More Scary News

Good day… A Wonderful Wednesday! Well… We saw continued dollar buying on Tuesday as the consolidation continues for the currencies. In fact, this consolidation has moved faster than most I’ve seen over the years! So… Batten down the hatches!

There was some further scary news that should have sent shock waves through the markets. I think stocks saw some shocks… But besides that… Nothing.

What I’m talking about was a story that Sentinel Management Group was seeking to halt redemptions to money market fund holders. Oh my! What next? Things just keep getting uglier and yet, we’ve still got pundits and people who should know better, out there telling investors that “everything will be OK”.

This time it was Larry Kudlow, with a “feel good” article in the Washington Post. Oh well… The Central Banks of the world may have performed a miracle on the credit crunch/liquidity problem last week, but at what cost to the future? A BIG COST if you ask me!

So… Yesterday, June’s trade deficit came in lower than expected. June’s total… $58.1 billion, so still nothing to get goose bumps all over. But, as I’ve said before, isn’t this what I’ve been preaching for years now could happen if the dollar got weak enough? And if we look back over the spring and early summer currency performance, we see the dollar getting taken to the woodshed daily.

So… As I’ve said before to the knucklehead dollar bulls… Go ahead and rally the dollar, and ruin a good thing going on right now with the trade deficit!

The other piece of data we received yesterday was producer price index (wholesale inflation) and did it ever surprise the “experts” on the high side! The July PPI rose 0.6% following a 0.2% decline in the previous month. The experts were looking for a gain of 0.2%. A 2.5% increase in energy prices contributed to a greater-than-expected gain in the overall producer price index.

The report actually wants us to believe that food prices declined last month, but as you and I know from going to the grocery store… That’s a bunch of baloney!

This morning we’ll see the latest TIC data, which measures how well we did at attracting investments flows to finance the current account deficit, which, when all things are taken into consideration, is about $80 billion per month.

The trend with this data has been for it to weaken each month, although there are rogue months of positive gains, the overall trend has been for the net security inflows to be less each month.

Also on the docket of data releases we have the stupid CPI, and industrial production with capacity utilization. If CPI surprises to the up side like PPI did yesterday, we’ll see further dollar strength, as the dolt mentality that exists in the markets these days will prevail over people like me, who think that rising inflation is bad for a currency!

Well… The Dow took it on the chin yesterday, and that fed the Asian and European stocks to slide also. So, we have stocks getting taken to the woodshed, here in the United States but the dollar gaining ground… Hmmm.

What moved U.S. stocks lower yesterday was a combination of the story above regarding the money market fund, and China-West (or Wal-Mart as some call it), which came out with a lower profit warning. It all comes back to the mortgage meltdown… But you don’t hear anyone in the media saying that… Because they don’t want to start panic among investors.

But, I got to thinking about this last night… And isn’t this the same type of stuff we heard back in 2000? Stocks were beginning to slide, and we were told that this time it was different and “not to worry”. This whole mess scares the bejeebers out of me!

The Fed injected another $2 billion into the markets yesterday just for “good measure”. I guess they must have made an error on Friday when they injected $38 billion. The $2 billion yesterday was just to round off Friday’s effort!

Yes… Central Bankers around the world are smiling like Cheshire Cats, thinking they’ve performed a “miracle”… Yeah… We’ll see!

Well… The European Union printed a disappointing growth number yesterday, and that along with the consolidation going on has pushed the euro (EUR) below 1.35 for the first time in a few months. The United Kingdom also has reported slower growth and that has pushed the pound (GBP) below “2”!

The slowing growth… The global liquidity crunch may have put the European Central Bank’s (ECB) next rate hike that I had called for in September on hold. The markets are looking at that, and this too has a bearing on the euro’s value right now.

One currency that has been flying under the radar of the consolidation is the Japanese yen (JPY)… The yen has seen some strong buying as traders dump risk, and as I said the other day, the unwinding of currency trades even if they are directly paired with yen, will come back to yen. And that’s a good thing!

And before I go to the Big Finish… One of my fave economists, Nouriel Roubini, was being interviewed last night, and he strongly suggested that the risks of a recession in the U.S. are running “HIGH”. Well, I’ve said that before, but then I’m not being interviewed on a major media outlet!

Currencies today: A$ .8225, kiwi .7150, C$ .9275, euro 1.3480, sterling 1.9880, Swiss .8225 (look at that Swiss and Aussie running neck and neck!) ISK 67.23, rand 7.4250, krone 5.9540, SEK 6.9530, forint 192.30, zloty 2.8440, koruna 20.73, yen 116.70, (nice to see that 116 handle in yen again, eh?) baht 32.38, sing 1.5310, HKD 7.8170, INR 40.70, China 7.5859, pesos 11.10, Silver $12.55, and Gold… $675.10

That’s it for today… The Big Boss is stopping by to see me this morning. Always great to see Frank! How about this heartwarming story going on with the St. Louis Cardinals and their once pitching future, Rick Ankiel. Rick had control problems six years ago, and three years ago he was ready to walk away from the game, but decided to try and make it as a position player. And all these years later he’s back in the major leagues with the Cardinals! And… To top it off he hit a home run in his first game back! WOW! Talk about “never giving up”! What a story! OK… Off to see the wizard, and get ready for my visitor… Have a Wonderful Wednesday!

Chuck Butler
August 15, 2007