Daily Pfennig : Currencies, Bailout, Automotive Industry, Euro

Another HUGE Currency Rally!

Chuck Butler — Mon, 29 Dec 2008 23:43:17 GMT

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In This Issue..

* Gaza bombing has dollar on the run...
* More proof we're turning Japanese...
* Adding to the debt burden...
* What will deflation do for the dollar?

And Now... Today's Pfennig!

A HUGE Currency Rally!

Good day... And a Marvelous Monday to you! Well... It's been a long time, now I'm coming back home! Actually, I've been home all of my winter vacation, but I'm referring to the trading desk and EverBank's office. I had a vacation that had a split personality, as I was sick for the first part of it, then went to the eye doctor to get another shot / injection in my eye. So much for the first part! The second part went quite well, with lots of rest and time spent with family. Are there two better ways to spend your time? Not in my book!

So... The currencies had a split personality while I was gone too... At first, they rallied like there was no tomorrow, but then sold off, and then range traded. So, we'll finish the year on a down note for most of the currencies, but knowing all too well that the markets are beginning to realize that the debts the U.S. is chalking up are not going to go away, and in fact they're just going to get worse, and that spells bad times for the dollar... Eventually...

I did a lot of reading on my vacation, and the book I read the most was one by Christopher Wood, titled: The Bubble Economy... Now, on first take you would think that he was talking about the U.S.... But that would be wrong... This is an old book, and was written about Japan's economy in the 90's... I've spent a ton of time talking about the similarities between Japan then, and the U.S. now. And this book, just brings those thoughts even closer! For instance... In the book he quote the Levy Institute circa 1991... "monetary policy would not, on its own, be able to restart a depressed economy suffering from asset deflation and widespread financial crisis, for lower interest rates cannot motivate fixed investment when the market is glutted with existing assets worth much less than it costs to replace them."

Oh my! We're turning Japanese, I really think so!

So... Then this weekend, a Pfennig reader sent me a link to a story on Bloomberg regarding the Japanese... Here's a snippet... "Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.

The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes "drastic measures" to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said."

Well...the "rest of the story" can be read by clicking here: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aFgHlh.Dn4Lc

As I write, the euro is back on the attack VS the dollar, with it trading above 1.43 once again. There has been a 2 figure move up in the euro from just last night, as it appears that the markets are running from the dollar with the Israeli / Gaza thing going on. The Swiss franc is back above 95-cents, and so on... I also noticed, while on vacation, that the Aussie dollar bounced nicely off its 65-cent level. And Commodities staged a nice rally / comeback while I was gone. Gold is trading around $880 again...

When I left, I had told you about a Santa Rally for the euro, and it did just that, even with the profit taking after reaching 1.45, it's still much higher than it was when I said that we should look for a Santa Rally. I also was hinting that the Trading Theme that we've seen in place since July, was beginning to show chinks in the armor. Those chinks are becoming major exposed areas, as the markets are returning to focus on the fundamentals the hang over the U.S economy and dollar like the Sword of Damocles.

So... I see that the Fed has opened the door to grease the tracks to make GMAC a "bank-holding company" Why? Ahhh grasshopper... If GMAC is a bank holding company, they would be eligible for TARP funds, which would put them on the fast tracks to obtaining taxpayer bailout funding.

The thing I see happening now is that "everyone and their brother" is going to line up for taxpayer bailout funding... We've already set the stages for car loans, and student loans, and next we'll get real estate guys and who knows what else! Everyone is lining up at the Government bailout trough...

So, thanks guys... Thanks for running up the taxpayer costs... Thanks for making it possible that my grandchildren will be burdened with these unbelievable financing costs of all this debt we're building... Thanks... But no thanks!

It's all sort of like Humpty Dumpty isn't it? You know, all the king's men and all the king's horses couldn't put Humpty Dumpty back together again. All the Big Ben Bernankes and Henry Paulsons are trying to put the economy back together again, but it "ain't happenin"! Just shows to go you that they should have left it all alone... Let it fail... Then pick up the pieces and begin again... I've had a few people along the way that tell me that I don't offer solutions all I do is pick at the wounds... But they just don't read into what I'm typing each morning... I've said all along that we would end up in a debt ridden society if we didn't stop spending... So, there's one solution... STOP SPENDING! And then I warned that these bailouts that began last spring with the $150 Billion in checks to consumers, was going to put us on the road to turning Japanese, and we should have let things go their normal business course... There was another solution!

Now, that we're here in this quagmire of debt and there's more coming folks... I recall telling Chris while I was gone that there are rumors that the next bailout amount could reach $1 Trillion! But now that we're here, what's a poor boy to do? Well... For me, it's called savings... And when things look really bad, and prices have fallen to the core, then I'll put those savings to work, and if everyone does the same, the economy will grow once again, but from a lower base, which is a good thing. Of course, should everyone begin to spend their savings at once, this will bring about inflation that comes out our ears, but let's worry about that then, eh? Besides, like no one really thinks that with interest rates near zero, and all this money going into the system, that eventually we won't have an inflation problem do they?

OK... Now, that was a lot to get off my chest on my first day back, eh?

