Housing Blues Continue

Good day… The currency markets traded in a fairly tight range yesterday as the dollar held onto its gains versus the euro (EUR) and pound (GBP) despite bad data on the U.S. housing market. Today we will get additional data on housing along with the durable goods number for June and the weekly jobs numbers.

Before getting into today’s expected numbers, I want to expound on something that I just touched on yesterday. The rebound in the U.S. dollar versus the euro and pound was a normal reaction in a market that had been going one direction for too long. Both Chuck and a Pfennig reader emailed me yesterday to tell me this dollar rally had all the signs of normal profit taking. The charts for the dollar index, euro, and pound sterling all suggested the dollar decline to a record level was too rapid and that a sell off was needed.

Also, with all the negative moves in the equity markets, money managers were looking to book profits where they had them. What I’m driving at is that this move by the euro and pound doesn’t mean the overall trend is over. In fact, it is a very good sign we have further to go, as the profit taking occurred without a sustained rally in the dollar. I would look to range trade at these levels for a while before the next major move down by the U.S. dollar.

As I mentioned in the opening paragraph, we will get more data on housing today as new home sales are scheduled to be released. Sales are expected to be off 2.7%, just additional fuel for the housing meltdown. Durable goods will also be released and will be touted by the mainstream media as a positive offset to the horrible housing numbers. Orders for goods that have a long-term shelf life are expected to have risen 1.9% in June after rising 2.4% in May. Boeing will be responsible for this pickup in orders, and the number will be very close to flat after taking out the orders for new planes. The weekly jobs numbers will likely show a small pickup in the number of claims – not good news for the U.S. economy.

So we will have a push/pull from the data this morning. Dollar bulls will be able to point to the pickup in durable goods while the bears will focus on the housing numbers and increase in jobless claims. The mood of the markets is still negative, so I would expect to see the dollar get sold, but not in a big way.

Chuck knew I would be pressed for time this morning, so he emailed me the following regarding yesterday’s data:

“Remember last week, when I was singing the old Chubby Checker song, Limbo Rock? Well… It was going around in my head again yesterday as I read the latest printing of U.S. existing home sales… How low can you go?

“June existing home sales fell more than expected, to a low since 2002, as the median price rose to $230,100. What? The median price rose? Ahem… Maybe that’s why home sales are taking place! The elevated supply of homes means that sluggish sales will continue and the pipeline of houses potentially for sale will probably grow. This has got to weigh on price appreciation, even though this last printing doesn’t reflect it. The consumer has got to begin to feel as though the walls are closing in around him/her, and sooner or later, love is gonna get you… No wait! Sooner or later, this is going to be negative to the consumer and when that realization is made. Watch out below, economy!

“The U.S. Fed’s beige book was printed for the public yesterday, and in our latest look into what the Fed is thinking, we see that the Fed has come to the realization that higher energy prices appear to be hurting retail sales. They also had the light bulb above their collective heads come on with the thought that the weak dollar is providing a kick for manufacturing.

“Another thing I saw in the report was the use of the words ‘Moderate and Modest’ growth. It wasn’t that long ago that they were still shouting from the rooftops that growth would be strong. Hmmm… Makes you wonder, doesn’t it?”

Yes, Chuck, it does make me wonder. Is the Fed finally getting it? Are they finally going to come to the realization that the housing slowdown will in fact trickle down into the general economy? We will just have to wait and see.

The commodity markets sold off yesterday and impacted all of the commodity currencies including the Canadian dollar (CAD), which had just hit a 30-year high. Commodities make up about half of Canada’s exports, so the currency is impacted by the decline in the price of metals. The currency had gained over 1% yesterday to hit a 30-year high after a report showed that the nation’s retail sales rose in May at the fastest pace in almost a decade.

Another commodity-based currency that moved down yesterday was the New Zealand dollar (NZD), which fell despite a rise in interest rates by the Reserve Bank. Chuck emailed me his thoughts on the kiwi late last night:

“Well, how about those apples? Speaking of apples… Lance Armstrong tells a great story about asking his former sponsor that dropped him during his fight with cancer, and finishing first in a race during his come back, ‘Do you like apples?… Well yes, we do… Well then, how about them apples?’ Great stuff, eh?

“Anyway… The apples I’m referring to here regard the Reserve Bank of New Zealand (RBNZ) and how they raised their Official Cash Rate (OCR) 25 BPS to an internal rate of 8.25% last night.

“Reserve Bank Governor Alan Bollard said, ‘The New Zealand economy is running strong. We are recording continued big increases in international commodity prices, especially dairy, reflecting solid world demand for our products.

“‘This is very good news for New Zealand. Given this positive situation, some of the negative commentary circulating about the economy is unwarranted.

“‘However, the continued tight labor market, high capacity use, and rising oil and food prices all point to sustained inflationary pressures. That is why we are increasing the OCR today.’

“Kiwi has taken a step back though, as Bollard went on to indicate that this may be the last rate hike. Shoot Rudy, did we think they would raise rates to Icelandic levels? But, I don’t think this step back will be the tip of a big sell off iceberg.”

