Everything Gets Sold

Good day… Great day yesterday at the SF Money Show; the booth was busy with investors looking for a place to hide their money from the stock market rout. Presentation went well, but I’m no Chuck Butler! Another presentation today and then a currency panel tomorrow will keep me busy. But the markets are absolutely nuts right now, so I’ll move on to them.

Yesterday we saw volatility move back into the world’s markets in a huge way. Another bad housing number simply added fuel to the fire and everything got sold. And I do mean everything!! It started with the equity markets, with the Dow off close to 500 points before rebounding to close down 300 something. This selling spilled over to the fixed income markets, and anything with risk got sold with the big winner in all of this selling being the U.S. Treasuries.

I got some great news from Chuck yesterday, but I don’t want to spoil it for everyone, so here are the contents of the email he sent me:

“I’m free to move about the country… Ding!

“In other words… While I still need to use the walker some… I’ve been cleared to use a cane most of the time, and learn how to walk again without limping! Really, it’s been since March that I didn’t limp or didn’t have a walker. It’s like trying to learn to walk all over again… And at my age, it’s not easy! Plus, unlike a small child, when I fall, I have a long way to go to hit the ground! UGH!

“OK… On this Happy Friday for me anyway, as I’ve been cleared to enter the next phase of my battle against cancer… I’ve ditched the walker (for the most part) and have graduated to a cane! YAHOO!

“Anyway, on this Happy Friday, it sure seems that the markets can turn on a dime, eh? What I’m talking about here is a return to risk aversion that has been fueled by the mortgage meltdown in the United States and then carrying over to the rest of the world.

“So if risk aversion is now in play, what should we do? Well, grasshopper, if this is truly a call to full risk aversion, then the currencies that have been treated like a red headed stepchild (OK no emails about that, it’s just a saying, my beautiful bride is a red head!) like Japanese yen (JPY), and Swiss francs (CHF) should see some love thrown their way. And if we see a real full risk aversion, and not like the false dawn we had a few weeks ago, then everybody, join in, get on the love train, love train… People all over the world join in… Oh yeah, just like that… The yen and franc love train will be loading passengers at the station, so don’t miss the train!

“The risk here is that it is just another false dawn… But something is telling me that this time could be different. This doesn’t in any shape or form mean that the dollar is out of the weak dollar trend woods! No way! It just means that some high yielders could see some weakness, while yen and francs see some strength.

“I would look for Aussie (AUD) to remain well bid though. Interest rates aren’t as high as New Zealand’s (NZD) and Australia remains a good ‘China play’. I’ve said this all along, that as long as China’s demands for raw materials remains in play… So does the Aussie dollar!

“OK… Is this Mortgage Merry-Go-Round of bad news ever going to stop? Yesterday I told you how awful existing home sales were. Now I have to tell you that New Home Sales fell 6.6% in June! UGH! Oh… And previous months were all revised downward! The weakness in sales in June along with the downward revision to activity in earlier months have contributed to a much worse inventory picture, and that my friends is not good for this economy… Or… You guessed it, the dollar!

“I think the profit takers have left the building with Elvis… Which means euro and sterling can get back to gaining versus the dollar. The European Central Bank (ECB) is still looking to raise rates at least one more time this year, and probably in September. You see, ECB President Trichet, and the boys all head to the beach in August. I know, I know, that’s not a pretty image… But then, maybe people don’t try to roll them back into the ocean like they do when I’m on the beach! HAHAHAHAHAHA!

“So… The ECB goes away in August and sings, and I’ll see you…. In September… See you… When the summer’s through… And then they will raise rates again, just to show the world that they know how to provide price stability!

“Last but not least… Number 13 on the roster, but number one in the hearts of the fans (not really!), durable goods in June disappointed the experts only gaining 1.4% versus 1.9% forecast. I bet you really didn’t hear too much about this one. Wanna know why? Because in the current credit crunch caused by the mortgage meltdown, fundamentals don’t make waves… But I keep track of them on my abacus for sure, just to keep everyone in line!”

