The dollar kept going and going...
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In This Issue...

* April surplus

* Dollar tops all

* Aussie falls below parity

* Will the yen remain weaker than 100

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

The dollar kept going and going...

Good day...and welcome to Monday morning. I'll be taking you through the first half of the week while speaking engagements take both Chuck and Chris out of town. It was a busy weekend so it was a little tough to get the wheels spinning for me this morning, but what at first looked to be a washout actually turned into chamber of commerce type of weather. Well, there is plenty to talk about so let's jump right in.

The dollar buying that Chuck was talking about on Friday remained in place all day long and left no stone unturned. The stock market was just about the only thing to turn in a positive return as every major currency went into the weekend underwater. The more people that I speak with, the more I hear about how they are going all in on the equity market. I certainly understand the temptation since it has been doing well and its pretty much the only thing everyone is talking about on tv, but in my opinion, this type of scenario can be telling. I usually keep an attentive head when the one way street mentality begins to boil over.

Chuck sent me some words, so let's take a look. OK...I've been talking a lot recently about how it seems we just have this axe to grind to revisit the problems of the financial meltdown...So there I was on Friday, reading stuff, and I came across this story in the WSJ, titled: Investors Rediscovering Margin Debt...and it goes like this: "driven by a combination of rising stock values and rock bottom interest rates, margin debt is increasing." It goes on to say..."Small investors are borrowing against their portfolios at a rapid clip."

So...did I ever tell you about my time, many years ago, as the head of the margin dept at Stifel Nicolaus? Oh, I remember those days like they happened just a few years ago. I remember having to call people and tell them they either need to fund their account immediately, or have the account liquidated, which would have resulted in huge losses, and a negative balance on their account. Those same calls had to be made in 2007 & 2008, folks, as stock prices crashed...And when the house of cards that is the stock market right now, collapses, it will be déjà vu all over again...And these people can't look to the Gov't to bail them out...Oh, they'll be looking, but no bailout will follow...I'm reminded of a song by Jethro Tull...the lyrics go like this: We'll go walking out. While others shout of war's disaster. Oh, we won't give in, Let's go living in the past.

Now...back to Mike!

Thank again Chuck. This is where diversification and not keeping all or most of your eggs in one basket comes into play.

Moving on to US economic data, Friday brought us only one report with the April monthly budget statement. As expected, we saw the largest surplus since April 2008 as the tax payments came rolling in. As Chuck pointed out on Friday, this isn't going to be the start of a new trend so there's no need to spend much time on this. It is, however, going to be a busy one in the data department as our plate will be full for most of the week. While the sheer number of reports are limited today, we do have one that packs a punch with the April retail sales numbers.

If you recall, the March results were disappointing as they fell 0.4% and was the biggest drop in nine months. The April figures aren't expected to show much in the way of improvement as the headline figure is forecast to fall 0.4%. McDonalds drops angus burger from menu as customers favor dollar menu was a headline from Bloomberg that really caught my attention. While there are several other reasons for the decision, I thought it played well with the idea that consumers are still strapped even though stocks are flying high and home prices continue to rise.

As we progress through the week, we'll get a plethora of April data that includes inflation reports, regional manufacturing, and leading indicators. In taking a glance over the various reports, the experts are calling for them to be a non-event as most are expected to match previous results. The housing numbers are expected to be a mixed bag as starts should show a moderation and permits to be higher. If expectations are correct, we shouldn't see too much that would rock the boat.

As I mentioned earlier, it was another rough day for the currency market on Friday as every currency we follow, including the Chinese renminbi, finished the day in negative territory. The dollar buying came to a crescendo late in the morning and ended the day in the same neighborhood as what Chuck posted in the currency roundup. Commodities got pounded as well but silver actually made a last minute run and turned in a 14 cent increase as I headed home for the weekend. At one point, silver was down $0.50 and knocking on the door of the $22 handle, but it was nice to see it buck the trend.

The Norwegian krone was the best performing major currency with a 0.25% loss on the day as the higher inflation report poured water over those calling for an imminent interest rate cut. The New Zealand dollar finished at the bottom of the barrel by losing over 1% as the central bank's intervention efforts paid off, at least for now. The rest of the currencies finished the day with between 0.50% and 1% losses, so not exactly a good way to end the week. Unless we see retail sales disappoint by a significant margin, there isn't much today that would turn the positive market sentiment about the US economy.

The Mexican peso fell nearly 1% as March industrial production decreased 4.9% and marked the biggest decline since 2009. The disappointing report fueled the fire for those in the rate cut camp, so traders were getting anxious and bailed on the day. Mexico usually isn't a destination for core investment funds, so a strong yield differential is needed in order to attract that hot money. I thought the bigger story wasn't about yield, but instead, the destination of most Mexican exports. That's right, the US buys about 80% of Mexican output so to me, this is just another indication the US economy may not be hitting on as many cylinders that some claim. I know this is old data, but its consistent with the slower March numbers in the US.

