Knee Jerk Reaction Is Reversed .
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In This Issue.

* Currencies & metals give back gains.

* Sentiment rules, but for how much longer?.

* Lou confuses the markets about Chinese GDP.

* S&P raises Ireland's outlook to positive.

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

Knee Jerk Reaction Is Reversed .

Good day. And a Happy Friday to one and all! A rough late afternoon and evening for yours truly, but I woke up this morning, the birds were singing, the guy on the radio said it would be a sunny day, and I thought, "what the heck, let's give it a go". So, here I am, and I feel fine, as the Beatles once sang. Leon Russell is singing his great song: A Song For You, on the IPod to get me started this morning, so I've got that going for me!

Well. The euphoria that was in the currencies and metals yesterday that was caused by Big Ben Bernanke's comments from the previous day, faded as the day went along, and by the end of the day, most of the gains were given back. The overnight markets haven't been too kind to the currencies and metals either, and so it appears that what was a twirl on Mr. Toad's Wild Ride this week, will turn out to be sailing through It's A Small World. (not only does the song drive you crazy, but in the end it's very annoying (to me any way!) ) and that pretty much describes this week's trading. Annoying.

Well, just about every brokerage house from Switzerland to Los Angeles has come out this week with their calls that the dollar is the place to be. That tapering won't be a big deal, and that the eventual rise of interest rates in the U.S. won't bring the economy to its knees. And so, here I am, once again, all by myself, don't want to be all by myself anymore. Everyone is thinking that Quantitative Easing will have worked its magic, Unemployment won't be a problem going forward, and higher interest rates will be the magic elixir to save the dollar. Well, when I say "everyone" I mean the boys and girls in the media, the academic world, and the brokerage houses.

So. I guess I had better collect my bat and ball and head home, for there's no game to be played here any longer. Next week, I'll come back as a raging dollar bull! I'll tell you all about how Quantitative Easing (QE) was manna from heaven and that we should have never, ever worried about the long term effects of QE. And if you believe that I'll be doing that, then I've got some swamp land to sell you! This dollar euphoria is nothing but another of the circuit breakers that we've seen several times in the past 11 years. I have a whole presentation that I'm working on for my main stage talk in Vancouver in two weeks that goes through all the stuff that I've been banging into your heads for years now.

While this circuit breaker works its way through, it will be tough to find things to talk about, given that every story that goes across the Bloomberg, or my email box from dealers contains stories about how lucky we are to have the dollar as our currency. It's going to be tough, but I'll find some things to talk about, for you know me, I open the hood and look inside, and don't just take the Gov't's data reports and research at face value.

OK, for any of you that think I've gone off the ledge and come back reincarnated as the second coming of Alan Greenspan, with Greenspeak and all, no worries. That was just an exercise in shaking reality out of the trees. To put me back at square 1 and start all over again. You know, in 1992 when I began writing the Pfennig each day, hand written I might add, and copied for the sales guys to have when they came in each day, I based everything on Trends. In 1992, we were in the later stages of a weak dollar trend that began in 1985 with the Plaza Accord. It was then that I did all my research as to why each trend (there had only been two completed trends at that time), that began in 1971, began and why they ended.

Fundamentals it seemed were the answer. It was far easier then to determine what currency was going to outperform the rest, based on their fundamentals. And fundamentals driving asset classes into and out of trends, held true until, it didn't.. 2008. Fundamentals were still used, but the main driver was "sentiment". What was the latest whim of the traders / markets. For a short time late last year, and early this year, fundamentals seemed to be back as the leader of the pack. But once again, they slipped behind "sentiment".

I tell you all this because the reason Trends begin and end is caused by a fundamental changing. The fundamental could be starting or ending. For the dollar in 2002, the fundamental was the soaring debt. So, this is where I come to the fork in the road, and have to decide if the weak dollar trend continues because the fundamental reason hasn't been resolved, instead it's actually gotten much worse, or. will sentiment overtake fundamentals? I only know one way to value currencies folks. And that's with fundamentals. Sure I understand sentiment, and momentum and even technicals, but when you come right down to it, the fundamental reason to own something must always win out, otherwise why own it to begin with? If it has no fundamental value?

Well. that was quite the dissertation on fundamentals, Chuck. Are you going to talk about anything else today? Why, of course I am, Shoot Rudy, I'm just getting started!

The China- U.S. meeting continued yesterday, and Chinese Finance Minister, Lou Jiwei (Lou) really caused the markets to say, "What did he just say?" Lou basically made a statement that said that China could cope with a 6.5% growth rate. The markets took that as him downgrading China's official GDP forecast, which right now stands at 7.5%... The last quarter GDP was actually 7%, so, you can see how the markets might have gotten confused here.. But Lou was simply saying that China can cope with the current slowdown.

I did a long interview over the phone with a reporter from IBT yesterday afternoon and we talked about Japan, which can get boring, and then he switched to China. Ahhh, I thought, "now I can really get to some meat" He wanted to know about China's slowdown and if the slowdown was going to affect all of Asia. I explained to him that China is attempting to have a more capitalist economy, and by doing so, they will experience growing and slowing economic cycles. In the past, China, with their Treasure Chest of reserves, would just apply some large chunks of cash in the economic sector that was slowing, and problem solved. (except their reserves were reduced) But now. China is attempting to keep their hand out of the cookie jar, and see if their fledging capitalist economy can stand on its own. Slow down, and recover on its own. So, the slowdown may take longer than what most observers of China are used to.

One of my all-time fave songs is playing. Gregg Allman from the Allman Brothers Band is singing "Melissa". Oh he won't stay. without Melissa. You can't go wrong in the morning when Melissa is playing on the IPod.

