Same old story.
Daily Pfennig

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In This Issue.

* Manufacturing slides

* Annual home prices finally rise

* Greece on the front page again

* Tides turn this morning

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

Same old story.

Good day.and welcome to another wonderful Wednesday. Chris and I were joking back and forth yesterday morning that there hasn't been much of anything to talk about with respect to the currency market, so if it wasn't for the European problems, I would have struggled finding something to write about. While there has been plenty of market movement, the news stories have been extremely repetitious. It still feels like the movie Groundhog Day and it seems like everything will just continue repeating itself until someone gets it right. It makes sense to me because the same problems keep popping up and will continue to do so until they are fixed one way or the other.

Finally, I at least have a little something to talk about besides Europe so I'll lead off with the data reports that we saw yesterday morning. While these reports are secondary at best, it's at least therapeutic to change subjects once in a while. The July Markit US PMI report, which measures business conditions, fell more than expected to 51.8 from the previous figure of 52.5 but does represent the lowest figure since December 2010. While the number did remain above that all important threshold of 50, it shows manufacturing is just holding on by the skin of its teeth. In fact, this marked the second lowest figure since the official recovery in manufacturing began in late 2009.

Cut from the same cloth, we also saw the Richmond Fed Manufacturing Index show significant disappointment by posting a -17 reading compared to the upward revised June reading of -1. While economists were expecting to see no change in July with a -1 result, you'll want to take note these regional reports can be very volatile. Still, this report just further exposed the fragile economic state and that manufacturing is moving at a slower rate than anticipated. Some of the individual components of this report I thought were very telling as shipments, new orders, and the jobs index saw significant erosion.

The final installment in the data department came in the way of an increase in the house price index. We saw the first year over year price increase since 2007 as home values climbed 3.7% compared to May of last year. The monthly gain of 0.8% doubled the original forecast but there is still a long way to go before I get all lathered up. I'm definitely glad to see things are finally rising from the depths, but we still have some significant fundamental roadblocks that could keep things in a holding pattern. First and foremost, employment needs to show some type of self sustained life before I start jumping up and down.

Sure, interest rates are at historic lows and that just adds a kicker to those buying, but a large segment of the population remains handcuffed. According to RealtyTrac, initial notices of foreclosures rose 6% in the second quarter from a year ago and was the first annual gain since 2009. We also have to contend with over 11 million properties that are burdened with negative equity. While these factors both directly and indirectly impact the overall market, including prices, lets learn to walk again before we try an all out sprint.

Today will bring us the June new home sales, which the experts are calling for a slight rise. The higher prices must mean that more people are buying so this result would make sense to me. The other report due first thing this morning are the weekly mortgage apps, so record low interest rates should give this report a boost. Other than that, most market participants are taking a deep breath and waiting for the second quarter GDP report to be released on Friday. This report could end up being the defining moment as to whether additional stimulus measures show up at the doorstep.

I tried to push off the European talk as long as I could, but there was no stopping it. Most of the news headlines literally haven't changed over the past few days as we already know about the problems that exist, so aside from new developments, the markets are being driven by investor concerns that flare up almost on a random basis. For example, Greece made headlines again yesterday when some European officials voiced pessimism as to whether the country can meet their target for reducing debt. This combined with more talk over the weekend that Greece probably won't be able to meet obligations under the bailout program caused more panic. I think the world by now has made Greece a foregone conclusion so why beat a dead horse.

One of the few concrete reasons for a fall in the euro came when German manufacturing and services output contracted more than forecast. The same Markit report that we saw in the US gave us the worst German manufacturing results in over three years as it fell to 43.3 in July. Germany is the glue holding the euro zone together at this point so maybe this weaker currency will begin to help things out. The decision by Moody's to cut the outlook on the German credit rating was just another reason for the risk aversion crowd to abound in masses.

The German Finance Ministry did defend itself by saying they remain in a very sound economic and financial situation that can be evidenced with record low bond yields. They went on to say Germany will, through solid economic and financial policy, defend its safe haven status and continue to responsibly maintain its anchor role in the euro zone. I wonder if German officials ever get the feeling they work at a fire station due to the constant running around and putting out of fires.

Since Moody's cut the German outlook, Finland quietly became the top rated euro member as they maintain the Aaa rating and a stable outlook. Finland has kept its budget deficit within EU rules since 1996 and has managed to diversify its export market by only relying on the euro zone for a third of its sales. Moody's cited the government's lack of net debt as a result of its stable outlook and they wisely demanded collateral in exchange for providing bailout funds to Greece. I can't remember the last time we mentioned that country, so thought I would pass it along.

Now that I set the stage, let's see what kind of impact the resulting risk aversion had on the markets. I'll start with the initial beneficiary of scared money, which are US Treasuries. Yields fell to record lows for a second straight day as the flight to liquidity had investors lining up and coming back for more. Not that it's a productive move, the theory of return of capital instead of return on capital proves that investors feel like they have no other alternative in this otherwise uncertain world. While the perceived safety gives a warm and fuzzy, risks still exist.

Chuck took time out of his busy schedule to send me some thoughts. Did you see that Mr. Bonds.Bill Gross of PIMCO, came out and said that he doesn't like bonds? The Bond King said that? (I hear you asking) Why yes he did boys and girls! So, he's jumping on Chuck's bandwagon that says that bonds are not a safe haven, nor do they represent any form of wealth generation. (at today's yields, you are actually losing money when you factor in inflation).