The Australian dollar did end up falling below parity for the first time in more than 10 months, but was trading just over $1.00 when I was packing by stuff to go home on Friday. The rate cut last week didn't help matters, but the central bank's reduction of both the inflation and growth outlook for the remainder of the year was the main culprit. The RBA said the outlook for non-mining business investment remains relatively weak over the next few months.

They went on to say an approaching peak in resource investment, the high level of the Aussie, and ongoing fiscal consolidation are all likely to weigh on growth over the next year or so, while at the same time, the low level of interest rates are helping to support demand. Australia still has a two speed economy as the mining regions show continued expansion while the manufacturers remain hampered by a strong currency. The central bank will also need to keep an eye on the housing market since prices have been on the rise, so any additional rate cuts will need to be studied carefully in order to avoid unintended consequences.

The Canadian dollar finished on the lower end of the Friday losses as Canadian employment, as expected, increased by 12,500. The rise was marked by the largest rise in manufacturing over the past 11 months, but a look under the hood suggests that things are still a little soft. Private companies cut about 20k jobs while govt hiring increased by 13,200, so most economists had a muted response. The Canadian finance minister was interviewed last week and when he was asked about exporters concern of the loonie, he said that most anticipated the currency around par and have based their business plans around that.

I saw another headline on Bloomberg that actually made me laugh out loud. It was titled Kuroda says BOJ easing isn't aimed at manipulating rate of yen and it basically said this policy maker thinks the yen is weakening on the back of the US recovery story and not a direct result from the Bank of Japan's actions. That's like saying pushing your gas pedal to the floor won't make your car go 100 mph. Anyway, the yen did fall past the 101 handle for the first time since April 2009 and Deutsche Bank seems to think the currency will stay on this side of 100 going forward.

In looking at a couple more currencies, the Swiss franc and South African rand finished toward the bottom of the pile. There really wasn't anything new from the Swiss, so it was a direct result of a stronger dollar. A Swiss policy maker was interviewed last weekend and said the cap remains essential and a change of course in the short term was highly unlikely. The rand was not only impacted by the fall in commodity prices, but also from their ongoing labor issues. There was yet another group of miners threatening to strike so just another example of instability. Not only that, but rumors are circulating that the central bank could soon cut rates again.

As I came in this morning, the dollar has retained its strengthening bias with both gold and silver down over 1%. In fact, gold is having its worst yearly start since 1982 as investors continue bailing on exchange traded products. At the same time, I saw a report that citizens in India, which represents the world's largest consumer, are lining up to buy gold at cheaper levels. Gold imports are expected to rise 47% in the second quarter compared to last year as lower prices entice more buyers. Other than that, we're just waiting for retail sales to come out in just a bit.

Then there was this...The Bond King himself, Bill Gross, said the bull market for bonds has probably ended as yields have reached a low and prices peaked. He's quoted as saying that you need to look at an amalgamation of Treasuries, mortgages, as well as corporate and not just Treasuries. He went on to say measures on that basis, 4/29/2013 has been the price high and yield low up to this point. I thought he summed the overall picture nicely as he said current policies come with cost, even as they magically float asset prices higher. Negative real interest rates, inflation, currency devaluation, capital controls, and outright defaults are among the costs or haircuts from global central banks' unprecedented monetary stimulus.

To recap...The dollar buying bias remained intact all day long and the equity market was just about the only thing in positive territory on Friday. The April monthly budget came in at the largest surplus in 5 years as tax receipts were making their annual flight. There will be plenty of economic data to look at this week starting with retail sales this morning. There was not a single currency in positive territory on Friday and commodities got smacked around as well. The yen traded into the 101 handle and the Australian dollar fell below parity for the first time in 10 months.

Currencies today 5/13/13. American Style: A$ $.9976, kiwi .8291, C$ .9892, euro 1.2984, sterling 1.5372, Swiss $1.0466, European Style: rand 9.1106, krone 5.8041, SEK 6.5962, forint 226.27, zloty 3.1996, koruna 19.8735, RUB 31.31, yen 101.58, sing 1.2398, HKD 7.7614, INR 54.76, China 6.2072, pesos 12.1117, BRL 2.0204, Dollar Index 83.13, Oil $95.17, 10-year 1.89%, Silver $23.68, and Gold $1,431.82

That's it for today...Hopefully you were able to enjoy the weekend and wish that mother in your life a happy Mother's Day. The weekend was filled with work and running around so there wasn't much relaxing going on but I was able to see the Cards beat the Rockies on Friday night. Unfortunately, our St. Louis Blues got knocked out of the playoffs on Friday night as well, so my playoff beard is no more. I still can't believe Memorial Day is right around the corner since it seems like yesterday we were doing the countdown to 2013. It's shaping up to be a busy week as we have some visitors to the office and a short desk. So on that note, it's time to get Monday morning started. Until tomorrow, Have a Great Day!

Mike Meyer
Assistant Vice President
EverBank World Markets

Posted 05-13-2013 11:46 AM by Chuck Butler
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