Beware the Thin Markets

Good day… And a Happy Pseudo-Friday to one and all! It is actually Thursday of course, but it’s our Friday, as tomorrow is the 4th of July holiday here in the United States. I think a lot about the Declaration of Independence these days, as I feel there is a faction of people here in the U.S. that would like to tear up the constitution. So, as we come to the day we celebrate the signing of the Declaration of Independence let’s stop and remember that it’s WE THE PEOPLE that make a difference in this country, certainly not anything that comes out of Washington D.C.!

OK, I’m down from my soapbox… This could really be a Tub Thumpin’ Thursday as it has the potential to really kick some rear and take names later. Here’s what I’m talking about.

Front and center, we’re waiting for the European Central Bank (ECB) to announce their rate decision. ECB President Trichet all but hiked rates three weeks ago, when he told us that rates were going higher in the Eurozone, so, the markets are expecting 25 BPS this morning. As I said yesterday, what’s really important here is for Trichet to continue to sound hawkish in the press conference following the rate hike.

On the U.S. side, today is a Jobs Jamboree day. The “experts” continue to believe there will be a sixth consecutive month of job losses in June. I agree… The ADP Jobs report that printed yesterday had a huge downside surprise, which doesn’t bode well for the Jobs Jamboree. A reader asked me yesterday what I thought about the ADP report, and here’s what I said… In the past, the ADP data has had a far better track record of calling downside surprises than upside surprises in the official payrolls data. So what does that tell us about tomorrow’s Jobs Jamboree? It tells me that the dollar bulls had better duck and cover!

Here’s where I think the trouble for the dollar today resides… However, and this is just conspiracy talk… As I was driving in today, I got to thinking about how empty the roads were (they’re usually pretty empty when I come to work, but today they were REALLY empty!) and that how a lot of people had probably taken the day off to get in a nice four-day weekend. (How nice would that be!) If that’s happening here in St. Louis, it’s happening everywhere, including NY City. Could this lead to thin volume today?

Once the Londoners head to the local pubs, the U.S. market could become very thin. That makes it ripe for the pickin’. In other words, a central bank could step in and intervene today without repercussions in the markets for three-days, which could stop the bleeding in the dollar. Or… What if… Trichet and Bernanke have it worked out that Trichet will talk dovish in the statement after the rate hike to stop what they know will be some major dollar bleeding?

That’s all conspiracy talk there folks… But the market is so ripe for something like that to happen today… The negative posting of jobs, which is most likely a done deal, and an ECB rate hike on the same day in thin markets are like the Perfect Storm on the dollar. Or… Try this one on for size… How about tomorrow? Yes, tomorrow, as the U.S. feasts on barbequed ribs and ooohs and ahhhs while watching fireworks, the foreign central banks could step in… Or Trichet could say something tomorrow.

However, I just have to think it would be today; otherwise the cow is already out of the barn, with regard to further dollar weakness.

And if we don’t get any of that kind of talk/action today? Well… As I said above, the dollar bulls had better duck and cover!

They guys over at Citigroup Capital Markets think the euro (EUR) may be nearing an “explosive breakout”. A reader sent me a note about a story he saw that highlighted the euro’s possible rise to 1.69. Let’s listen in to what Citigroup is saying… “We cannot help but feel that things might be about to get very bad again.”

OK… Yesterday I said that 1.58 seemed to be the euro’s boogeyman right now… And almost as soon as I hit the “send button” the single unit jumped to 1.5835 and didn’t look back. It’s currently around 1.5880… The ADP jobs report yesterday – which showed a loss of -79K when only -20K was expected – really got the markets thinking that the Jobs Jamboree would be disappointing, and that would keep the Fed on hold for rates again next month.

With the Big Dog (euro) off the porch and chasing the dollar down the street again, the little dogs, like Aussie (AUD), Swissie (CHF), Norway (NOK), and others were able to join the chase. Only Japanese yen (JPY) was not allowed to join the chase.

