A Currency Bounce

Good day… And a Wonderful Wednesday to you! The fall chill has really set in here, as witnessed by my need to throw on a jacket and my Missouri Tigers baseball cap each morning! When you are basically bald like me, the cold air is not a friend to you, thus the need for a baseball cap from now until late spring!

Well… The trading theme remained in place yesterday, but this time it was reversed. For those of you new to class, or any of you who have been playing horse hooky, the trading theme that has gripped the markets since August is: The deeper, darker, and more dangerous the U.S. economy and financial meltdown – including the credit market’s locked status – the more dollar gets bought. If there is any sign of light to all this mess, the dollar gets sold, for whenever the markets get their minds off the mess, they are reminded of the awful fundamentals for the dollar.

So… Yesterday, the stock jockeys must have read the Pfennig and seen that I called for a 50 BPS rate cut from the Fed… (Now don’t get me wrong here… I’m against a rate cut, as: 1. It debases the currency further, and 2. It will fuel, along with the money stimulus going on, future inflation pressures… But! This is what I see the Fed doing, not what I would like for them to do, which would be nothing. They just cut rates 50 BPS last month. That rate cut hasn’t even filtered into the economy yet, why not wait-n-see, rather than put that pressure on the dollar and inflation?)

OK, I really got off on a tangent there… As I was saying, the stock jockeys read the Pfennig and noticed a call for a 50 BPS rate cut, and the stocks were off to the races! 600 points later, the Dow was looking perky… And all through the day when stocks were rising, and the overall feeling in the markets was upbeat… The dollar got sold, along with Japanese yen (JPY)! This trading theme is so prevalent now that one could make some real dough if they were smart enough to trade this thing… But that’s not our bag… Really, I’m telling you that’s not my bag! (Austin Powers on a Wednesday morning, yeah baby!)

So… A currency rally that really had some meat and potatoes to stick to your bones! Stock markets around the world were strong overnight too, so maybe, just maybe, this rally can have a two-day run, and then… Who knows, right? Well… Maybe The Shadow knows, and he tells me that the deep, dark, dangerous days (my poetry teacher would be proud of that alliteration!) for the United States are still in the cards… So be careful out there! Oh, and this just came across the screens. U.S. stock futures are down this morning, which doesn’t bode well for the stocks or the currency rally!

Consumer confidence here in the United States for this month fell to an all-time low. I saw that and said, “Well it’s about time!” Not that I want gloom and doom for the U.S., I just happen to know that we already have it, and kept wondering what U.S. consumers were so upbeat about! Well, they aren’t any longer… And wait till they get the news that the credit card companies are curtailing the issuance of credit cards… Uh-Oh! If these guys that send pre-approved credit cards to grade school kids, (not really, it’s an exaggeration, but not a stretch!) are pulling back the reins, then you can be sure that they are feeling the pinch of losses from credit cards.

The Pfennig first told you that the next crisis would come from credit cards… Well, it think we’re about to see it unfold right here in front of us, which is NOT exactly what beleaguered banks need right now… Or the economy for that matter!

In other news… The S&P/CaseShiller House Price Index fell once again in August (which seems like eons ago; isn’t there a way to get this data quicker?) to the tune of -16.6%! OUCH! That’s going to leave a mark! And the overall price index has fallen 20% since July 2006… The real problem though is that the report indicated that the inventory of unsold homes remains very large, and that will put further pressure on prices.

You may recall me mentioning Bill Fleckenstein from time to time in the Pfennig… The most recent mention was with regards to his book Age of Ignorance at the Fed: Greenspan’s Bubbles… I talked about it for months, as it gave me a great inside look at how badly Big Al Greenspan screwed up the economy we are now faced with. Anyway… Mr. Fleckenstein is an outspoken defender of short selling, and was interviewed by Bloomberg regarding his stance. I like his stance… Short selling is part of the fabric of the markets, and was put there for the bears… Short sellers are not jackals, hyenas, vermin or vultures; they are simply bears… How can the government ban this, and call the market “free”? Anyway… Way to stand up for what you believe, Bill Fleckenstein!

OK… I’ve sat on the sidelines too long on this next subject, and it’s time to get off the bench and get into the game… The Amero…

I know that there are people out there claiming they have Ameros, and that they were minted in Denver, and that the U.S. has shipped them all to China for holding, until which time the United States can’t pay its bills any longer and calls for a “force majeure”, thus making the dollar worthless, and introduce the Amero. The Amero is supposedly the North American Union of the United States, Canada, and Mexico, and that it will be backed by silver, thus the reason for the physical silver shortage.

OK… If you are a believer of all this, you have to ask yourself this question… The U.S. dollar is the reserve currency of the world, and by having the reserve currency, they are allowed to run up such huge deficits and the world doesn’t bat an eye! Why would they jeopardize this arrangement? Why would the United States just give up the reserve currency of the world? I’m sorry, but I can’t get my arms around the Amero story…

But! If you are so inclined to believe in the Amero story, then you’ll want to make certain that you convert dollars to currencies now, before it’s too late!