We didn't see any economic data on Friday after Christmas, so one would think that there's some catching up to do this week to end the year. But the data cupboard is empty today too! And it looks like those that are responsible for restocking the data cupboard, have taken this week off too... One piece of data we will get is the ISM (manufacturing) Index for this month... And remember when this index was hovering around the contraction/ expansion level of 50 and I kept saying that it was going to go below it and fall? Well, the index number in Nov. stood at 36.2, that's a long way from 50, eh? And the "experts" have forecast another fall to levels not seen since 1980! UGH! Now... Early last fall I fretted about the reversal in the weak dollar and its affect on manufacturing... Exports had just posted a strong performance in the 2nd QTR, boosting GDP, because the dollar was so darn weak! Well, I said then, that those wishing for a stronger dollar had better be careful for what they wish for...

So, with the trading desks still undermanned the volumes will be thin for the most part, unless... We see a ton of "book squaring" today, to settle before the end of the year... Either way, we need to be aware of the fact that thin volumes can cause wild swings in the currencies... Take last night's action for instance. When I went to bed the euro was trading 1.4130, and that looked pretty darn good to me... But when I turned on the screens, here in the office, this morning, what did my wondering eyes did appear, but the euro trading at 1.4350!

This rally means the euro is only down 2.5% from a year ago, which is far better than it was showing a month ago! And the best performer of 2008? Like you didn't know! It was Japanese yen, up 24.7% since last year! WOW! Of course there are some real "problem children" in the currency performance roster... Aussie, kiwi, pound sterling, loonies, and krone are all showing pitiful performances for 2008... But, if the recent price action is any indication of what could happen in 2009, if we return to the fundamentals, then these pitiful performances might get put in the rear view mirror...

U.S. Treasury Sec. Henry Paulson is just about at the end of his "tour of duty", and you've got to think that he can't wait for the new administration to take over! I don't doubt for a minute that the new Treasury Sec. will pull back on the bailouts... But what I do question, with Paulson leaving, is what happens with China? Paulson didn't make the progress with China that he set out to make, but what he did do is keep the knuckleheads in D.C. from slapping trade tariffs on China... I have to wonder if that will be the direction of the new Secretary... If it is, then that won't be good for the dollar, as protectionism is never viewed as a positive for a currency. So, those questions and more are on the docket for 2009...

I received quite a few emails from readers while on vacation with a question about something that another newsletter writer wrote about the euro / dollar... The writer believed that deflation was going to be a big problem for the U.S. next year, and that would be a good thing for the dollar, thus pushing the euro to parity. Hmmm... Well, that may be true, for I don't know what's going to REALLY HAPPEN! But! I would just have to say that since we're mirroring Japan so much, let's go back and look at what deflation did for the yen in the late 90's when deflation was so prevalent... Oh, it doesn't look like deflation did yen any favors then... And I doubt it will do the dollar any favors this time around... So, there's my answer to that call by someone else... To me, though, this is all good, as it still means that there is a two-way trade, and that not everyone is on the same side of the ship!

So... Before I head to the Big Finish, let me re-cap today's action so far... The dollar has been hammered overnight on fears that the Israeli attacks on Hamas in the Gaza Strip will disrupt oil supplies to the U.S. This has driven the price of oil higher to $40.40, and has caused a traders to unload dollars... The data cupboard is empty today, and trading desks are undermanned, which could cause wild swings in the currencies this week.

Currencies today 12/29/08: A$ .6965, kiwi .5850, C$ .8210, euro 1.4355, sterling 1.4670, Swiss .9585, ISK 143.20, rand 9.55, krone 6.95, SEK 7.67, forint 186.10, zloty 2.9050, koruna 18.54, yen 90, baht 35, sing 1.4370, HKD 7.6710, INR 48.42, China 6.8525, pesos 13.46, BRL 2.3450, dollar index 79.70, Oil $40.40, Silver $11, and Gold $885.80

Oh, and thanks for all the kind words about our Christmas card / photo we sent out! Chris had a little error on his listing of the names on the photo... He said "right to left", but it really was left to right... Now, we've really got you confused, eh? HA!

That's it for today... Well, did you have a great Christmas / Holiday? I sure hope so! Do you have Big Plans for New Year's Eve? If you do, please be careful! I will get together with close friends for dinner, and return home! Thanks to Chris for another great job Pfilling in on the Pfennig! Chris sure had some very kind words about my beautiful bride last Friday. I thought he had ticked her off some way! HAHAHAHAHA! Wait till he sees my travel plans for March! I guess most people will be back today, except for Jen, who will be out this week. She needed it after me being gone two weeks! My beloved Missouri Tigers play in the Alamo Bowl tonight (a far cry from where they thought they might play this year!), against Northwestern. Should be a good game. Go Tigers! The bitter cold we had here has been replaced by normal temperatures, still chilly / cold, but not bitter cold like they were. So, that's all good... I guess it's not too early to talk about the Orlando Money Show, which will be Feb 4-7... I'll be there, God willing, along with others... I wonder where the currencies will be then? This is always the biggest show, best attended, and a welcome relief from the cold weather here in St. Louis! OK... That's all I've got for today... Let's make it a Marvelous Monday, eh?

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Currency markets stabilize...

Chuck Butler — Mon, 22 Dec 2008 15:40:00 GMT

.........But First, A Word From Our Sponsor..........

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In This Issue..

* Currency markets stabilize (for now)...

* Data packed holiday shortened week...

* China cuts rates...

* Indian rupee falls...

And Now... Today's Pfennig!

Currency markets stabilize...

Good day...The dollar settled in at the slightly higher levels it reached Friday morning and is trading in a narrow range heading into a holiday shortened week. Trade desks across the globe will be mostly staffed by the backups as the big bosses take Christmas week off. Volume will likely be lighter, which can sometimes lead to an increase in volatility.

