A Data and Event Risk Week

Good day… And a Marvelous Monday to you! We had to scratch and sniff for data last week, only to turn the calendar week and see a plethora of data this week… And not just Tier II data… This is what I would call “event risk” data… But first, we need to talk about something that came up Friday afternoon.

There’s a rumor going around that the Fed may make an emergency meeting this morning to cut rates. The Fed has done “out of meeting” rate movements five times since 1994, so it’s not like it’s rare… It is not a common occurrence though, and some people new to “Fed Watching” might find it strange… But, I’m a Fed watcher, I’m a Fed watcher, watching rates go down, I’m wearing a frown.

So… This news really has sent the dollar to the woodshed, and don’t look now, but the euro (EUR) is 1.49! WOW! Swiss francs (CHF) are kicking some tail, and taking names later, while even Japanese yen (JPY) takes a turn at swinging the stick a the piñata (dollar)! I kept trying to tell everyone one that sooner or later love was gonna get them, and that the market participants would grow tired of looking at all this bad data and Fed stuff that would eventually wear on the dollar… Here it is.

OK… Besides the data… We’ve also got corporate earnings to deal with, including those of the brokerage company that owns a bull. There are some not so kind stories going around that this brokerage firm may have to take losses of more than $15 billion due to subprime write downs. And Citigroup could write down as much as $20 billion, and lay off 20,000 workers. This stuff is all over the web; I don’t make this stuff up, folks!

The data risk this week starts this morning with retail sales for December. The experts have the forecast to be very disappointing… Not like that would be surprise or anything… I’ve been telling you about the store chains and their warnings for a couple of weeks now. But still… This is a market mover.

Then as the week goes on… We’ll see the government’s stupid CPI report, which long time readers know I think is absolute garbage, but the markets still get lathered up over the data, so I have to pay attention to it. Industrial production, housing starts, the TIC’s data, consumer sentiment, and leading indicators finish out the week. Lots o’data to deal with.

On Friday, we saw the trade deficit take a turn for the worse, just as I said on Friday morning that I thought it would. But the jump higher was larger than even I expected. The trade deficit jumped from $58.6 billion, to $63.1 billion in November.

I keep hearing people say that the trade deficit doesn’t matter, etc. etc. Again… Let me make certain that everyone knows where I stand on this matter… DEFICITS DO MATTER!

The currencies really range traded on Friday, with the euro remaining stuck around the 1.48 level. I don’t think the tight ranges will remain in place this week, especially if the Fed pulls a rabbit out of its hat with an “out of meeting” rate cut.

Either way… The Fed WILL cut at their next meeting – if not before. And when they do, the interest rate in the Eurozone will be greater than in the United States… OUCH! And as I’ve said before… You think the euro was a popular offset to the dollar before? Just wait till the euro enjoys a positive rate differential to the dollar!

Again, though… Let me say that interest rate differentials are good, but they are not everything. You also need a good balance sheet, strong leadership, good income flows, and economic growth… The euro has the U.S. dollar beat on all of those measures.

Canada’s trade surplus widened in November… Even larger-than-expected to $3.7 billion. But the loonie (CAD) just can’t catch a break these days…

In commodities… Oil sure has backed off since the U.S. inventory report showed an increase last week. However, gold and silver continue their assault… And I see where our old fave, copper, continues to be a hot commodity.

Gold climbed to $900 overnight, and silver hit a 27-year high! Spot gold pushed to $913, in Singapore overnight… WOW! Are you under… The power of gold? The story is told of the power of gold. Great song… Great move by the shiny metal, eh?

And why not a strong move in gold? The dollar is getting trashed with Fed moves… And people turn to gold.

I was reading the local newspaper yesterday, and the business writer mentioned something about how the S&P 500 had basically gained nothing since 2000… With dividends… 1.66% per year.

Now… That got me thinking… I had a customer call and was not happy at all that her yen was up “only” 7%. If I had only seen that newspaper story before that call! I did explain to her that this is a “hedge”/diversification of her investment portfolio, and while it “hedged” it gained! But there was no consoling her… She was an unhappy camper.

OK… Enough of that! Remember last week when the odds of a 50 BPS rate cut started mounting higher and higher? Guess what? Now there are 44% odds of a 75 BPS cut. OK, now that’s going a bit too far, don’t you think? 75 BPS moves are reserved for third world countries, or small countries that already have interest rates approaching the moon… So, that’s silly stuff. Somebody is trying to push the Fed’s buttons here.

In the United Kingdom this morning, U.K. producer prices increased at the fastest annual pace since 1991 in December. Uh-Oh! So much for all those thoughts that the Bank of England surely must cut rates in February, since they didn’t do it in January. This news has helped sterling (GBP) up off the canvass… At least for now.

The Bank of England is going to keep finding it harder and harder to justify cutting interest rates, as global inflation rises, led by the price of oil. This goes for the European Central Bank (ECB) too! That’s one of the reasons the euro is sniffing the 1.49 level this morning. The ECB can’t cut rates due to inflation, while the Fed ignores inflation and cuts to the bone.

And on that uplifting note… I’m heading to the Big Finish!

Currencies today: A$ .8985, kiwi .79, C$ .9840, euro 1.49, sterling 1.9640, Swiss .9170, ISK 63.65, rand 6.7230, krone 5.2585, SEK 6.3260, forint 170.25, zloty 2.50, koruna 17.41, yen 107.70, baht 29.74, sing 1.4285, HKD 7.8030, INR 39.28, China 7.25, pesos 10.93, BRL 1.7470, dollar index 75.40, Oil $92.85, Silver $16.61, and Gold… $913.20

Retail sales today… I’m torn on this one, because the BHI (Butler Household Index) says it should be stronger than forecast. Got to see my good friend, Duane this weekend, he had hip replacement surgery a month ago. We look funny as both of us now use a cane. My neighbor, Kevin says, “I have to get a cane too!” HA! At least Duane will get to ditch his cane! My little buddy, Alex, pounded in six points in his basketball game Saturday. Ready for a wild and crazy week? Well you had better be, because this is it! Strap yourself in, keep your arms and legs inside the vehicle at all times… And have a Marvelous Monday, and wild week!

Chuck Butler
January 14, 2008

The Daily Reckoning