OK… I’m joshing just a bit there, but in reality that’s the case… If that’s what you believe, then you had better get your dollars converted before the government proclaims them to be worthless.

Alrighty then… Back to reality (For me at least! If you’re an Amero believer, then that’s OK!), and the reality right now is watching the euro (EUR) add on to gains made yesterday! The single unit has gained a 1/2-cent while I wrote about the Amero! Of course, I just put the kiss of death on the euro’s rally by mentioning it! UGH! I seem to be a bit snake bitten lately… But, Shoot Rudy, at least I’m here to be snake bitten!

Regarding the Fed rate cut announcement this afternoon… I’ve said that I believe the Fed will cut 50 BPS, bringing the rate to 1%. There is currently a 20-30% chance they could go 75 BPS… Talk about raising the “everybody out of the water flag”! That would really bring Halloween early to the markets, as they would have the bejeebers scared out them by a 75 BPS rate cut! I’ll stick to, and the Fed had better stick to 50 BPS, as if that’s not enough already to bring about memories of Jason or Freddy Krueger!

Norway’s Norges Bank, which did NOT participate in the coordinated round of rate cuts on October 8th, but then did cut 50 BPS a week later, is expected to shave another 50 BPS rate cut at their next meeting… But, I wouldn’t bet the ranch on that rate cut, based on their resistance to joining in the rate cut party earlier this month.

Norway’s krone has rallied along side the euro, and I would not like to see a rate cut from the Norges Bank.

The Bank of Japan (BOJ) announced last night that they are “mulling over” a 25 BPS rate cut this week… But come on! Since when does the BOJ tell us what they are “going to do” ahead of time? I would say they did this to jawbone the yen lower. I wouldn’t go betting strongly that the BOJ will cut rates this Friday at their meeting. Their jawboning did help yen to weaken yesterday, along with the trading theme.

And those wild and crazy guys over at Citgroup are talking up euros again… Recall, about a month ago when these guys issued a report showing charts that indicated the euro was about to take off against the dollar? Well… They’re Baaaaaacccckkkkk…. This time, they’ve tempered their call regarding euros, and it sounds a whole lot like they’ve been reading the Pfennig! Let’s listen in to see what they have to say now… “We believe the euro’s move lower against the dollar has been driven by a strong anti-risk bias that has benefited the yen and the dollar. Today’s improvement in commodities, equities, the rise in yields and emerging market improvements suggest a short-term respite that could send the euro back above 1.30 in the near term.”

That’s the trading theme in a nutshell right there! Glad to see them come around to the Pfennig’s way of thinking! But… If a spanner gets thrown into the works, and the deep, dark, dangerous clouds begin to gather over the U.S. economy again, those improvements seen yesterday will be wiped out in a NY minute!

OK… A quick check of economic releases today… Oh, here’s one… Durable goods for September will print today… Recall last month’s print was awful at -4.5%. This month’s report should remain in negative territory, but probably not as awful as the previous month.

And… Then the Big Kahuna of them all… The FOMC rate announcement that will come right after lunchtime today. Fed Funds are already trading at 1%, so at this point, everyone expects the announcement of a 50 BPS rate cut! Should be bad for the dollar, but then… Will the current Trading Theme’s grip be too tight?

Currencies today 10/29/08: A$ .6460, kiwi .5750, C$ .7925, euro 1.2810, sterling 1.6020, Swiss .8715, ISK (no quote), rand 10.22, krone 6.7075, SEK 7.7210, forint 199.50, zloty 2.83, koruna 18.77, yen 96.75, baht 34.90, sing 1.4940, HKD 7.72, INR 49.71, China 6.8485, pesos 12.9590, BRL 2.1675, Dollar Index 85.45, Oil $66, Silver $9.27, and Gold… $748.66

That’s it for today… Well… They might get Game 5 of the World Series played by Christmas! Sure wish they played those games during the day the way they are supposed to be played! Remember as kids in school, we would watch the World Series Games? Great memories! We will be adding to the trading desk next week, as John Kimsey from our Jacksonville home office is set to join us full time. John has worked a couple of times here, filling in, and decided to stay. So welcome John! This makes the 11th person that has been added to the desk since I started it in June of 2000, when the deposits were brought home to EverBank! (Two have left) And on the operations side… We had two. Now, we have more people than I have fingers and toes to count on! Pretty amazing! There’s a new James Bond movie out. It hasn’t gotten rave reviews, but that doesn’t matter, it’s a James Bond movie, they’re all great! And… I saw a preview for my all-time fave TV show, 24, last night. A new season of 24 is set to start in November… I can’t wait! The NBA season began last night… It will end in June! Talk about a looooonnnnngggg season! OK.. Time to go… Hope your Wednesday is Wonderful!

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Chuck Butler
October 29, 2006

The Daily Reckoning