The U.S. stock markets really took one on the chin again yesterday… Here’s what The Wall Street Journal had to say about it… “ The Dow Jones Industrial Average and NASDAQ Composite Index closed in bear-market territory for the first time in the current market downturn after a late sell off seized markets. The drop was driven in part by a jump in oil prices, which settled at a new record of $143.57 a barrel on the New York Mercantile Exchange and pushed above $144 in late trading. General Motors shares briefly dipped below $10 for the first time since the Eisenhower administration.”

U.S. stocks in bear market territory… U.S. bonds with paltry yields… Do you see any reason for foreign investors to flock to these assets? Capital flow into the United States has been teetering on collapsing for months now, if U.S. stocks continue this slide, you can expect Capital Flows to slide too. And that’s not good news for the dollar.

Let me stop and explain this before I go on. You see, when a foreigner wants to buy U.S. stocks, he has to exchange his local currency for dollars to “settle” the transaction on the U.S. exchanges. So, if all these “exchanges” fade away, so does all the buying of dollars.

OK… Gold recovered from an early morning sell-off to post another positive gain yesterday. Oil posted higher prices, which helped gold move higher. But the gatekeeper here was the weaker dollar… All the stuff I talked about above regarding a Perfect Storm against the dollar, and higher oil will all lead to a higher price in gold.

Here’s another arrow headed toward the dollar… The Fed is due to report the market value of the securities they purchased in the Bear Stearns bail out… This will be reported late this afternoon, probably after everyone has gone home. It will be a new line item, so it will be there for everyone to see… And I think it will be used as a proxy for the rest of the subprime debt that still has to be market down by dealers. There’s a manager for this debt (Blackrock) so the Fed can’t cook the books or bring the Bureau of Labor Statistics (BLS) in to perform some of their magic on the valuations!

Speaking of the BLS… They could be the wild card today. Let’s say the Jobs Jamboree is set to show a very disappointing job loss, but the BLS hangs a big figure on it from the Birth/Death model, thus making the report not look so disappointing… Now don’t Tsk, Tsk… It could happen, it has happened, and it will happen again… The question is… Will it happen today? I don’t know, but I would say the chance are, ’cause I wear a silly grin, the moment you come into view… No wait, chances are it could happen today, given all “Perfect Storm”.

The Chinese renminbi (CNY) continues to move slowly with its appreciation versus the dollar. The renminbi has been the kumquat of Asian currencies… But for heaven’s sake, could it speed up the process?

Currencies today 7/3/08: A$ .9620, kiwi .7595, C$ .9850, euro 1.5895, sterling 1.9885, Swiss .9880, ISK 78.50, rand 7.83, krone 5.06, SEK 5.9465, forint 148.88, zloty 2.11, koruna 15.02, yen 106.25, baht 33.30, sing 1.3580, HKD 7.7980, INR 43.26, China 6.8510, pesos 10.39, BRL 1.6040, dollar index 72.14, Oil $145.35, Silver $18.33, and Gold… $943.35

That’s it for today… This is long time colleague and friend, John Kaupisch’s, last day today, as he retires. I wish him well in his retirement. Back to rain here in St. Louis. Sure hope it doesn’t wash out holiday weekend plans, like it did for the Memorial Day weekend! UGH!

Every year when we get to the 4th of July, I think about my dad… What a patriot he was… Fought in WWII, and loved his country. But the 4th was special with him; you could always see it in his eyes. He loved the 4th! He also loved to set off fireworks! He used to tell me on pretty, Chamber of Commerce days… “Chuck, they don’t have days like this in the Soviet Union”. I say that same thing to this very day and my kids look at me strangely…

So… Be careful this weekend… Don’t drive fast, and take chances! I plan on going home and staying there until Sunday, when I take my family to the Cardinals/Cubs game. Have a great 4th! And take a moment to think about the men that signed that Declaration of Independence, they knew they were signing their death wish, but did it anyway… We The People… Remember that! And have a Tub Thumpin’ Thursday!

Chuck Butler
July 3, 2008