Wooden Arrows?

Good day… And a Happy Friday to one and all! A Fantastic Friday, I hope! As the blind man said, as he spit into the wind… It’s all coming back to me now. And so it was yesterday morning after I had hit the send button for the Pfennig, a trader friend called to give me some insight, and… After talking to him, it all came back to me.

What the heck is he talking about now? I hear you asking… Well, recall how I – and probably all of you too – have been scratching my head and wondering just how in the world the dollar could be rallying in the face of all that’s going on, and the bad data to boot. Well, here it is folks, sit back and take a sip of coffee…

One of the things we’ve learned this week is that the European banks are not getting to go Ollie, Ollie Oxen Free, on the holding of toxic waste debt… And since they are U.S. issued mortgage bonds, the trader that called tells me that they need to have capital reserved in U.S. dollars. Well, usually, these banks use LIBOR for this funding… But with the credit crunch going on all over, LIBOR rates have gone through the roof. So… Looking for alternative means of raising capital, the European banks have turned to the euro/dollar swap market… Selling their euro reserves and buying dollars.

SLAP! I could have had a V-8! Now why didn’t I think of that? Anyway… This is what’s going on. One would logically think that when LIBOR gets back to normal, these euro/dollar swaps would be reversed. Now… The next question is… What will it take to get the LIBOR rates to normalize? Well, that would be an unlocking of the credit crunch. And according to our Fed Chairman, U.S. Treasury Secretary and President, the way to unlock the credit crunch is to pass the bailout package! Dang it! I knew it would all get back to that darn bailout package!

Speaking of which, the House is expected to vote on it today… Yesterday, I told you about some of the “inducements” the Senators added to the package, and a friend of mine sent me a note and said, “Hey Chuck, you missed the wooden arrows in the package”… What? Wooden Arrows? So… I looked into it… And there it was! And wooden arrows weren’t all! But this is the thing that really gets me hot under the collar… Dan Denning, in yesterday’s Daily Reckoning put it brilliantly, so I’ll let him describe it…

“Of course, a spending Bill cannot originate in the Senate because as we know, Article 1, Section Seven of that useless piece of paper (the Constitution) says: ‘All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills.’

“So the Senate lobotomized a Bill already passed by the House, which included, among other ridiculous spending provisions, Section 503 (EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN.”

OK… A dear reader sent me a note yesterday, and told me in so many words to stop my complaining, as this bailout package is the end-all for what ails the U.S. economy, and the world for that matter. OK, I guess I should just get down off my soapbox and give up my right to challenge views that don’t go along with the “Washington crowd” or the “mass media”, right? NOT! That dog is NOT going to hunt!

So… I’ve written for over half an hour now, and I’m just now getting around to the currencies… Well, that’s not true, Chuck, you told everyone what was going on with euro (EUR) weakness! Yes, but you know what I mean… I truly get dear readers who get angry with me for not talking about the currencies at the top of the page; leave out the salutations; leave out the sponsor’s ad; leave it all out, and get to the meat! They are like the Wendy’s ladies of the ’80s… “Where’s the beef?”

The currencies are once again being held hostage by a stronger dollar… However, they haven’t gotten any worse overnight. It sure looks as though they just might have bottomed… But, the euro can’t catch a cold right now, much less a bid. So, we’ll have to see what shakes out of the House vote on the bailout package today.

And today IS A JOBS JAMBOREE Friday! Usually, the Jobs Jamboree gets top billing in the Pfennig… But not today. That’s because the markets are not paying attention to data these days. I wonder if they’ll sit up and take notice today, when Job losses go over 100K for September. Yes, that’s the forecast for September jobs… A Big Fat Negative -100K! Take away the “magic” by the Bureau of Labor Statistics (BLS) and this could potentially look even worse!

Yesterday… August Factory Orders were a dismal -4%, which was worse than the forecast of -3%. Initial Jobless Claims hit 497K! OUCH! Jobs are being lost all over, folks. When will the Fed open their eyes and see what’s going on? And I don’t want to hear the bailout package flag wavers yapping about how the credit crunch is causing these job losses! HOGWASH! The United States has been posting job losses for 8 months now, and this one would make 9 months!

Japanese yen (JPY) continues to hang on to the 105 handle, while the currencies all around them look sickly… It sure looks as though all those Japanese housewives that were highlighted a couple of years ago as shrewd investors when they sold their yen and bought Aussie (AUD) and kiwi (NZD) dollars and booked the interest income, along with the currency gains, are repatriating their yen. That’s not a good sign for Aussie and kiwi dollars, but it’s a great sign for yen!

There’s going to be a European Union (EU) Summit this weekend. Many years ago (16-years to be exact) I began writing the Pfennig, and at that time, I would talk about the different European countries, as there was no EU… I coined the phrase, Club Med, when talking about Italy and Spain, and even France… And now 16 years later, I come back to that phrase… Club Med is banging the drum for assistance from the EU, and Germany is balking. Just like the old days… You could always count on Germany and their staunch, well respected, central bank (the Bundesbank) to be sticks in the mud… But the Bundesbank, led by Hans Tietmeyer, always won… And Club Med was sent home with their tails between their legs… I wonder how this weekend’s summit will turn out…

There was a story in the U.K. Telegraph yesterday, claiming that the EU might break up if Club Med can’t get what they want… Which is namely, lower interest rates, and some help with their toxic waste bonds. Look… The EU has faced tougher problems than what they currently face, and they didn’t break up… I found the Telegraph article to be nothing more than trying to stir up more “fear”. Sort of like the “fear” that’s being used to shove the bailout package through.

So… Before I go to the Big Finish… Earlier this morning, I talked about LIBOR, and I thought… “I bet some people aren’t familiar with this term.” So, I thought I would give you some info. If you already know what LIBOR is all about, go ahead and skip to the Currency Round-up…

LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world. It is determined by rates that banks participating in the London money market offer each other for short-term deposits. LIBOR is used in determining the price of many other financial derivatives, including interest rate futures, swaps and Eurodollars. Due to London’s importance as a global financial center, LIBOR applies not only to the pound sterling (GBP), but also to major currencies such as the U.S. dollar, Swiss franc (CHF), Japanese yen and Canadian dollar (CAD).

Currencies today 10/3/08: A$ .78, kiwi .6636, C$ .9285, euro 1.3865, sterling 1.7675, Swiss .8835, ISK 112.75, rand 8.4940, krone 5.9850, SEK 7, forint 177.25, zloty 2.4730, koruna 17.91, yen 105.10, baht 34.18, sing 1.4490, HKD 7.77, INR 47.05, China 6.8470, pesos 11.18, BRL 2.02, dollar index 80.22, Oil $94.80, Silver $11.17, and Gold… $840.17

That’s it for today… A Big football weekend for our teams at the Butler house. My little buddy, Alex, and his 7th grade Lindbergh Flyers football team who play their big rival tomorrow morning… And our beloved Missouri Tigers take on Big Bad Nebraska tomorrow night in Lincoln, where the Tigers haven’t won since 1978. Time to put an end to that awful streak! The game is on ESPN at 8 CT if you want to watch! Hey… Did you hear that Mr. Clean, has died? He lived to be 92! That dude had some pipes! Guns! The big VP debate last night was boring to me, so I turned it off and went to bed… Dodgers, Phillies and Rays were winners in baseball’s playoffs yesterday… Time to go… I hope you have a Fantastic Friday! Go Tigers!

Chuck Butler
October 3, 2008