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The U.S. Treasury Moves The Goal Posts...

ChuckButler — Wed, 01 Jul 2009 14:33:01 GMT

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In This Issue..

* A 4-day rally gets stopped at the border...
* Home Prices fall at a -18.12% pace...
* Alice Rivlin gives her 2-cents...
* Kiwi bond maturities galore next month...

And Now... Today's Pfennig!

The U.S. Treasury Moves The Goal Posts...

Good day... And a Wonderful Wednesday to you! As tradition with the Pfennig would have it, here's my introduction to July... There I was... On a July morning... Looking for love... With the strength of a new day dawning, and... The beautiful sun...

Yes, for those "old rockers" from the 70's like me... That's Uriah Heep, at their best!

OK... So, welcome to July! The last day of June was quite the volatile one to say the least! There we were waiting for the S&P/CaseShiller Home Price Index to print, and show that home prices were still down by quite a bit, when it did, it did, it printed at -18.12%... But! The media was all over that like a cheap suit, clamoring that the spiral down in Home Prices had come to and end! Which, may be true... But wouldn't you want to wait to see if next month's report confirms it? And... By the way... Since when does -18.12% fall in home prices beckon a rally? Yesterday, would be that answer!

So... The currency rally that was going on for a 4th day, was quickly wiped out, Ventures style... What? Don't know who the Ventures are? Boy, you really missed a lot of great instrumentals! Any way, the euro sunk like the Titanic from a level of 1.4130 to 1.40... The iceberg that caused this mess was simply the fact that traders, etc. believe the U.S. is on its way out of this mess... Of course, they must not be Pfennig readers, because... They would have read yesterday how I detailed the monthly numbers and showed how even with the spiral down in Home Prices ending, it would take until 2011 before the Home Prices got back to zero!

But NOOOOOOO!!!! They couldn't read it until late yesterday afternoon, because... Houston, we had a problem, with the Pfennig's delivery yesterday... See, how I've mellowed? I'm not even going to rant about this... Instead, I'll just remind everyone that whenever the Pfennig doesn't show up in your email box, you can most likely find it to read on the Pfennig's website, where you can view that "glamour shot" of me, and archives of the Pfennig! You can find it here: www.dailypfennig.com ---- Hope that helps!

OK... Well... After the thrill is gone, and the dust settled on all that yesterday, the euro is leading the other currencies higher once again... Here are a few things that have caused a sell-off of the dollar overnight once again...

Not that I'm a fan of his... In fact, I don't really care at all... But George Soros, normally has some interesting things to say, that end up being bang on... So here are a few one liners from a speech by George Soros yesterday... I believe this sounds very much like the things I tell you, have told you, and will continue to tell you...

SOROS SAYS SEES A "STOP-GO" ECONOMY GOING FORWARD
SOROS SAYS SELF-CORRECTING MARKETS IS A MISCONCEPTION
SOROS SAYS INFLATION FEARS WILL DRIVE UP RATES AS MARKETS REVIVE, CHOKING OFF GROWTH
SOROS SAYS CURRENT SUPER BUBBLE MADE POSSIBLE BY PAST INTERVENTION, EFFORT TO RESOLVE PREVIOUS BUBBLES
SOROS SAYS FORMER FED CHAIRMAN GREENSPAN REFUSED TO ACCEPT RESPONSIBILITY FOR STOPPING BUBBLES

And then there was Alice Rivlin, she of former Budget Director, and former Fed Reserve member, fame, had a few things to say to the House Budget Committee... Good stuff, but you have to wonder if anyone was paying attention! Here's Alice!

"The long term budget outlook: impending catastrophe"

"No one needs to remind this Committee that the outlook for the federal budget is worrisome indeed, scary. Long before the financial crisis and the current deep recession, this Committee was anxiously pointing out that current federal spending and revenue policies are on a risky, unsustainable course. Promises made under the major entitlement programs (especially Medicare and Medicaid) will increase federal spending rapidly over the next couple of decades, as the population ages and medical spending continues to rise faster than other spending. Federal expenditures are projected to grow substantially faster than revenues, opening widening deficit gaps that cannot not be financed."

