04/22/09 St. Louis, Missouri Good day… And a Wonderful Wednesday to you! Another bad night for your Blues, which means their season has come to an abrupt halt… They are a young team, so they’ll be back next year.
OK… The euro (EUR) traded in a very tight range yesterday with a bias to sell dollars, but like I said, it was very tight. The Aussie dollar (AUD) rallied very strongly during the day, adding over 1-cent to its figure. It sold back some of that 1-cent gain overnight, though. As the upbeat stock session, immediately turned sour after the close. As I said yesterday, there was a lack of data to help the currencies along, and they had to rely on the earnings season for direction.
Stocks did enjoy a 127-point rise yesterday, so that helped things… But to me, that’s nothing more than a dead cat bounce for stocks… But then, I’m not even your last choice as a stock jockey!
OK… The BIG news yesterday that was going around the horn was that Turner News and the AP apparently got hold of the stress test results for banks, ahead of the government telling us what they contained on Friday of this week. Recall, I’ve maintained that the government wouldn’t “really” tell us the results of the stress tests. I believed that the government would tell us what they wanted us to know, and that’s it! I also have maintained that then, the government will be able to step in and really get their hands in the cookie jar of these large banks.
For instance, when asked, U.S. Treasury Secretary Geithner has said over and over again that he believes the stress tests will show that most of the 19 biggest banks have enough capital. Shoot Rudy, they had better! Each and every one of these 19 has received TARP funds! And again, the relaxing of the mark-to-market rules should also free up some capital. But… Again, let us a look under the hood… Shoot, why not? We as taxpayers paid for what’s under the hood!
I’ll get down from my soapbox now, sorry… Geithner told the oversight panel on TARP yesterday that each bank that needs help will get a mix of help, including more TARP funds. Great… Just great! Throw more good money at a bad situation… Makes perfect sense to me… NOT!
Geithner also told the oversight panel that regulators are doing the review of the stress tests not the Treasury Department. Hmmm… OK, so now we have to believe that the regulators are going to blow the whistles, right? That’s not going to happen folks, it would cause panic in the markets, period!
The currency guys think that the stress tests will be bad, and to that they have been buying Japanese yen (JPY)… Recall, that when the financial meltdown in the United States was in its darkest hour, to date that is, the Japanese yen was all the rage, as a safe haven currency…
Over in the United Kingdom this morning, the Chancellor of the Exchequer, Alistair Darling, is going to announce the budget for the next year. He’s already heard the news that unemployment in the United Kingdom has hit 2.1 million in the through months through February, which is the most in 12 years. The bond market in the U.K. is feeling the pain as they anticipate Darling announcing the biggest deficit since World War II, which means more bonds – or “gilts” – will need to be sold… And that outlook has caused gilts to fall in value.
Now, remember what I told you a couple of weeks ago, about how the U.K. has seemed to be ahead of the U.S. with regards to the timing of these disastrous events? Well… If gilts are getting sold because of the need for additional supply… When will that shadow be cast on U.S. Treasuries? I realize that with the Fed buying debt, monetizing the debt, that Treasury prices have received a boost… But, you’ve got to wonder with the U.S. deficits, and the amount of debt that will have to be issued, can the Fed support the price forever? I don’t believe they can… And the Treasury bubble will eventually pop, causing prices of Treasuries to spiral downward.
What does that have to do with currencies I hear you asking? Ahhh grasshopper… The dollar’s strength since July of last year has been predicated strictly on safe haven Treasury buying… Unwind those purchases because of spiraling downward prices, and you have dollar selling once again. It’s that simple…
So… All you potential homebuyers out there… Now’s the time to get on the ball and get it done, for these mortgage rates in the 4’s aren’t going to last forever! Now… I sounded like one of those snake oil mortgage sales people on the radio! UGH! But it’s how I feel! If Treasury prices begin to go down, their yields will go up, and when Treasury yields go up, mortgage rates go up… Again, it’s that simple…
Speaking of the U.S. deficits… Did you see where President Obama has asked for $100 million to be cut from the budget? HAHAHAHAHAHAHAHAHAHA! That’s like removing a bucket of sand from a beach! But, I’d rather let you see what my friends Ian Mathias and Addison Wiggin over at the 5 Minute Forecast had to say about this announcement… Here’s The 5…
“These radical cuts will come by ‘purchasing office supplies in bulk’ and teleconferencing when applicable. And they account for roughly five one hundredths of a percent of last month’s – just March’s – $192 billion federal budget deficit!
“Ooooh…
“That’s like making a $5 payment on a $10,000 monthly credit card bill.
“If your neighbor sent the bank a check for $100 on a $200,000 loan, he’d be a bum on the verge of personal collapse – the village idiot. In Washington, he’d be the leader of the free world.”
Those guys at The 5 are the best!