Well. One day, the rate cut campers in Australia are taking bets off the table that rates will be cut at the August meeting of the Reserve Bank of Australia (RBA), and the next day the rate cut campers are back at the rate cut table placing bets once again that rates will be cut at next month's RBA meeting. The day before it was the better than the average bear labor report from Australia. Last night, it was the comments from China's Finance Minister that brought the rate cut campers back. And with the rate cut campers back, the selling in the Aussie dollar (A$) returned.

The A$ received a one-day break from the selling, but it appears the sellers appear to be back in earnest. In fact the A$ has lost nearly 1.5-cents on the Lou comments.

The Eurozone received some good ratings news for once. After S&P had downgraded Italy's rating the other day, the ratings agency affirmed Ireland's BBB+ sovereign rating. which was OK, but the good news came from S&P's raising their outlook from stable to positive for Ireland. I look for Ireland to be out front of the other peripheral countries, and be the first one on their block to get an upgrade within a year. This would go a long way toward the healing continuing in the Eurozone. Remember, I told you some time ago that in a few years, the members of the Eurozone might look different. But I do believe Ireland will still be on the roster.

I spent a fair amount of time earlier this week on my thoughts for the Emerging Markets. So, just to whet your whistle this morning, I'll talk about Columbia. Did you know, that Columbia had cut their interest rates 7 times in the past year? WOW! That sounds like they had a real economic growth problem.. And yes they did! But now, growth has turned the corner, and with inflation ticking higher from a 55 year low, it now appears that the next move in rates will be higher. This hasn't been a good hear for the Columbian peso, but that could all be put behind it, if growth has turned the corner, and interest rates head higher. Which would make the selling in the peso seem like a thing of the past, and the current levels a bargain. Too bad the peso is not a very liquid currency, and doesn't trade freely without a non-deliverable forward attached to it. But, the idea here is that the Emerging Markets will recover.

And Gold, which added $22 to its value yesterday, is being spent by $14 this morning. not a good way to end the week.. But the week as a whole was still better than last for the shiny metal.

The U.S. data cupboard has a couple of things for us today, nothing earth shattering though. PPI (wholesale inflation) will print for June, and the first two weeks gauge of Confidence by the U. of Michigan. Next Monday we'll finally see something worth printing. Retail Sales for June. The BHI (Butler Household Index) tells me that we should expect a strong Retail Sales figure. But not too strong. kind of like that Toyota commercial where the husband says I want a big truck, and wife says "but not too big" and then he says I want a red truck, and she says "but not too red". funny.

And here's some good news for the U.S.. The June Monthly Budget Statement was the largest Budget Surplus since 2008. Greater tax revenues (higher taxes, not really from a stronger economy, maybe just a little) and weaker spending. The June Surplus was $116.5 Billion. I'm not even going to start taking these numbers apart this morning. Let's just take them for what they printed as, and don't worry be happy.

For What It's Worth. I found this on Ed Steer's letter and he got it from should you want to read the whole story. It's about how in India, the Gov't tried to curb the import of Gold because their trade deficit was getting out of control.

"India's efforts to curb gold imports are backfiring as the country already started to suffer from illegal gold transactions.

Reports said old style gold smuggling is back in the country as series of restrictions by the government makes it difficult for the importers to buy from abroad while smugglers are offering much lower prices.

Analysts said smuggling became a lucrative affair after the rise in customs duty on gold imports and people risking their necks to smuggle in gold.

Chuck again. Yes, the reports are that over $5 Billion worth of smuggled Gold will hit the streets and be sold in India this year. That's about a 40% increase over last year. I tell you all this for two reasons. The reports that Indian buyers of Gold have disappeared are false. And that physical demand remains strong.

To recap. The one-day euphoria in the currencies and metals has ended and the bias to buy dollars has returned. Everyone is shifting to a dollar bias, except Chuck.. S&P raises Ireland's outlook from stable to positive. Gold loses $14 of the $22 it gained yesterday, and Chuck talks to IBT about Japan and China.. And the U.S. Monthly Budget Statement was a whopping $116 Billion Surplus in June!

Currencies today 7/12/13 . American Style: A$ .9035, kiwi .7785, C$ .9630, euro 1.3025, sterling 1.5095, Swiss $1.0515, . European Style: rand 10.0390, krone 6.0650, SEK 6.6860, forint 224.50, zloty 3.3175, koruna 19.9565, RUB 32.73, yen 99.55, sing 1.2660, HKD 7.7570, INR 59.62, China 6.1631, pesos 12.85, BRL 2.2555, Dollar Index 83.15, Oil $104.62, 10-year 2.54%, Silver $19.81, Platinum $1,404.75, Palladium $719.80, and Gold $1,272.83. And it's Friday so here's your link to check out a REAL Fundamental. the U.S. Debt Clock. click here:

That's it for today. What a long week! . One more full week, and then I travel to Vancouver, and from Vancouver I go on my summer vacation, which is more than highly anticipated by me! Our old pitcher shut us out last night in Chicago, as the Cards lose. Our Blues are breaking up the band, which is something I thought they would have to do, given all the hype and then the disappointment. And can you believe that the NFL will be starting their training camps soon? I'm not ready for football at all! I just want baseball to make the summer feel like it lasts forever! Mike Meyer returned to the office this morning, smiling like a Cheshire Cat, now that he's the proud father of a baby girl! And our little Christine is playing 100 questions with Mike! No plans for this weekend, so it should be nice and relaxing, I hope you get to relax some too! Now let's go make this a Fantastico Friday!

Chuck Butler
EverBank World Markets

Posted 07-12-2013 11:30 AM by Chuck Butler
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