03/06/09 Good day… And a Happy Friday to one and all! It’s supposed to be 70 degrees here today, so in my book that makes it a Fantastico Friday!
It’s also a Jobs Jamboree Friday, and while this report is probably not going to be anything good, it will be Fantastico BAD! The experts have forecast a job loss in February to be 650K!!!!!! Six Hundred and Fifty Thousand did I say? Yes, sir, may I have another? Well, shiver me timbers, this is just downright awful! And if it prints this bad, it will be the most jobs lost in a month since 1949! This is horrific, just plain horrific, folks… And in my opinion, will NOT signal the bottom of the barrel for labor just yet… This thing has momentum and I don’t think you’d want to step in front of this runaway bus!
A strange thing is happening in the currencies, though… While currency investors have had to live with this trading theme – which rewards the dollar with every deep, dark, dangerous data report – this time it appears to be different. The dollar is getting sold on all corners overnight, and the reason is that traders have looked at the size of the forecast for job losses and have run for the hills. The euro (EUR) is leading the way higher, with a huge gain overnight… As I walked out the door yesterday afternoon, the euro was barely holding onto the 1.25 handle. When I woke up this morning the euro was 1.2675! And we all know what happens when the BIG DOG gets off the porch to chase the dollar down the street… All the little dogs get to chase the dollar too!
And Japanese yen (JPY) was one of the best performers, which tells me that the risk takers were back!
So… Is this a change in the trading theme? Well, one overnight rally doesn’t lend itself to a convincing argument of such, but… It certainly points out that the dollar is vulnerable at the margins; and once we get back to fundamentals… Watch out!
I came across another story about Europeans repatriating euros ahead of their quarter end, March 31st… Now, that would be interesting… The report didn’t say “WHY” they would be repatriating their euros, but shoot Rudy, the Europeans are apparently doing it, so, again, don’t step in front of that bus either!
Gold had a great day yesterday, rebounding to $940, after barely holding on to $900 earlier this week… I said at the time that I thought $900 or $890 would provide resistance, and for now, at least, that’s held true. Of course, having the auditors finally admit that General Motors (GM) is in trouble, didn’t hurt gold. The safe haven buyers were out in force after this announcement by the GM auditors. In case you didn’t hear… The auditors at GM issued a report questioning GM’s ability to remain solvent, citing recurring losses from operations, stockholders’ deficits and an inability to generate enough cash to meet its obligations. GM has already received $13 billion from the government, and is seeking an additional $30 billion… Of course that $30 billion isn’t even enough to cover GM’s losses last year, which were $30.9 billion! You know me… I say, “stop throwing good money at bad businesses!”
While we’re on the subject of cars… Did you see where Sweden told the SAAB unit “no bailout for you”? Recall, I told you in a letter a week or so ago that SAAB wanted to break away from GM, but needed billions to do so, and had asked the Swedish government for the money… And the Swedish government said NO! While it’s not funny to SAAB, or to GM, it’s kind of funny when you think about the fact that Sweden isn’t exactly your first choice when it comes to picking the democracies in the world… But, here they are holding the flag… And appear to be the only one’s holding the flag, and saying NO!
And I saw a quote yesterday that made me chuckle, not that the subject is funny, because it’s not, but the thought process to come up with the quote is! Let me begin with the backdrop of the subject… Yesterday, Citigroup’s stock fell to below $1… Which prompted the quote from a guy that said… “Now you can finally buy Citi’s stock at the dollar store.”
OK… Back to the task at hand… Did you see, wait, of course you probably didn’t see, because I just happened to come across it… What am I babbling about? It’s the data from the Fed that there was a sharp drop in commercial paper issuance last week. Why is that so important, I hear you asking? Ahhh grasshopper, recall that after the initial meltdown of the markets in August of 2007, the issuance of commercial paper dried up, which was an important method of corporations to generate cash and for the buyers to generate above Treasury interest rates. So… A few months ago, the Fed took over facilitating the commercial paper market, to give it the backing of the Fed… And things were beginning to look brighter, until last week – when total commercial paper outstanding fell $44.2 billion. I think this is another reason for the rally in gold yesterday.
