German Investor Confidence Rises!

Good day… And a Terrific Tuesday to you! Whew! A long day yesterday for me and the kids on the trading desk. I suspect today will be cut from the same cloth. We have quite a few currency investors panicking and bailing on their plan to diversify. It’s not a one-way street folks… No one ever said it would be! But those that held on to their positions during the dollar rally of 2005, were rewarded, as I believe they will be this time, too… But then, I could be wrong.

Yes, maybe… The markets are going to forgive the U.S. of its debt position and imbalances. They will forgive the U.S. of the financial institution meltdown that all began with subprime mortgages. They will forgive the U.S. of having rising unemployment, and an economy that will be proven to be in a recession. And I’m not even going to go into the future debts the U.S. will have to take on with all the baby boomers hitting retirement. Yes, maybe… Maybe I’m wrong… To go on thinking, to sing my song… Maybe, the wall is falling down, call out the trumpeters… Oh stop! They see what you’re talking about!

So… The dollar continued to gain versus the euro (EUR) and other currencies yesterday. The euro rallied at one point in the morning, but soon gave way to dollar strength which saw the euro give up the 1.47 handle. I told the crowds in San Francisco that the dollar rally might see the euro fall to 1.45… But I also said the dollar rally could last through the elections, as the “curb appeal” campers get the “house” looking nice for the voters. But if the euro is already in the 1.46 handle, that call of 1.45 might be taken out before we get to the start of the NFL season! UGH!

Dollar strength also has gold on the run, which is very interesting to me… Has inflation been wiped out because oil has fallen from $146 to $112? I don’t think so Tim! But you would think so given gold’s drop in price. I was reading a communiqué from my friends, Mary Anne and Pam Aden (The Aden sisters) regarding gold’s drop, and while I can’t give you the full story because they charge their readers for this information and I would be bypassing their system… I can tell you that they believe the gold has become oversold.

Speaking of oversold… The euro fits in here along with the Aussie dollar (AUD)… And a look at the dollar index futures positions shows me that the dollar index is extremely overbought. The euro did hit a low overnight of 1.4631, and then saw a bounce to the present trading level of 1.4670. I would like to think that this bounce could be a super-ball bounce, but, given the trading range lately, I doubt it.

In Germany this morning, German investor confidence, as measured by the think tank ZEW, printed stronger than expected this month. The euro backing off along with the price of oil seems to have done the trick here… So much for the naysayers calling for Armageddon in the Eurozone! There is a glimmer of hope that Germany can stand tall and pull the Eurozone through this slowdown… At least I said there was a glimmer of hope… And not, that the chances were slim and none and slim had left town!

Down Under… The Reserve Bank of Australia (RBA) printed their last meeting minutes, and they revealed what the markets had priced into the Aussie dollar… A forthcoming rate cut – probably at the September 2nd meeting. The Aussie dollar has rebounded a bit, as the markets had begun to price in a 50 BPS rate cut, whereas the meeting minutes point to a 25 BPS rate cut. However, what I read in the minutes tells me that a follow up rate cut of 25 BPS in October is probably in the books. The RBA had better be careful here, as they still have a very elevated level of inflation to deal with… But you would think that the 24% decline in oil prices would be worth at least a 25 BPS rate cut! Quid pro quo.

And in Europe, other than the Eurozone, Swiss National Bank (SNB) President, Roth, gave a boost to the franc (CHF) this morning, as he said, “The central bank may raise interest rates if second-round effects became unacceptable”. He doesn’t know where these “second-round effects” could come from, but kudos to Mr. Roth, for at least keeping his finger on the pulse of inflation!

The NAHB Market Index that I mentioned briefly yesterday really threw a spanner in the works of the Home Builders and mortgage lenders yesterday. The National Association of Home Builders Market Index printed at 16… Now I know that doesn’t really mean much, but if you look at where this index was just three years ago – at over 70 – that tells you that the mortgage meltdown hasn’t bottomed, and continues to cut a very bloody path across the country.

Following that up, today, we’ll see Housing Starts and Building Permits data from July. Both are expected to continue to show the rot on the vine in housing. We’ll also see PPI data, which I expect to be quite the shocker for those that believe the inflation slate has been wiped clean by the drop in oil prices. Look for PPI (pipeline inflation) to have risen 9.3% year-on-year! UGH!

Well… Here’s a note from someone who agrees with me that there are more tears to shed for financial institutions this year… Kenneth Rogoff, who used to be the head of the IMF, and is now a Professor of Economics at Harvard says that, “the worst is yet to come in the U.S. The financial sector needs to shrink. I don’t think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job. We’re really going to see a consolidation even among the major investment banks.”

Hmmm… Interesting. He talks like he “knows something”, eh?

The Japanese yen (JPY) continues to trade in a very tight range, going back and forth of the 110 handle. Without an unwinding of “risk” trades, I don’t see how yen can mount much of a charge. Which leads me to the question… Where has risk aversion gone? The markets are feeling like Superman right now, as if there’s not a bullet that subprime, or anything else, could shoot at it that would knock the markets off this “no risk” grandstand. I just don’t see how that can be, given the “risk events” that have happened and the ones that I believe, and Ken Rogoff believes are still to come.

I received my speaker packet yesterday for the New Orleans Investment Conference, which will be held November 13-17… I was the very last speaker of the Conference last year. This year, I think I’ll be the second to last speaker, so hey! I moved up! This is the oldest investment conference in the country, and is usually quite good… So, I’m happy that they invited me to speak!

I hear that Martin Weiss has issued a report listing what he feels are bad banks and brokerage houses. A customer reports to me that EverBank isn’t on either list… I would have told him that before the list came out, but it’s always better to see it, or not see it in this case!

Currencies today 8/19/08: A$ .8675, kiwi .71, C$ .9390, euro 1.4685, sterling 1.8615, Swiss .9120, ISK 82.62, rand 7.7525, krone 5.4150, SEK 6.37, forint 160.50, zloty 2.2650, koruna 16.6150, yen 108.75, baht 34.06, sing 1.4170, HKD 7.81, INR 43.53, China 6.8650, pesos 10.20, BRL 1.6390, dollar index 77.10, Silver $12.97, and Gold… $793.45

That’s it for today… The first day of 7th grade for my little buddy Alex… He hasn’t been feeling well the past couple of days, so I hope he’s better for the first day of school. He was complaining about the start of school the other day, and I told him… “Bud, I never cared that much for school when I was your age either, but I always looked at the start of a new year like this… You can’t get to the finish without starting!” He had to think about that one for a minute, then smiled and said, “That doesn’t help”. You ought to see my little granddaughter, Delaney Grace, light up when her uncle Alex is around. She simply adores him, and he adores her. She always looks for him when she comes in the door, and when finding him, has hugs and kisses for him. Alex wanted a nephew very badly, but I don’t think he would trade his niece now.

OK… Enough of that! Time to hit the send button and get going with trading and managing risk… A full time job, on top of everything else… Whew! No wonder I’m tired when I go home each day! HA! I hope your Tuesday is Terrific!

Chuck Butler
August 19, 2008