The Australian dollar (AUD) went against the commodity trend and increased slightly as inflation data suggests the central bank will likely have to raise rates again on August eighth. The Aussie has been one of our favorite currencies, and will remain one of our picks as it combines good interest rates with a strong currency. I look for the Aussie to continue to outperform the kiwi, as rates in kiwi will likely stay put for a while.

The Japanese yen (JPY) rose to a two and a half month high against the dollar as the global equity rout prompted traders to reduce carry trades. This is a pattern that has emerged over the last few months. Any sharp sell off in equity markets seems to cause investors who have funded these equity purchases with Japanese yen borrowings to reverse their trades and buy back the yen. Increase in volatility across all markets will have a negative impact on the carry trade. If this volatility continues, we could see the yen finally make a strong move back up. But we have been teased by these short-term reversals before, and will just have to wait and see if this is the start of something more.

I will end today’s Pfennig with a report on things from the big boss, Frank Trotter, who is in Vancouver speaking at the “Rim of Fire Investment Symposium” put on by Agora Financial:

“This morning I arose early here in Vancouver and headed out for an inline skate around this magnificent city. It’s a picture postcard day with clear skies, 70-degree temperatures, and calm seas. Normally I head around Stanley Park, but part of the seawall is closed for repairs and I diverted down past English Bay into and around the False Creek inlet. I was so struck by the continuation of intriguing residential architecture and setting that I extended the tour well past my allotted time as the city drew me in deeper and deeper. It is truly a delight to be here. My good luck in location comes courtesy of the “Rim of Fire Investment Symposium” produced by Agora Financial. It’s a star-studded cast of speakers and anyone reading this from somewhere other than Vancouver should plan on attending next year for one of the best perspectives on the global marketplace available anywhere. You can take a peek at this year’s offerings by visiting https://www.agorafinancial.com.

“In the late 1970’s, the economic situation in the United States was so unique that a new term was fused to describe it: Stagflation. In my talk to the Symposium yesterday I (sadly) borrowed the fusion construct and introduced the concept that the United States has become a Banana Empire. At the core of my thesis are the following: 1) The U.S. economy has shown good debt-propelled growth and remains a fragile (subprime and other potential woes) but steady performer; 2) This steady performance and decline in the cost of many goods due to globalization has left the middle class blissfully unaware of the severe decline in their real global purchasing power; 3) As wage and production differential advantages have shifted to countries outside the United States, especially in China, India, and Asia the U.S. may remain a major player in intellectual capital but will not be able to compete effectively in many production industries; and finally 4) That the economic drag of running an imperialist foreign policy diverts U.S. capital away from beneficial investment alternatives.

“Like the Banana Republics of the 50’s the U.S. situation is characterized by a large and expanding external debt, a trade deficit dominated by expanding energy purchases and imports from China (1.8% of GDP by itself), and a situation where global investment capital seeking venture returns has turned to Asia to place it’s bets. Like the banana kingpins, American tourists depart their homes feeling prosperous and return home from places like London wondering why their vacation budget was blown as the value of the U.S. dollar has dropped unnoticed by them almost 50% since 2002. At home the subprime mess is only starting to come to light as prices in the toughest end of the market have fallen from near 97 in January to under 50 today with a trend line that looks like a waterfall. Australia’s Finance Minister Paul Keating had it right when he commented that the country risked becoming a banana republic as net external debt rose past 15% in 1986 (he helped put the brakes on and the Aussie climb since then has been impressive) – the USA stands above that figure and it’s growing every day.

“The comforting news is that many of the Symposium attendees have stopped by the EverBank table to say how much they appreciate the results they have seen from diversifying their portfolio into currencies and metals. Both at the podium and in person, I echoed Chuck’s consistent message that investors should continue to allocate a portion of their portfolio to currencies, especially those with a solid trade surplus, good economic growth, and a strong central bank.”

Wow, I’ll have to steal some of Frank’s thoughts for my presentation today! Now on to the currency wrap-up:

Currencies today: A$ .8843, kiwi .7960, C$ .9569, euro 1.3720, sterling 2.0480, Swiss .8247, ISK 59.70, rand 6.9531, krone 5.7934, SEK 6.7160, forint 181.49, zloty 2.7745, koruna 20.51, yen 120.295, sing 1.5148, HKD 7.8243, INR 40.26, China 7.5578, pesos 10.918, dollar index 80.69, Silver $13.13, and Gold… $674.20

That’s it for today… Thanks to both Chuck and Frank for sending me their contributions today! Its tough to put this together on the road. Sounds like things are going well for Frank up in Vancouver; I can’t wait to see how the crowd is here in San Francisco. I’m sure most will be asking where Chuck is (he is like a rock star at these money shows!) Saw a Starbuck’s in the lobby when I was checking in last night, awfully tempting right about now. Hope everyone has a great Thursday!

Chuck Butler — July 26 2007

The Daily Reckoning