Commodity Bear Market Hogwash

Good day… And a Terrific Tuesday to you! I’m Baaaaaaaaaccccckkkk! Well, actually, I made it to the office yesterday morning, after flying all night from San Francisco (with a stop in Dallas). I told the crew ahead of time I didn’t want to hear anything about how I looked… And they obliged, but I could see that they were giggling inside! I’m still worn out, but hey! I got back yesterday only to find out that I get to go back out on the road all next week. Geez Louise, somebody get me a private plane! HA!

Well… The joke on the desk used to be, “When Chuck is gone, the currencies rally”. That certainly wasn’t the case with this past absence! I had pre-written a large part of what I was going to say in yesterday’s Pfennig, before I was not able to connect, flying in a big airliner.

Chris did a great job Pfilling in on the Pfennig, eh? Especially explaining this dollar rally… But there’s one more thing I think we all need to think about here… Where did this “need” to buy that huge amount of U.S. debt come from? And why at that time, when the U.S. data looked soooooooo bad, and that it would take the dollar down even further? Well… I’ll tell you what I think caused it… I used to shrug off the thought of the Plunge Protection Team, but as time went on, and there was one “unexplainable asset movement” after another, I’m now a firm believer in the Plunge Protection Team (PPT). In case you don’t know what I mean, the PPT was created to protect the markets from major meltdowns during the Reagan Administration after the stock market crash of 1987. So… Until some one can give me a better explanation, and I doubt anyone will be able to, I’m blaming this on the PPT; and just like in 2005, when we had “dollar props”, another “dollar prop” has been administered to the dollar to protect it from falling.

But this one really got the juices going in the markets, and the “massive short position in dollars” that was created by this U.S. debt purchase, triggered one dollar buy after another… Or, triggered one euro sale after another.

So… What’s it going to take to turn this puppy back around? OK, I hear you saying, “Well, Chuck… If that’s the case, then it’s a one-and-done for the dollar, and it will go back to the weak dollar trend this week!” Not so fast, Tim! You see, these things have to work themselves out… And with it all happening on a Friday, thus giving people/investors that didn’t see it on Friday a chance to take part on Monday/this week, I believe this massive short covering could possibly lead to dollar strength until the elections/end of the year.

However, I kept telling the attendees of the San Francisco Money Show that I truly believe we will see one or two more financial institutions get down on their knees and beg for forgiveness this year; add that to the fact that the mortgage bill passage should begin to show chinks in the armor, and the market participants will do a V-8 slap to the forehead and realize that the fundamentals in the United States are still baaaaaaaaaddddddd, and begin to sell the dollar again.

Remember in January of this year when I kept talking about a pullback in the euro and a short-term rally in the dollar? Well, it looks like it’s all happening at the zoo. I do believe it, I do believe it’s true! OK, so I was 8-months early… Seriously though… This one was difficult to take, as it was so violent in its movement. A tourniquet needs to be applied and fast!

The bad data just keeps racking up miles here in the United States and I can’t believe that traders are taking the “European data is worse than the U.S. data” approach… Because it just isn’t true! Take for instance the news headline this morning that “One third of U.S. Homeowners owe more than their Houses are worth”.

The trade deficit for June will be printed this morning. The deficit is forecast to reach $62 billion, up from May’s $59.8 billion. Recall, that in June the dollar had received a boost early in the month, when Big Ben said he was an “inflation fighter”, only to show his true mettle leaving rates unchanged at the last two meetings. Eventually though, in June the dollar began circling the bowl again. Which is one thing I must point out here… Be careful what you wish for dollar bulls, for if you truly want a stronger dollar, the trade deficit will suffer even more.

We actually get a taste of the Twin Deficits this morning as the Budget Statement for July will also print and is forecast to add another negative -$90 billion to the budget deficit tote board!

The dollar has got it all going on right now, and not just versus the euro (EUR) and Aussie (AUD) and other currencies. Commodities have taken on major water too, which has led some pundits to write that the commodity Bull Market is over and is now a “Bear Market”. To that I say, HOGWASH! But, I’ve seen this many times in the past 6.5 years of the weak dollar trend. I was in Phoenix in May of 2003, and the USA Today had a headline that said, “China to slow, Commodities to fall” or something like that… And it sent the commodities down the slippery slope, along with the commodity currencies of Aussie, New Zealand (NZD), Canada (CAD) and South Africa (ZAR)… Was it true then? NO! The same thing happened in 2005… Was it true then? NO! So, what gives traders the sure thought that it’s true now?

