Auditing the Lehman Cash Movements

I’m not getting a good feeling about today’s labor report at the Jobs Jamboree. The forecast is for jobs losses to fall from -216,000 to -175,000, but for the unemployment rate to tick up to 9.8% from 9.7%. I’m getting the feeling that there are risks to this forecast… And that the job losses could come in higher, which would really be a BAD thing for the recovery flag-wavers and risk takers, I’m sorry to say…

You see, the recovery flag wavers and risk takers are wishing, and hoping, and thinking and praying that the data in the US continues to show some sign of life. Any signs that the US economy could be slipping backwards, would deep six stocks for sure, and if last year’s trading tells us anything, it would have an adverse affect on commodities and currencies too!

So… This is a BIGGIE today, folks… So strap yourself in, and make sure you keep your arms and legs inside the ride at all times!

Yesterday’s currency trading left a lot to be desired… There was little movement from the overnight sessions, which tomahawked the non-dollar currencies. That’s a good thing… But the downside risk today is just too much for me right now… Again, Japanese yen (JPY) enjoys the sun from both sides of their house… When the dollar is weak, yen rallies with the other non-dollar currencies… When the dollar is strong, yen rallies alongside the dollar! It’s good to be the yen! (That is before the Ministry of Finance in Japan begins to intervene!)

Hey! Remember when I bashed the cash for clunkers program, and exposed it for what it was, and what it would do to future sales of automobiles? Well, as they say… The proof is in the pudding!

Yesterday, it was reported that General Motors had posted a 45% drop in September US light-vehicle sales, while Chrysler’s sales fell 42%. Ford saw a much more modest drop of 5.1%. Among Japanese auto makers, Toyota said its September US sales declined 16% from a year earlier, while Nissan saw its results fall 7% and Honda said its sales slid 23%. So, clearly the auto industry was hurt by the expiration of cash for clunkers.

I also think that any government program to prop up the economy is just falling into the ghost of Japan’s hands… I’ve explained this before, how when Japan experienced a HUGE market correction after their go-go ’80s, they panicked and began throwing money at the problem, instead of just letting the markets run their course. The Japanese introduced stimulus package after stimulus package, and government program after government program, like quantitative easing… And look how well that’s worked out for them!

So the ghost of Japanese recoveries that never panned out, is haunting the US government, now!

Today is also the start of a G-7 meeting in Istanbul… The rumors coming out of the pre-meeting stuff is that G-7 will no longer make a statement or issue a communiqué regarding currencies, as they now feel that the only group that should have that responsibility is the G-20, which last week took the world economies watchdog title from G-8.

Currency traders have long used these G-7 communiqué statements as a tool that indicates direction for currencies… And while that has actually come to fruition a handful of times over the years, for the most part, G-7 was nothing but a boondoggle!

One thing that’s out there that you won’t see a lot of people talking about is the vote going on in Ireland today, on the Lisbon Treaty, which the Irish people voted down last year… This Lisbon Treaty changes the way the European Union works, and would amend the Maastricht Treaty… It was intended that all member European Union states would ratify this before now… So, this vote is like the Sword of Damocles hanging over the euro (EUR) for Monday morning.

You see, the vote will be taken today, counted tomorrow, and announced Sunday, which will cause a knee-jerk reaction to the euro trading on Monday… Right now, the polls show that the Irish will accept the Treaty this time. If passed, it goes to Poland and the Czech Republic, and if they vote yes then it would lead to ratification, which would be a good thing for the euro… A no vote would be bad thing, just like it was in June of 2008, when Ireland voted no the first time around.

Yesterday, the IMF issued a report on Currency Composition of Global FX Reserves… And this is quite telling I believe, for the report showed a continued diversification away from the dollar, in the second quarter of this year. I had to laugh last year, when I was on the FXU Currency Tours, and one of the guys there said that the fall of currency reserves allocation of dollars from over 80% to 64%, was nothing but currency appreciation by the euro… I would point to the these IMF reports, when I talked so that I didn’t make a big thing out of it…

Did you see the story in the Wall Street Journal regarding Lehman Brothers? This story had conspiracy stamped all over it, so you know me, I was all over this story like a cheap suit! Here’s the gist of the story from the WSJ… “An examiner is looking into how the Federal Reserve was promptly repaid billions of dollars in cash and securities it lent to Lehman Brothers before the bank filed for bankruptcy, while other creditors are still owed money. The court appointed Anton Valukas, chairman of Jenner & Block and a former US attorney, to explore whether the Fed received improper preferential treatment.”

Now you, me and the lamppost all know what went on here, just by that description in the WSJ… But, we’ll wait for the report, I guess…

The US stocks really got taken to the woodshed at the close yesterday, and the futures in the overnight markets are weak… So… Guess where the money goes when they sell stocks? That’s right, US Treasuries… So, just about the time you think that the “mom and pops” of the world that went to Treasuries last year in the so-called flight to safety, had taken on enough losses, and were going to get out… Here comes the stock correction that I’ve been talking about… Or maybe not… Maybe this is just a couple of days of selling… Or maybe it is the correction…

So, if dollars are flowing into Treasuries, the yields of those Treasuries are going down once again… UGH! This just doesn’t make any sense to me! Didn’t these people that went to the so-called “safety of treasuries” last year – but lost money – learn anything? Or did enough time pass and they’ve “forgotten the pain”?

Oh, heck! This just feeds more air into the treasury bubble… Which means that it grows larger and larger, and also means that when it does pop, the losses will be severe and all across the board… I mean, isn’t that what we’ve learned about what happens when a bubble pops, in the past?

Yesterday, the data cupboard was busy… We had the Weekly Initial Jobless Claims post a higher number than was expected, coming in at 551,000, versus last week’s 534,000… I always love it when the Jobs Jamboree follows a Weekly Initial Jobless Claims repot… Because the weekly report shows that, in this case, 551,000 jobs were potentially lost last week, and today’s monthly report by the BLS will show something far less.

We also saw that the US consumers continue to spend more than they make, as personal spending was up 1.3%, while personal income was only up 0.2%…

And then finally we saw the US ISM Index (manufacturing) come in weaker than expected, but remain above 50, at 52.6… That’s a weaker number than the August figure which was 52.9… And I would think that someone would have noticed this… But we had the TV on all day, and I had it on when I got home, and never saw mention of this anywhere!

And then there was this… My colleague, Aaron Stevenson, called me yesterday morning, trying to beat the deadline for stuff to add to the Pfennig… He missed… So I have it for today… Remember yesterday morning, when I announced that BOA CEO Ken Lewis was retiring, and that I thought that was strange?

Well, Aaron was all over this, telling me that he worked for BOA for a number of years, and sat in on meetings with Ken Lewis, and that Ken Lewis was not the kind of person to take “early retirement”… In fact, Aaron says, “Four months ago, I heard an interview with Ken Lewis, and he said ‘I’m 62, I’m not ready to retire.’” Aaron said that he was a “no surrender, no quit, kind of guy.” Hmmm… I wonder what changed in four months? Well, Aaron thinks, and I agree, that he was forced out by the Feds, for speaking his mind on the BOA/Merrill Lynch deal that was brokered by the Fed and Treasury.

OK… To recap… Today is a Jobs Jamboree Friday, and I’m getting the feeling that it will be disappointing versus the forecast of 175,000 job losses… G-7 meets this weekend, and there might be a change in what they say after each meeting. The ghost of Japanese recoveries, is at work in the US Ireland votes on the Lisbon Treaty today, and the dollar remains well bid versus the non-dollar currencies… Except yen!

The Daily Reckoning