Don’t know if you read Outstanding Investments, by Byron King… But he wrote a very interesting report the other day on oil… He believes that the Saudi oil reserves are considerably less than what the Saudi’s tell us… But they can’t tell us the truth, because it would send oil prices back to $150 in a heartbeat. Mr. King didn’t just make this stuff up; his “intell” is what he believes to be a good, reliable source in the industry…
Oil heading to that price again would be disastrous right now… So don’t expect this to happen overnight, next week or next month… It’s a situation that will have to take time to work itself through… So… Let’s hope it doesn’t come to light for a Looooonnnnngggg time!
Gold gave back some of the ground it gained the previous day, as the stocks rallied and Geithner calmed the markets’ nerves about banks. I found that the gold move down was interesting given the IMF’s report that said the losses from the financial meltdown will reach $4.1 trillion… This gloomy outlook by the IMF could take some time to work its way toward a gold rally… But it should!
Speaking of gold… A reader sent me a note the other day, when I said, “doesn’t anyone want to have a strong currency any more?” He, the reader, said, you forgot about gold! Well… No, I didn’t forget about gold. Long time readers of this letter know that I truly feel that gold is a currency, that’s why I talk about it in my “currency newsletter”! The difference is simply that no country issues gold as their currency.
Still no “real” data to look at today, just the House Price Index, which we wouldn’t expect any surprises there, eh?
The Bank of Canada (BOC) surprised me yesterday by announcing a rate cut of 25 BPS… This was an interesting cut, in that the BOC cut the target rate, but not the deposit rate. Under normal circumstances, the deposit rate would also be cut by 25 BPS to avoid distortions in short-term money markets. Not sure what the BOC hopes to achieve with this move, except that they could at a later date come back and cut the deposit rate as a symbolic rate cut. You see the BOC made a statement that they will hold their target rate at the current level of 25 BPS until the end of 2010… Again, that’s a very curious announcement by the BOC… The loonie (CAD), however, wasn’t fazed, and rallied on the day.
The Chinese renminbi (CNY) finally moved higher versus the dollar overnight, finally moving to the 6.82-and-change level. The renminbi had remained in the 6.83-and-change level for a month!
That’s quite a bit to digest on a Wednesday morning; I think I’ll head to the Big Finish now!
Currencies today 4/22/09: A$ .7055, kiwi .5555, C$ .8065, euro 1.2950, sterling 1.4650, Swiss .8570, rand 8.9550, krone 6.77, SEK 8.53, forint 230.30, zloty 3.41, koruna 20.91, yen 97.80, sing 1.5060, HKD 7.75, INR 50.36, China 6.8298, pesos 13.17, BRL 2.22, dollar index 86.44, Oil $48.79, Silver $12.15, and Gold… $886.65
That’s it for today… I’m finally feeling almost human again. That pneumonia was a real pain… Not that it’s completely gone, but I’m no longer coughing my head off, etc. The miracle of drugs! And a lot of sleep! Nice comeback win by my beloved Cardinals last night… When I went to bed both the Cardinals and the Blues games were tied… One bad outcome, one good outcome… I finished up my 3 presentations for Bermuda yesterday, so I’ve got that going for me! Now, I just have to find my passport! Got to get going here, I have a long meeting to start the day… I hope your Wednesday is Wonderful!
Chuck Butler
Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter, which is reposted here at The Daily Reckoning. With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News and World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune. Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.
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From a site I happen to come across yesterday:
The Turner Radio Network has obtained the stress test sults.
They are very bad. The most salient points from the stress
tests appear below.
1) Of the top nineteen (19) banks in the nation, sixteen (16)
are already technically insolvent.
2) Of the 16 banks that are already technically insolvent, not
even one can withstand any disruption of cash flow at all
or any further deterioration in non-paying loans.
3) If any two of the 16 insolvent banks go under, they will
totally wipe out all remaining FDIC insurance funding.
4) Of the top 19 banks in the nation, the top five (5) largest
banks are under capitalized so dangerously, there is serious
doubt about their ability to continue as ongoing businesses.
5) Five large U.S. banks have credit exposure related to their
derivatives’ trading that exceeds their capital, with four
in particular – JPMorgan Chase, Goldman Sachs, HSBC
Bank America and Citibank – taking especially large risks.
6) Bank of America’s total credit exposure to derivatives was
179 percent of its risk-based capital; Citibank’s was 278
percent; JPMorgan Chase’s, 382 percent; and HSBC America’s,
550 percent. It gets even worse: Goldman Sachs began
reporting as a commercial bank,revealing an alarming total
credit exposure of 1,056 percent, or more than ten times
its capital!
7) Not only are there serious questions about whether or not
JPMorgan Chase, Goldman Sachs, Citibank, Wells Fargo, Sun
Trust Bank, HSBC Bank USA, can continue in business, more
than 1,800 regional and smaller institutions are at risk
of failure despite government bailouts!
The debt crisis is much greater than the government has reported.
The FDIC’s “Problem List” of troubled banks includes 252 institutions with assets of $159 billion. 1,816 banks and thrifts are at risk of failure, with total assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in prior quarter
Put bluntly; the entire US Banking System is in complete and total collapse.”