Another Perfect Storm Averted!

Good day… And a Marvelous Monday to you! Well… One of St. Louis’ landmarks was sold this morning. One of my fave companies for a number of reasons, Anheuser Busch, was sold to InBev this morning… Just another in the line of Corporate Headquarters that will no longer reside in St. Louis. At one point in the ’80s, St. Louis was the 5th largest city with Corporate Headquarters in the Western Hemisphere. I doubt we are even on the list these days.

OK… Well… Friday was chock full-o-fun – and not fun for some – as U.S. Treasury Secretary Paulson tried to calm the markets regarding Freddie and Fannie. That may have some soothing effect in the short run, but if home prices keep falling, and mortgage backed bonds keep losing value, this problem will return to the markets.

One thing that was rumored to be a major problem for IndyMac Bank, came to fruition… Federal Regulators seized the bank on Friday afternoon. I’ve got a message at the end of the Pfennig, right before the Big Finish, regarding the state of the Union for EverBank, in case you’re wondering.

Another Perfect Storm was averted by the dollar on Friday, as Paulson soothed the markets’ fears, and the trade deficit and The U. of Michigan Consumer Confidence report surprised on the upside. Here’s the skinny… The trade deficit was actually just a touch better than the previous month’s $60.5 billion, it just didn’t get to the forecast $62.5 billion. So, guess what the mass media decided to focus on? You got it! But, here’s the real meat here… The trade deficit was $59.8 billion, which was a bit of a narrowing from the previous month, which tells me that the weak dollar is working a bit, along with the slowdown in imports.

The U of Mich. Consumer Confidence for the first two weeks of July showed an improvement that was unexpected for sure! The index improved from 56.4 to 56.6. Not a huge upward move, so don’t be getting out that party dress for the big dance to celebrate the return of consumer confidence just yet! There was a big hit in the index taken by sentiment… As well it should… We’re getting squeezed by inflation big time! I don’t believe that the food and fuel (commodity) inflation is going to spiral into wage inflation – not with six consecutive months of job losses.

This commodity inflation is causing the biggest transfer of wealth in history (I believe). So, don’t look for continued improvement in this index, or any other that measures the pulse of consumer confidence any time soon.

Paulson has thrown the Treasury behind Freddie and Fannie. I guess that’s better than taking them over, which is what I thought he was going to announce on Friday morning. In fact, I yelled out across the desk when the announcement came that he was going to make a statement, that… “Another step toward socialism, as our once proud Republic fades away”… Of course then, I was wrong, he didn’t announce a takeover, which is fine with me!

So… The Perfect Storm was averted, but still the negativity toward the dollar came front and center most of the day, with the euro (EUR) rallying to 1.5935. Overnight, we’ve seen some short covering in the dollar, causing the euro to fall back to 1.5860… But, that move on Friday is just a tiny taste of what could happen to the dollar, should these “risk events” continue, as I believe they will!

I see where Bill Gross, the bond king, came out and said that he now favors the dollar over the euro for the first time. He believes the slowdown in the Eurozone will bring the euro back down to earth. I on the other hand don’t believe the slowdown in the Eurozone will matter enough to the offset currency to the dollar, as the dollar continues to get sold on “risk events” in the U.S. financial sector. I’m sorry to see the bond king go this way; he had always been an “awful fundamentals in the United States will lead to dollar weakness”, kind of guy…

The Aussie dollar (AUD) followed the Big Dog, euro, on Friday, as it hit a 25-year high of 97+ cents! WOW! You know, I’m hearing lots of talk from people/analysts who believe the Aussie dollar is vulnerable. I’m not seeing that, or getting why they feel that way… I even saw an article in The Economist that hinted toward Aussie dollar weakness. I would say, that I think the Aussie dollar will get to parity before it falls to 90-cents… So, we’ll have to see who’s right, eh?

You know, every once in a while I remember to write something about the Euro-Wannabes… Hungary, Poland and the Czech Republic. I gave them that name “Euro-Wannabes” seven years ago, when I created the Euro-Opportunity Index CD, one that continues to book some very nice returns. These three were deemed to be on the “fast track” to euro acceptance… But something funny happened on the way to the forum for these three. They haven’t joined the euro yet, and others have moved in front of them. Here’s the thing though, they are still loosely tied to the euro… So, the euro strength shows up in Euro-Wannabe strength… It’s that simple, Simon! HA! That reminds me of that silly Mike Meyers as Simon on Saturday Night Live… What a hoot!

