Housing Stats Show More Rot on the Housing Vine

Good day… And good morning! It has been a while since Chuck turned over the reigns of the Pfennig to me, so I’m a bit out of practice. But there has been a lot of movement in the currency markets over the last 24 hours, which gives me plenty of Pfennig fodder, so I’ll get right to it.

The ‘safe haven’ status of the U.S. dollar continued to prop it up yesterday, as bad housing data in the United States scared investors. Sales of previously owned homes fell 5.3% in January, after rising slightly last month. And even worse for U.S. homeowners, the median price of a home fell to $170,300 – down nearly 26% from its peak in July 2006. These numbers reflect a worsening housing market, which will weigh on the U.S. economy through most of 2009. The inventory of unsold homes did fall, but still stands at 3.6 million. At the current rate of sales, it would take 9.6 months to exhaust the excess supply of homes. And this is assuming no more homes come into the market. The housing downturn will continue well into 2010, and will likely keep the U.S. economy in the doldrums.

So the negative housing data sent the dollar up yesterday with investors moving money back into the temporary safety of U.S. treasuries. Readers know just how temporary we believe this ‘rush to apparent safety’ will be; but Chuck and I aren’t the only ones thinking this way. Ty Keough sent me the following quote from bond guru Bill Gross:

“We entered this crisis with certain economic and financial strengths relative to all other nations. Our reserve currency status was the primary one. Which means that we can write checks in our own currency and they are accepted all over the world. This privilege, however, can be and is being abused.

“Global willingness to accept American dollars is being tested. Granted, the U.S. currency has appreciated strongly against its counterparts during most of this crisis, but technical short covering as opposed to a flight to quality may have been the dominant consideration. Watch the dollar. If it falls hard, there may be nothing policymakers can do to restore the ensuing financial chaos.”

When I left last night, only the Brazilian real (BRL) was up versus the U.S. dollar… But overnight, the Asian and European markets turned around, as investors moved out of dollar holdings and back into the currencies. The dollar’s strength was mainly due to risk aversion; and Bernanke’s assurance that there is still a preference to keep the financial sector in private hands calmed investors’ nerves. Both Bernanke and Treasury Secretary Geithner stated they are not looking to ‘nationalize’ U.S. banks. But with the amount of money the U.S. taxpayers have already invested into these financial institutions, we are already well down the ‘nationalization’ path. Just yesterday the Treasury announced that America’s 19 biggest banks have six months to raise new capital after a mandatory review of their balance sheets, or they must accept taxpayer money on government conditions. Sure sounds like a move toward nationalization to me!

The Swedish krona (SEK), which Chuck has been talking about for some time, was the biggest gainer last night, appreciating over 1% versus the U.S. dollar. Both Sweden and Norway have solid economic fundamentals, and their banks’ balance sheets have remained fairly clean. Both currencies have been sold off due to the financial problems of Iceland and Eastern Europe, but these two currencies look like bargains in today’s market.

The biggest loser in the markets yesterday was the Japanese yen (JPY), which continues to fall from grace. The yen is off to its worst start in a decade versus the U.S. dollar, as Japanese economic data continue to disappoint. After peaking on January 21 at 87.13 yen/dollar, the Japanese currency has fallen almost 9%, and is quickly approaching 100 yen/dollar. GDP in Japan shrank at an annual 12.7% pace last quarter and the trade deficit widened in January to the most in 20 years. Exports from Japan plunged 46% according to reports released from the Finance Ministry last night. Sales to the United States fell 52.9% as U.S. consumers cut back their purchases of Japanese automobiles and electronics. Japan is facing its worst postwar recession, which looks like it will continue to deepen. The yen had been the beneficiary of the reversal of the carry trade, but with most of the carry trade now reversed, the currency is beginning to reflect the underlying economic data, which is not supportive. The fall of the yen could certainly be a precursor of what is in store for the U.S. dollar, as the ‘safe haven’ flows will dry up and investors will begin to look at the underlying economic fundamentals of the United States.

A rare piece of good news from down under had the Australian dollar (AUD) rallying a bit versus the U.S. dollar overnight. Australia’s dollar rose after fourth quarter wage growth unexpectedly accelerated. This data could push the central bank to slow down the pace of interest rate cuts, making the Australian dollar more attractive on interest rate differentials. The jump in the price of gold should also help the Aussie dollar recover.

I read a research piece yesterday from Nomura Holdings that suggested the Australian dollar will gain 15% by the end of 2009. In the piece, Simon Flint – the head of global foreign exchange research for Nomura – suggests that the emerging market currencies will turn around in April as we start to see a global economic rebound. Flint believes investors will break out of their ‘paralysis of fear’ in April and start to move funds back into the emerging markets. The biggest gainers according to Flint will be the Brazilian real, Korean won, and the Australian dollar.

Those of you wishing you had invested in gold as it approached $1,000 have a good buying opportunity right now, as gold slid again. Next month’s copy of EverBank’s Review and Focus was delivered to us from the printer, and in it Chuck writes about the advantages of holding gold. Gold truly is an ‘uncertainty hedge’ and will protect investors in the case of inflation or deflation. EverBank’s pooled accounts are an excellent way to invest in the precious metals as it is the most efficient way I know of to hold the metals.

But several callers worry about the possibility of U.S. government confiscation of their precious metals and what would happen to their investment in the pooled accounts. First of all, I don’t think we will see another confiscation of gold by the U.S. government. The last time this happened, the dollar was on the gold standard. This meant the U.S. government had to control the price of gold in order to control the value of the U.S. dollar. Today’s dollars are not backed by gold, and therefore the government has no need to try and manipulate the price of gold. What would they gain by confiscating gold? It would equate to the government stealing property, which none of us would put up with.

But if you are still concerned, we also offer you the ability to purchase gold or silver coins and bars, which can be shipped to you. With today’s uncertain economic situation, every investor should hold some precious metals in their portfolios.

Currencies today 2/26/09: A$ .65, kiwi .5107, C$ .8004, euro 1.2760, sterling 1.4271, Swiss .8595, rand 9.949, krone 6.8714, SEK 8.8751, forint 235.37, zloty 3.6829, koruna 22.23, yen 97.99, sing 1.5365, HKD 7.7537, INR 50.48, China 6.8392, pesos 14.9025, BRL 2.3558, dollar index 87.59, Oil $43.46, Silver $13.45, and Gold… $943.90

That’s it for today… Chuck is spending a long day at the Siteman Cancer center. Hopefully he will come back with some good news. Christine is here with breakfast; (Chuck usually brings us breakfast on Thursdays, so he made sure Christine picked it up for us). The weather is teasing us again today, with temperatures shooting up to 60 degrees. But this weekend we are supposed to get a couple inches of snow. The joys of St. Louis weather!! Hope everyone has a Tub Thumpin Thursday!

The Daily Reckoning