A Focus on Retail Sales

Good day… And a Happy Friday to one and all! A Fabulous Friday to boot! Well… We finally saw some of that profit taking in the euro (EUR) that I expected to see the day before. So, a day late… However, the selling hasn’t been crazy… And the euro is still trading above its old record level.

The selling hasn’t been too crazy because of all the negativity that exists toward owning dollars these days. While most traders/investors would have taken profits with the move above 1.39, their eyes are now fixed on even higher and more profitable levels…

Like I said yesterday, there were no data or Fed Head speeches so we drifted along the shoreline all day. Now, today is quite different, as I laid out the retail sales data yesterday. However, we have more than retail sales to look at today. We’ll also see the color of two of my faves – industrial production and capacity utilization. And finally, right out of the starter’s blocks this morning we’ll see the second quarter current account deficit… Which has been my biggest bugaboo for over seven years now.

Let me take you back seven years… The tech bubble was in its hey-day; I would go to investment conferences and talk to basically empty rooms. No one wanted to think about anything but the latest Qualcomm, or Yahoo. Investment flows were coming into the United States by the truckload, and the dollar was king… But I kept pointing to a chink in the dollar’s armor, and that was this rising current account deficit… And when it got to 4.5% of GDP, I remember screaming at the top of my lungs for people to buy euros!

Why? Because historically, whenever a country’s current account deficit reached 4.5% of GDP, a currency crisis usually followed. And let me remind you that the euro was trading in the 80-cent level back then too! The current account presently is running at about 6.5% of GDP… So things have gotten worse. And guess what? So has the value of the dollar!

Had one bought those euros then, and there were a handful of people who did, imagine the smiles on their faces each day, knowing that not only have they diversified their investment portfolio, and hedged against a falling dollar, they’ve profited big time!

OK… Water under the bridge… But still, the current account deficit requires over $2 billion a day in foreign investment; and when the deposit levels in the United States come down because of rate cuts, the ability to attract that amount of investment each day is going to be one tough row to hoe!

In my opinion, you can talk about bubbles bursting, and mortgages melting, and low interest rates, and recessions all you want – those just illustrate the awful fundamentals in the United States. But when you come right down to it, the financing of the current account deficit is the key fundamental that put the dollar into the weak dollar trend in 2002, and it won’t come out of that weak dollar trend until the current account deficit has been corrected, or at least is far along down the road to correction.

The Swiss National Bank (SNB) surprised the markets yesterday with a rate hike of 25 BPS. I really believe the SNB dearly wanted to catch the market by surprise, because there was no indication by the SNB that they even wanted to raise rates, much less at this time! The Swiss franc rallied on the news, but by the end of the day, had fallen back to the same level it held before the announcement.

I think we’re seeing another round of carry trades this week, as the yen (JPY) has lost ground, the Swiss franc (CHF) didn’t rally when it should have, and New Zealand (NZD), South Africa (ZAR), and Iceland (ISK) all saw their high yielding currencies gain versus the dollar.

I saw a report that tells me why the carry trades are seeing another go around the block. Commercial paper issuance is on the rise again, and buyers are entering this market once again… I’m sure those looking at this think that the credit crunch is out of the woods, and it’s time to take on risk again. I don’t think so… But then, I don’t normally agree with masses.

So, anyway… Taking on risk, leads to carry trades, which leads to yen and franc weakness, and kiwi, kroner, and rand rallies.

British pound (GBP) sterling took a bit of a hit yesterday when it was reported that Northern Rock had asked the Bank of England for support. Northern Rock is a U.K. mortgage lender, and although it is well run, it does not have the diversification of business or balance sheet of the main high street lenders to weather the credit storm.

Stories like this are what lead me to believe the credit crunch is not out of the woods… This news could put a crimp in the carry trade line… But we’ll have to see how it all falls out.

I’m seeing more and more talk from the Eurozone about the need for intervention (to keep the euro from going higher). They may as well not waste their breath! The European Central Bank fully understands what the strong euro does to keep inflation below their 2% target. So… “If you hear stuff like that, don’t be confused,” as a famous pitchman used to bellow here in St. Louis. Think of these guys as blowhards… Or, how about this… Think of them as the Big Bad Wolf, and he just got to the house made of bricks! There will be no blowing down that house, and there will be no euro intervention!

Let’s finish up here, and head to the weekend, eh? Oh, but before we head to the weekend, yesterday’s Weekly Initial Jobless Claims showed more rot on the labor market vine, when for the sixth time in the past seven weeks, jobless claims rose. I told you a couple of weeks ago, when the fall in jobs was interrupted one week with a gain, that the overall trend was still in place and we should continue to see jobs lost… That has held true.

And poor old Countrywide… We had commented on the desk this week about a story that surfaced saying that Countrywide was in need of additional fresh funds. Of course, most everyone responded saying, “even after Bank of America’s $2 Billion infusion?” Yes, sad as it is, it’s true… But not to worry, Countrywide announced yesterday that it had indeed lined up additional financing. These guys have caused enough worry in the marketplace.

So… We get hit with a plethora of data right out of the starting gate this morning, so it should be wild and wooly on the trading screens. The Big Kahuna today is retail sales. Let’s hope it doesn’t disappoint us like the Jobs Jamboree did last week, and led to the rout on the dollar this week. Yes… It’s funny isn’t it, that the markets are all keyed up on whether or not U.S. consumers keep spending money they don’t necessarily have… Going deeper into debt… Yes… I read the other day that there’s a new trend going on with homeowners that are in line to lose their homes… They sacrifice their homes to keep their credit cards! YIKES! What are these people thinking? I shake my head in wonder, at these mental giants! NOT!

Currencies today: A$ .8395, kiwi .7130, C$ .9670, euro 1.3875, sterling 2.02, Swiss .8440, ISK 64.20, rand 7.1930, krone 5.6350, SEK 6.6910, forint 183.83, zloty 2.7310, koruna 19.80, yen 114.90, baht 31.89, sing 1.5110, HKD 7.7880, INR 40.48, China 7.5110, pesos 11.11, dollar index 79.60, Silver $12.65, and Gold… $715.30

That’s it for today… Yes, my fat fingers had a typing faux pas yesterday, and typed the sterling price incorrectly at 2.20… Or, maybe it was wishful thinking… I’ve always said that the Pfennig is a written as a stream of consciousness… Nah, probably just fat fingers! I believe my darling daughter Dawn, and her lovely little Delaney, my granddaughter are going to visit the office this morning… Since I talk about her so much, Dawn thought she had better bring Delaney in to show everyone I’m not crazy when I talk about how cute she is! So, we’ve got that going for us today! Time to eat some breakfast, so I’ll hit the send button and be on my way! My beloved Tigers play W. Michigan tomorrow… Go Tigers! Have a Fabulous Friday, and Wonderful Weekend!

Chuck Butler — September 14, 2007

The Daily Reckoning