1991 Revisited

Good day… And a Terrific Tuesday to you! A real slow day with the currencies yesterday… Not much movement, as traders and market participants try to survey the land, if you will, to see if there are any other monsters out on the horizon that could strike as quickly as the liquidity problem two weeks ago.

Well… We revisited 1991 yesterday… Nah, I’m not talking about the “Seattle Sound” or “grunge”, or even the beginnings of Starbucks. I’m talking about the existing homes data that printed. Sales fell, however not by a huge margin; the supply of existing homes for sale hasn’t been this high since 1991. Looks like housing just got another hickey!

Remember 1991? The economy was yucky, and just downright nasty. It was so bad that it cost the first President Bush his re-election bid even after his victory in the Gulf War! OK… So we’ve established that 1991 was bad news bears. I just thought of something… 1991 was the year I had back surgery!

The point I’m trying to make here is that we could very well be heading in the same direction as in 1991. In fact, I’m convinced we will be heading there. But in reality, that’s all yet to be seen. But, with this all stacking up, doesn’t it make sense to make sure your investment portfolio is diversified and acts as a hedge in case? It does… And you know it does!

The currencies just didn’t seem to want to run on the existing home sales news. Well… Maybe, just maybe, you never know, we could be settling down to a “normal” August. Yes, a “normal” August when most traders around the world all take a vacation. I normally do… And with traders on vacation, volumes are thin, and market movements are as boring as counting flowers on the wall, or playing solitaire till dawn with a deck of 51, smoking cigarettes and watching Captain Kangaroo. Ahhh… I always get carried away when I talk about things boring!

In his first public speaking engagement since the bank he heads (the ECB) injected nearly 200 billion euros (EUR) into the market system, ECB President Trichet, did not give any winks or nods to the markets about the next ECB meeting on September 6. Speaking at the annual European Economic Congress, Trichet said the central bank would reassess inflation risks at its next meeting and noted that it was important for central banks to anchor inflation expectations.

Hmmm… Seems to me that statement could be a hint. But… The markets didn’t see it that way, and the euro drifted on the day.

It looks like the “flight to quality” that took place during the liquidity “crisis” continues to unwind as Treasury yields are rising again. There’s a report on the Bloomie this morning that several “real money” investors are advising clients to put on risk assets that have been unfairly punished in the recent credit/liquidity event.

OK class… Given what I just said as your clue, what does putting clients back into risk assets mean for the carry trade? Come on now, we went over this in class yesterday… Johnny? “It means the carry trade is going back on the books again.” Correct! You get a gold star!

That’s right – yen (JPY) and Swiss francs (CHF) higher… Kiwi (NZD) and krona (SEK) lower. Classic carry trade identifiers! But wait! Now a story just flashed on the screen that subprime concerns are returning to the markets. Geez Louise, could we make up our minds here, and get a little direction?

In Germany this morning, business confidence, as measured by the think tank IFO, slowed this month, which makes sense given that the Central Bank had to inject 200 billion euros to keep things running! The good news is that the index that measures this business confidence didn’t fall as much as the experts were forecasting. So… The damage to the euro has been minimal. In fact, as I glance up at the screen, I see that the euro has swept this news under the rug, and moved even higher!

In the United States this morning, we’ll see the latest S&P/CaseShiller home prices for 20 metropolitan areas which are expected to have declined 3.3% year-on-year during June, a new low for the data set. Yesterday we saw inventory of existing homes for sale growing, and today we see that their values are falling. Something’s got to give here.

We’ll also see consumer confidence, which is always giving me a rash due to the “bubbly” confidence those surveyed have with what’s going on. The list to make their timbers shiver is long, but they don’t care! Their 401K is going up, and they are rich. Stinkin’ rich, I tell you! Not really, but don’t let a little thing like that get in the way of a “feel good story”; that’s stuff they can’t touch for years.

Anyhoo… I expect the consumer confidence index to drop dramatically this month. It doesn’t mean that those surveyed woke up and smelled the coffee… Or maybe it does. Maybe, maybe I’m wrong about these people. Maybe they can see the trees in the forest! However, as I always say – one swallow doesn’t make a summer… And one data report doesn’t make a trend. We’ll have to stay tuned… Same bat time, same bat channel next month to see if we can solve this riddle. In the meantime… The dollar should not find any comfort in a dropping consumer confidence Index!

Yesterday, I talked about silver and gold chomping at the bit to move higher, and that it all depended on when the U.S. economy really does slow down, and the Fed cuts rates. I was sent a note from a customer telling me that a different fellow that he reads is calling for gold to go down. And wanted to know my thoughts.

Well… Gold could very well go down in the short term as it waits for the two events I just spoke of to take place, which I believe will be early in 2008. But, you’ve got to love a good two-way market with people on both sides of the fence! And on that note… I’ll head to the Big Finish!

Currencies today: A$ .8270, kiwi .7135, C$ .9495, euro 1.3675, sterling 2.0125, Swiss .8355, ISK 64, rand 7.2350, krone 5.8130, SEK 6.8540, forint 188.25, zloty 2.80, koruna 20.2875, yen 115.50, baht 32.72, sing 1.5210, HKD 7.80, INR 42.18, China 7.5560, pesos 11.07, dollar index 80.61, Silver $12.01, and Gold… $677.30

That’s it for today… Thanks again to all who have written words of encouragement to me. I can truly say that they work! One day closer to the big event… I’m talking about my beloved Missouri Tigers first football game of the year! And it’s here in St. Louis! A big rivalry game with Illinois on Saturday. I’ve got my ticket, and I’m going to attempt to go to the game! My beautiful bride and oldest son, Andrew, will be with me to help in case I get trampled by the crowds for moving too slow! Go Tigers! Have a Terrific Tuesday!

Chuck Butler
August 28, 2007

The Daily Reckoning