Home Sales Collapse

Good day… And a Happy Fabulous Friday to one and all! This is going to be shorter than normal… And that’s OK, we all have other things to do on this Fabulous Friday!

We saw the euro (EUR) trade up to 1.4182 yesterday. As the morning began, I received word that the new home sales report had been leaked, and that they were going to show a drop of 10%! News spread pretty quickly, and the dollar was immediately taken to the woodshed.

When the report actually printed later in the morning, it “wasn’t that bad”. New home sales had collapsed 8.3%, not the 10% rumored. So it was a “sell the rumor, buy the fact” morning, and the dollar was released from the woodshed. But why? Isn’t a fall of 8.3% bad enough? I, for one, would think that a fall this big would be enough evidence that the housing market continues to struggle at best! I also think the credit crunch in August aggravated the declining prices in homes, and this ever increasing inventory of homes is going to weigh on home prices for some time to come.

If the report hadn’t been “leaked”, I think the fall of 8.3% would have been looked at as catastrophic and the dollar would have been sold all day, instead of just early in the morning before the report. Oh well, the markets are well… The markets… There are times they just don’t make sense!

But not to worry! Overnight, traders have taken the euro back to 1.4182! You just can’t keep a good currency down… A truly “inspiring currency” to borrow a phrase from ECB President Trichet!

Second quarter GDP in the United States was revised downward to 3.8% from 4% in the final print. I think as we look to finish up the third quarter today, and then look back in a few weeks at the growth in the quarter, we’re going to see that the housing meltdown will be a huge subtraction from growth. However, we may see an offset to that subtraction with exports, given the weakness in the dollar… But, that remains to be seen, so we’ll have to wait-n-see!

Earlier in the week I was referring to the carry trade’s on again, off again trading as a scene with Wayne and Garth playing street hockey… “Game On!” etc. Well… It’s been a couple of days since I last checked the pulse of the carry trade, and once again it looks as if it is “Game On!” Risk aversion is being swept under the rug, as the markets forget the pain of August. Risk appetite is building to strong levels again, so watch those high yielders rally, while Japanese yen (JPY) gets sold.

Speaking of Japan… Industrial production surged 3.4% in August and at the fastest pace in four years. But before we go waving the rally flag for yen, we have to deal with the fact that risk appetite has returned to the markets, and that’s bad news from consumer prices, which fell 0.1% in August. Now don’t get me wrong here… I’m always ranting about inflation… But in Japan, a little inflation would be a good thing! They’ve had deflation for so long, a little inflation would help to get consumers spending!

Yes… This is the tale of two economies. The United States can’t stop spending and has inflation out the ears, while Japan won’t spend, and deflation hangs over the economy. Again, don’t get me wrong here… I love “savers”… But there’s still room for some spending, Japan… Come on!

And just when some dolts thought we had seen the end of $83 oil… Guess where oil is trading again? That’s right… Over $83! I just can’t get over the long run of commodities… I remember being in Phoenix in the spring of 2003, and the USA TODAY had a front page article that claimed the Chinese economy was going to slow down, and the bull run in commodities would be over… And for about a month, the commodity currencies of Aussie (AUD), kiwi (NZD), Canada (CAD), and South Africa (CHF) all took it on the chin.

And here we are five years later… China’s economy is still strong, and their demand for commodities and raw materials is as strong as ever! And the commodity currencies? Well… Kiwi has gained about 50%, Aussie about 60%, and so on since that article.

A few years ago I kept telling people that I had read Jimmy Rogers’ book on commodities, and in it he outlined the history of bull markets for commodities going back 200 years. History shows us that every bull market for commodities has had a trend that lasted 17 to 22 years. We’ve only been in this bull run for about six years now. The other day, Mr. Rogers was on Bloomberg TV, which I bet someone recorded! No wait, I won’t go there, it’s a happy Fabulous Friday! What I’m talking about here is that no one in our company thought to record my talk on Bloomberg TV. No one! I guess that tells me what they think of me, eh?

OK… Back to Jimmy Rogers and his talk on Bloomberg TV… Mr. Rogers said that with the Fed’s rate cut, he’s sure that the bull run will last another 15 years… Which would put us at the far end of the historical bull markets for commodities.

Of course the shiny metal that is gold, has been the cream of the crop in commodities… But don’t forget those base metals. Copper has been a moon shot, nickel, and many more have all seen price increases as the demand for them increases. I’ve talked about this before, but the food prices are really beginning to push the envelope… Sugar… And so on.

What is this an indication of? Inflation… Pure and simple. You won’t see this in the stupid CPI report… But if you really want to see inflation, check out the commodities… Oh, and probably your child’s tuition (thank goodness my son goes to public school!) or health care, insurance, medicine, movie tickets. It’s all there, and it’s all chock full-o-inflation!

Norway’s Central Bank, the Norges Bank, surprised the markets yesterday with a rate hike… I was busy getting ready for a very long interview (1 hour) and Ty yelled across the desk that the Norges Bank had hiked rates. Well… I half expected them to continue their work with rate hikes to offset the rising price of oil… So it wasn’t that big of a surprise to me! Here again, is Norway… Flying under the radar, along with Sweden… Alternative currencies to euros, should you already have a boatload of euros. They’ve been at the top of my Hit Parade for over two years now. When will they be at the top of yours?

And don’t look now… But the dollar index is just a tick above the all-time low of 78.19 this morning… I’m not a chartist, nor do I play one on TV, not that anyone would have recorded it if I had, but I believe a break below this all-time low is not a good thing.

Currencies today: A$ .8810, kiwi .7550, C$ 1.0015, euro 1.4180, sterling 2.0285, Swiss .8550, ISK 61.80, rand 6.8680, krone 5.44, SEK 6.4920, forints 176.84, zloty 2.6620, koruna 19.4170, yen 115.40, baht 31.64, sing 1.4850, HKD 7.7610, INR 39.7250, China 7.5025, pesos 10.92, and out newest member to the currency roundup will be Brazil 1.8420, dollar index 78.20, Silver $13.70, and Gold… $745

That’s it for today… I did a very long interview with a magazine yesterday, and went through everything… Almost like a Reader’s Digest version of 15 years worth of Pfennigs! Well… My two weeks without the cancer medicine is up this weekend, and I begin Phase 2 next Monday… I never did get my full taste buds back during these two weeks, but heck, there are people with far greater problems from cancer medicine than that, so I’m not complaining! I get lots of emails from people asking me to keep them up to date with my battle, so that’s what I’m doing!

No Missouri Tigers this weekend… But my little buddy, Alex’s football team has a game… So, I’ve got that going for me! Time to hit the send button, so, I hope you have a Fabulous Friday and Wonderful Weekend!

Chuck Butler
September 28, 2007

The Daily Reckoning