Who Owes Who?

Good day… And a Happy Friday to one and all! It certainly doesn’t look as though it will be a Fantastico Friday in stocks, as yesterday was a bloodletting, and overnight the Japanese stock market sold off 11%, and Europe is down about 9% at this point. UGH! This is getting quite ugly.

But remember what I’ve been saying this week about the currency trading theme… When things look bleak, the dollar goes up… And when it looks as though all the stimulus might work, the dollar sells off. This has been quite evident in Japanese yen (JPY) overnight, as stocks sold off 11%. The currency rallied to a 98 handle from 101 yesterday… And then in dollar trading. Other than yen, the dollar is stronger this morning, pushing the euro (EUR) back to the 1.35 handle. The high yielders, which enjoyed a day in the sun yesterday before U.S. stocks took a turn on the slippery slope, got whacked hard overnight! UGH!

When I told you the other day that this was the darndest thing that I’d ever seen in the financial markets – and that I had begun my career in the brokerage industry in 1973 – I wasn’t kidding. I was dead serious… And I started tracking currencies in 1985 when we began the WorldCurrency desk at the old Mark Twain Bank. The reason I take you on this journey back in time is to illustrate the fact that the Aussie (AUD) and kiwi dollars (NZD) have fallen so much this week, that you have to go back 25 years to find another week like this one for these two currencies. Twenty-five years! A quarter of a century! One score and five years! Simply unbelievable that strong countries like Australia and New Zealand, full of natural resources and located near China, would go through these daily beatings.

When I arrived this morning, the TV was on, and Bill O’Reilly was talking about that crazy Jim Cramer, and how he told everyone earlier this week to get out of stocks. O’Reilly said something to the affect of: you shouldn’t pay attention to market analysts’ advice on TV. And then he said, “And those stupid newsletters”… I thought for a minute… And then said to myself, “It’s OK Chuck, he said ‘giving advice’… You don’t give advice – just opinions!” Whew! I thought for a minute he was calling the Pfennig “stupid”!

OK, back to the task at hand… And that is reporting on this financial market meltdown. I don’t mean to sound flippant here; this is serious stuff, folks! Looks to me as though the Fed is going to have to round up the posse once again and get another coordinated rate cut, because the one they made earlier this week hasn’t produced the W-2 they need to unlock the seized up credit markets.

The Wall Street Journal reported that the U.S. government is considering following the United Kingdom’s lead by guaranteeing billions in bank debt and temporarily insuring all U.S. bank deposits. This did little to appease the markets. What is going to appease the markets? The Fed and Gov. have turned over a lot of rocks, but the credit markets are still locked/seized up.

There are rumors going around this morning that today will be the “settlement” of the Lehman Brothers default… And while normally this wouldn’t cause problems, it has this time, because of those darn Credit Default Swaps (CDS)! Here’s something to think about folks… A CDS allows the holder of some debt (e.g. a portfolio of subprime mortgages) to get insurance on the risk of default of that debt from a third party such as a bank, insurance company or other entity.  In this case, buyers of Lehman Brothers bonds and other debt securities are looking for the payoff of credit default swaps they purchased.

In this case… Banks are hoarding cash in expectation of payouts on up to $400 billion of defaulted credit derivatives linked to Lehman Brothers and other institutions, according to analysts and dealers. This is when we’ll find out “who owes who”, and whether they have the cash to pay their obligations should they fall into the category of a “who that owes who”!

The Fannie and Freddie settlement went off at 98-99 cents, thus not a “default” and didn’t cause as much of a ripple in the markets as first feared… But this Lehman thing is a horse of the different color, folks. We’ll have to see how the markets deal with this today. Could add more fuel to the trading theme of: if it’s bad for the U.S., buy the dollar; and if things get better in the U.S., sell the dollar. Strange, I know, but I’ve seen this before back in the ’90s…

Have you been tracking the fall in the price of oil? This is just as amazing as the run-up in oil. Could we actually see the return of less than $3 gas? Now that would be amazing as far as I’m concerned. It has fallen almost $5 overnight! This has led to the sell off in Canadian dollars/loonies (CAD). The loonie has fallen to an 18-month low of 86-cents! UGH!