The data calendar is empty today, but chock full tomorrow and Christmas eve. Markets will be closed on Christmas day, and most will be closed again on the day following Christmas (known as boxing day). GDP, Personal Consumption, U of Michigan consume confidence, New Home Sales, Existing Home sales, House price index, Richmond Fed Man. Index, and ABC Consumer confidence numbers will all be released tomorrow. On Christmas eve the US will release MBA Mortgage applications, Personal Income, Personal Spending, PCE deflator, Durable Goods orders, and the weekly jobs numbers will all be released. I told you we will be packing in a weeks worth of data in the next two days!!

So what will all of this data mean to a thin currency market? I expect all of this data will show a US economy which is continuing to weaken. 3rd quarter GDP is expected to show a drop of .5%, and Personal Consumption is expected to have dropped 3.7% during last quarter. The housing industry continues to weaken, which will be reflected in this week's data. Personal Income is expected to be flat, with spending in the US to show a slight decrease. Durable goods orders will probably show a drop of 3%, and the weekly jobs data will end the data packed two days showing further weakness in the US labor market. The bias for the US$ will continue to be negative, as the next two days of economic data will confirm just how bad the state of the US economy is.

As I mentioned earlier, the currency markets have been trading in a tight range with the Commodity currencies of the Canadian dollar, South African Rand, and the Australian dollar leading the pack. The Japanese yen weakened slightly, trading back above 90 yen per dollar. The yen weakness came as investors slowly moved back into risk trades as a US bailout of GM and Chrysler moved closer to reality. The yen stayed lower vs. the US$ as China announced an interest rate cut in order to try and support its economy.

The dollar weakened a bit vs. the Euro which held just above 1.40 during early European trading. According to a story on Bloomberg by Stanley White, the Euro will likely rise to $1.50 in the next two weeks. The relative strength index for the Euro moved above 50 which illustrates the Euro is gaining momentum. The Fibonacci series of numbers says we are in a bullish trend, with resistance at $1.50 near a 150 percent projection of the euro's rise from its Dec. 4 low of $1.225 to its Dec. 16 high of $1.4147. White goes on to report the 14 day relative strength index shows the euro will start heading higher after a short correction.

The Australian and New Zealand dollars rose as the Feds bailout moved investors back toward higher risk trades. These currencies have been two of the biggest recipients of 'carry trade' flows, and the expected rescue of US automakers gave currency investors confidence to move back into these higher yielding currencies. Even after aggressive rate cuts in both South Sea nations, benchmark rates are still over 400 basis points better than in the US. If commodity prices can start to rebound, the combination would be very good for both the AUD$ and NZD$. I still favor the Australian currency vs. the kiwi, as New Zealand has a much larger current account deficit, which will need to be funded with foreign capital flows.

China's central bank cut interest rates for the fifth time in three months to try and support growth. Chinese leaders have stated they want to keep growth in the world's fourth biggest economy from dropping below 8%. The IMF predicts they will be unsuccessful, as a recent report released estimates 2009 Chinese growth at 5% to 6%. But the People's Bank of China is going to continue to try and meet their goal, using a combination of economic stimulus spending, lower deposit requirements, and easier credit. Mike Meyer tells me we have been fielding a number of callers selling their Renminbi deposits after Dr. Steve Sjuggerud suggested investors exit their positions. While I don't disagree that there are probably many currencies which will outperform the Renminbi, I do think the Renminbi will continue its slow ascent vs. the US$.

The Indian rupee fell sharply after its recent move to a 2 1/2 month high vs. the US$. The selling was probably due to importers taking advantage of the rupee's strength to lock in rates. The rupee touched 46.86 in trading on Friday, the highest since October 3, rebounding more than 8 percent from a record low of 50.615 on Dec. 2. Trading in the forward markets indicate the rupee will recover slightly from where it is trading now.

Currencies today 12/22/08: A$ .6861, kiwi .5755, C$ .8299, euro 1.3976, sterling 1.4807, Swiss .9096, ISK 176.5, rand 9.6712, krone 7.0286, SEK 7.7487, forint 189.52, zloty 2.9259, koruna 18.784, yen 89.96, baht 34.55, sing 1.449, HKD 7.75, INR 46.02, China 6.8512, pesos 13.12, BRL 2.3644, dollar index 80.88, Oil $42.95, Silver $10.965, and Gold... $842.52

That's it for today...Had a great weekend, as a couple of work crews worked long days so that I will be able to make my wife's Christmas eve deadline. I guess the injury to my hand had a silver lining, as these guys really knew what they were doing and probably did a better job than I would have been able to. I caught up with some Pfennig readers and old friends at a big formal ball on Saturday night and got to go watch the Blues vs. Boston yesterday. The new puppy is adorable, but is just like having another child, as he got us up a few times during the night. With temperatures hovering in the single digits, taking the puppy out to do his business is not an enjoyable experience!! Got to get to work, hope everyone has a Marvelous Monday!!

Chris Gaffney, CFA

Vice President

EverBank World Markets

1-800-926-4922

1-314-647-3837

Waiting on the FOMC meeting...

Chuck Butler — Mon, 15 Dec 2008 15:11:05 GMT

.........But First, A Word From Our Sponsor..........

Gold and silver prices are down.

Invest for as little as $5,000, avoid costly broker commissions, and receive account statements every month.

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In This Issue..

* FOMC to cut further...

