmmm. Greek ministers fully rejected the idea. I don't think that even the Greeks are ready to give up their sovereignty, which is what this German proposal would do. Apparently the proposal was supported by Austria and Finland. Another Hmmm.

Well. anyway. we're left with picking up the mess created by Germany with this proposal. And now the euro looks like it will have a difficult time holding on to the 1.31 handle, after being over 1-cent higher when I went home on Friday!

There WAS some good news from the Eurozone this morning though. Italy sold 7.5 Billion euros of debt, with borrowing costs falling. This makes two consecutive auctions for Italy that have seen decent interest, and with borrowing costs falling. I would doubt that their borrowing costs can fall much more though, unless of course, things get better in the Eurozone.

Another European Summit begins today. and these summits hang over the euro and thus all the other currencies like the Sword of Damocles. So, as I look at the currency screens this morning. The Canadian dollar / loonie which hugged parity with the green/peachback all day on Friday, is weaker, as are the Aussie and New Zealand dollars. And Gold is down $17 this morning! UGH!

Last week I wrote to you about how maybe, just maybe the bond bears had come out of their hibernation, as bond yields in the U.S. & Germany were moving higher. But, then along came the Fed.. OK, I don't know that the Fed was the real reason for the drop in the yield of the 10-year, but the "risk on" trade was on last week, thus eliminating the need for the so-called "safe haven Treasury market". But, curiously, the yields dropped like a bad habit, moving from 2.06% to 1.85% in less than a week! So. the reason I say along came the Fed is simply that there are guys out there that track this stuff, and they say they can prove that the Fed's balance sheet increases by huge amounts any time you see this drop in yields occur. And we all know that this isn't the first time this has happened!

So. do we really care that if the Fed is indeed supporting the Treasury market? Somebody's got to do it, if we want to keep rates low, right? And economist would tell you that they are simply taking up the slack left by the private market. And if that was all there was to it, that would be fine, for they would simply sell off the "slack" when the markets turned around. But, that's not what has been going on, the Fed's balance sheet just continues to balloon, larger, and larger.

When something like that goes on and on, The Treasury Bond bubble. I'm reminded in what one of my economic mentors would always talk about. Hy Minsky, was his name, and it was his thought many years ago (this was the 80's that I would talk to him), that when a market fails or falls into crisis after an extended period of market speculation or unsustainable growth. A Minsky moment is based on the idea that periods of speculation, if they last long enough, will eventually lead to crises; the longer speculation occurs the worse the crisis will be.

So. when the Treasury Bubble finally pops. remember Hy Minsky. But more importantly steer clear of Treasuries! That is unless you enjoy receiving tiny yields, and a potentially bear market if you sell before maturity.

But, the popping of the Bubble isn't going to happen as long as the markets allow the Fed's balance sheet to expand. So. yields will remain low for an even longer period of time, which according to Minsky, will only increase the severity of the crisis.

Oh. and a recent survey by the Fed, indicates that the U.S. economy faces a risk of deflation, no inflation.. Never mind that the cost of gasoline is up 10% from a year ago. And that Americans face sticker shock every time they go to buy groceries. And companies are having to deal with soaring commodity prices (remember the Hostess cupcake people?). And Tuitions, insurance, medical costs, and baseball tickets just keep getting more expensive. But our Fed Heads are all about deflation, folks.

The Chinese return from their week long new year holiday last week. and they immediately marked the renminbi weaker VS the dollar by a very large amount! Here's something that's going to really tick U.S. lawmakers off. The renminbi which reached a high on Jan 4th of 6.2920, has steadily fallen in value VS the dollar, falling to 6.3330 today. (remember, renminbi is a European priced currency, which is opposite of what we normally think about prices) That's about 2/3 rds of a percent. And while it's not that big of a deal, the lawmakers will not like it.

Actually, I'm surprised by the move, because the dollar fell by quite a bit last week, even with the sell off overnight and this morning. So, to me, I would have thought the Chinese would play catch-up today. But not so. Oh well. like I said no biggie. really.

The Brazilian real has gotten back on the rally tracks, and without too much fanfare, and chagrin of the Brazilian officials, who have done everything, including throwing of the kitchen sink, at Brazilian real strength. But, as I said all along. Brazil needs financing from outside of the country for their infrastructure projects for the upcoming Olympics and World Cup. So, Brazilian officials are sort of like the comedian that tells people to stop applauding but at the same time motions with his hand to keep the applause coming. They want to appear to the world as though they are turning away inflows of investment, while waving them in the back door.

Then there was this. There was a new release this weekend in New Zealand, which caught my eye. Reserve Bank of New Zealand (RBNZ) Gov. Allan Bollard, announced that he will not seek another term as the Gov when his current term ends in September later this year. Bollard served 2-5yr terms as RBNZ Gov. and I have to say that I was never a fan of Mr. Bollard. He was the antithesis of what I believe a Central Bank leader should be, as he never missed a chance to deep six his own currency, kiwi. I've always believed that if a Central Bank says enough times that they need a weaker currency, eventually the markets will get the hint and oblige them!

So. we get Bollard's insistence to diss kiwi for 8 more months!

To recap. After a wild and crazy rally in the currencies and metals on Friday, most of those gains have been wiped out overnight and this morning. We actually saw the currencies rally while stocks sold off after the somewhat disappointing 4th QTR GDP printed at 2.8%. Greece disappoints once again with no agreement with private creditors, and a new European Summit begins today. China returns from their weeklong new year celebrations and immediately weakens the renminbi. And Chuck talks about a Minsky Moment.

Currencies today 1/30/12. American Style: A$ $1.0560, kiwi .8190, C$ .9955, euro 1.3120, sterling 1.57, Swiss $1.0890, . European Style: rand 7.8380, krone 5.85, SEK 6.7825, forint 225.25, zloty 3.2390, koruna 19.2425, RUB 30.41, yen 76.65, sing 1.26, HKD 7.7577, INR 49.79, China 6.33, pesos 13, BRL 1.7475, Dollar Index 79.24, Oil $99, 10-year 1.86%, Silver $33.22, and Gold. $1,722.40

That's it for today. We received sad news on Friday. Chris Gaffney's father in-law had passed away. So our thoughts are with Chris, his lovely wife, Tina, and their family.

Today is our little Christine's Birthday! Christine is in the final 3 months of her pregnancy. Christine also goes by the name Caroline, Wonder Woman, and Super Chris. She's been at my side here on the Trading Desk for over 10 years now. So. Happy Birthday Christine! I went to the St. Louis Auto Show yesterday, with friend, Duane, and I think I found the car I want, so now the "fun" NOT! Begins. I go to see the oncologist today, that's always an interesting trip. and I have to not eat anything before I go (blood work), and wouldn't you know it, I woke up this morning and my stomach is already rumbling! UGH! Oh well, it is what it is. and with that, I hope you begin the week with a Marvelous Monday!

Chuck Butler


EverBank World Markets



Posted 01-30-2012 10:46 AM by Chuck Butler