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In This Issue.
* New Home Sales climb to a 5 year high...
* Kiwi moves higher as rates are expected to rise...
* Precious metals continue to drift lower...
* A recap of my lunch with Jim Rogers...
And, Now, Today's Pfennig For Your Thoughts!
New Home sales climb to a 5 year high...
Good day. And happy Thursday to everyone. It is Thursday right? I have been traveling a lot this month, and flew in early this morning after my plane was delayed so things are still a bit fuzzy as to exactly what day it is. My trip out west to Denver was a successful one, I was there to speak to a Financial Analyst seminar but the highlight was lunch with one of my all time favorite investors, Jim Rogers. More on that in a bit, but first let me recap what went on in the markets yesterday.
As Mike mentioned (by the way, great job on the Pfennig Mike!), the market makers have been watching every piece of US data to try and predict just when the Fed will begin their 'taper'. Wednesday's contribution to the taper watch was June's New Home sales which rose to the highest level in 5 years. Purchases climbed 8.3% in June to an annualized pace of 497,000 homes which was slightly higher than the Bloomberg survey which predicted a gain to 484,000. This was a bit surprising as June sales were the first month during which sales could have been impacted by the jump in mortgage rates.
The spike may have actually helped sales in June, as buyers worrying that rates would continue to move up went ahead and closed on properties. But the June numbers probably don't reflect the full impact of higher mortgage rates, as many of the new home sales were likely under contract prior to the jump in rates resulting from Bernanke's tapering comments.
And the housing report also showed new home prices increased 7.4% in June from a year ago, probably due to the tight supply. There is currently 3.9 months of housing supply, down from 4.2 months in May. This lack of supply, along with a stronger demand may help the banks start to release some of the 'shadow inventory' which is still waiting in the wings. And the increase in prices could also help spur more re-financing as higher prices help those homeowners who are currently 'under water'.
Another report released in the US yesterday hinted at a manufacturing recovery. A rebound in new orders helped push the preliminary US Manufacturing PM index to 53.2 this month from a reading of 51.9 in June. This was good news for a sector which had a disappointing 2nd quarter.
So all of the data released this morning was positive for the US economy, and therefore positive for the US$. The dollar held on to the gains which it had made in overnight trading, with only a couple of currencies moving higher vs. the greenback.
One of those currencies was the New Zealand dollar or 'kiwi' which moved higher after statements from RBNZ Governor Graeme Wheeler suggested interest rates may be moving higher. Sounding a bit like US Fed Chairman Ben Bernanke, Wheeler said that monetary stimulus will need to be removed in the future as the economy picks up. Unlike Bernanke, Wheeler stated that the rate will probably remain on hold for the rest of 2013, but currency traders have now placed the odds of an increase in the official cash rate in January of next year at 50%.
By the way, one of the questions asked of me during my panel discussion in Denver was my prediction of when the Fed will start pulling some of the liquidity back out of the markets. I reminded the audience that Bernanke did not even mention 'removing' any of the stimulus, but instead suggested that the monthly infusion would start to decrease if and when the markets indicated they could handle it. But to answer if and when I see the Fed starting to taper, I think they will probably start to decrease the bond buying in the last quarter of 2013 but they would stand at the ready with another increase if the data shows a need. I agree with Chuck that US GDP will slow in the second half, with the US economy just 'muddling through' (borrowing a term from our friend John Mauldin).
The yen was another currency which rose against the dollar as a drop in the Asian equity markets had investors moving back into the yen for 'safety'. I am always amazed when I read that investors are buying the yen as a safe haven. Japan has been mired in over two 'lost decades' of deflation and no growth, and the government has been adding debt almost as quickly as the US.
Gold ended 4 straight trading days of gains drifting lower throughout the day, as the good US economic data had traders thinking the Fed would scale back their purchases sooner rather than later. The positive housing numbers have inserted 'tapering' thoughts back into the minds of precious metals traders and subjected the shiny metal to the largest one day slide since July 5th. The thought of a cut in stimulus had investors selling gold, silver, platinum, and palladium. The precious metals face a few headwinds, as the government of India continues to do everything they can to decrease demand for gold in the country which purchases the largest amount of physical gold. Questions on the Chinese economy also has precious metals traders questioning the demand side of the equation.