* Bernanke turns his back on inflation...

* Kiwi and Australia rally...

* Gold continues to shine...

And Now... Today's Pfennig!

Waiting on the FOMC meeting...

Good day...and welcome to another week, hopefully the currency markets can continue their assault on the dollar which began a few weeks ago. The dollar index peaked back on November 21, and with the exception of a few days around the beginning of December, the greenback has consistently fallen vs. most of the major currencies. Friday was no exception, and the dollar continued to give back gains over the weekend with the Euro climbing back over $1.35 for the first time in two months.

This morning the markets are focusing on the Fed's Open Market Committee meeting and rate announcement which will come tomorrow. It is widely expected that Bernanke and his compatriots will push US interest rates close to just 0.5%, the lowest on records dating back to July 1954. From everything I've read over the weekend, this 50 basis point cut is pretty much a done deal, and currency traders are actually more interested in what the Fed's statement will say about 'alternative easing measures'. The rate announcement will come tomorrow at around 2:15 pm EST after a two day meeting. The FOMC meeting had originally been scheduled for just one day, but was extended so policy makers could study options for unusual steps to spur the economy. I guess they finally figured out that they are running out of room with the interest rate cuts!

The Feds newest weapon against the falling economy is 'quantitative easing', which the Bank of Japan used in the 1990's. This non-traditional method of easing centers around pumping money back into the financial markets as quickly as possible. The Fed has already started down this path by allowing its balance sheet to more than double in size after pumping over $1 trillion into financial markets. The markets are now expecting the Fed to announce it will start purchasing private sector mortgages to drive down home loan costs. By purchasing these bonds, the Fed would narrow the spread between their yields and yields on US Treasuries, and theoretically allowing banks to offer home loans at lower rates.

But the Fed has already pumped trillions into the banks in an effort to get them to start lending, so I'm not sure having the Fed narrow mortgage spreads will get these same banks to open up their lending windows. And even if the banks lower mortgage rates, they won't be lowering credit standards. Unemployment continues to rocket upward as more and more firms lay off workers. Do you think these banks are going to be willing to refinance someone who has just lost their job?

And what will be the long term impact of all of this 'quantitative easing'? The Fed is mashing on the money supply accelerator, totally ignoring the inflationary results which all of this will bring down the road. Ben Bernanke is smart enough to know the risks of the path he is speeding down, but right now he is choosing to ignore the consequences in an attempt to keep the economy from falling off the abyss. Some at the Fed believe they will be able to pull all of this added liquidity back out of the markets as soon as the economy starts to recover. But this is a very difficult thing to do, as the Fed would have to start pulling liquidity and increasing rates just as the economy is starting to turn. I think it is pretty obvious the 'experts' have a tough time calling the turning points, as it took them almost a year to call the recession!! And the consequence of missing the timing on pulling the liquidity back out of the market is much more drastic than mistiming the entry into the recession. Hyperinflation is waiting on the other side of this short term deflationary pause, and the Fed is currently looking the other way.

This weekend, President Bush announced that he is thinking about spending some of the TARP money which was set aside to stabilize the financial system to bail out the auto industry. This announcement caused a further sell off of the dollar as it is quickly losing its status as a safe-haven currency. Chuck was busy this weekend, but still found time to send me his thoughts:

"Well... We went to cut down our tree today, then watched Alex's basketball team get smoked! Put the tree up in a spiffy, with one of the greatest inventions of man kind, the swivel stand... And now I'm off to tell you what I've read about this weekend...

First though... A quote from Ronald Reagan... "The most terrifying words in the English language are: I'm from the government and I'm here to help"

OK, with that in mind, I wanted to discuss the bailout for the automakers, GM and Chrysler.

First of all, I know it will be tough for the autoworkers should they be laid off, especially at this time of the year. But, the problem here is the fact that the automakers have run their respective companies very badly, and now they expect the taxpayer to bail them out.

It was reported on Friday that the Gov't is "looking into" using TARP money for the automakers bailout since the Senate voted "no" to the $14 Billion plan.

First of all... Congress said nothing about helping carmakers, or any other non-financial business, in October when it authorized the $700 billion Troubled Asset Relief Program, or TARP. But yet, it is being discussed as the "funding source of funds"...

That fund was never designed to rescue manufacturing companies with long-term operational issues. It was designed to shore up confidence in the banking system in order to thaw the world's credit markets.

Our own David Nicklaus of the St. Louis Post Dispatch has this to say, which makes a whole lot of sense to me! "The Detroit Three have been losing market share for decades, and their bloated cost structure makes it difficult for them to turn a profit even in good times. They have too much debt, too many models, too many dealers and, sad to say, too many workers.

Congress seemed to view an auto bailout as a jobs program, and TARP is nothing of the sort. In fact, the Treasury has invested in Bank of America, which is eliminating 35,000 jobs, and Citigroup, which is slashing 52,000.

The Treasury program, as it's been used so far, at least lacks one of the worst features of the failed auto bill. Nothing in the TARP legislation allows the government to name a car czar."

Yes, a Car Czar... Those Czars worked out well for the Russians, eh?

But the thing that really gets my blood boiling folks, is the fact that if bailout had gone through with the Car Czar, it would have been one more nail in the free markets / business coffin, just another opportunity for those that want to run the country toward the socialist side of the ledger..."

That is one of the things I love about Chuck, you don't ever have to wonder where he stands on something!

