Falling in and Out of Love

Good day… And a Thunderin’ Thursday to you! Today we mark 7 years since the “monsters” attacked our great nation and thousands of lives were lost. My blood still boils at the thought of what happened on Sept 11, 2001, and the image of the twin towers coming down still flashes in my mind. Seven years ago today, we witnessed that horrific scene of terrorism in our country. I recall trying to come up with words the next day, and just couldn’t, so I stuck to currencies, in attempt to keep things as normal as they could be. I hope everyone flies their flag today in remembrance of this day seven years ago.

OK… We’re seeing a complete meltdown in the currencies this morning, folks. The euro (EUR) has fallen to the low 1.39 handle, and all is looking quite bleak for the single unit right now. Our metals trader, Kristin, sent me this note that she came across regarding the euro…

The market’s love affair with the euro is surely flagging when UBS analysts can write: “We have revised our long term targets for the USD higher across the board as America’s economy is likely to come out of recession faster than the rest of the world. We now look for the euro to fall to 1.30 over the next year.”

She didn’t tell me who actually said that, but the point is simply that the market’s love affair with the euro has gone to another lover. To me, it’s a case of: “falling in and out of love with the euro”

The actual stories flying around the markets right now are that the economic growth outlook for the dollar is soaring, and with it, the dollar. I’ve said this before many a time, but it’s worth repeating… I learned many years ago, that: “The markets are never wrong”. So, I won’t sit here and pretend to know more than the markets, who have now switched their affections to the dollar based on an economic growth outlook that is so full of holes it looks like a sieve instead of a pipeline to euphoria.

There’s also a note on the news screen this morning that the Fed is going to increase their lending to banks, brokers as the “mother of year-ends” nears. You would think that a story like that would scare the bejeebers out of the markets, as it does me… But NOOOOOOOOO! The markets have decided to become “comfortably numb” with the bad news in the United States. On a side bar, Chris said the other day that he liked when I used that term, “comfortably numb”. I said, “Just as long as everyone realizes that I’m referring to the song by Pink Floyd, and not the remake by the Scissor Sisters”. A young lady that sits behind me, said, “Chuck, I’m surprised that you know the Scissor Sisters”. I guess that just shows to go you that you should never be surprised at what I know!

OK… The Reserve Bank of New Zealand (RBNZ) did cut rates 25 BPS last night to 7.75%, and the currency got whacked by 1%… That just doesn’t make sense to me. Sure the rate was cut, but it’s still 5.75% above the 2% Fed Funds rate in the United States! Again, though, the markets are on a mission to mark down the currencies that have gained so much versus the dollar in the past 6.5 years. The markets have been drawn into Big Ben and Hank Paulson’s evil web of deceit and future economic horrors.

The New Zealand dollar/kiwi (NZD), too, got a one-two punch in the gut with the rate cut news and more unwinding of carry trades. That unwinding can be seen in the Japanese yen’s strength (trading in the 106 handle today)… Poor kiwi, this one-two punch has it keeling over.

But… And this is a BIG BUT (notice one “T” not two!), this is all good news for the Japanese yen. So in keeping with my long time thought that the Asian currencies needed to gain versus the dollar to allow some correction in the global imbalance/current account deficit… It also proves the point I was making for at least two years that the yen was undervalued only due to the selling pressure from using it as a funding currency of the carry trade.

One other thought comes to mind here… And that is… “There’s always a bull market somewhere”.

Yesterday, I talked about the “scaredy cat” traders who were no longer “your father’s currency traders”… And Chris Gaffney had these additional thoughts…

“Continuing on your ‘scaredy cat traders thought’, the ‘easy’ money which these currency desks used to have to play with is no longer available. All currency desks have been hit with a tightened credit market, making it harder for them to make big bets and even more difficult for them to fight the central banks. So in the current credit environment, the central banks are walking with a much bigger stick.

“But as we have seen in the past, intervention doesn’t last. The markets will always return to fundamentals, it is just a question of how long it will take.”

I was really taken aback by the comment that was made about “lipstick on a pig” yesterday, as this “was” one of my fave expressions. A reader sent me this note…

“I’m guessing we won’t be seeing the expression ‘lipstick on a pig’ in the Pfennig anymore. You probably never realized what dangerous waters you were sailing into! Another perfectly good & colorful expression assigned to the Forbidden Words & Phrases bin.”

OK… I went off on a tangent there, but I’m back now… The dollar strength that is being displayed this morning is quite something to behold. And all this with the black cloud hanging over the financial institutions… Did you see the news on Lehman Bros. yesterday? The Wall Street Journal reported that “Lehman would post a $3.9 Billion 3rd QTR loss on net mark-to-market adjustments of $5.6 Billion. The firm said it will spin off its commercial real-estate assets and sell a majority stake in its investment-management division. It slashed its annual dividend to 5 cents a share from 68 cents.”

