Bernanke continues to taper his talk of tapering...
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In This Issue.

* Markets wait for FOMC...

* Poor job numbers offset by a spike in Durable Goods...

* UK economy expanding...

* Consumer prices rise in Japan, sending the yen higher...

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

Bernanke continues to taper his talk of tapering...

Good day. And welcome to Friday, the end of what has been a long week for me. Travel wears me out, and I am heading right back out on the road next week so I guess I better rest up this weekend. Talk about travel, Chuck is making what is probably the longest trek you can make in the contiguous 48 states, traveling from up in Vancouver to his vacation spot down in Jupiter Florida. Chuck sent me a note to let me know his presentation out in Vancouver was a big hit. In fact, let me start off today's Pfennig with a few words from Chuck:

OK... you all know me, and even though I'm a couple thousand miles away I still dig at Gov't reports, and open the hood to see what's inside, and so it was with the curious Existing Home sales that Chris talked about yesterday that increased to a 5-year high.... And then I found it... a report that foreclosures are surging in 32 states this year! Ahhh, no wonder Existing Home Sales are so strong, they include the surging foreclosures! This will probably prove to be a case of the life of a star... Remember, it shines the brightest right before is burns out!

And the proof on the ground is very compelling... I received an email from a dear reader that said, "I'm the CFO of a homebuilder, and sales dropped off a cliff in July 2013." Thanks for the report from the ground!

I spoke to the crowd twice today... A general stage performance, and I say performance, because for the first time in my career, and of the Agora Investment Symposium I sang a bit, and had the crowd singing along with me! Sound hokey? Well, I simply got tired of all the talk that the dollar was in a "sweet spot" so I decided that the "sweet spot" reminded me of the great Trini Lopez song... come on sing along with me... Lemon Tree, very pretty, and the lemon flower is sweet, but the fruit of the poor lemon is impossible to eat! That describes the dollar folks... It may be getting some love right now, but a "sweet spot"? I doubt it... the fundamentals are not there, haven't been there, aren't there, and won't be there! OK... I got a little riled up over this, so I'll calm down now, and get this back to Chris!

Thanks to Chuck for his recap of his experience out in Vancouver, I'll have to try and get my hands on that tape of him leading all of the crowd in song! And the markets sure seem to agree with Chuck that the dollar is not really in such a 'sweet spot' right now as it drifted lower again in overnight trading.

The dollar was down yesterday and will end the week lower vs. just about every currency (the Mexican pesos is the only one of the Majors which was down vs. the US$ over the past 5 days). The selling of the dollar has come on the heels of all of the backpedaling by Fed Chairman Ben Bernanke. As readers know, it was Bernanke's talk of 'taper' which sent the dollar shooting up at the end of June, but this spike up has been reversed as Bernanke and the rest of the Fed heads have come out and tapered their talk of tapering. With the Fed's decision to start winding down QE clearly dependent on economic data, traders have been over-analyzing every report.

Yesterday it was the weekly jobs data which showed a slight tick higher in the number of initial jobless claims. The report showed 343k filed for first time claims compared to an expected 340k. The prior week's claim numbers were also adjusted upward from 334k to 336k. But while the weekly jobs numbers were disappointing, the bad news was offset by the report of Durable Goods which came in much higher than expected. Orders for goods and equipment expected to last longer than 3 years increased by an impressive 4.2% during the month of June and the previous month's figure was also revised higher to show a 5.2% increase. Automobiles dominated the increase in orders, with the Ex-Transportation number actually coming in flat for June. But on a positive note, the backlog of orders to factories jumped 2.1% in June, which signals next month's durable goods numbers may continue to show improvement.

A story in the WSG by reporter Jon Hilsenrath was also credited with at least some of the fall in the dollar. Hilsenrath detailed his thoughts which are similar to my own, that the Fed will continue to maintain an easing bias, and that all of the taper talk is just that. TALK. The feeling in the currency markets today is that the Fed will re-iterate their position that the US economic recovery is still fragile, and that the bond buying program will remain until we see definite signs of a sustainable recovery.

With only one piece of data being released into the markets today, I wouldn't expect to see much volatility. The University of Michigan confidence number is expected to show a slight tick higher to a reading of 84 compared with the previous reading of 83.9. Nothing really market moving there. So let's turn to the overseas markets to see what could drive the currencies today.

A report yesterday showed the UK economy gained a bit of momentum during the second quarter. GDP in the UK expanded .6% in the second quarter after growing just .3% in the previous three months. Next week data is expected to show UK mortgage approvals increased in June to the highest level in 5 years, another sign the UK economy is on a good path. But the BOE is expected to still caution against pulling back QE during their meeting next week. The August inflation report, due out next week prior to the BOE meeting could give traders more direction on whether the BOE will start any talk of 'taper'.