Hmmm... Sounds like me too! Is this "sound like Chuck day?" HA!

OK... Enough of all that, I don't want anyone to get hurt, and I should have told everyone to put away the sharp objects before reading!

In other data yesterday, Consumer Confidence took a step backward, and fell in June to 49.3 from May's figure of 54.8... Maybe those that were surveyed has just read Alive Rivlin's talk to the House Budget Committee! Seriously though, this was a surprise, given the fat that the DOW gained 838 points in the 2nd QTR! At least, that's what the Wall Street Journal said!

Today, we get a truckload of data starting with Challenger Job Cuts, and the ADP Employment Change. Those are followed by the ISM Manufacturing Index, Construction Spending, Pending Home Sales and Vehicle Sales... Not a lot of "major" data prints, but still stuff to check the pulse of the economy.

I was talking to my good friend, and an economics professor at a prestigious University, yesterday, and she mentioned that "this piece of data is questionable as to the inputs"... I said to her... "What piece of data isn't questionable these days?"

OK... The "demand for high yield" was put on hold yesterday... But it will return, or at least I should say I think it will return... I don't know for sure to say "it will", so had better make the legal beagles happy... That's funny! To say that they would be "happy" with me... They cringe, and get very uncomfortable every day when they read the Pfennig! HA!

But you know me... I'm just trying to provide Market Commentary, and other things that I think are important, well, important to me that is!

Like... A long time reader sent me a note yesterday, and said, "hey Chuck, did you see the story in the Wall Street Journal (WSJ) on Foreign Demand for Treasuries?" Well, I hadn't and went immediately to the WSJ, and there it was... Tucked away in a corner so that no one would see it, if they weren't looking for it... A story, by Min Zeng, titled, "Is Foreign Demand As Solid As It Looks?

These are the things that really TICK ME OFF folks, so stay with me on this... Basically, as we all know the U.S. Treasury Auctions have been getting "covered" easily recently... And foreign demand was listed as the reason... Which would have been the exact opposite of what I was saying about foreigners shying away from Treasuries...

Here's the skinny... But I'll let Min Zeng tell it, since he did the research and brought this to the public, even though it was tucked away so no one would notice!

"But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners.

The new definitions are deep in the arcane world of Treasury auctions. The change involves buyers who place orders through primary dealers. Those had been counted as direct buyers, but as of June 1 they were classified as indirect buyers, making that group larger than before. Because investors view that group as being dominated by foreign buyers, they assumed foreign demand was higher."

>>>> OK, back to me... Ahhh, so that's what's going on... The Treasury "moved the goal posts on us"... As Sylvester would say... That's despicable! Why isn't someone in Washington D.C. shouting from the roof tops about this? Oh, that's right, they're all in cahoots!

This is HUGE folks... So... When the markets were thinking that foreign demand was increasing, it was actually, as I had said, shying away from Treasuries! Which, if the market participants are thinking that as long as foreigners are "buying into our deficit spending" then the dollar will be on terra firma, but instead are getting "duped" by the U.S. Treasury, you would think that someone would have some xplainin to do... Right Lucy?

And here's another thing that just ticked me off when I read it this morning... Recall, last week I told you about how someone in China was dissing the talk that China's stimulus was working, and that China would not be recovering, which sent the Aussie dollar to the woodshed until this news had passed? Well... Talk about egg on their face! Here's the skinny...

China's manufacturing expanded for a fourth month in June... The official Purchasing Managers' Index rose to a seasonally adjusted 53.2 in June from 53.1 in May... And just like here in the U.S. any reading above 50 is thought to show manufacturing is expanding... The manufacturing index in the U.S. is around 44, so... We DO have the tale of two economies...

In one corner, we have the Chinese who have spent about $585 Billion worth of renminbi in stimulus, and are seeing the results... Whereas in the other corner we have the U.S. who have spent... More money than you can shake a stick at, and are not seeing green shoots like they "think they are", instead they see dandelions, and weeds!

And the currencies of Australia and New Zealand have responded positively to this news from China...

