Fundamentals Rule!

Good day… And a Happy Friday to one and all! Hopefully a Fantastico Friday too! It’s the last Friday of June… Where did the month go? WOW! Next Friday, we’ll be celebrating our nation’s birthday. Can you believe that? The 4th of July? It just finally warmed up here in St. Louis, and it’s already the going to be the 4th! Amazing… How the time flies when you’re having fun! And fun is what I’m having… With every day that passes, I get a little stronger, and another day further from the pain and problems of last summer. How could I not be having fun?

OK… Well… Recall yesterday when I told you a big bank’s chartist said that the euro (EUR) would top out at 1.5726, and that I hoped it would fly right by that? Well, it did! It did! It did fly right past that! I love it when fundamentals rule! The euro has climbed to 1.5765 this morning as I write after spending most of the day yesterday taking liberties with the dollar. Another chartist said yesterday that the euro would re-visit the 1.60 level if it breached 1.5785… So, we’ve got that going for us, eh?

The big winner of the day, though, was gold. Right after everyone began coming in yesterday morning, gold got some wind in its sails and took off! Before you could read the Pfennig that said, “Gold is still trading below $900 wink, wink” it was above $900 and beyond. The trading band for gold stretched and stretched as if it were made of spandex! Then, before you could gather up your cash that was stored in coffee cans and buried in the back yard, gold was hitting $922. The shiny metal posted its biggest one-day move since 1985! WOW!

A sagging dollar, a weak stock market, and mounting global inflation problems put the wind in gold’s sails, and it never looked back. Oh, and we can’t forget that our friends over at OPEC (NOT!) said that the price of oil could reach $150-170 this summer. Oh boy, please tell me where I can send the “Thank You” card to OPEC! They’ve been so kind… Oh, and don’t look now, but the price of oil has just hit $140! UGH!

Speaking of global inflation, guess who has inflation problems? Come on… Japan! WOW! The country that lived through a decade of deflation now has the opposite problem, as inflation in Japan hit a 10-year high.

OK… Let’s stop and put this into perspective… Japan’s inflation rose from 0.9% to 1.5% on high oil and food prices… Same story around the world, unless you live in Venezuela where they pay 18-cents a gallon for gas!

Anyway… With U.S. stocks circling the bowl yesterday, and inflation rising in Japan, the yen (JPY) was able to enjoy a day in the sunlight versus the dollar. Yen is trading with a 106 handle this morning, which is much better looking than its stepsister, 108! You see, when inflation rises in a country these days, traders look at that currency as possibly receiving higher interest rates to back it, and they reward that country/currency… Much like we saw with the dollar earlier this month – only to have that all erased.

I just signed off on an 800 word piece that I wrote for Forbes on why I Don’t Buy Into The Idea That The Weak Dollar Trend Is Over. Don’t know when or where it will appear, but I had all but forgotten that I wrote it, when I received notice to sign off on it yesterday. Though it still rings true, it sure would have been more timely, and piercing if it had been printed when I wrote it! However, am I complaining? Heck NO! I think about these things all the time when I get printed… If my parents had only been alive to see all this.

OK… I was saying… Oh, yeah… I don’t agree with the markets’ mentality in rewarding currencies with inflation, unless… Their central bank has been ahead of the inflation 8-ball with rate hikes. Think about the European Central Bank (ECB) and Reserve Banks of Australia and New Zealand… They fit this description to a “T”!

Someone asked me what I meant yesterday when I said that New Zealand’s pimples would get exposed with a negative print GDP. Well… I was simply referring to New Zealand’s current account deficit, which is HUGE! But has been swept under the rug by investors that loved that high yield… But if the yield begins to melt away, it will take kiwi (NZD) with it, I’m afraid.

There was some strong profit taking in Brazilian reals (BRL) yesterday and overnight. The real had reached 1.5895 yesterday, but sits at 1.6025 this morning. As I stated the other day, the real was the top performer this year, and I think some investors sat up and noticed, and took profits… And why not? I learned a long time ago, “It’s not a profit until you take it”. Paper profits don’t pay bills! We’ve seen these short-term profit taking days in reals before… So… Look at this move as a chance to buy reals cheaper than yesterday!

The data that printed yesterday in the United States was not what the Fed wanted to see. It really illustrated the corner that they’ve painted themselves into.