As I started to say before I went off on my FOMC tangent, the dollar continued to give back ground vs. just about all of the major currencies over the weekend. The Euro was up over 1.2% vs. the dollar, and broke through the $1.35 handle. The only two currencies which sold off over the weekend were the South African rand and Brazilian real, which were down just slightly. In addition to the FOMC meeting and announcement, we will get the TIC flows, Empire manufacturing number, Industrial Production, and Capacity Utilization numbers today. Tomorrow will bring the CPI numbers along with housing starts, building permits, and ABC Consumer confidence. Wednesday will be a light data day with just the Current Account Balance reported, and Thursday will close out the data with the weekly jobs numbers along with Leading indicators.

The Australian and New Zealand dollars rose on speculation the FOMC will be cutting US interest rates. These two currencies will benefit from their higher rates with the US cutting rates to near zero. The currency markets have started to move back toward trading on fundamentals over the past few weeks, and interest rate differentials are one fundamental which favors the NZD and AUD. If the Fed's statement makes it known that interest rates will remain low for a long time, the dollar would likely fall further vs. the Aussie dollar, as the RBA has signaled that it is close to the end of its rate cutting cycle. Benchmark rates are nearly 400 basis points higher in Australia and New Zealand when compared with the same rates here in the US.

In a break with the recent trading pattern, the Japanese yen rallied along with the New Zealand and Australian dollars. A former Deputy Governor of the BOJ said Japan is probably not going to lower rates further; "with the interest rate already so low, a further reduction would have only limited impact." The central bank's Tankan survey today showed confidence among large manufacturers fell the most in 34 years as a deepening global financial crisis crimped export demand, forcing companies to pare production and fire workers. The yen's recent surge to a 13 year high has compounded woes for manufacturers.

Gold continued to rise over the weekend, pushing back up to an eight week high in London. The dollar's fall has spurred investors to move back into gold as an alternative investment. News that President Bush was looking to tap the bank bailout fund to keep GM and Chrysler out of bankruptcy spurred further purchases of gold. With the tremendous growth in the US money supply, and the FOMC turning their back on inflation concerns, precious metals should continue to gain ground. Gold is traditionally one of the best hedges against rising inflation.

Currencies today 12/15/08: A$ .6635, kiwi .5523, C$ .8138, euro 1.3473, sterling 1.4969, Swiss .8534, ISK 218, rand 10.1985 krone 6.9051, SEK 7.9963, forint 197.97, zloty 2.9644, koruna 19.428, yen 90.79, baht 34.88, sing 1.4773, HKD 7.75, INR 48.0512, China 6.85, pesos 13.5138, BRL 2.387, dollar index 83.15, Oil $48.52, Silver $10.36, and Gold... $827.60

That's it for today... The roads were a bit icy this morning, as we got a small taste of the ice storm which hit the Eastern states so hard over the weekend. But my drive into work was fantastic, as the 6 mile stretch of interstate running from my home to the office was reopened over the weekend. Some of the schools are closed this morning, so we will be shorthanded on the desk. Better get to work, hope everyone has a Marvelous Monday!!

Chris Gaffney, CFA

Vice President

EverBank World Markets

1-800-926-4922

1-314-647-3837

A HUGE Currency Rally!

Chuck Butler — Thu, 11 Dec 2008 15:00:55 GMT

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....

In This Issue..

* Another currency rally....

* SNB cuts another 50 BPS!

* Budget Deficit continues to widen!

* Treasury yields go south for the winter!

And Now... Today's Pfennig!

A HUGE Currency Rally!

Good day... And a Tub Thumpin' Thursday to you! It's been quite the rally this week in the currencies led by the euro, which is like old times, eh? The Big Dog on the porch finally gets to stretch its legs and chase the dollar down the street! It's been a long time since we've seen this go on for more than a day. Yes, we've seen one day spikes, and even two day rallies turn into false dawns, but this one has lasted about a week now. Ever since last Friday's awful Jobs Jamboree, the tide has turned, and the Trading Theme that has held the currencies in a full nelson since the end of July, could very well be on the way out the door. I said that about the Trading Theme earlier this week, so I just wanted to repeat that to emphasize the point!

So... Yesterday, we saw the euro lead the currencies higher all day, with the single unit finishing the day in the 1.3050 area... I turned on the currency screens this morning, and what did my wondering eyes did appear, but the euro trading at 1.3170, and others bringing up the rear!

The Swiss National Bank (SNB) cut rates further this morning, bringing their internal rate to 1/2%, 50 BPS, that's it... So, one would think that bringing your interest rates to near zero, would NOT be a good thing for the currency, right? Well, in this day and age of rewarding a currency for lower interest rates to promote growth, that's not the case. The franc has rallied on the news... Of course it's probably just caught up in the euro's move higher.

Looks like the U.S. House of Representatives approved a $14 Billion package for GM and Chrysler, but the Senate has put some roadblocks out on this deal, and that puts the whole deal in jeopardy... A Final Jeopardy if you will for the contestants Gm and Chrysler! Notice I didn't include Ford. The people at Ford, backed out, and tried to put a 100 miles of desert between them and GM & Chrysler. Good for them!

Well, earlier in the week, the glimmering light of the bailout for the Big 3, helped the currencies... But now that the Trading Theme seems to be taking its last breaths, the news of the bailout in jeopardy, has helped the currencies, as this would mean that we could finally be back to focusing on fundamentals! Could we really? Is it possible? Well, maybe if you're real good and take a nap... No wait, that's what I used to tell the kids on Christmas Eve! It IS possible... But we need a few more days of what we've seen so far this week to confirm the Trading Theme to be a thing of the past.

