Chicken Little Is Warming Up!

Good day… Back in the saddle this morning. I’d much rather be writing from here than in any hotel room, I can tell you that! Hope your weekend was grand. How about that Ohio St./Michigan football game? Good stuff! This will be a short week for me, with Thanksgiving on Thursday, and a well-deserved day off on Friday! The markets will, for the most part, treat Friday as though it was a holiday, with the Big Guys gone, and instructions on the desk to “square” any new positions immediately.

On Friday we saw the latest housing numbers, and boy did they stink! Housing starts for October fell 14.6%, which brought housing starts to a six-year low! I think I hear Chicken Little warming up. The dollar lost ground on this news, but still remained in a tight range.

I’ll tell you this…the Fed Heads are the latest version of the “Lost Boys.” Just last week, they were going around telling people that the weakness in housing hadn’t translated into a broader economic downturn. Hmmm, I wonder what a 14.6% drop in housing starts does to their thoughts? There’s a boat load of new homes that are sitting around without occupants, and housing starts are falling. Chicken Little…Chicken Little are you ready?

The data cupboard is relatively empty this week, with October Leading Indicators today, and the U. of Michigan Confidence on Wednesday, the only data printing this week. Leading Indicators are interesting in that, I don’t understand why the markets don’t look at this data with more interest than they do. For 2006, Leading Indicators have been telling us that we should expect a slowing of the economy…but stock jockeys aren’t listening, and neither are dollar bulls…hmmm.

OK, so here’s what I’m thinking about today with regards to Leading Indicators. For most of the year, this index was negative, with no negative reaction from the markets. But for October, the “experts” think Leading Indicators might show a 0.2% rise. If that happens, I see the media jumping all over it and hailing the economy. Watch…this will be beyond belief, but it will happen if everything goes as I believe it will.

Germany will print their latest CPI this week, and while it will seem to have come in line with the help of rate hikes and the fall in the price of oil, the thing to look at will be what the ECB looks at, and that’s called “Headline Inflation” – and that will have accelerated this month. So…there is no change in the outlook for a December rate hike from the ECB. They are on a roll here, and I don’t think they’ll stop in 2007 until rates are 4%. That should keep the fire burning for euros.

You know…I’ve watched pound sterling get beaten and battered down for the past week, because of the markets’ thought that the Bank of England is only going to raise rates one more time in 2007. Hmmm…I say hogwash! And just like when the Bank of England decided in August of 2004 to cut rates, and I said they would rue the day they did that…I believe traders are going to rue the day they sold sterling!

Japanese officials are “doing it again, Mom!” That is, they are singing from different song sheets, with comments from Bank of Japan Gov. Fukui, and their vice-Finance Minister Watanabe. First Fukui says that Japan doesn’t face an immediate inflation threat. (Read no rate hike needed at this time). And then Watanabe says that Japan’s economy doesn’t warrant further decline. Hmmm…no wonder the markets are confused as to what to do with yen – the officials there don’t even know if they should talk it up or down!

I know what traders and investors should be thinking about with regards to yen, and that is simply, that the United States has two choices to help correct the Current Account Deficit mess: 1. See the economy go into a deep recession, or 2. Allow a general depreciation of the dollar versus the Asian currencies. Given these two choices, the government will always choose a debasing of the currency. If traders and investors ever get this thought into their thick heads, we could finally see the dollar go deep into the underlying weak trend again!

I received a few emails regarding my announcement last week that we will stop offering the Gold and Commodity MarketSafe CD’s with the December issues. We are not stopping the issuance of these CD’s because we are bearish on commodities/gold. That couldn’t be further from the truth! The truth is, while we might bring them back at some time in the future…the funding was dwindling.

So…prove us wrong, and blow this December funding out of the water! Go ahead…I dare you! (Remember Robert Conrad with the battery on his shoulder, daring you to knock it off? HAHAHAHAHAHA)

While the Canadian dollar/loonie has been able to remain in the neighborhood of their lofty spring/summer levels, the frosting looks to be off the cake. The tax on income trusts has really killed the golden goose, and unless the Senate blocks the tax – the chances of which are slim and none (and slim just left town) – the loonie is going to suffer more.

Aussie and kiwi continue to burn the midnight oil, and get back on the rally tracks. With the United States holding rates steady, and these two currencies enjoying strong interest rate differentials that continue to widen…they have become strong again. I’ve talked at length about what I see for Aussie dollars, and between the two, I would choose Aussie dollars. But that this point, they are both on terra firma, and moving higher.

Currencies today: A$ .7695, kiwi .6678, C$ .8740, euro 1.2840, sterling 1.8960, Swiss .8060, ISK 70.60, rand 7.2850, krone 6.4425, SEK 7.08, forint 201.75, zloty 2.97, koruna 21.83, yen 118, baht 36.58, sing 1.5585, HKD 7.7870, INR 44.98, China 7.8694, pesos 10.97, dollar index 85.28, Silver $12.91, and Gold… $623.80

That’s it for today…The “boys” weekend at the Butler house went well – no major messes at least! The Rams can kiss their season good-bye after that awful showing in Carolina yesterday. Pitchers and catchers report in three months! UGH! Today, they announce the National League MVP…should be Albert Pujols again. I have just one more trip this year. In two weeks I head to Phoenix for a short trip, and then home for the holidays! My winter vacation is about a month away…I am ready for that one! Have a great Monday and week!

Chuck Butler
November 20, 2006

The Daily Reckoning