First the inflation piece of the GDP final print – which by the way did print at 1% – showed rising inflation… But then the weekly jobless claims data printed an increase in job losses for the week. The real kicker here was the fact that the continuing claims are still rising by the truckload each week. This doesn’t bode well for the Jobs Jamboree, for June. The jobless rate should remain high, and inflation will continue to rise… So, which door will the Fed opt to open? Growth or inflation? Well, if you ask me, they’re doing a horrible job at both right now!

Speaking of the Fed… Did you hear this one? The Wall Street Journal reported last night, “The Federal Reserve, in a move that could facilitate the flow of capital to cash-strapped banks, is considering steps to make it easier for private-equity firms and others to invest in banks, according to regulators and other people familiar with the matter. The central bank is also expected to offer more clarity about what exactly outside investors can and can’t do when they want to acquire sizable stakes in financial institutions but avoid direct regulatory supervision.”

Hmmm… OK… The Fed is going to issue the blueprint on how private-equity firms can buy huge stakes of banks and avoid regulatory supervision. What’s next? Leaving a key under the mat? Geez Louise, I shake my head in disgust at these people.

Did you see where Warren Buffett made some comments about the U.S. economy yesterday? Speaking on Bloomberg TV, Buffett said he’s, “concerned about ‘stagflation,’ or slowing in the U.S. economy while inflation accelerates. We’re right in the middle of it right now. I think the ‘flation’ part will heat up and I think the ‘stag’ part will get worse.”

Can you say 1970’s? Bell-bottoms here we come! The ’70s was a great decade for rock bands and rock music (just say NO to disco!), but I really don’t want to have to dig out my WIN button. For you youngsters, WIN stood for Whip Inflation Now, and was the creation of President Gerald Ford… Of course buttons don’t whip inflation; that took a Central Banker with intestinal fortitude. You might have heard of him… Paul Volcker.

The rumors are running rampant that a major bank might incur further substantial write-downs in the second quarter. There are also rumors that a major U.S. automaker is on the brink of bankruptcy. Things are getting quite ugly folks… I hope you have diversified your investment portfolios to protect your money.

We’ll end the week with some data from the data cupboard: two of my faves, personal income and spending, for May. Look, I know we almost always spend more than we make and it shows up here, but May is really going to look strange, because of the stimulus/tax checks. We’ll also see the U. of Michigan Confidence final reading for June. This confidence index has fallen out of bed in recent months, as it should! The dollar won’t get any love from these data prints, so the dollar should end the week on a sour note… And give investors and traders a weekend to think about what direction they think the dollar will go. Of course, if they would just read the Pfennig, they would know already, and therefore wouldn’t have to waste their weekends thinking!

Next week will be a short week, with the market volatility drying up on Thursday morning.

Currencies today: A$ .9615, kiwi .76, C$ .9940, euro 1.5765, sterling 1.9875, Swiss .98, ISK 81.40, rand 7.9375, krone 5.0680, SEK 5.9750, forint 151.35, zloty 2.1370, koruna 15.25, yen 106.30, baht 33.55, sing 1.3625, HKD 7.8010, INR 42.85, China 6.8615, pesos 10.29, BRL 1.6020, dollar index 72.40, Oil $140, Silver $17.40, and Gold… $922

That’s it for today… Well… Today is the one-year anniversary of my second cancer operation, which was the most awful thing I ever went through. So, it’s good to put a year behind that ordeal! Tomorrow is my little buddy’s 13th birthday. As I told you last week, we’re heading to Kansas City to watch our beloved Cardinals play the Royals tomorrow night. Alex had two hits in his game last night; one was a double! Looks like more rain for us again today… Can you believe this is the last Friday in June already? I finalized my flights to Vancouver for the Agora Financial Investment Symposium July 22-25 at the Fairmont Hotel Vancouver. I missed this conference last year, so I’m excited to get back to that beautiful city and this fabulous conference! Then I come home for a week and head back out to the San Francisco Money Show. But that’s not all… I then come home for a day and head to Milwaukee for meetings all week. I’ll be one worn out dude come the middle of August! But I’ll be having fun! OK… Let’s get this Fantastico Friday on the way!

Chuck Butler
June 27, 2008