The Canadian dollar/loonie (CAD) was able to push past 99-cents on Friday… It’s about time it got out of the 98-cent handle! Canada saw it’s unemployment rate edge up to 6.2% on Friday, but the move in the actual numbers was miniscule, so don’t expect this to push the Bank of Canada (BOC) to another rate cut when they meet this week. In fact, I believe the BOC is done with rate cuts, which should underpin the loonie as we go forward.

The data cupboard is empty today, but gets restocked tomorrow for a week chock-full-o-data… Of the more important data prints we’ll see this week… The stupid PPI (wholesale inflation), retail sales for June tomorrow, the even stupider CPI (consumer inflation) prints Wednesday, along with the TICs Flow for May. Industrial Production and my fave, Capacity Utilization also print on Wednesday. Thursday brings us Housing Starts, and the Philly Fed Index (manufacturing).

So… You can see that we’ll have plenty of data to talk about, and there will be plenty of data to make the dollar feel like its getting picked on again! Oh, and we get Big Ben Bernanke’s take on the economy at his testimony to lawmakers tomorrow.

The euro will see some data on its end this week also, as Eurozone CPI inflation prints on Wednesday and the German ZEW on Tuesday. Look for the Eurozone inflation to remain above 4%, which should bring about some hawkish remarks from European Central Bank (ECB) ministers. Those hawkish remarks should help the euro maintain its edge versus the dollar.

OK… With all the goings-on in the financial sector (see IndyMac above), and more to likely come, I thought it would be best to give this update on EverBank.

I wanted to share some EverBank news with Pfennig readers. As a private company EverBank is not driven by the demands of quarterly earnings reports and Wall Street expectations. Our Board and the executive management team set high expectations for performance, but hold a long-term view on when and how these results are realized. EverBank also avoided entering into the exotic and risky subprime and Alt-A markets that are plaguing many firms today, and in doing so we believe that we have built a diversified financial services company that is strongly capitalized and positioned for significant growth.

One indication of this position is our results. In 2007, a year that saw many firms erase all earnings and sometimes more with write-downs, EverBank was able to make a year-on-year earnings gain on continuing operations. Over the past five years we have consistently had return on equity results in the high teens.

We have now closed the books on the second quarter of 2008 and will be reporting earnings in a press release later today. As Pfennig readers I thought I would give you a peek at the numbers so that you are the first to know. For the second quarter of 2008 EverBank Financial Corp will report record earnings of $44.7 million including the impact of the sale of our Reverse Mortgage business, with results from continuing operations of $18.5 million for the first six months of 2008 – up 8% over the same period in 2007. At quarter end the EverBank capital position now stands firmly at over $402 million supporting $6 billion in assets and over $4.1 billion in deposits. As our Chairman, Rob Clements states, “EverBank’s financial health and performance have never been greater.”

Currencies today 7/14/08: A$ .9685, kiwi .7615, C$ .9905, euro 1.5865, sterling 1.9860, Swiss .9775, ISK 76.65, rand 7.6210, krone 5.08, and SEK 5.9750, forint 145.20, zloty 2.0540, koruna 14.70, yen 106.60, baht 33.66, sing 1.3580, HKD 7.8020, INR 42.98, China 6.8430, pesos 10.28, BRL 1.60, dollar index 72.19, Oil $143.80, Silver $18.71, and Gold… $958.64

That’s it for today… Crazy day on Friday, for sure! Got to see my old neighbors Rich and Laura and their girls, Allison Road and Madison Ave. (I give them those silly names) on Friday night, such cuties! That little Allison Road just climbs in my lap and hugs me when she sees me… Can’t wait for my granddaughter, Delaney Grace, to start that! Our little Christine is on vacation this week, then I’m gone for the next two weeks, first to Vancouver, then on vacation. Remember when I would get so excited about my summer vacation? Load up the family and head to our fave lake to camp, boat, water ski, relax… I had to skip it last summer (surgeries) and I’ll have to skip it again this summer. Hopefully by next summer I’ll be good to go again! So… Get ready for a wild ride this week… And have a Marvelous Monday!

Chuck Butler
July 14, 2008