Fundamentals Remain Weak

Good day… Well, yesterday was another day of little or no movement in the currencies and was it pretty boring to watch. But the thing to remember is that the dollar is still weaker overall, and nothing has fundamentally changed to reverse that position for the dollar. In fact, one could even argue the point that the fundamentals have gotten even worse, given the problems in the housing sector, and the Fed’s current pickle.

For instance, yesterday I forgot to talk about the poor showing of the ISM manufacturing index that printed on Monday. The index fell to 50.9 in March from February’s figure of 52.3. For those of you new to class, this index uses a line in the sand at the 50 level, that tells us whether the manufacturing sector is expanding or contracting. Any index number above 50 indicates expansion, and the opposite holds true for any index number below 50.

But there are other things this report can be used for. Take, for instance, the fact that the Fed has never raised rates when the index was below 50, and that a two-month figure of 45 or below indicates recession. So this is a report that I follow closely, and I think that the index falling very close to the 50 level is an indication that the economic slowdown that both Chris and I have been talking about is taking place.

Today, we’ll see U.S. factory orders for February, which is expected to rebound a bit from January’s awful showing of negative 5.6%. I think the data will be disappointing again, though. We’ll also see the ISM non-manufacturing index, which is a non-event for me. The service sector is growing; we all know that…now if they could just provide some service we might have something!

Friday is a Jobs Jamboree Friday. Recall last month the markets/experts were expecting around 150K jobs created in February, and I said they would be disappointed – and they were, as the jobs created only amounted to 97K. Well, once again the markets/experts expect 133K, and once again, I believe they will be disappointed. Shoot Rudy, even if the 133K is bang on, it’s not enough to keep the economy moving in a positive direction. I sure hope the markets keep that in mind before the media spins a “feel good” story that jobs are being created! Never mind the fact that we have no idea what kind of jobs they are.

OK… Enough on that data stuff. It can really take on a life of its own if you let it! But, I always feel it to be important to go through, as it helps explain why the dollar is so weak, and why we should expect it to be weaker in the future.

Now… Back on the ranch… The European Central Bank (ECB) is still waging a war of words to engage the markets in the thought that they will be raising interest rates again soon…and they have to do this because the markets have ADD. Seriously though, the ECB has to worry about an expanding money supply, the economic growth in the Eurozone, the fact that rates, by their own admission remain low, and their greatest fear: Rising oil prices bringing higher inflation risks for them to deal with.

Speaking of higher oil prices… I mentioned yesterday morning that the price of oil had fallen over $1. This is all tied to the geopolitical tension in Iran (again). At one point the markets felt that the holding of British sailors by Iran would have a diplomatic resolution, and thus the price of oil fell… But who really knows what’s going on there? I would think it to be wise to not make forecasts and just wait-n-see.

I saw a report yesterday evening that the Chairman of Xstrata, a major mining house, declared that Chinese demand for base metals, particularly copper, was nothing short of phenomenal! He went further to say that the Chinese demand for copper may increase 8-10% this year, and that all commodities will enjoy growth figures this year.

When base metals move higher, they normally support a stronger price of gold, so we could certainly have that going for us if the Chairman of Xstrata’s views come to fruition, eh?

When you connect the dots, you see that the Chairman of Xstrata is seeing continued strong growth in China. So, it doesn’t look like the so-called “slowdown” in China has begun to happen yet!

In Japan, economic growth is going on, but not like in China, and that’s probably a good thing for the Japanese. The Japanese yen, on the other hand could use some love by the markets, as it looks as though the dust has settled on the bombshell that Big Al dropped on us at the end of February. Recall, when the former Fed Chairman Big Al Greenspan, said the United States would enter into a recession within a year, and it set off a fire storm in the markets, and carry trades were reversed faster than you could read a book called “Things I Can’t Afford” by Bill Gates?

Well, it looks like the dust has settled now, and the carry trade is back on the table. Japanese yen is struggling once again. Of course, since we saw what just one little comment by someone that should probably go sit in his rocking chair, can do to the carry trade, I would be very scared to be short yen. In a moment’s notice, hedge funds, institutions, and big players are all heading to the exit door, and unwinding carry trades, and you just sit there with your short position? That’s a scary place to be, if you ask me!

Japan’s latest Tankan report, which measures the pulse of the Japanese economy, did slip two ticks last quarter; but that’s not the kind of stuff that will keep the Bank of Japan from tightening further… And as rates go higher (I know this is not on an express route!) the borrowing costs of those short yen positions will get more expensive. So, just another thing to think about when shorting yen!

As Gold has ticked up, and the carry trades are put back on, the South African rand has seen some long awaited buying. But as I always, always I tell you… Be yourself. No wait, no tutor turtle here! Let’s try this again… I always tell you that rand is too volatile for my taste. The only way I’ve ever liked it was as a part of our Commodity Index CD, where it only took up 25% of the CD. But for those of you who like to do a Lou Reed and take a walk on the wild side… Rand could be your bag, baby… I’m telling you though, that’s not my bag, baby! (Just couldn’t resist the Austin Powers reference there!)

It’s time to go to the Big Finish, and hit the send button.

Currencies today: A$ .8127, kiwi .7180, C$ .8650, euro 1.3350, sterling 1.9745, Swiss .8190, ISK 66.50, rand 7.17, krone 6.1225, SEK 6.99, forint 184.40, zloty 2.8850, koruna 20.9440, yen 119, baht 32.40, sing 1.5140, HKD 7.8150, INR 43.08, China 7.7325, pesos 10.98, dollar index 82.97, Silver $13.47, and Gold… $666.51

That’s it for today… Cards are off to a slow start… I could see down in Jupiter that we just weren’t hitting the ball, and it has come north with the team… UGH! Our new Japanese REIT MarketSafe CD is hitting the ball out of the park! Chris told you last week how Japanese housing prices are soaring… Could be a harbinger to a great investment choice! Thanks to Cheryl who baked me a German Chocolate cake, and Kristin, who baked me a pineapple upside down cake for my birthday! (I was gone for the actual day) YUMMY, both of them! Good thing I only celebrate a birthday once a year, I could easily look like the Michelin Man with these cakes! Have a great Wednesday!

Chuck Butler — April 04, 2007