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A Pfennig For Your Thoughts

March 7, 2012

In This Issue.

* Greek Bond Swap acceptance.

* German Factory Orders drop.

* RBNZ has some explaining to do.

* Norway again.

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

Fear Factor Backs Off.

Good day. And a Wonderful Wednesday to you! Last week, while in South Florida, I went to a function that was titled "a reception" with the Cardinals. I had no idea it was going to be an outdoors function with a lot of standing in the sun. Which is great, when I have a baseball cap on to protect my balding head! But I didn't, so now I have this "glow" about me. Not exactly what I'm looking for, but. at least it was just a little more sun than needed, and not a whole lot of sun that was needed! But from now on, I'll have my baseball cap with me, no matter where I go in S. Florida. The fear factor taught me that lessons learned are like bridges burned, you only need to cross them once!

Speaking of the fear factor. it has been reduced in the Eurozone, as it appears that private investors are accepting their medicine, and taking their dose of the Greek bond swap. Soc. Gen, France's second largest bank, and UniCredit have announced that they will accept the terms of the bond swap, along with a long list of other companies that too have announced acceptance of the terms. This flood of private investors announcing that they would accept the terms, has lifted the fear factor for the euro this morning. But by all means that doesn't mean the euro is out of the woods, folks.

All it takes is for a big company to diss the bond swap and the fear factor will rise again, which won't be good for the euro. OK.. I explained the terms of the bond swap the other day to you, so I won't go through that again, but like I said then. the holders of current Greek bonds don't have much choice other than to accept the terms of the swap, for it is better to get "something" rather than "nothing". on an investment!

German factory orders disappointed this morning, falling -2.7% in January, but the euro hardly noticed!

OK. with all the talk yesterday about Gold and the manipulation, etc. I mentioned Warren Buffett. So, here's where I was going to go with that, but ran out of time and money. In the Berkshire Hathaway annual report, Warren Buffet provided us with some great quotes. "In the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time.

In God We Trust may be imprinted on our currency, but the hand that activates our Government's printing press has been all too human. High interest rates, of course, can compensate purchasers for the inflation risk they face with currency (dollar) based investments, and indeed rates in the early 1980's did that job nicely. Current rates, however, do not come close to offsetting the purchasing power risk that investor's assume. In other words, the interest rates in today's money market accounts are not enough to offset inflation. You can't see it, but due to inflation, if you leave cash in the bank, you will lose money every year. Investing in domestic money market accounts these days is like keeping your money under the mattress. It's financial suicide. You don't have to settle for that."

Chuck again. OK, Mr Sage of Omaha, you're either telling us to get dollars out of money market accounts and investment them in either stocks or currencies. but since you don't own any currencies, you must mean stocks. But, unless you go to another country's stock market, your U.S. stock market investments are still dollar denominated. And didn't he talk about the loss of purchasing power holding dollars? I find this letter to be very confusing.

Of course most currencies these days are in the "no interest rate paid" camp too. That is all the ones that aren't Commodity Currencies! But interest on a currency deposit is not the only reason you look to buy a currency. You want to always view a currency as the "stock of a country". So. you've examined stocks before, and you look for: balance sheet, leadership, ability to attract investors, yield, something to sell that others want, and other things. now do that for currencies, and you'll find that you end up with a handful of currencies. That's right, with all the gin-joints in the world, and all the currencies in the world, we only end up with a handful that meet that criteria? WOW!

Take Norway for example. Their balance sheet is impeccable. Their leadership, top-notch, their ability to attract investment is good at times, their yield is nascent at best, but they do have something to sell that other countries need. Oil. Chris gave you an update on the recent data prints in Norway last week, and I've said several times now that if we were truly trading on fundamentals, Norway would provide a nice alternative to the euro. As it did prior to 2008.

When Switzerland devalued the franc last fall, tons of franc holders swapped their francs for Norwegian krone, and both currencies have done well, after the franc's initial drop. I think that swapping to the krone was a good idea at that time, as they would represent a "true safe haven" as far as I'm concerned. However, the Norges Bank (Norway's Central Bank) blew a gasket at the size of the flow into the krone, and we saw an immediate jump in the krone's value. And with everyone and the their brother very touchy about currency strength these days, that didn't sit well with the Norges Bank, and so they began to talk rate cuts to scare investors away.

Yesterday, I typed something in error regarding the Reserve Bank of Australia (RBA). I didn't put the n't at the end of did when talking about what the RBA did with rates. I said the RBA did move rates, but that was in error, they didn't move rates. Hey! I did get the part about them keeping their easing bias correct!

The Aussie dollar (A$) really took one to the chin this week, after the RBA meeting, and then to pour salt in the A$'s wound, it appears as though the Aussie economy is slowing, which would allow the RBA to move on that easing bias. However, the data is so old, I'm not sure anyone could get a picture of the economy, reviewing 4th QTR GDP when we're close to ending the 1st QTR! Oh well. 4th QTR GDP for Australia grew .4%, which was about ½ of what the economists forecast. This put the annualized GDP for Australia at 2.3%... not bad for a country that had a drought and a cyclone the size of the whole country devastate the economy in 2011.

With China announcing a lower target for their GDP this will affect the economic growth for Australia. But here's the catch as I see it. I think that China will grow at a faster clip than they have targeted, which will surprise the Aussie economy in a good way! Therefore all the Chicken Littles are crying for no reason. on a sidebar, my dad used to say, "what are you crying about? Come here and I'll give you something to cry about!" That would shut us up with the crying and whining! So, China needs to tell the markets the same thing!

