Celebration Time, Come On!

Good day… And a Tremendous Thursday to you! Well… The dust has settled on the Fed’s 50 BPS rate cut… And now as I look out across the markets I have this thought… The Fed has basically told us that all is right with the world… Not to fear, for the Fed is here… To bail us all out. With that thought in mind… Why not get back to the “throw no caution to risk positions” mentality.

I just can’t express enough what the Fed signaled to the markets. “Go ahead… Put those carry trades on until you can’t put any more on.” That’s not good for Japanese yen (JPY), folks… And yesterday’s price action in yen tells it all, as yen fell to the 116 handle. This, to me, is just like everything else that the Fed has had their hands into. The longer, those carry trades are allowed to live on… The worse the unwinding will be, when it comes… And more folks will get hammered and I mean… Hammered!

Besides the selling of yen yesterday, the rest of the currencies only saw slight moves downward. Profit taking had to be the order of the day. The euro (EUR) remains ready to strike at the 1.40 level… However, I read a research paper yesterday that explained how there was this well-known large option to sell euros at 1.40. Any time euros move close to 1.40, knowing it won’t go any higher at this time, profit taking sets in… But, I don’t think this will have a hold of the market for too much longer… And since the Fed did its best Cat Stevens and sang “The First Cut is the Deepest”, 1.40 might well be an “easy” target to hit… 1.45 might not be a hard target to hit… Am I saying it could to 1.50? Hmmm… Well anything is possible, right? All I’m saying is that with the negativity toward the dollar running high, and deposit rates in the United States going down, the possibilities are endless!

And now that I’ve written all that… I look up and the euro has pushed through 1.40 anyway! WOW! We’re talking lampshade wearing for Mike Meyer! So… Look at this currency GO! OK, I know you can’t see the trading screens, but WOW! So much for that well-known option position to see euros at 1.40! This currency looks like its riding on a bullet straight to the top! I’d give it a 95, the beat is good, and you can dance to it!

1.40… I think I’ll faint! No… Not faint… I think I’ll jump for joy! No… I can’t jump anymore… Hmmm, what shall I do to celebrate this occasion? Stop on the way to work and pick up some Krispy Kremes for the boys and girls on the desk? Celebration time come on… We’re gonna have a good time today, let’s celebrate…

OK… I’m back now, I was gone for a minute there, but I’m back now! Where were we? Oh, that’s right, the euro’s triumphant climb past 1.40! OK, let’s go on to other things, eh?

Oh… And the Government’s printing of CPI, sure put a feather in the Fed’s cap… Believe it or not… The government said that inflation fell -0.1%… What? Oh brother! Why do they continue to think we are morons, and we don’t feel inflation eating at us every day? CPI just doesn’t tell the truth about what’s going on, but… The markets seem to take the bait, hook, line and sinker! But not me! I don’t believe it one iota!

The other piece of data that printed on Wednesday was housing starts… Housing starts for August were weaker than expected, dropping 2.6%. A sharp 5.9% drop in permits does not provide much reason for optimism that housing activity is poised to turn around.

And foreclosures continue to shoot upward. RealtyTrac, in Irvine, California, reported that nationwide, lenders served notices of default to 108,716 homeowners in August, two and a half times the 42,144 a year ago, and up 50% from July.

“This is just the beginning of a wave of new foreclosures,” said Rick Sharga, an executive vice president at RealtyTrac.

Big Ben Bernanke will give his take on the economy to Congress today… His words will be followed closely to see if he gives any insight to the Fed’s plans for further rate cuts. I’ll bet he’s pinned down on his thoughts of the housing market and how that could spread through to the rest of the economy. If he tells the truth… The markets will come away with the same thoughts I have and that is the Fed will come back to cut rates again in October, and maybe December.

If that happens, look for another round of dollar selling, which means euros, and the high yielders going hog wild again, along with gold and silver!

Today we will see leading Indicators and the Philly Fed Survey, which monitors manufacturing in that region… The August leading indicators are expected to fall versus last month, which makes sense given the market volatility in August… And the Philly Fed Survey is expected to fall versus the August figure. So… No love for the dollar from the data today.

And borrowing a line from the ’60s… Everybody’s doing it! Here’s what I’m talking about… The United States says that inflation on an annual basis is running at only 2%. Now we know that’s a bunch of bunk… But now… Canada has issued a report on their inflation and they say it fell 0.3% last month, putting the annualized rate at 1.7%. NO WAY! That’s crazy talk! Oil prices are soaring… Energy prices as a whole are soaring, the economy is running at full capacity, and the expect us to believe that inflation fell last month?

I love the Canadian dollar/loonie (CAD)… So I won’t hold this against the currency… But remember the other day, when I mentioned that the loonie could hit parity, but not with any help from the government? Well… This is what I’m talking about… By printing a report like this, the government gets the markets to back off the pressure to hike interest rates again, thus reducing the attraction to the loonie.

The Australian dollar (AUD) has really rallied since the rate cut announcement in the United States, and it’s not just tied to that rate cut… The rally in Aussie dollars has also been fueled by a rise in commodities again. For instance… Nickel kicked some tail and took names yesterday, rising the most in 19 years! So… Duel injectors are fueling the Aussie dollar… And look… It has pushed to within a hop, skip and a jump from 86-cents! WOW!

So… Tally it all up, and we have stocks, commodities, currencies and carry trades all benefiting from the 50 BPS rate cut. But not all is seashells and balloons people… Inflation is going to hit us hard… Just you wait-n-see… And then more rate cuts will come, and the dollar will continue to get hammered… And risk? There will come a day, an event, much like the liquidity crunch in August, and carry trades will get unwound faster than you can say, “unwind my position”!

And one more thing before we head to the Big Finish on this day when the euro passed 1.40… And that is… The Indian rupee (INR)… Amazing performance this past month! Yesterday, I called a Big Dealer to do an NDF in Indian rupee, and he tells me that the currency just traded below the 40 handle! WOW! This is the first time since 1998, that the rupee has seen the light of day below 40! (rupees are priced as European style, which means as the price goes down, it returns more value to you when you convert to dollars)… That marks a 10% rise versus the dollar this year.

Is there more in the rupee’s tank here? It all depends on the money… If foreign inflows continue as strong as they have been in the past month… Then yes… However, I can’t imagine the Indian Central Bank not intervening here to stem this rise… So… Look for rupees to curry their time at this level for a while… Which allows people to get in, get out, and get on with their lives!

Currencies today: A$ .8620, kiwi .7395, C$ .9895, euro 1.4035, sterling 2.0067, Swiss .8530, ISK 62.85, rand 7.07, krone 5.5370, SEK 6.5625, forint 178.78, zloty 2.6850, koruna 19.5780, yen 115.35, baht 31.57, sing 1.5040, HKD 7.7840, INR 39.89, China 7.5180, pesos 10.99, dollar index 78.92, Silver $13.25, and Gold… $735.40

That’s it for today… Big Ben speaks today… Should be interesting… Had a visit from little Delaney Grace last night… She’s such a cutie! Went home and slept a long time yesterday… Kristin and Christine think I’m overdoing it at work… OK… I’ll work less! Pretty soon, I’ll just go out to my car, and then come right back in the house! HAHAHAHA! Seriously though, maybe they are right… I’ll take it easier and see what happens! Gotta go now… Have a Tremendous Thursday!

Chuck Butler — September 20, 2007

The Daily Reckoning