ISM Falls Below 50

Good day… I woke up this morning, and immediately started mumbling the words to the old song…By The Time I Get To Phoenix, she’ll be rising. Well, that’s not how it will play out, but I am on my way to Phoenix this morning. I’ll write the Pfennig, get ready to trade, but then hand the trading reins over to Jen, as I head out the door.

The dollar got spanked and sent to its room on Friday after the National ISM Manufacturing Index did indeed fall below 50. The index reading came in at 49.5. Remember what I have told you many times over, and that is…the Fed has never raised interest rates when the index was below 50. So, with that in mind, traders took the dollar to the woodshed, and immediately the euro climbed above 1.33, and didn’t stop there.

In the overnight trading, the euro climbed to 1.3367, before profit taking set in. I think traders and investors are so focused on the possibility of a Fed rate cut in 2007. As I’ve stated here more than once, I just don’t see that happening until the second half of 2007. But then, if manufacturing is going to continue to hit the skids, that rate cut might come sooner rather than later!

I had to laugh at a comment by a Fed Head on Friday, as he commented on the ISM report. He had the nerve to say that “one month doesn’t make a trend.” Now…I’m always the one to say that one swallow doesn’t make a summer…but come on! On Friday I even pointed out the downward trend of manufacturing. This Fed Head must either: 1. Not have the information to make that statement, or 2. He couldn’t see a trend if it hit in the face! Well…maybe that’s a qualification for a Fed Head. Recall, Big Al Greenspan said that he couldn’t point out a bubble until it had popped! HAHAHAHAHAHA!

OK…back to currencies. In European trading this morning, they’ve taken a different approach to this rate cut talk. Traders here have taken the path that this is a “second half of 2007 story” and have taken profits accordingly. But that’s fine with me…as I said last week…I don’t want to go to fast here. So a bout of profit taking is always welcomed, especially in a rallying market like the currencies right now…and especially when you see quotes like this one from a currency strategist at RBC Capital Markets. Sue Trinh said in an interview yesterday that the “Dollar is in all sorts of trouble.”

While the dollar gets entrenched in the weak dollar trend once again, I’m reminded of a book I read last year that was written by my friend, Addison Wiggin. “The Demise of the Dollar” is a must read for those of us that invest in currencies and diversify outside of the dollar. I believe you can still pick up a copy of the book, and I’m going to make it quite easy for you. Simply click on this link and you are on your way to reading the best book I’ve read with regard to the dollar, and where it’s headed…Click here!

Did you see the big article in last week’s Economist magazine on the dollar? You should pick one up just to see the accompanying cartoon face of George Washington… It’s hilarious! Here’s a snippet from the report…The Economist, dated Nov. 30th:

“So, contrary to popular perceptions, America’s economy has not significantly outperformed Europe’s in recent years. And to achieve this not-much-better-than parity, America has had to pump itself full of steroids. Since 2000 its structural budget deficit (after adjusting for the impact of the economic cycle) has widened sharply, while American households’ saving rate has plunged, causing the current-account deficit to swell. Over the same period, the euro-area economies saw no fiscal stimulus and household saving barely budged.

“America’s growth, thus, has been driven by consumer spending. That spending, supported by dwindling saving and increased borrowing, is clearly unsustainable; and the consequent economic and financial imbalances must inevitably unwind. As that happens, the country could face a prolonged period of slower growth.”

Pretty good stuff, eh? And long time readers know how much I like the Economist.

Ok…that was last week. How about this week? There is some data that will lead us up to the Jobs Jamboree on Friday, but nothing like last week’s market movers. For instance, October’s Factory Orders print tomorrow, and should go in line with the fall of the Manufacturing Index, and show a decline of around 4%. Not a good thing folks.

On Thursday, The European Central Bank (ECB) meets…and everyone and their brother is expecting a rate hike. Of course, they have all come around to this thought recently, when yours truly told you six months ago, that the ECB would add another rate hike for 2006 in December. Not looking for cookies…just thought I would blow my horn. My dad always told me to blow my own horn when I could, because no one else would!

What’s more important for the euro this week is that the ECB, and President Trichet, keep talking the talk, and walking the walk. Remaining vigilant is most important to the euro.

The Aussie dollar continues to get a lot of attention by traders and investors for its yield differential, etc. I’ve tried to keep everyone on top of this attention by shining the spotlight on the Aussie dollar whenever I think to.

Speaking of spotlights…the pound sterling continues to book multi-year highs. Gordon Brown will present his Pre-Budget Statement on Wednesday…and I think he’s going to try to water down growth prospects. That should slow down sterling for a while.

Silver passed the $14 mark on Friday, and gold put in a nice performance too. The precious metals have really rebounded stealth-like…and that’s fine with me!

Currencies today: A$ .7885, kiwi .6885, C$ .8750, euro 1.3820, sterling 1.98, Swiss .8360, ISK 67.88, rand 7.1675, krone 6.1250, SEK 6.7830, forint 192.65, zloty 2.8665, koruna 21.04, yen 115.50, baht 35.83, sing 1.5420, HKD 7.7720, INR 44.61, China 7.8275, pesos 11.02, dollar index 82.58, Silver $14.03, and Gold… $645.25

That’s it for today… It’s15 degrees as I set out this morning…and I’ll welcome that warm sun of Phoenix later today for sure! I’ll be back on Friday, and Chris will take over the Pfennig until then. Got a chance to go to the Rams game yesterday, they sure didn’t look like they wanted to win…and didn’t! The Holiday party season has begun…so be careful out there! Have a great Monday and week!

Chuck Butler
December 4, 2006

The Daily Reckoning