It's Alive!

Good day… And a Marvelous Monday to you! For a lot of you, it was a long four-day weekend that I hope you enjoyed. We were quite busy on Friday before shutting down, so not everyone was taking time away from the markets; the phones rang off the hook!

I am so pumped up this morning… My beloved Missouri Tigers are Number 1! I was five years old the last time this happened, my friends, so let me bask in this spotlight for a minute or two!

It’s Alive, It’s Alive! The U.S. consumer is alive! U.S. consumers set aside worries of higher gas prices, a mortgage meltdown, and pipeline inflation to go out and shop till they dropped on Friday. You should have seen the parking lot here at our office. They had a policeman out in front to direct traffic! As I circled the lot looking for a place to park, I wondered out loud, just what Best Buy was giving away to draw such a crowd!

Should the U.S. consumer be out shopping till they drop? Probably not… But it’s Christmas, right? The retailers had to be dancing in the streets after Friday. Let’s see if it carries through the remainder of the holiday season.

The currencies remained in a tight trading range on Friday, with a bias to sell dollars once again… But with the markets closing at noon, there was little time for any momentum to be built.

There’s a story going around this morning that the dollar has become the new “funding currency” for the carry trade. With rates falling, the dollar becomes even more attractive as a funding currency. With the dollar, it’s not so much the low borrowing rates, it’s simply the fact that people/investors think that they know the dollar will continue to weaken, thus allowing them to buy it back to cover the short position they created, cheaper.

An advisor to hedge funds was quoted as saying, “With the dollar giving the appearance of being in a free fall, it increases the attractiveness of using the currency to fund investments.”

This is different than simply buying a currency using dollars like many of you have done. But both types of trades are looking for the same thing… A weaker dollar!

The data cupboard gets restocked this week starting tomorrow when we see the color of the latest consumer confidence report. Then on Wednesday we’ll see durable goods, and existing home sales data followed by new home sales on Thursday. On Thursday, we’ll also see the next preliminary printing of third quarter GDP.

Recall last month when the first preliminary print of third quarter GDP surprised to the upside. I didn’t believe the 4.8% print then, and truly expect to see this revised downward.

Shifting gears, I want to talk about a currency we introduced this past summer, the Brazilian real (BRL)… The real has seen some selling pressure lately, along with a lot of other emerging markets currencies. These currencies are so tied to the U.S. economy… And with the U.S. economy looking to be fading away… Currencies like the real, have suffered. I would have thought the Brazilians had long diversified their economy so it would not be so dependent on the United States… And they have… But apparently, the U.S. economy is still important to the real.

BUT! How important will be the question… Personally, I think the U.S. will have limited impact on the real… So are these current levels blue light specials? Could be… Could very well be… And as I look at the currency screens, it looks as though the real has already begun to rebound… Hmmm… Smells like the carry trade is cooking again…

So… This morning… We’re looking at a weaker dollar versus the euro (EUR), sterling (GBP), Swiss (CHF), and others… But not the Japanese yen (JPY)… Carry traders must be feeling their oats again overnight, eh?

The euro is closing in on 1.49 again, after touching it ever so briefly last Tuesday night. The liquidity in the markets should return this morning with everyone back from their long holiday weekends, and that should help the euro find its way higher versus the dollar.

The dollar received some bad news this weekend when former U.S. Treasury Secretary Larry Summers, said that, “Without stronger policies than have been observed to date… There is the risk that the adverse impacts will be felt for the rest of the decade and beyond. Odds now point to a U.S. recession that slows global growth significantly even if policy changes are implemented.”

Now… I was never a Larry Summers fan… You can see why with this statement… First he says without stronger policies, and then he says even if policy changes are implemented.

This is all “Fed Speak” for “interest rates need to be lower”… Yeah, right… What about inflation, Mr. Summers? Or do you buy into the CPI mirage?

Speaking of inflation… The price of oil is nearing $99 again this morning. Colder weather arrived here in St. Louis on Saturday, and probably across the United States, which is going to boost fuel demand… Which will probably be enough to drive oil past $100 this week… I was not a happy camper when I filled my gas tank on Saturday… OUCH! Now… That’s going to leave a mark!

And then there was this cute little story about rising inflation… The “12 Days of Christmas” items would be pretty costly to buy your true love these days… It would cost $78,100 to buy the 364 items from a pear tree to 12 drummers drumming… The cost is up 4% from last year’s cost of $75,122.

Gold is back! After a couple of weeks of consolidation and profit taking, gold has bounced back with a vengeance! Yes, indeedly do it has! Gold has risen 7% since hitting it recent low of $772.60… This morning it’s trading… $828.70. I would bet a dollar to a Krispy Kreme that we’ll see it test those previous highs of $845.

Someone asked me the other day why I had mentioned the problems over at Fannie Mae and Freddie Mac… I sometimes feel like Big Lee Smith coming in from the bullpen. “I’m so tired” of talking about the bad stuff in the United States. But really, I just didn’t get around to it… They are just more problems resulting from the mortgage meltdown… I said from the beginning, well before the beginning, that the mortgage bubble was going to cause more problems than the stock bubble from six years ago… And the fallout just keeps coming… And coming… Energizer Bunny like.

Yesterday, I sat in my recliner trying to rest my leg, which had become quite painful the day before, and looked outside on a dreary, gray, misty and cold November day, and remembered that this is what I think of whenever it gets to this time of year… I used to say that I truly dislike November because of these kinds of days… But now? I have come to the realization that you have to have these kinds of days, to enjoy the beautiful days that are ahead!

Ok, I digress, but the point I was trying to make before I went off on that tangent, was that the cold day reminded me that the year was coming to a close, and that in some years, the dollar would just get its lunch handed to it. This year feels a little different… While I think the dollar will continue to get hammered, it will not get crazy like in 2004, the last time the dollar stood on the edge of the cliff… However, if I’m wrong, and it does get crazy, then batten down the hatches and watch it all unfold… Don’t get caught up in it, chasing the markets and all that.

Currencies today: A$ .8865, kiwi .7610, C$ 1.0190, euro 1.4875, sterling 2.0710, Swiss .9090, ISK 62.30, rand 6.7880, krone 5.3860, SEK 6.2385, forint 172.50, zloty 2.4720, koruna 17.90, yen 108.40, baht 31.30, sing 1.4410, HKD 7.7780, INR 39.72, China 7.3970, pesos 10.9650, BRL 1.7870, dollar index 74.86, Oil $98.76, Silver $14.98, and Gold… $835 (still moving higher from just 15 minutes ago! WOW!)

That’s it for today… Got my tickets and my flights for San Antonio this coming weekend… That’s right, I’m taking my family to see the Big 12 Championship game where my beloved Tigers will play Oklahoma. If Missouri can get the stars aligned and the karma flowing to get past a great Oklahoma team, they will play in the National Championship Game! Amazing! There are decades of frustration spilling out of anyone that bleeds black and gold, like me, and the emotions are almost too much for me to handle! I stopped chewing my fingernails in 1983… But, Saturday night was tough on them! Can’t even imagine how they fare in San Antonio! I would like to hear from readers in San Antonio about their city that I’m about to visit!

Oh! And on Friday… My old fat fingers played a trick on me again… I was talking about my beautiful wife, and typed beautiful wire. So, I apologize to her for that mistake… One reader was funny and said I should feed my wire more of that tasty Thanksgiving food!

So. Here we go! Should be an interesting week, are you ready? I hope so… And I hope you have a Marvelous Monday and week!

Chuck Butler
November 26, 2007

The Daily Reckoning