And then, did you see this. According to, nearly half of Americans don't have enough savings to cover three months expenses.. Not that it's such a big deal, given that the average duration of unemployment in the U.S. is now 10 months!

Its Mike again. The currency market didn't have a strong sense of direction as most traded within a fairly tight range to begin the day. It looked as though we were going to buck the trend of a consistent selloff during the first couple hours as the euro made its way back above 1.21. Once the data reports came out late morning, things again turned for the worse and we ended the day in the mid 1.20 range. While the currency returns weren't as wide as they have been, it was still another dollar dominated day.

I think I've written this sentence for three days in a row, but the rand and peso both finished in last place. That got me thinking about where the currencies stand over the past week as both of them have been losing close to 1% on a daily basis. Sure enough, both currencies are sitting on 4% losses and are double the euro's 2% fall. The past week has pretty much focused the spotlight on the dollar and then yen, so everything else remains in the red.

I was then curious to see how the monthly picture has turned out so far. The story remains the same but the Singapore dollar has joined the yen as the only two currencies that are in positive territory. If I take it one step further, the year to date returns are a bit of a different story as the Singapore dollar is by far in first place and then yen has a 1.5% loss. There are only five currencies on the short list with positive returns so far this year, of which, the Australian dollar maintains a membership.

Here are more thoughts from Chuck. The LUCKY COUNTRY. Yes, that's what Reserve Bank of Australia (RBA) Gov. Stevens called his country the other night. Now, that's what I'm talking about! Stand up for your country. stand up for your currency! Stevens went on to say that "a serious deterioration in international economic conditions would still see Australia with scope to use macroeconomic policy." Folks. that's central bank parlance for, "hey just because everybody else's economies are circling the bowl, doesn't mean we have to join them!

I love it! A Central Banker that doesn't do the Roy Clark, Buck Owens, gloom, despair, and agony on me song! OK.this is not a solicitation for you to buy Aussie dollars (A$), it's merely Chuck giving credit where credit is due! So, you go Mr. Stevens! You go!

Mike again. Another currency that has managed to stay afloat is the Canadian dollar, even though its seen some pressure this week amid the European problems. The results of May retail sales were a mixed bag as they did post a gain after dropping in April, but managed to miss estimates. It looks as though lower spending on gas was enough to provide the offset but the economy has still managed to expand even though the global picture has been dimming almost daily. We'll get a better sense next week as we get to see the results of May's economic growth. The risk that growth slows more than expected does exist, which would probably coax the rate cut proponents out of the woodwork.

When I came in this morning, the tide has begun to turn as most of the currencies are actually sitting on gains to start the day. It's nice being able to report somewhat of a positive bias for once. It looks as though the markets have taken kindly to comments from ECB council member Nowotny when he said giving the region's rescue fund a banking license would be a good idea. In other words, this would give the European Stability Mechanism much more clout and provide access to ECB lending so optimism on containment of the European problems are flying high this morning. I think the market is just looking for an excuse to stretch their legs, but I'll take it.

Then There Was This.Questions arise about N.Y. Fed's role in Libor issue. U.S. Treasury Secretary Timothy Geithner said that in 2008, when he was president of the Federal Reserve Bank of New York, he voiced concern to regulators about issues related to calculation of the London Interbank Offered Rate. However, Geithner reportedly failed to notify top regulators that Barclays executives had acknowledged Libor manipulation to the Fed. Geithner and numerous other regulatory officials are scheduled to testify before Congress this week regarding Libor oversight.

To recap.I was finally able to talk about something other than the euro since we had a handful of economic data to report. US manufacturing continues to decline and home prices showed an annual gain for the first time since 2007. The only thing we'll see today are new home sales but the focus remains on the Friday GDP report. Greece made headlines again, what's new, as doubts rise they won't be able to meet the bailout obligations again. Germany tries to explain the Moody's outlook cut and Finland slides into the top rated euro zone spot. It was another day for the dollar and Chuck talks about Australia.

Currencies today 7/25/12. American Style: A$ $1.0284, kiwi .7876, C$ .9822, euro 1.2142, sterling 1.5507, Swiss $1.0110, . European Style: rand 8.4295, krone 6.0778, SEK 6.9577, forint 237.33, zloty 3.4585, koruna 21.0188, RUB 32.6813, yen 78.22, sing 1.2580, HKD 7.7577, INR 56.18, China 6.3885, pesos 13.6206, BRL 2.0478, Dollar Index 83.63, Oil $88.69, 10-year 1.43%, Silver $27.12, and Gold. $1,593.10. and to take a look at the U.S. Debt Clock. click here:

That's it for the week draws to a close, Chris should be able to offer more in the way of variety as the economic reports come rolling in. It's going to be Chris steering the ship tomorrow and Friday then I'll be back Monday and Tuesday. I was listening to sports radio on the way in today and they mentioned the Rams start training camp next week, so it's only a few more days. It's hard to believe the NFL season is right around the corner. I can't wait. I also made plans to make a road trip to Mizzou in early September to see Missouri's first SEC conference football game when Georgia comes to town, so I'm fired up. With that said, I'll be back on Monday, so until then.Have a Great Day!!

Mike Meyer

Assistant Vice President

EverBank World Markets



Posted 07-25-2012 11:57 AM by Chuck Butler
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