And since I'm talking about China, might as well check on the other members of the BRIC's (Brazil, Russia, India and China) Brazil's real just posted its best quarterly performance on record, and India was Asia's 3rd best performing currency, and if you throw out the two currencies above India that are illiquid, South Korea, and Indonesia, India was the best performing currency in Asia in the second QTR...

And the people over at the Royal Bank of Scotland (RBS) believe that the rupee won't stop here... RBS issued a research report calling for a record 11% gain by the rupee in the 3rd QTR... I bet this news is music to the ears of my colleague on the "other" newsletter that I write... The Currency Capitalist... (to find out more: https://www.web-purchases.com/CUC/WCUCJ900/landing) My colleague, Ashish Advani, at the Sovereign Society, has been saying the rupee would be a strong performer for months now!

Here's something you might want to be aware of, regarding the New Zealand dollar / kiwi... About $4.5 Billion in kiwi Uridashi and euro kiwi bonds denominated in kiwi will expire next month... I'm told that this is more than 4 times the size of a usual monthly expiration of bonds. This could very well be the hoola hoop the Reserve Bank of New Zealand (RBNZ) is looking for, given their wish that kiwi would weaken...

Royal Bank of Canada's Currency guru, Sue Trinh, says that kiwi weakness could be beneficial to Aussie dollars, as the Japanese are leaning toward Aussie over kiwi these days...

Sounds about right to me!

And then there was this... OK, you all saw that Bernie Madoff was given 150 years in prison... Did you see that his wife, Ruth, reached an agreement with the authorities to return all of her wealth except $2.5 million that she got to keep? The thing that I still don't get is how there aren't more people going down with the ship on this one... I've been in the back office of brokerage firms, ran a margin dept, etc. and know this wasn't just Bernie and his accountant... There was a lot of wool pulled over many eyes... And this will be the next step in the investigation by the U.S. officials... To see, who else knew what... If a whole stable full of people aren't found to have known, then I'll be surprised...

Currencies today 7/1/09: A$ .8045, kiwi .6410, C$ .8640, euro 1.4050, sterling 1.6430, Swiss .9220, rand 7.7675, krone 6.39, SEK 7.6337, forint 192.50, zloty 3.1390, koruna 18.3315, yen 96.90, sing 1.4475, HKD 7.75, INR 47.90, China 6.8330, pesos 13.18, BRL 1.9515, dollar index 80.11, Oil $71.27, 10-year 3.54%, Silver $13.67, and Gold... $931.20

That's it for today... So sorry about the tardiness of the Pfennig yesterday, but I can't do anything about it when we have technical difficulties... You know that I get up before the milkman, and the paper man, to get here to write it... It wasn't like I was dilly-dallying around and didn't get it done until 5 in the evening! HA! I see that my little buddy, Alex, got a 2nd and 3rd in backstroke and freestyle respectively at his latest swim meet. Really long time readers might recall when Alex's older brother, Andrew was a highly decorated swimmer, and I would write about his swimming records... And their sister Dawn, also was a medal winner as a young girl! So... It's now up to granddaughter, Delaney Grace to carry on the swimming tradition! HA! Cards lose again... UGH! OK... Time to try to get this out the door, hopefully it will go without a hitch... But whether it does or doesn't it won't stop me from having a Wonderful Wednesday... How about you?

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

Removing Fed Rate Hike Bets...

ChuckButler — Fri, 20 Jun 2008 14:20:55 GMT

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In This Issue....

* The euro rallies 1-cent!
* U.S Data continues to be a drag...
* Canada's Carney underpins the loonie...
* RBS issues a warning!

And Now... Today's Pfennig!

Removing Fed Rate Hike Bets...

Good day... And a Happy Friday to one and all! Looks like it could be a Fantastico Friday as traders are Finally coming around to Chuck's way of thinking regarding Fed rate hikes... And as traders remove their bets for aggressive Fed rate hikes, the luster begins to fade on the dollar rally. The meetings are over for this week (they start up again next week!), YAHOO! I get to spend the day on the trading desk... I've missed everyone!

