Focusing on ISM

Good day…and a Happy Friday to one and all! Welcome to December, too! It’s nasty outside this morning, as the ice and snow that the weather-people predicted came along just as they said it would! Amazing! OK…I’m not going to go off on weather people. They do the best they can with the information they get.

The phone has been ringing off the hook this morning, with people calling in to see how the roads are. And they trusted me to tell them? HAHAHAHAHAHAHA! Wouldn’t you know it…this happens to be the week the people we hired to finish the inside of our garage came to do the job! That means I was scraping ice at 4:30 am this morning. I’m sure my neighbors were loving me!

OK…enough…onto the currencies and all that! The dollar was sold again yesterday. The selling all has its roots tied to interest rates, and the thought that the Fed will cut rates in 2007, while the rest of the world is still hiking rates. So any data that helps to confirm that thought, brings more dollar sellers to the table.

Yesterday, we saw personal income fall, and personal spending rise. The Personal Consumption Expenditures (PCE) didn’t show any additional inflation, the Weekly Initial Jobless Claims shot up to 357K (that’s going the wrong way folks), and the Chicago Purchasing Managers report come in far below the forecast and last month’s figure.

None of this says, “The Fed will hike rates”…and some of it says, “The Fed will cut rates.” So in the end, traders went with the latter, and sold dollars. I will admit this move in the last week has been a long time coming, but it has been quite fast moving…and sometimes that stuff scares me, because you can get to “overbought” levels too darn fast! That makes today’s ISM manufacturing report very important.

Think about it. I’ve talked about this many times in the past…but the Fed has never raised rates while the ISM Index was below 50. Now, consider the fact that the index has been falling all year after hitting a high of 56.7 in February. The Chicago report, as I said, fell further than expected in November, and it feeds into the ISM. October’s ISM was 51.2…so there’s not a lot of breathing room here.

Having said that… I don’t believe that the ISM will show that much rot on the vine…I believe it will remain above 50 (recall that 50 is the line drawn in the sand between contraction and expansion). But, if we do see it slip below 50…watch out below! Dollars will be sold like funnel cakes at a State Fair! Shoot…even if the Index continues its slide, which I do believe it will, we’ll see additional dollar selling to end the week.

Yesterday I told you that there was still good two-way buying and selling of the dollar versus the currencies. But I’m really noticing something in regard to the news stories the past couple of days…there are more and more forecasters coming out of the walls calling for further dollar weakness. I don’t like that…these are the same guys that two months ago talked about how the dollar was the cat’s meow.

OK…looks like we’re back to Central Bank intervention. The Thai Central Bank admitted last night that they had stepped in to slow down the baht’s rise. And after posting a stronger than expected economic growth number the other day…surprise, surprise, Japan posted a slower than expected inflation report. Funny how that happens isn’t it? Funny? Well…maybe not funny…but you know me, Mr. Conspiracy theory…and this report smells funny to me.

Anyway… The report took away all of the yen’s gains it made yesterday, as it had moved well into the 115 handle.

The euro hit 1.3277 overnight (it has since backed off), which was a 20-month high versus the dollar. Again…I said this the other day, but I’m not sure it registered completely. Twenty months ago, the euro was falling. This time its rising!

And after posting a larger than expected Current Account Surplus yesterday, today, Canada posted a larger than expected job creation in November! Good Show!

Before I go to the Big Finish…I had a reader ask me to talk a bit about the Canadian Income Trusts that had been so popular with investors before the Canadian lawmakers decided to kill the golden goose with taxes. Basically, my feeling on this is the same as when the tax law was first announced. These Trusts have some great assets…and if they are selling now at a discount, that’s an opportunity to buy at a cheaper level if oil and gas assets are what you are looking for.

Currencies today: A$ .7897, kiwi .6848, C$ .8745, euro 1.3245, sterling 1.9680, Swiss .8340, ISK 67.92, rand 7.1330, krone 6.1650, SEK 6.8220, forint 192.25, zloty 2.87, koruna 21.08, yen 116.10, baht 35.85, sing 1.5460, HKD 7.7755, INR 44.66, China 7.8360, pesos 10.98, dollar index 82.98, Silver $13.88, and Gold… $644.80

That’s it for today… December is here. Boy, I am one happy camper that I not only got all my outside lights up, but also got my tree cut down too, while it was warm and dry outside! Lots of holiday parties on tap beginning this weekend for yours truly. I just love getting together with friends! Sure hope I’m not the only one to make it in today! Have a great Friday and weekend.

Chuck Butler
December 1, 2006

The Daily Reckoning