This is the kind of stuff the dollar should be getting sand kicked in its face over… But, for now, the dollar has gotten all gussied up, put on the red dress, and had its hair done, for the suitors that come knocking at its door… The line of suitors is long and wraps around the block!

Today, we get the skinny on July’s trade deficit, which is expected to have risen in July to $58 billion from $56.8 billion in June… You have to remember back to July to recall when oil was still kicking sand in the dollar’s face; therefore oil imports were still expensive… Not that they have become cheap… Just cheaper.

We’ll also see the Weekly Initial Jobless Claims that have remained above 400K now for some time… And the monthly budget statement for August…

These data prints “could” take the shine off the dollar… But I doubt it, given the whole “love scene” going on for the green/peachback. But maybe, just maybe, ’cause you never know, someone with some intestinal fortitude might stand up and say, “The U.S. economy isn’t going to get strong any time soon with numbers like this!” But then, I believed in Santa Claus until I was almost driving age!

The price of oil has fallen to $101.70! That’s all fine with me, but again, I can’t help but feel that there has been no fundamental change in what was going on two months ago and now… And that leads me once again to believe that this is just “window dressing” for the elections. But, I’m not going to be too upset with the fall of the oil price… Shoot Rudy! I’ve got to put gas in my cars too! But, I guess what I’m saying is that we, as Americans, shouldn’t grow complacent with this fall in the oil price, we still need to find other measures/energy sources!

The fall in the price of oil has really helped the dollar rebound… And has pushed gold to levels it had not seen in a year. The shiny metal lost $20 yesterday in price! UGH! It has lost another $8 this morning… I know, I know, I said the other day that a price below $800 seemed like a blue light special to me, and I can’t help but think that if I liked it at $790, I should love it at $744!

This is one of the great things about the Gold MarketSafe CD’s we used to sell… As the price of gold ratcheted up to over $1,000, and now heads back down, the gold CD used an average price… So, I doubt many investors in gold sold at the high… Too bad the market makers decided it was too volatile an asset to allow us to offer the gold CD any longer… It was my fave!

The Canadian dollar/loonie (CAD) fell below the 94-cent handle it had held onto during all this dollar strength… But, it’s not because of bad data in Canada. Earlier this week I reported that Canada created 15K new jobs in August… And now Canada reports that Housing Starts in July were up 13.1%! I think that these two data prints point out that the economic picture in Canada may not be as bleak as some had thought it was.

I was trading emails with a reader yesterday, regarding the problems that the Fannie and Freddie bailout were going to cause on Banks that held their preferred notes which got squashed in the agreement. I said that I believed this would cause even more problems for banks, and that the 11 banks that had failed so far this year would be chickenfeed compared to those that would fail because of this bailout… He then sent me a link to a story that was in the U.K. Telegraph this morning. Here’s a snippet…

“The nationalisation process that has wiped out value for many institutions which had invested in Fannie and Freddie, together with ordinary equity investors and those holding preferred shares.

“Up to 40 US regional banks owned preferred shares in the mortgage companies, with analysts estimating that at least eight banks have more than 10% of their capital tied up in the shares, while another six had between 5% and 9% of their capital invested in Fannie and Freddie.

“The US Federal Deposit Insurance Corporation, which provides a lifeboat fund for customers of collapsed banks, currently has 117 problem banks on its watch list, the highest level in five years.”

I’m going to the Big Finish now, as I’m just plain worn out from all this dollar strength in the face of bad fundamentals and a financial institution meltdown. ECB President, Trichet speaks at the Eurofin Conference today, maybe he can light a fire under the euro.

Currencies today 9/11/08: A$ .7945, kiwi .6480, C$ .9310, euro 1.3940, sterling 1.7510, Swiss .8785, ISK 91, rand 8.2480, krone 5.8090, SEK 6.8275, forint 172.10, zloty 2.4510, koruna 17.6450, yen 106.80, baht 34.75, sing 1.4440, HKD 7.7990, INR 45.47, China 6.8460, pesos 10.64, BRL 1.7875, dollar index 80.15, Oil $101.70, Silver $10.67, and Gold… $746.96

That’s it for today… Again, my thoughts are still filled with the pictures from September 11, today. I took down my University of Missouri flag last night, and put up my American flag. Everyone should fly their stars and stripes today. This is it for me this week and next, as I will be at the hospital for most of the day tomorrow, and then set out on the road for the first leg of the Currency Tours next week. These Currency Tours are doing well with regard to booking attendees… It looks like we’ll have our biggest crowd in San Diego! It’s an educational seminar, not a “buy this and sell that” seminar… So if you want to learn about currencies, the history, how to buy them, hold them, trade them, options and bonds, this is the place! I won’t be my normal sarcastic, speaker, as I will be an “educator”! Now, that sounds funny! HAHAHAHAHAHA!

Chuck Butler
September 11, 2008

The Daily Reckoning