OK... Front and Center this morning, we have the euro trading 1-cent higher, knock, knock knocking on Heaven's Door, I mean, the 1.56 handle. As I said in the intro, it appears that traders don't have the stomach to hold on to their bets that the Fed will aggressively raise interest rates this year. Recall, the other day, I told you that the bets were ratcheting up and had reached 75 BPS of rate hikes this year... I doubt we have any... In fact, as I told you the other day too, I believe that when the dust settles on the fact that the Fed isn't going to raise rates, things will have gotten so bad here that the Fed will be entertaining thoughts of cutting rates again!

Japanese yen had really been beaten about the head and shoulders this past week, as it re-visited the 108 handle... But with the stocks looking soft, it recovered a bit the past two days. The Royal Bank of Canada (RBC) says that the dollar is overbought VS the yen. Hmmm... I agree with that, but I think RBC's call for a yen rally to 105.60 is not enough... That's too conservative for me... But then, I get emotional about these things... I called for yen to rally to 100 this year, and while it got very close, it didn't quite have the strength needed to reach that level... I based that call to 100 on the fact that we would have another "risk" event in the markets this year, which would lead to risk aversion, stock selling, Carry Trade reversal, and a yen rally! We still have 1/2 year to go, but the year is moving fast!

Speaking of the Carry Trade... I receive dozens of emails each week from people asking me what the Carry Trade is... For long time readers, we've been through all this more times than you can count... But for new readers, well... It's all new! So... Here you go! The Carry Trade basically is simply selling a low yielding currency (whose borrowing costs would be low) short, and taking the proceeds to buy a higher yielding asset. When the borrowing costs go up, or when the currency that was sold short rallies, it makes this trade very costly, and it then gets unwound / taken off...

OK... Back to currencies... Yesterday, I told you about Brazil's Central Bank chief, and his calling out the Bank of England's handling of inflation... Well, Mr. King of the Bank of England (BOE) heard that and came out with his own strong words... King said in an interview that the BOE needs to focus on rising inflation, not growth... OK... I'm with you there! The markets will take that to mean higher interest rates, considering the fact that inflation is well over the BOE's 2% ceiling. And when that thought process enters the markets, the pound sterling will be underpinned, and in fact it is rallying as I type my fat little finger to the bone here!

Here's story I doubt you saw on your news station yesterday... China said it will raise domestic gasoline and diesel prices by 17%-18%, as it responds to near-record crude-oil futures and criticism of its fuel subsidies. The surprise move is the largest increase in over four years, although local prices will still be below the international market. In case you weren't aware... The Chinese Gov't subsidizes fuel prices for their people... You see a country that has over $1 Trillion in currency reserves can afford to do that! However, with the price of Oil continuing to rise, even the Chinese had to say "no mas!"

I doubt this will be too heavy a load for the Chinese economy to bear... He ain't heavy, he's my brother! So... Expect the beat to go on in China, which means a slow, drip of currency appreciation at a time...

This news led Oil prices lower for the day... And that's OK in my books! And looky there! The euro just went back above the 1.56 handle! No more knocking... Someone's knocking at the door, somebody's ringing the bell, do me a favor, open the door and let them in... Why hello, Mr. euro! How are you today? It's good to see you back in the 1.56 neighborhood! Why thank you... It's good to be back... I was lost in the 1.53 block for a long time, and people kept telling me I wasn't worthy any longer, but I sure showed them, eh? HAHAHAHAHAHAHA!

OK, I'm back now, that was silly... But, you know me, once I get typing, I can't stop, it's simply a stream of consciousness!

Bank of Canada's (BOC) Gov. Carney gave a speech last night, that should be quite the underpin for the Canadian dollar / loonie. Carney indicated that the BOC was finished with their rate cuts and have moved to a neutral bias... He also talked about how a strong loonie will help exert a "dis-inflationary" influence. The loonie took notice and is rallying this morning.

Yesterday, we saw the color of the latest Philly Fed Index (manufacturing in that region), and it looked awful! The Index was "expected" to fall to negative -10, but instead it fell to negative -17... Uh-Oh! This leaves this index near the lows of earlier in the year. Significantly worse levels have occurred only in outright recessions. And you know me... I contend this to be a recession!

