Housing Continues to Slide into an Abyss

Good day… Chuck convinced his wife to let him get back on the computer yesterday, so he is back at work, albeit from the comfort of his home. And as all of the long-term readers know, you can’t stop Chuck from writing about the currency markets if he has his laptop. He plans on being back at the office next week, but until then he will be sending me his thoughts each morning to share with you. So here they are:

“Well… The weak dollar trend remains, and all the soft U.S. data only add to my call that the Fed has further easings to perform. With that in mind, it is soooooooo difficult to build a case for a dollar reversal… So, this selling of currencies and buying of the dollar we’ve seen the last two days is merely a correction of an oversold dollar position. Things should get back to normal with the dollar being taken to the woodshed, soon…

“Pending home sales imploded in August. This housing sector meltdown just keeps going deeper and deeper into a dark abyss, and this will most likely go on and on like the Energizer Bunny for some time to come! With pending home sales falling 6.5%, we should look for more rot on the vine of home prices.

“But, I have to ask, ‘When does this begin to affect the U.S. consumer? When do they stop spending money they don’t really have, that’s robbing Peter to pay Paul?’ I don’t have the answer to that… But my goodness, shouldn’t it have already taken place?

“I see where former Fed Chairman, Big Al Greenspan, just can’t keep his trap shut! Recall… He first said that the U.S.’s chances for a recession were 1 in 3… Then he upped it to more than 1 in 3… Now he says the chances have “risen” again! Well, you know my opinion on Big Al. He’s the one that started this mess. He ought to have a handle on when it will all come crashing down on us!

“Now I’m hearing all this talk and rumor about some ‘strong’ language being used at the next G-7 meeting, taking place October 19th… G-7, Schmee seven! These guys haven’t come out with a meaningful communiqué in over four years. I don’t know how the markets can get all lathered up thinking that G-7 members will come up with one now! Besides… Who has the squeakiest wheel at G-7? That’s right… the United States. And who has done whatever they can to keep their currency weak? That’s right… The United States! So… Why would they endorse changing horses in the middle of the stream? They won’t!

“In a sign that maybe – just maybe (you never know) – the end of the carry trade is near… Yen (JPY) sales on the Tokyo Financial Exchange fell to a four-month low last month. Or maybe it’s just a sign that everyone that’s played this carry trade game, has gotten tired of it! Of course, how could you ever get tired of making money? Ahhh… But in August they didn’t make money, and when they saw their statements, that probably led to the sales falling in September. One can only hope!

“Today… We’ll see the ISM non-manufacturing (services sector) data, which will probably fall in line with the manufacturing decline that printed the other day. After this printing, all eyes will shift to Friday’s Jobs Jamboree. I told you the other day about the rumors that there could be some huge downward revisions to the September report. I haven’t heard anything differently, but then again, I just spent the last two days in the hospital. It’s not like you hear the nurses discussing the Jobs Jamboree or anything!”

As Chuck alluded to above, the dollar rally we saw during the past few days looks like it is losing steam. The euro (EUR) is actually up slightly in overnight trading on speculation that a U.S. report today will show the slowest services industry growth in six months. And in what has become somewhat of a typical pattern lately, the yen sold back off overnight, as investors seemed to be moving back into the carry trade. The yen dropped the most versus the Brazilian real (BRL), Icelandic krona (ISK), and Australian dollar (AUD) as investors seemed to be drawn back toward the higher yields.

Speaking of the Australian dollar, the Reserve Bank of Australia kept interest rates unchanged at an 11-year high during their meeting today. The Aussie dollar actually strengthened after the rate announcement, as currency traders see this non-move as a pause in what will likely be further rate increases. A report released today showed that Australia’s retail sales rose twice as much as economists forecast, and imports climbed to a record in August. The strong Australian economy will likely mean the RBA will need to move rates up further. Treasurer Peter Costello said the government won’t take any steps to limit the currency’s rise because it trades in an open market. As I said yesterday, parity with the U.S. dollar is looking more and more likely, and could occur before year-end.

Another story that caught my eye this morning concerned the diversification of assets by Middle Eastern governments. The Qatar Investment Authority has lowered the amount that its $50 billion fund has invested in the dollar to around 40% from around 99% over the past two years, according to the CEO of the Authority – who is also Qatar’s prime minister. We have been talking about this diversification of currency reserves for some time, and while Qatar’s fund isn’t large enough to move the markets, it further reinforces our views. Foreign governments will continue to diversify their holdings out of the U.S. dollar, putting more downward pressure on the greenback.

And to finish, Chuck wanted me to pass along the following reminder of the upcoming New Orleans Investment Conference… “The Granddaddy of all Investment Conferences is fast approaching us on the calendar… The New Orleans Investment Conference has always been a great place to gain investment knowledge from some of the biggest names in the business. Frank Trotter will be there during the first part of the conference (October 22 & 23), and right now, I plan on finishing out that week. But with my latest health problems, I may have to take a rain check. It’ll be a game day decision!”

But that shouldn’t stop you from finding out more:

The New Orleans Investment Conference

Currencies today: A$.8864, kiwi .7617, C$ 1.0032, euro 1.4182, sterling 2.0394, Swiss .8523, ISK 61.53, rand 6.9135, krone 5.4255, SEK 6.4928, forint 177.96, zloty 2.6610, koruna 19.4559, yen 116.24, baht 31.70, sing 1.4798, HKD 7.7584, INR 39.58, China 7.5060, pesos 10.9073, BRL 1.8240, dollar index .78236, Silver $13.35, and Gold… $730.83

That’s it for today… Boy did I ever hear from the Rockies fans yesterday! Just to clear it up, the play at the plate was apparently not as questionable as the TV announcers made it out to be, since the catcher was obstructing the plate. Also, the homerun that was ruled a double earlier in the game would have ended the game before this play ever occurred… So my apologies. Hope everyone has a Wonderful Wednesday!!

Chris Gaffney
October 3, 2007