Speaking of things of the past... A Bank of New York (BONY) strategist, issued a statement saying the, "Carry Trade is Dead and Buried." Hmmm... I beg to differ with him on that, for if we get investors and traders focused on fundamentals again, and the risk takers come out of the woodwork again, the Carry Trade could very well be on the burners again... But then, I do see his thought here and that is (I think it is) that if every Central Bank is cutting interest rates to the bone, there won't be any "high yielders" left to buy on the buy-side of the Carry Trade. Well, let's see now... Aussie and New Zealand were the BIG WINNERS of the last Carry Trade craziness, and their rates are lower, but still 3 and 4 hundred basis points above those in Japan, Switzerland and the U.S.! But, the Carry Traders might have to look further, and do some additional leg work this time to find the "high yielders" like... Brazil, and India...

OK... I came across this story yesterday and really had my blood boiling... I wanted to talk to the Big Boss Frank Trotter about it and get his thoughts, but the poor guy was tied up on the phone all day, well, all day that is, until I left to go home! Anyway, here's the base story, that the entire piece can be read here: http://www.cnbc.com/id/28153817/

The U.S. Federal Reserve is considering issuing its own debt for the first time, the Wall Street Journal said, citing people familiar with the matter.

"Fed officials have approached Congress about the move, which could include issuing bills or some other form of debt and would provide the central bank with more flexibility to tackle the financial crisis."

NOW WAIT JUST A MINUTE THERE BIG BEN! This is the bailiwick of the Treasury Dept, issuing debt! You've already got the printing press for currency, and now you want to issue your own Debt? This is complete madness I tell you, complete madness! I think the Fed is thinking of ways to deal with deflation...

Oh well, apparently, Big Ben can do whatever he pleases these days, the new President has named an "energy Czar" and the automakers might get a "Car Czar", the new President had better think about naming a Fed Reserve and Treasury dept Czar!

OK, yesterday's printing of the Monthly Budget Statement saw the monthly deficit not "as bad" as forecast, with the figure posting a $164.8 Billion deficit, instead of $171 Billion as forecast... That's still really bad folks, let's not get caught up in the media spin of talking about how it "wasn't as bad as forecast"! Let's focus on the fact that for the second consecutive month the Budget Deficit widened... And this month it went from $98 Billion in October to $164.8 Billion in November!

Of course you know why this is happening, right? No? Ahhh grasshopper... Recall the bailout money? Well, whenever any of it is spent, it will show up here! Want even further bad news here? Government revenue fell 4.2%, while spending soared 24%!

The Treasury Dept has written checks on all but $15 million of the first half of the $700 Billion allocated to help financial institutions.

So, as I said the other day when I mentioned that the President-elect's plan to spend more money on infrastructure since 1950 might be the right thing to do at the wrong time... We've got the deep, dark recession going on, the Credit Crisis and this collapse of revenue... But don't let that stop him! Why would we want to stop with the deficit spending here? I shake my head in disgust!

Today's data cupboard has the Trade Deficit for November, which should narrow, given the collapse of the Oil price. That and the recession should allow the Trade Deficit to narrow... But, let's not get caught up in the media spin on this too... You see, the Trade Deficit is still $53 Billion, which annually is $636 Billion... Which is probably right about where it will end out this year...

And... $53 Billion still needs to be financed! Let's not forget that little ditty!

I just watched the euro gap up to 1.32... This is a rout like I've not seen since last summer! And wouldn't you know it, here it is, and I'm going on vacation! Oh well, maybe the old adage that the currencies rally when Chuck's away, will come back!

I just can't pass up on this one though... And I know the legal beagles will be all over me on this, but here goes... This certainly looks like the Santa rally that I talked about earlier this week, eh?

I know, I know, it could all be reversed in a New York Minute, but you've seen these types of routs before...

Another currency on the rally tracks this week is the Chinese renminbi... After all the "bad talk" about China last week, the Chinese have said, "you'll be sorry"! What I'm talking about here is the fact that everyone is dissing the renminbi right now, and selling it, and pushing forward contracts down in value... And the Chinese, because they can, have moved the renminbi higher VS the dollar this week! There! In Your Face, disgrace!

So... What's everyone thinking these days buying Treasuries? I mean, the yield on a 3 month T-Bill is 1 BP! You have to go out 30 years in a Treasury Bond to get 3% yield! OUCH! But, investors keep buying! Well, I think what you've got going on here is simply the fact that all this repatriation of dollars has investors with tons of cash, that they don't want to put into banks, (for a number of reasons, like FDIC insurance limits, shaky banks, etc.) So, they put the cash into Treasuries, realizing that they may not earn any interest, but it will be there when they want it at some point in the future. And this "point in the future" is what scares the bejeebers out of me! Because when the icing is off the cake here, there will be a swift exodus from Treasuries, as no one will want to be the last man standing here... UH-OH! Just be careful folks...

The weekly Initial Jobless Claims will also print this morning. We've seen a huge increase to average above 500K in the Weekly Initial Claims, and that should hold true today. This isn't a good thing folks...

Well, the rally this week hasn't been cornered by currencies... The Commodities have come back too! Oil is up $2, but the real meat here is the rally in Gold! Gold this morning is perched above $827, when it was sitting at $770 just a week ago!