People say… “Hey, Chuck, the price of oil is dropping, isn’t that great? I thought you believed in that ‘Peak Oil’ stuff?” Ahem… The price of oil isn’t dropping… The dollar is rising, thus pushing the price of oil down. There are two different scenarios there… If the dollar is “allowed” to return to the underlying weak dollar trend, the price of oil will rise once again, and people will go back to throwing darts at the heads of oil companies! (Of course I’ve told you my stance on that, so I won’t get into that one again!)

One of the currencies hardest hit by the dollar’s rally has been the Aussie dollar. Adding to the U.S. dollar strength was the fact that the Reserve Bank of Australia (RBA) announced an easing bias following last week’s board meeting. I have to question the markets’ motive here… Does an announcement of an easing bias automatically mean that the RBA takes rates lower at subsequent meetings this year? I don’t think so, but… That’s what the markets think, and it has created a Perfect Storm for the Aussie dollar, with the storm fronts from the U.S. dollar rally, the RBA’s announcement, and commodity prices all converging on the once proud and ready to hit parity to the green/peachback, Aussie dollar.

Don’t you think the RBA saw that the Aussie dollar was knocking on parity’s door, and freaked out? I do! And I think that led the RBA to make that announcement on rate bias. Prior to that announcement, the RBA was all over the “inflation fighting” side of the ledger, so this kind of came from left field… But… In reality, the Aussie dollar has fallen for 11 straight days; that’s the longest run of sell-offs for the Aussie dollar since 1975!

Shoot Rudy! Even the Chinese renminbi (CNY) has fallen versus the dollar in the past two weeks! Now that’s not going to make the Schumers and Grahams of the world happy campers!

Time to head to the Big Finish, as I’m so behind on stuff here on the desk… Notice I said that I’m so behind and not that I am a behind! HA!

Currencies today 8/12/08: A$ .8735, kiwi .6955, C$ .9345, euro 1.4890, sterling 1.9025, Swiss .9175, ISK 82, rand 7.7455, krone 5.38, SEK 6.3070, forint 159.60, zloty 2.2040, koruna 16.16, yen 110.10, baht 33.73, sing 1.4110, HKD 7.8090, INR 42.38, China 6.8630, pesos 10.16, BRL 1.6230, dollar index 76.34, Oil $113.50, Silver $14.44, and Gold… $814.65

That’s it for today… Strange days indeed, so peculiar momma! My little buddy, Alex, comes home from camp today; and after 13 days in an un-air-conditioned cabin, he’ll sure appreciate air conditioning more now! The San Francisco Money Show was good, though not as big as the other Money Shows. I had great help in the booth from John Kimsey, Pam Strickland, and Kristin Kuchem. San Francisco is a special city to me, as I played there in the Cannery when I was a young man traveling around the country with my guitar! So, I got back yesterday, to find an email that said I needed to be in Orlando next Monday for the week, and two days the following week for training on a new system. I can’t tell you how happy I was to see that email…. NOT! But, I’m not the only one going, so I’ll stop complaining! It’s been a couple of weeks since I last wrote to you. I’m feeling pretty good, swelling in my leg and ankle/foot is down. I’m in my second week of my four week treatment, so at some point this week, I’ll begin to feel like I just ran into a wall, but that’s nothing compared to week 3 and 4, so I have that going for me! But, Hey! I’m still here! And… I know this kind of treatment to be far better than the stuff people took 10 years ago, so no complaining from me!

Chris ran an ad on the Pfennig all last week and I have it again today. It talks about the Currency Tours I’ll be doing with the Foreign Exchange University in September (and again in October). I’ll be in Seattle, San Diego and Dallas the week of Sept 14-19. I have another announcement regarding something new that I’ll be doing in the future that I’ll get around to telling you about later this week, still tying up the legal stuff… Hey!, The Olympics are something to watch aren’t they? I find myself so wrapped up in those swimming races… WOW! OK… Enough! Time to go… I hope your Tuesday is Terrific!

Chuck Butler
August 12, 2008