Another Large Rate Cut from the Fed

Good day… And a Wonderful Wednesday to you! I’m back once again for a couple of days before I head back to Florida, this time for an entire week! I just spent five wonderful days with my good friends, Rick and Duane, a good time was had by all! The markets were pretty wild since I left you on Friday morning. I can tell that things here must have been awfully crazy, because Chris normally leaves me a short email with an update of what happened in the markets. I have over 500 emails this morning, but not what I was looking for!

So… Here we go… The Fed did cut rates 0.75 BPS or 3/4% (whichever way you like it) yesterday. There were some in the markets that were expecting the “Full Monty” 1% rate cut, but that didn’t happen, and so there was some disappointment in the markets. But the stock jockeys loved it! When will these guys ever learn? When will they ev-er learn? The inflation wolf is always at the door, and the Fed just opened the door and let him in! But that’s today’s society… Why worry today, about what is going to happen tomorrow or sometime down the road?

I’m glad I wasn’t brought up like that.

So… With the stock market soaring over 400 points, the dollar was bought… But don’t expect this to remain in place. The yield differentials that have ruled the roost in currencies will come into play again, and with interest rates here in the U.S. at 2.25% (Just 0.25% away from where I told you the Fed would cut rates to, last fall), even Swiss francs (CHF) are on the same playing field with the dollar again! This cut leaves the U.S. the second lowest yielding currency behind Japanese yen (JPY)… And now… Bank of America issued a report last night calling for another 75 BPS rate cut by the Fed. Uh-Oh!

Speaking of Swissie… I saw the franc over parity to the dollar the other day… Now, there’s another source of pride for me.

Another source of pride is the fact that Japanese yen is now trading below 100 for the first time since 1995… WOW! I sent Chris a text the other day, and said, “Chris… How about yen at 98? How right was I about that?” All this time people were shunning yen and buying renminbi (CNY)… When they should have been buying yen. I kept telling whoever would ask me about renminbi that I would prefer buying yen; it floats! Which reminds me of that skit that David Letterman does… “Will It Float?” HAHAHAHAHAHA… But seriously folks… Yen should have been bought instead of renminbi… But… To each his own, right? Renminbi hasn’t exactly been chopped liver… It’s just that yen finally got the fire lit below, and has outperformed every other currency but…. Swiss francs!

Anyone in attendance at my presentations in New Orleans, or Marco Island, will remember me saying… “The two currencies that we would look for good performance from in 2008 are Swiss francs and Japanese yen”… Of course, I’ve also said it at least a dozen time in the Pfennig since last fall, too… Right now… Yen and francs are kicking sand in the dollar’s face.

One of my fave reads on the Bloomie is William Pesek… And today, Mr. Pesek has a story about the rise of yen, and the need of a G-7 meeting at the Plaza Hotel again.

You may recall, and I tell everyone when I give presentations, that the “Plaza Accord” was held at New York’s famous Plaza Hotel in 1985… G-7 members were concerned with the U.S. trade deficit, which had reached 2.5% of GDP (we currently are around 5.7% of GDP) and decided that the dollar should be weakened. The markets complied with the G-7 wishes and the weak dollar trend lasted 10 years!

Yield differentials have Aussie (AUD) and kiwi (NZD) back on the rally tracks. But the emerging markets’ high yielders are a different story. Iceland (ISK) has really taken a beating around the head and shoulders lately… But I kept warning people about this possibility. Carry trades getting unwound results in Iceland selling and Japanese yen and Swiss franc buying. That’s exactly what we’re seeing these days… South African rand (ZAR) is in the same boat as Iceland… It’s a shame really that people didn’t wake up Maggie and see this was happening.

Will it reverse like it has so many times before? It’s really difficult to say… I certainly don’t know anything more than anyone else when it comes to “lives of the carry trade”… But, if stocks continue to rally like they did yesterday, then one would think the carry trade will come back. I’m just not a fan of stocks right now, and I’m glad that they rallied 400 points yesterday and gave some “smart” people the chance to “get out” while the getting’ was good. But I know there will be tons of others that have the “this 400 point move is just the beginning for stocks” mentality… Uh-Oh!

Our old friend, the euro (EUR), climbed as high as 1.58 and changed at one point Monday night… WOW! It has settled back into the 1.57 handle, which is fine with me. If you start too fast you can’t last, as all Marathon runners know all too well! The euro has really pushed the envelope this year, climbing almost 8% versus the dollar in the first three months.

You’ve got to love the euro… I know that many people over the years have shunned the euro because they don’t “trust it”. I would shake my head in wonder regarding their lack of “trust” – but, that was their loss, because the euro has gone from 82-cents in 2000 to 1.5740, and as I said last week, sure has the 1.60 look about it.

Silver and gold really had it tough yesterday, losing some major ground to the stock market’s 400-point move. I would look at this sell off as an opportunity to buy at cheaper levels.

So… Chris told you all about the Bear Stearns bailout the other day… Who’s next? (That was a great album by the Who!) But really… Who’s next? There’s a lot of speculation going on in the markets about how bad the credit market losses will get, with the housing market still falling. I’m really concerned about all this; and I’m probably the first person you know who was telling you that all this was coming down the pipeline… So… I’ve been concerned for some time, and that concern just keeps growing.

Things like U.S. building permits falling to a 16-year low last month, just keeps feeding that concern, along with the losses that lenders keep having to report. Morgan Stanley, the second largest U.S. securities firm (by market value), is expected to report a 57% drop in first quarter earnings today. The list just keeps getting longer… And the stories just keep getting scarier.

So… After all that scary talk, I need to head to the Big Finish with an uplifting story… So… How about Norway and Sweden? The Swedish krona (SEK) has been one of the top performing currencies this year versus the dollar with Norway’s krone (NOK) just a step or two behind. Interest rate differentials are coming into play here, as these two both outpace the dollar’s rate. You’ve gotta love those “positive balance of payments” countries, of which Norway and Sweden are both members of the club!

Currencies today: A$ .9315, kiwi .8130, C$ 1.005, euro 1.5740, sterling 2.00, Swiss 1.007, ISK 78.10, rand 8.0480, krone 5.11, SEK 5.99, forint 163.60, zloty 2.2470, koruna 16.19, yen 98.60, baht 31.10, sing 1.3785, HKD 7.7750, INR 40.43, China 7.0660, pesos 10.6790, BRL 1.6860, dollar index 71.53, Oil $108.08, Silver $19.85, and Gold… $990

That’s it for today… It has been raining for three days now here. But at least all the snow and salt that was around when I left last week is now gone! The river that flows through my little town is about ready to flood, which means getting around in my little town will become difficult. I had three deer in my front yard when I went to leave for work this morning… I’m sure they were saying, “shouldn’t he be sleeping?”! My beloved Cardinals baseball team looks good… But we are having the same problems as last year defensively. That’s not like Cardinal baseball, so they had better get that straightened out! Next week while both Chris and I are out of the office on vacation, Mike Meyer will take over the Pfennig… However, and I don’t want to hear any complaints… Mike will simply give you a brief one paragraph of what happened overnight and the previous day, and the currency roundup… That way you can stay on top! I hope you have a Wonderful Wednesday!

Chuck Butler
March 19, 2008