The Swedish Krona has moved higher this week as consumer confidence gained for a second month in a row. But the positive consumer number was somewhat offset by a manufacturing confidence index which fell slightly. Sweden's central bank has kept its main interest rate unchanged at the last 3 meetings, but has suggested rates will begin to move higher during the second half of the year. With the ECB pledging to maintain a 'very accommodative' policy for the foreseeable future, any move higher in Swedish rates would be very supportive of the Swedish krona.

The Japanese yen extended recent gains vs. the US$, and will end the week as the best performing currency vs. the US$ with an increase of over 2.1% in the past 5 days. The yen has been moving higher as currency traders see inflation in Japan starting to tick higher. As readers know, Japan has been dealing with over two decades of falling prices called deflation. Japanese Prime Minister Abe pledged to do everything in his power to reverse the downward spiral in prices and has taken very aggressive stimulus steps in order to generate inflation. A report released yesterday showed consumer prices in Japan rose the most since 2008, a signal that Abe's efforts have worked. With inflation starting to move back into the Japanese economy, currency traders are starting to bet the stimulus which the BOJ has been injecting will start to be 'tapered' (there is that word again!). Thoughts of tapering stimulus in Japan have sent the yen higher.

Then there was this. Driving in this morning I was listening to an NPR story on the drop in the price of gold. The story detailed the impact this year's fall in gold prices has had on Pawn shops. You see, gold jewelry is by far the most popular item to pawn. The reporter spoke of the similarities between gold and the pawn shops and houses and the banks, with the banks taking in homes as collateral and the pawn brokers lending against gold. The story compared the big drop in the price of gold since September of last year to the big drop in housing prices; and wondered if Pawn brokers were feeling the effects of the falling prices. But apparently the pawn shops are run a bit more conservatively than our big banks, with a typical 'advance' against gold jewelry of not more than 70%. So the 25% drop in the price of Gold since September of last year still left the pawn brokers with a slightly positive collateral position.

When asked if he was upset about the drop in the price of gold, one Pawn broker who was interviewed said that he welcomed the drop in price because it made gold more affordable to his clients. The more gold they had, the more collateral they would have to bring in when they needed a loan. He looked at the drop in prices as being good for his business!

But what was interesting to me was the fact that gold is still used as the best and most efficient item for 'bartering'. While I don't imagine many of the Pfennig readers have ever pawned any of your gold, the story really brought home the fact that gold is the TRUE currency. In cases where the banks either can't or won't lend, gold is the most popular alternative; even in today's 'high tech' world of financial innovations it all comes back to the base metal. Interesting.

To recap. Chuck had the crowd singing along with him in Vancouver. The dollar slid further, and will end out the week down vs. every currency except the Mexican peso. The attention of the markets have turned to the Fed meeting next week, and expectations of a tapering of all of the talk of tapering. The Swedish krona moved higher after gains in consumer confidence suggested the Swedish central bank may start moving rates higher in the second half of the year. And the Japanese yen extended gains after a report showed inflation may finally be taking hold.

Currencies today 7/26/13. American Style: A$ .9271, kiwi .8078, C$ .9737, euro 1.328, sterling 1.5414, Swiss $1.0775. European Style: rand 9.7171, krone 5.9084, SEK 6.4712, forint 223.05, zloty 3.1894, koruna 19.5220, RUB 32.6673, yen 99.53, sing 1.2633, HKD 7.7567, INR 59.025, China 6.1720, pesos 12.6018, BRL 2.2427, Dollar Index 81.673, Oil $104.56, 10-year 2.57%, Silver $20.0115, Platinum $1,430.90, Palladium $737.20, and Gold $1,327.94.

I got to witness an absolutely beautiful sunrise this morning, with the sun casting a raspberry glow over the buildings of downtown Clayton which sits just north of our office. There is a chance of thunderstorms all weekend, but the cold front which is bringing in the chance of rain has also brought us cooler temps. The high is only supposed to be 80 degrees which is a welcome relief from the recent heat. I'll be heading to Florida on Monday, and then down to Dallas, so Mike will be taking over the Pfennig over the next five days. Not an easy feat with a newborn keeping him up at night! And how about those Cardinals!! Did you see our pitcher, Lance Lynn, participated in 3 double plays last night? I hope Chuck found a TV in Vancouver to watch the game as it was another Cardinal win. Hope everyone has a Wonderful Weekend and a Fantastic Friday to start it off. And thanks for reading the Pfennig.

Chris Gaffney, CFA
SVP & Director of Sales
T. 314-951-1619
EverBank World Markets
8300 Eager Road, Ste. 700,
St. Louis, MO. 63144

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 07-26-2013 5:38 PM by Chuck Butler
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