Damaging Data

Good day… And a Tremendous Thursday to you! There was some very damaging data on the U.S. economy yesterday, which pushed the dollar down, along with stocks, which lost over 200 points on the day. So… Let’s check the data report card, to see who has to stay after school and write on the board 100 times, “A U.S. recession is coming”…

First of all, the ISM Manufacturing Index, which I told you yesterday would continue its downward trend toward the line in the sand… 50… Unfortunately, the index sunk below 50 and landed on 47.7, its lowest level since 2003! And that’s not the worse part of the data… New Orders fell to the lowest reading since October 2001… The Prices Paid remained high, thus signaling inflationary manufacturing.

Overall, this report tells me, and should tell the markets that they can look for another Fed rate cut later this month. And before I go on… Let me explain my thoughts on the ISM Index. First of all, I learned in econ class that when the ISM hits a level of 45 for two consecutive months, it indicates a recession. I know that economists believe it is two consecutive quarters of negative growth… But I argue that point… And in 2001 I was bang on, and months ahead of the economists’ call that a recession “had” occurred.

So… Going forward, we’ll keep track of this closely, of course.

The other piece of data was the Fed minutes from their last meeting, where you recall they cut rates for the third consecutive meeting by 25 BPS. Overall, the minutes (to me, that is) reveal that the Fed is shifting towards a more dovish stance while leaving themselves an “out” should the fixed income markets suddenly recover. I believe the financial system’s heart is barely beating. Even with the coordinated central bank actions. The Fed sounds very dovish to me… And like I said above, I’m looking for another rate cut later this month, and then another one in March.

Oh… And let’s not forget that oil futures hit $100 yesterday. That’s right… $100 oil… And wasn’t it just a month ago, when oil backed off, that people that should know better were saying that the price of oil would head downward, and I said that was ridiculous?

So… The dollar got sold like tickets to High School Musical! And… Drum roll please…. Gold hit a 30-year high! That leaves gold within spittin’ distance of the all time high of $875 hit in 1980.

And with stocks off 200 points, guess what else got sold… Well… Carry trades that’s what. You should have seen the surge in Japanese yen (JPY) yesterday… I was busy setting up my trade sheets, and looked up to see yen trade through the 110 handle down to 109 in a NY minute!

Today, we’ll see the weekly jobless claims, ADP Employment Report, factory orders, and the petroleum status report. That’s one full day of data, eh? None of these are what they call “Tier 1” data reports… But all of them together, make something… And it looks like all of them will be working against the dollar!

In Germany, the good news on the labor front continues to help support the euro (EUR). Germany’s seasonally adjusted unemployment total fell by 78K, much better than the forecast drop of 30K, and the adjusted jobless rate fell to 8.4% from 8.6%. Think about this job creation machine in Germany for a minute… Back in 2005, the jobless rate was 12.5%! So… All the stories regarding the death of the German economy have been greatly exaggerated. Yes, it’s slowing down, but dead-in-the-water, as the two speakers on CNBC would have had you believe the other day? I doubt it!

Yesterday I had a chance to catch my breath and look at the trading screens a little more closely, and noticed that the CRB (commodities) index had really gained some ground lately. Of course, the price of oil and gold has lit the fire under the CRB, but there has to be more than just oil and gold… (Sorta sounds like that Burl Ives song… Silver and gold/ Silver and gold/ Everyone wishes for silver and gold…)

Of course with silver and gold moving higher (silver past $15, and gold past $850) we could be singing that song here too… How do you measure its worth? Just by the pleasure it gives here on earth.

You know… Gold just put in a 31% gain for 2007, its seventh successive annual gain… Rising inflation pressures here in the United States, and geopolitical uncertainty in the Middle East, Pakistan and Nigeria are adding to the reasons for investors to buy gold as a “safe haven”. Of course it doesn’t hurt when your “safe haven” gains 31% in one year, eh?

As I look at the currencies this morning… The Japanese yen has been the biggest mover this week, as it is now trading 108.60 this morning… WOW! This move has been too fast for the Bank of Japan’s (BOJ) comfort I’m sure… So look for some jawboning to slow this move down from the BOJ, as that’s their normal M.O.

And while I’m in the Asian region… The Singapore dollar (SGD) reached a 10-year high overnight, even in the face of a report that showed Singapore’s economy shrank last quarter for the first time in 4.5 years! The Monetary Authority of Singapore decides how fast it will allow the currency to move, and with inflation pressures rising there, I doubt the Monetary Authority will stand in the way of a faster appreciating Sing dollar.

You’ve got to love it when a plan comes together, eh? Asian currencies, the point I was trying to make on CNBC the other day, are undervalued currencies.

Currencies today: A$ .88, kiwi .7740, C$ 1.0068, euro 1.4760, sterling 1.9755, Swiss .90, ISK 62.50, rand 6.86, krone 5.3750, SEK 6.3740, forint 171.90, zloty 2.4490, koruna 17.81, yen 108.50, baht 29.88, sing 1.4320, HKD 7.8025, INR 39.38, China 7.2725, pesos 10.9270, BRL 1.7640, dollar index 75.90, Oil $99.65, Silver $15.44, and Gold… $867.40

That’s it for today… Well.. So much for talking up Oklahoma’s football team, eh? Yes… College Football is coming to an end… That makes for a long winter in my book! Thanks to everyone who sent along a note and agreed with me on how the CNBC thing went. I truly appreciate the notes! I return to the cancer doctor this afternoon for a check up, and to see if I will remain on the cancer meds. It sure has been sweet the last four weeks not being on them! But if that’s what it takes… I’m all for it! The phones on the desk are still lighting up every day, making it a crazy, noisy desk for sure. But that’s great! It’s better than everyone sitting around with nothing to do! Help is on the way, as we just hired a new Jr. Salesperson… The World Currency Team sure has grown from the days when we took over the deposits in June of 2000… And it was ME!

Another day in January down… That’s how I look at the month… One day at a time, as I completely dislike cold weather. I’ve said this before… I’ve gotta go where it’s warm! So, on that upbeat note… I’ll end it, and hope you have a Tremendous Thursday!

Chuck Butler
January 3, 2008

The Daily Reckoning