Yesterday, the Bank of England (BOE) left their rates unchanged, but announced they had adopted quantitative easing… And the European Central Bank (ECB) cut as we expected them to by 50 BPS, to an internal rate of 1.5%. ECB President, Trichet, was very strange in the press conference afterward, and mentioned “touching wood” when he was talking about inflation. Hmmm… Well, for all of you wondering what he meant by “touching wood”… Here in the United States we would say, “knock on wood”… You know for good luck!
I think Trichet was being tricky, and trying to tell us “inflation is not a problem right now, but I’m going to knock on wood, because I’m not so sure about the future”!
OK… I had a few emails yesterday asking me what “quantitative easing” was… I had explained this all a month or so ago, but for those of you who missed class that day, and are wondering just what the heck I’m talking about…
Quantitative easing is the creation of new money out of ‘thin air’ by a central bank, and its injection into the banking system. The aim is to increase the amount of deposits in private banks so that, by way of deposit multiplication, they can increase the money supply by increasing debt (lending).
‘Quantitative’ refers to the money supply; ‘easing’ refers to reducing the pressure on banks. A central bank can do this by using this new money to buy Treasuries in the open market, or by lending the new money to deposit-taking institutions, or by buying assets from banks in exchange for currency, or any combination of these actions. These have the effects of reducing interest yields on government bonds, and reducing inter-bank overnight interest rates, and thereby encourages banks to loan money to higher interest-paying bodies.
Wow! The Pfennig is chock-full-o-lessons today… Let’s recap… We’ve learned about commercial paper, touching wood, and quantitative easing, all in one day! WOW!
OK, seriously folks… This jobs report that will print later this morning is a scary thing right now… Sort of like those horror movies, when you’re screaming at the girl to not look in the closet, because you know what horror lurks behind the closet door! You’re screaming, “Don’t open the door! Don’t open the door!”… But she does anyway, and well, you know the “rest of the story”.
Before I head to the Big Finish, I’ll talk about China for a minute… Yesterday, I told you about their leader and his thoughts of a return to 8% economic growth… Well, that was followed up last night by the central bank Governor Zhou, who pledged fast and forceful policies to restore confidence and prevent the global financial crisis from deepening in China. Here’s what Zhou had to say…
“If we act slowly and less decisively, we’re likely to see what happened in other countries: a slide in confidence.” And my final thought here is “it’s good to be China in situations like this.” You see, China can do whatever it wants to do, and do it NOW! They don’t have to deal with earmarks, pork, and knucklehead lawmakers being directed by lobbyists! Now, I’m not saying that what China does will be any more successful than our method, I’m just saying they can do what they want NOW! And one would have to think that that would help things move along faster.
Currencies today 3/6/09: A$ .64, kiwi .5025, C$ .78, euro 1.2680, sterling 1.4230, Swiss .8670, rand 10.5350, krone 7.0575, SEK 9.2710, forint 249.55, zloty 3.7450, koruna 22.11, yen 96.70, sing 1.5475, HKD 7.7560, INR 51.66, China 6.84, pesos 15.34, BRL 2.39, dollar index 89.06, Oil $44.11, Silver $13.43, and Gold… $940.40
That’s it for today… Day two on our own… Done! My older kids, Dawn and Andrew are coming over tonight and bringing me fish from the fish fry… So, I’ve got that going for me! Alex is attending cotillion on Thursday nights, and he gets all duded up with a tie, and he actually combs his hair! Looking sharp, I must say! I want to thank our neighbors, Ray and Kathy for taking Alex to school and picking him up this week, it was a HUGE help to me! OK… Later this month I’ll be in St. Petersburg, to talk at the Investment U. Conference sponsored by the Oxford Club. Then in April, I’ll be in Bermuda to talk at the Total Wealth Symposium sponsored by the Sovereign Society. I’ve never been to Bermuda, so I’m as excited as a kid in December about that!
I haven’t had time to go through every “feel good” story that was sent to me, so I’ll start this when I get back, as today is the last Friday I’ll be in the office until April 3rd! And then only for a short time, as I go back out on the road to the Richard Russell Tribute dinner that day! OK… Time to hit the send button. I hope you have a Fantastico Friday, and a Wonderful Weekend… And don’t forget to “spring forward” tomorrow night, by setting your clocks ahead one hour!
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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FYI
BOE rate not unchanged 6/3/09 – in fact reduced by a rediculous 0.5%.