Like the equity markets, the metals markets are currently being held hostage by the Fed and their intentions on ending QE3. If the US economic data continue to show positive gains for the economy, both Gold and Silver will likely continue to correct. But I think there is a fairly high risk that economic numbers here in the US disappoint, with the US recovery slowing and the Fed extending their bond buying program at the current $85 billion monthly level through the end of the year. If this occurs and the Fed keeps up their purchases, the slide in precious metals which we have seen so far this year will end and the correction will be over.
This morning we will get Thursday morning jobless claims which are expected to show the number of people applying for benefits dropped by 89,000. We will also see the durable goods order data for June which is expected to show an increase of 1.4%. This would mark the third straight month of gains in the Census Bureau's report on equipment and goods expected to last longer than 3 years. But there is some downside risk with this figure after Caterpillar said June sales were down 8% vs. May. And we will end the data day here in the US with the Bloomberg 'Comfort Survey' and the KC Fed's Manufacturing Activity both of which are not expected to be as positive as the jobless and Durable Goods numbers.
I mentioned that I got to have lunch with Jim Rogers in Denver at the financial conference I was speaking at; and to end this morning's Pfennig I will share a bit of the insights he shared during lunch. Jim is still a commodity bull, and believes the agricultural commodities are some of the best values right now (Sugar is his favorite long right now). He thinks Gold could continue in a 'correction' for a while, but when pushed for what he meant by 'a while' he just said a 50% retracement from the high was within reason. But he also said he wasn't selling any of his gold, and would use this correction as an opportunity to add to his positions. He looks at his holdings in precious metals as an 'insurance policy' which he hopes to never have to use, but it allows him to sleep a bit better.
He is also a bull on China and continues to be a bear on the US. He pointed out that the Chinese are currently saving or investing 35% of their income, a figure which dwarfs the rate of savings/investment in the West. Rogers suggested that the sheer size of the Chinese market, and the increase in the number of 'new' Chinese consumers will continue to push China toward the #1 position in the global economy.
On the flipside, Jim shares Chuck and my worries about the direction Washington is taking the US economy. He reminded everyone that the US is now the largest Debtor nation in the world, and the Chairman Bernanke and the rest of the FOMC has put their faith in the printing presses. All of the liquidity being pumped into the markets by the Fed, BOJ, BOE, and the ECB has certainly pushed equity markets to record levels, these gains are built on an artificial base. He concluded with a message which we have been promoting in the Pfennig ever since Chuck started writing it; Protect your wealth by diversifying your investment portfolio.
Some great words of advice from a very successful investor!
To recap. Sales of New Homes increased to a 5 year high, countering what the existing home data showed earlier in the week. The good economic data pushed the dollar higher not against every currency. The kiwi was higher after the RBNZ head pulled a 'Bernanke' suggesting an end to 'easy money' once the economic data improves. Gold continued to drift lower on more positive US news, and I shared what I think is very sound advice from Jim Rogers.
Currencies today 7/25/13. American Style: A$ .9179, kiwi .8038, C$ .9712, euro 1.3197, sterling 1.5284, Swiss $1.0670. European Style: rand 9.8168, krone 5.9279, SEK 6.5206, forint 224.84, zloty 3.2164, koruna 19.6162, RUB 32.64, yen 99.78, sing 1.2679, HKD 7.7576, INR 59.1087, China 6.1759, pesos 12.6276, BRL 2.2505, Dollar Index 82.243, Oil $104.83, 10-year 2.60%, Silver $19.97, Platinum $1,436.20, Palladium $739.50, and Gold. $1,317.92
Denver is a great city, and I really enjoyed the time short time I spent there. I especially enjoyed getting to spend some time with several 'EverBankers' who came out to meet us at a reception we held Monday night. There were several Pfennig readers who attended the reception, and I let them know I would give them a 'shout out' in the Pfennig the next time I got to write it; so HELLO ALL YOU GREAT FOLKS IN DENVER! And with that I will have to send this on its way as I have a call with a Bloomberg reporter in a couple of minutes. The big bosses (Frank and Chuck) passed on this one as the time was a bit too early in the morning for West coasters. I hope everyone has a great Thursday, and thanks for reading the Pfennig!
Chris Gaffney, CFA
EverBank World Markets
07-25-2013 5:14 PM