Currencies today 12/11/08: A$ .6660, kiwi .5525, C$ .8015, euro 1.3235, sterling 1.49, Swiss .84, ISK 215.50, rand 10.13, krone 6.95, SEK 8, forint 199, zloty 3.01, koruna 19.64, yen 91.30, baht 35, sing 1.4890, HKD 7.75, INR 48.30, China 6.8515, pesos 13.30, BRL 2.3950, dollar index 84.33, Oil $45.50, Silver $10.46, and Gold... $832

That's it for today... And for me until after Christmas... I'll probably send Chris notes from time to time, but I really don't expect to be monitoring the markets THAT much while on vacation! And of course, I'll attempt to write a Christmas Pfennig, which has been a tradition that goes back to 1992! I've got the Review & Focus to do while on vacation and my "other" newsletter, the Currency Capitalist to do too! Don't know what I'm talking about there? Well, for new readers, I was honored to be asked to be the main writer for a "paid for" newsletter that is published by the Sovereign Society, called the "Currency Capitalist"... So, I've got "all that" going for me! My little buddy, Alex, is still sick, poor guy, he was supposed to be playing in the 7&8th grade jazz ensemble concerts last night... It's beginning to look a lot like Christmas, as the house gets decorated, and we will finally go to cut down our Christmas tree on Sunday. (Hope Alex is better by then!) This is late for us, as we normally put up our tree earlier in the month! I love a Christmas Tree in the house! OK, I've carried on enough, Mike's here, Mary's here... I'll head out now... I'll leave you with the note I put in the December Review & Focus...

I wish everyone a joyous Holiday Season. Myself, I celebrate Christmas, and say Merry Christmas in hopes that it doesn't offend anyone that doesn't celebrate Christmas.

May the light of faith, the warmth of heart, and the love of family be your gifts this year...

Chuck Butler

President

EverBank World Markets

1-800-926-4922

1-314-647-3837

SNB Cut Rates 100 BPS!

Chuck Butler — Thu, 20 Nov 2008 15:01:41 GMT

.........But First, A Word From Our Sponsor..........

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In This Issue..

* Trading Theme returns...

* Automakers' bailout vote today...

* Not using all your arrows...

* Housing Starts go back to 1959!

And Now... Today's Pfennig!

SNB Cut Rates 100 BPS!

Good day... And a Tub Thumpin' Thursday to you! It's a short week for me, so this IS a Tub Thumpin' Thursday! I head to Florida tomorrow, and I'm ready! After last week, and the cold that's set in here, I'm ready! Too bad I'll be working about 1/2 the time! But, I'm not complainin'!

OK... Whew! What an awful day yesterday for the currencies... In the morning, they ere in rally mode with the euro gaining ground to well within the 1.27 handle. But then the Trading Theme set in, and those gains were wiped out. The Trading Theme was set off by the awful Housing data, which reminded everyone of the deep, dark , dangerous days ahead... I bought some euros, and watched them rise, and went off to do something else... When I returned, they had fallen... UGH! The Japanese yen, however, rallied, as is the case with the Trading Theme... Risk trades get unwound, which benefits dollars, and yen. I've explained all this before, so I won't get into it again, but there's someone that has gone into the problems (credit markets and the Fed and Treasury's response to the crisis), and does a great job of telling it like it is... So, instead of hearing from me, ranting and cursing the "leaders" I'll let someone else explain it to you... This is a fellow named Ted Cook, that Ty Keough sent my way...

"One hardly knows where to begin. America has currently embraced the monetary policies of a banana republic. The Argentine and Zimbabwe models cannot be far behind. For years (35 to be exact) we have warned about the consequences of unbridled credit expansion. We argued that artificially low interest rates would lead to catastrophe. Now the first installment of this crisis has been visited upon us. Our policymakers have greeted this dilemma with even more ruinous money and credit policies that compound the problem. We've had the earthquake. The Tsunami is yet to come.

The monetary authorities in Washington, who are supposedly the brightest among us, have adopted a short-term strategy resplendent with economic error. As usual, the politicians are clueless. Somehow the idea has gained ground that recklessly expanding money and credit (inflating) will cure our economic ills without repercussions. Nothing could be further from the truth. This is currency debasement on a grand scale."

OK... Back to me... I see where Iceland is getting $2.1 Billion from the IMF, and $2.5 Billion from the Nordic Countries of Finland, Sweden, Norway, and Denmark to help resurrect the Icelandic economy. Seems like it's a case of too little too late to me, but maybe this can unlock the markets there a bit. For those of you keeping score at home, we received a price of 182.10 on our Icelandic currency this week. Now... I know there are people out there that don't believe that we receive a price like this when the Central Bank posts a daily figure of around 139... But let me tell you how this all works... I think the easiest way to explain this is to look at the Wall Street Journal, or most newspapers' business section, and you'll see the Fed Reserve rates for currencies that day. Since currencies only really trade at the level that's posted in the paper for a mili-second, it's merely used as a reference. It's not an indication where trades are being bought and sold.

Then there was the Housing data yesterday... October Housing Starts fell 4.5%, and Building Permits fell 12%! OUCH! That's just awful data! The Housing Starts fell to an annual rate of 791,000, which is the lowest since records began in 1959! That's 1959 folks! I hadn't even started kindergarten yet! We hadn't even launched Alan Shepard into space yet! Oh, the Soviets were way ahead of us at that time, only to be caught and passed later... But I digress, with this space exploration talk!