The fall in the price of oil also is probably going to help the Trade Deficit, which prints this morning. The August Trade Deficit is expected to narrow from $62.2 billion in July, to $59 billion. This would be a huge indicator that not only 1. The price of oil has fallen dramatically, but also that 2. The U.S. consumer is finally spent! And that, my friends, is another nail in the coffin of a long painful recession.

Yesterday, I read this in the Wall Street Journal… “The U.S. economy has sunk into a recession and government action is critical to stem the damage, according to economists in the latest Wall Street Journal forecasting survey. On average, the 52 economists surveyed now expect gross domestic product to contract in the third and fourth quarters of this year, as well as the first quarter of 2009. If those predictions bear out, it would mark the first time U.S. GDP – the total value of goods and services produced – has contracted for three consecutive quarters in more than a half century.”

I don’t mean to say I told them so… But if those knuckleheads had listened for the past year, they would not be surprised now to say that the United States is in a recession! It’s been staring us in the face since January… But those that the U.S. consumer depend on to lead them told them there was no recession, and that everything was just peachy!

Gold is back above $900 again this morning… I find gold’s performance in the face of a falling oil price and a stronger dollar to be very impressive indeed! But in reality, I’m still scratching my head over why gold isn’t soaring, given the lack of supply of the physical metal. Someday this will all be very clear to everyone… But for now, we scratch our heads and wonder.

And in what is now required due to the severity of the situation, my daily update of what’s going on in Iceland… Yesterday, I was thinking about the white knight for Iceland, and I began to wonder where the heck the IMF is during all this? What are they doing? They should be there to iron out the problems and provide a streamlined clearing mechanism. But they are nowhere to be found! Well, the news came in last night that the Netherlands has provided 20 billion euros to Icelandic financial institutions. There still doesn’t seem to be a “quote” available in krona, and that’s very concerning to me. Maybe the Netherlands’ 20 billion euros will get the bank operations going again.

The United Kingdom is all mixed up in this Iceland mess, and has frozen Icelandic assets in the U.K. in hopes of getting some of their U.K. depositors’ funds out of Icelandic banks. This problem with Iceland has really caused some problems for pound sterling (GBP) – as if pound sterling didn’t have enough problems of its own without Iceland weighing on it too!

OK… Here I am again, getting close to going to the Big Finish, and I’ve been nothing but gloom and doom all morning, and that’s not how I like to go into a Friday! So… Let’s see… Oh! Japanese yen is trading with a 98 handle! This has been long overdue, and held back by the carry trades… But now the carry trade is dead (for yen), but who knows… Maybe if the U.S. Fed keeps cutting interest rates to deal with the recession, the dollar might end up taking the yen’s place as the funding currency of the carry trade!

Currencies today 10/10/08: A$ .66, kiwi .5950, C$ .8635, euro 1.3555, sterling 1.6965, Swiss .8970, ISK (no quote), rand 9.3350, krone 6.2090, SEK 7.12, forint 195.50, zloty 2.6350, koruna 18.4910, yen 98.90, baht 34.40, sing 1.48, HKD 7.7580, INR 48.29, China 6.8359, pesos 13.60, BRL 2.2825, dollar index 81.65, Oil $81.50, Silver $11.75, and Gold… $916

That’s it for today… Well… This is it for me for almost two weeks! I head out on the Currency Tour on Monday morning, and then finish up in Jacksonville a week later. I’m then staying in Jacksonville for a couple of days to meet with the “BIG GUYS” at EverBank. I haven’t been to the headquarters since before I was sick in June 2007, so it’s long overdue. Chris will have the conn on the Pfennig, right after he finishes the Chicago marathon this weekend! I head out to Columbia, MO tomorrow, after my little buddy Alex plays football in the morning, to see my beloved Missouri Tigers play Oklahoma State. This will be a tough game for the Tigers… I’m worried… And… It’s another night game so you can tune in and watch them play! That’s all… I hope you have a Fantastico Friday, and a Wonderful Weekend, I’ll talk to you in two weeks!

Chuck Butler
October 10, 2008