So. with the Greek bond swap going well, so far, a tourniquet has been wrapped around the risk assets this morning. Gold is up $7, which seems like a good thing, but after all the selling through manipulation, $7 seems like a drop in a bucket! I was all ready to have something worthy of a Pulitzer prize to say here, but then I saw a blurb on one of the screens here that the Colts are set to release Peyton Manning, so they don't have to pay him $28 million that's due to him.

I know, it's business. so I won't get all into that here. Just wanted to mention it.

I did notice yesterday that stocks all around the world, not just here in the U.S. have been getting hammered, so the tourniquet is welcome today for the stock jockeys. But, as I asked the other day. stocks are getting sold, currencies and metals are getting sold, and Treasuries are not getting bought, as the yield stays steady Eddie at 1.97%... Where's the money going?

Under the mattress? In coffee cans to bury in the backyard? For new riding boots? New cars? Oh, I know! Campaign contributions! That's it, that's the ticket! HA!

The Canadian dollar / loonie slipped just below parity yesterday, and remains there. The price of Oil slipped $2 yesterday, but remains well above $100, thus underpinning the petrol currencies of Canada, Norway, Brazil, Russia, Mexico and U.K.

The Reserve Bank of New Zealand (RBNZ) meets tonight (tomorrow for them) and I expect no rate movements to come from this meeting. in New Zealand they their Fed Funds Rate, the Official Cash Rate or OCR. So, the OCR is expected to remain steady, so all the focus will be on the RBNZ Gov. Bollard to explain why he isn't reversing the emergency rate cuts that were made last year, after the two earthquakes hit New Zealand. This should be interesting.

And in China. the renminbi slipped for a 3rd consecutive day. But this slipping is very small, folks, nothing to get panicked about. What we should be panicked about though, is the news that the U.S. Congress had passed a bill imposing trade tariffs on China. (Congress added Vietnam too) The president is expected to sign the bill right away. This could be more than a tempest in a teacup folks. we'll have to watch this carefully.

And in the category of "this is difficult to believe". Brazil has passed the U.K. as the world's 6th largest economy. Just 10 years ago, you would have thought that Brazil was about to circle the bowl. But I read where in the past 20 years they have amassed the largest commercial cattle herd, and lead in the production of coffee, sugarcane and tropical fruits. (See, they have things to sell that other want!)

But before you begin to call us up and back up the truck with Brazilian reals, let me remind you that the Brazilian Gov't has been doing everything they can to keep the currency from gaining in value. Most of their efforts are only temporary, but do cause wild swings in the real.

Then There Was This. My friend Dennis sends me a weekly letter that goes through a number of items and I can always find good stuff from. and yesterday's is no different! Here we go. I know the President proposes a lot of things, but this one is very interesting to me, especially given the state and municipalities weakness right now. The president proposed an elimination the tax exemption on municipal bond interest for upper-income Americans above a 28% marginal rate. Therefore a taxpayer in the 35% tax bracket would be paying a 7% tax on their muni-bond income.

Now. does that make sense to do? Not now especially. UGH! Let's hope this proposal gets thrown to the side of the road, eh?

And then this final ditty. the U.S. Gov. paid $454 Billion of interest expense on the outstanding debt / Treasuries during fiscal year 2011. That was a 10% increase over 2010. at that rate of increase, it won't be long, yeah, yeah, yeah, yeah, yeah, yeah, it won't be long before interest expense or debt servicing it's called eats away all our tax receipts.

To recap. The fear factor has been reduced in the Eurozone this morning, as it appears that private investors will opt to accept the Greek bond swap, thus clearing the way for the next tranche of bailout money to Greece. The RBNZ meets tonight and will have to explain why they aren't removing the emergency rate cuts. Strong fundamentals still point to Norway, but breaking the pull that the euro has on it, is proving to be difficult.

Currencies today 3/7/12. American Style: A$ $1.0570, kiwi .8180, C$ .9990, euro 1.3130, sterling 1.5725, Swiss $1.0890, . European Style: rand 7.6525, krone 5.6680, SEK 6.7905, forint 225, zloty 3.1710, koruna 18.92, RUB 29.74, yen 80.75, sing 1.2610, HKD 7.7635, INR 50.28, China 6.3099, pesos 12.97, BRL 1.7620, Dollar Index 79.73, Oil $105.52, 10-year 1.97%, Silver $33.09, and Gold. $1,680.25

That's it for today. The sunrise this morning is very interesting, as there's a mix of clouds, and the sun peeks above the horizon. I like watching sunrises, and sunsets. My beautiful bride tells me that shows that I'm getting old. I would argue with her about it, but, I would lose, so, I just sit back and watch! Jr. Walker and the All-Stars are playing What Does It Take on the I-Pod, what a great song! Alex and Chuck are going to be unsupervised again this weekend and into next week. Lots of Pizza, basketball, and decadence for us! Alex has his first Water Polo game of the year Friday night, which also means that the coach, son, Andrew also has his first game of the year too! Good luck to both of them! And now, Mike is here, so it's time to go. I hope you have a Wonderful Wednesday!

Chuck Butler

President

EverBank World Markets

1-800-926-4922

www.everbank.com





Posted 03-07-2012 1:00 PM by Chuck Butler