The data cupboard is bare today... No data, nothing, nada, zilch! And for the dollar, that's probably a case of "no news is good news"!

Next week we'll have the first Fed FOMC meeting since Big Ben began "fighting inflation"... The markets will be greatly disappointed when they leave rates unchanged, and leave the "downside growth risks" on the board... But don't let that get in the way of dollar bulls still thinking they have the upper hand here... Too bad they'll get that hand slapped next week and the following weeks when the Fed continues to do nothing, absolutely nothing, say it again!

Did you see that the ratings agency, Moodys, announced that they were cutting the ratings of MBIA and Ambac, citing impaired ability to raise capital and write new business? Well... Just another item being swept under the rug! But you can depend on me to pull back the rug and expose these things!

And... Has anyone seen the warnings issued by the Royal Bank of Scotland (RBS)? Pretty scary stuff for a conservative bank to make this kind of a call, but they did, and I'm proud of them for going out on the limb! It gets lonely out on the limb alone! Here's the meat of the warning...

"The Royal Bank of Scotland, warned clients to be prepared for the biggest crash in stock and credit markets in the next three months as inflation and the dwindling fiscal growth continues to hit world economy. The views were expressed in a report by the bank's strategists Bob Janjuah, Kit Juckes, Tim Jagger and Richard Smith.

The report stated, "Our macro economic road map is playing out - slow growth for longer, deep into 2009, with the pain spreading globally, gradually."

Well... That warning plays well with my warning that another "risk event" will play out in the U.S. this year... The liquidity / credit crunch losses booked so far will turn out to be merely the appetizer to this four course meal! Of course that's my opinion... I could be wrong...

And... These investigations of the failed Bear Stearns hedge funds are getting interesting... Two former hedge fund managers have been arrested, and the prosecutors believe they have a "mountain" of evidence to show the managers mislead investors and lenders... Like I said a couple of months ago, I think this mortgage meltdown / sub prime debacle will eventually lead us to Corporate scandals much like we saw in the early part of this decade...

Does that matter? Well... When you're a country such as the U.S. depending on the kindness of strangers to buy their assets to finance their gargantuan DEFICIT, it SHOULD matter! If those strangers (foreigners) don't feel as those the assets they are buying have credibility, they won't buy... And that leads us back into the circle of when you can't finance your deficit, you have to either raise interest rates aggressively or continue to allow a general debasement of your currency...

Alrighty then! The dollar looks as though it will end the week on a sour note, and we'll head into next week with the focus on the Fed's FOMC on Wednesday... And I noticed yesterday, before I left, that Gold had rallied back to $900! I like the looks of that figure!... Time to go to the Big Finish!

Currencies today 6/20/08: A$ .9550, kiwi .7640, C$ .9870, euro 1.5615, sterling 1.9770, Swiss .9660, ISK 80.30, rand 7.9770, krone 5.15, SEK 6.0125, forint 153, zloty 2.1550, koruna 15.45, yen 107.50, baht 33.40, sing 1.3650, HKD 7.8050, INR 42.96, China 6.88, pesos 10.30, BRL 1.6030, dollar index 73.06, Oil $132.90, Silver $17.50, and Gold... $904.50

That's it for today... I guess I spoke too soon about that Chamber of Commerce weather yesterday, as it is raining again this morning! UGH! Next Saturday the 28th, is my little buddy, Alex's birthday... We are traveling to Kansas City to watch the Cardinals play the Royals for his birthday. (that's what he wanted! And you won't hear me arguing about a chance to watch my beloved Cardinals play!) The only reason I talk about his now is that someone mentioned yesterday that they couldn't believe he will turn 13 this year. And it hit me! 13? It just seems like a few years ago that he used to sit on my lap and "help" me write the Pfennig each morning! WOW! Time flies when you're having fun, eh? Alex is becoming quite the guitar player, plays football and baseball, and love to watch the Cardinals, Hmmmm sounds like a chip off the old block, eh? Maybe in a couple of years, I let him take a stab at writing the Pfennig one day... That would be a hoot! Anyway... I hope this Fantastico Friday continues, and you have a Wonderful Weekend!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837
www.everbank.com