I don't mean to try to get everyone's attention away from the awful Housing data, like the media would do... I think of the cable news people doing this story, something like this: "Today, we saw the October Housing Starts fall 4.5%, and how about Paris Hilton breaking up with her boyfriend yesterday?"

OK, I'm back now, the research team over at JP Morgan sent out a note to clients yesterday, telling them that they believe the Fed will cut interest rates to zero by the next two meetings, Dec. 16, and Jan 28, and leave them there for the rest of 2009. Recall, that I wrote about how I believed the Fed was going to cut rates to zero about a month ago? I said then that the Fed is thinking that they can be "Saved by Zero"... Well... It's nice to see the BIG research teams jump on my bandwagon!

I guess, the Nestea Plunge in the Consumer Price Index (CPI) yesterday convinced them to make that call... October CPI took the biggest Plunge in 61 years by falling 1% in the month!

Falling asset prices... Falling inflation (so they say)... Falling Home prices... And Falling Job Creation... This is getting pretty ugly folks... And here's Jimmy Buffett (a reader reminded me of this!) I don't know ---- I don't know --- I don't know where I'm gonna go when the volcano blows. Mr. Utley! (you can hear those steel drums playing in your head now can't you?)

I ran some numbers last week for our monthly newsletter to clients, called the Review & Focus, (shameless plug) because I wanted to see if our age-old portfolio theory thought about how diversifying your investment portfolio reduces the overall risk of your portfolio, was holding true, given the currency sell of since July... Lo and Behold, it's tru, it's tru, I did see a putty tat! Yes, with the S&P 500 off more than 39% in the past year, a $100,000 investment in the S&P would not have done you very good... But by allocated 20% to Gold, and 20% to 3 currencies, euros, Swiss, and yen, and you can even substitute Aussie to prove the point even more... You are left with far more money in your portfolio, than if you did not diversify.

So... Yes, the currencies have fallen on difficult times since July, but they are still doing their work as a risk reducing machine for investment portfolios... Interesting... Those are the facts, Jack!

Today... The Data Cupboard will yield, the Weekly Initial Jobless Claims, which last week jumped above 500K... I would look for this to remain above 500K... And that my friends, is not a good thing. We'll also see the Philly Fed Index (manufacturing), and one of my fave data pieces, Leading Indicators... If everyone would have paid attention to the Leading Indicators in the last year, they were telling us that something was wrong... And I believe they'll still indicate something still is going wrong, as they are forecast to post a negative -.6% print for October...

The Data Cupboard will be emptied after today, with nothing to report tomorrow.

In the Eurozone... ECB member Nowotny made a clever comment that has helped the euro a bit this morning... Nowotny was talking about interest rates cuts and said, "it makes perfect sense not to use all your firepower at once." Like I always say about not using all the arrows in your quiver! Yes, this is what I was referring to yesterday when I was talking to a long time customer... I said that the ECB would be more pragmatic when it came to their rate cuts... Yes, they participated in the coordinated round of rate cuts, and they cut rates 50 BPS at the last meeting... But... I believe they will pause for the cause, and take a look at what their two previous rate cuts did to the economic landscape before going off and cutting rates like there's no tomorrow.

Speaking of rate cuts... The Swiss National Bank (SNB) decided to take the plunge this morning and take out their yield that's offered... The SNB cut rates 100 BPS! That's crazy man! Crazy!

Speaking of crazy... The automakers were on Capitol Hill yesterday pleading for some bailout money... I understand that the proceedings were a bit heated at times, as well they should be! I think there will be a vote today on whether the Big 3 get some additional bailout money... You might recall that they already received $25 Billion to put toward alternative fuel vehicles... Yeah, I bet it went there, right? Oh, that's right, I see a whole line of alternative fuel cars rolling off the lines right now! NOT! If I were in charge of the purse strings here, I don't think I would give them a dime, until they demonstrated that they will change...

And... Finally, before I head to the Big Finish... Did you happen to see or hear or read any of the conversation between Sen. Ron Paul, and Big Ben Bernanke? Oh, this is classic stuff! Here's a link to a site that has the video of the back and forth between these two... Simply classic! http://news.goldseek.com/RonPaul/1227028538.php

Currencies today 11/20/08: A$ .6305, kiwi .54, C$ .7955, euro 1.2545, sterling 1.4865, Swiss .8210, ISK 182.10, rand 10.5675, krone 7.0740, SEK 8.15, forint 215.15, zloty 3.0740, koruna 20.43, yen 95.70, baht 35.15, sing 1.5290, HKD 7.75, INR 50.15, China 6.8342, pesos 13.40, BRL 2.3890, dollar index 87.62, Oil $52.15, Silver $9.39, and Gold... $745.50

That's it for today... And that's it for me till next Tuesday. Chris will have the conn on the Pfennig till then. Hey! I paid (technically below $2) $2 for premium gas last night! WOW! It's a good thing the oil price plunged when it did, given the state of the economy right now, eh? Still no improvement in the eye... My little buddy, Alex, and I were on our own last night, so we opted to go out for dinner after his guitar lesson! Tomorrow night is the office holiday party... I don't know who set this date, but to me, it's like putting up your Christmas decorations and lights before Thanksgiving! Just a little early, eh? Oh well, I'm not complaining, just observing... I'll be gone for it anyway... OK, Mike's here, better hit the send button! I hope your Thursday is Tub Thumpin'!

Chuck Butler

President

EverBank World Markets

1-800-926-4922

1-314-647-3837