Thanks to Chuck for that update on his health and his explanation of just where to invest to take advantage of this increase in volatility. We have been telling people they need to own Swiss francs or yen to protect themselves from just this scenario. I also agree with Chuck’s suggestion for investors who have been sitting on the sidelines to use this recent sell off and get money invested into the euro (EUR), Canadian dollar (CAD), Swiss, Aussie dollar, Norwegian krone (NOK), or Swedish krona (SEK).

I will close again today with some thoughts from the Big Boss, Frank Trotter who is heading back from Vancouver:

“American Airlines seems to be wishing for the good old days of bargain travel to Canada. For years U.S. travelers to Canada would remark, ‘everything is so cheap there’. Listed prices were often the same as in the United States, but they felt like a significant discount after considering the exchange rate between the U.S. and Canadian dollars. Visits to the wonderful national parks, ski trips to Whistler, and jaunts to Toronto or – like the Guess Who – ‘runnin’ back to Saskatoon’ were considered a nearby getaway value. It has driven the vacation and border-shopping decisions of Americans for years and most people took it for granted.

“Lifting off this morning from Vancouver on the way home from the ongoing ‘Rim of Fire Investment Symposium’ produced by Agora Financial was a treat. The departure route was a slow climb east up the agricultural bottom ground of the Fraser River, which is flanked by snow-capped mountains. But when the flight attendant came on to make the standard announcement that drinks (yikes, at 9 in the morning?) would be $5 U.S. and $7 Canadian, our entire row looked puzzled. Sheepishly the attendant then noted that American Airlines conversion rates were a bit dated – I would say so. The 1.40 conversion rate he just quoted hasn’t been seen in the interbank market since August 6th, 2003 (happy birthday dear).

“But the slip in pricing just brought me back to the current situation we face as residents and investors from the U.S. Banana Empire. Since 2002 when it took 63 cents to buy a loonie, the cost of goods in Canada has risen 49% based on the change in currency price alone! This has been repeated across many travel and business locations substantially outside of the attention of the mainstream U.S. investor. As nominal (not real) earnings grow for U.S. companies and the stock market has lurched to historical highs before falling off recently, we have observed that most do not realize that the 38% rise in the market since 2002 doesn’t even keep up with the drop in purchasing power in Canada (and Great Britain, Europe, Australia, New Zealand and many more). Like the old style banana republics, we’re living high locally, we’re tall in the saddle barking orders to the rest of the world in our Emperor’s role, but at the same time we’re in the middle of a global decline. Perhaps Chris has some suggestions to keep your own purchasing power intact?”

Yes Frank, I do. In this environment, those currencies with strong economic fundamentals (Norway, Sweden, Swiss, & euro) and/or good intrinsic value (commodity exporters CAD, AUD, & gold or silver) are going to be the best place to invest. This recent sell off is simply a great opportunity for investors to get into the currency markets. If you have been kicking yourself for not getting money invested into the currencies to protect against just what we have seen in the U.S. markets, THE TIME IS NOW! Call the desk or better yet log into EverOne Financial Center and apply online, or move those funds into the alternative assets.

Currencies today: A$ .8592, kiwi .7755, C$ .9429, euro 1.3641, sterling 2.03, Swiss .8254, ISK 61.79, rand 7.0963, krone 5.8891, SEK 6.7605, forint 184.60, zloty 2.7874, koruna 20.529, yen 118.84, sing 1.5135, HKD 7.8230, INR 40.42, China 7.56, pesos 11.016, dollar index 80.96, Silver $12.71, and Gold… $660.10

That’s it for today… Running a little late this morning (this left coast time zone has me all screwed up!) but the advantage is that I can report the GDP data, which is expected in a minute. And there it is, GDP surprised the markets on the upside, increasing 3.4% in the second quarter. This may calm some of the market’s fears, but don’t expect a big bounce on a Friday! Have a great Friday and weekend!!!

Chuck Butler — July 27, 2007

The Daily Reckoning