It's All About the Stress Tests

We’re stuck in a rainy pattern here in St. Louis. I just have to hope the rain stops long enough to get in the day game at Busch Stadium!

Well… The stress tests get their public showing today… The rumors continue to be something strange. Strange in that one day Bank of America (BOA) needs to raise $10 billion, the next day it’s $35 billion, and then later in the same day, BOA doesn’t need to raise any capital! Talk about wild swings of emotion! WOW!

The rumor going around this morning is that the banks are all right on the night, and not in major deep dookie any longer. Hmmmm… Didn’t I tell you over a week ago that this was going to be the case? I said it because… I just don’t believe the government is going to “spook” the markets right now and release the “real results”… Of course, I don’t know that to be a fact, it’s just my hunch. I could be all wet… But at least I got the first part correct, if in fact the results print as rumored.

But then, Bloomberg printed a story last night that showed a handful of banks needing between $34 billion and $2 billion in additional capital… So… Let’s see which set of books the government reveals, eh?

OK… So the currencies all sold off on the news yesterday morning that the banks would need more capital, and then came back overnight on the latest rumor. As I said yesterday, the markets are all about the stress tests right now… Actually, I’m surprised the government didn’t delay them one more day so that the focus would be on the stress tests tomorrow, instead of the Jobs Jamboree!

Speaking of the Jobs Jamboree that will take place tomorrow… The ADP Challenger report printed yesterday and indicated that tomorrow’s Jobs data will show less jobs lost, and a number below 600K for the first time in five months! ADP says the jobs lost were 491K… And believe me now and hear me later on this, the media will eat this up, and be all ecstatic about the fall from 600K to 491K… As if 491K is a “good number”! Well, yes, it’s better than 600K… But the reporting should all be balanced… Like… “Is this the turning point in job losses? Yes, their still almost 500,000 for the month, but that’s a fall of over 100,000. While one monthly report does not make a trend, just like one swallow doesn’t make a summer, this is good news, and we’ll be watching for signs of further improvement in May.”

I’m watching the Big Dog, euro (EUR), rally right now, from an overnight low of 1.3250, to its current level of 1.3330, as German Manufacturing Orders surprised this morning with a rise of 3.3% in March. The European Central Bank (ECB) is meeting right now, and is expected to cut rates 25 BPS to 1.25%. I read a couple of stories yesterday regarding the ECB… The writers were saying how the Eurozone economy is in shambles and needs a larger than 25 BPS rate cut… But, I argue with that. The ECB wants to keep some rate cut arrows in their quiver, in case they need more rate cut stimulus in the coming months… They shouldn’t shoot them all now! That’s what the Fed did, and we know what that led to… Quantitative easing!

But the Big Winner of yesterday and last night is the Aussie dollar (AUD)… It’s on a moon shot, since the Reserve Bank of Australia (RBA) left rates unchanged the night before, and issued a balanced statement afterward, with emphasis on waiting to see the affects of the previous rate cuts. The Aussie dollar got an additional boost this morning when it was reported that the unemployment rate in Australia fell for the first time in eight months! The Aussie dollar is 75-cents and change this morning, heading to 76-cents… A seven-month high!

Some commodities have been rising in price recently… I’ve chronicled the rise in the oil price, but here’s one you don’t hear about every day, except of course if you listen to our friend, Jim Rogers, every day! I can hear Jim Rogers talking about sugar as if he’s sitting right here next to me… Sugar is heading to a 28-year high, as the crop in India fell short of expectations… And wheat had gained three consecutive days now, on low yield estimates for the U.S. crop… I hear you, Jim!

I would think that if the bank stress tests “somehow” show no insolvency risk, that risk taking will be back on the table, BIG TIME! So… I would think that if risk taking is back on the table, gold, currencies and other commodities would be singing a different tune.

Yesterday, I told you about how the Indian currency (INR) was rallying, and how my Currency Capitalist colleague, Ashish Advani, gave the currency the thumbs up in last month’s letter, and how Standard Chartered Plc was now bullish on rupees… Well, now add Society General (SOCGEN) to the list of rupee flag wavers! SOCGEN believes the rate cuts in India are a thing of the past, and it will be all seashells and balloons for the rupee going forward.

And while I’m talking about an Asian currency… I might as well head over to China and talk about how their stimulus continues to hit the nail on the head, and help to bring China’s economy out of their slowdown and doldrums. The Peoples Bank of China (PBOC) issued a report yesterday saying that the economy performed “better than expected” in the first quarter. This improved performance is helping the “managed currency” (renminbi) to gain ground versus the dollar once more.

I had a reporter follow up with me yesterday on my thoughts toward what China had on their minds The reported asked me if I thought the Chinese would be under more pressure to allow the renminbi (CNY) to float, if they are really pursuing a “wider use of the renminbi.” I said… I thought the Chinese would receive pressure to allow the renminbi to float, but no more than what they received in the past from the combo of Paulson, Schumer and Graham… (The United States!)

The Bank of England (BOE) is also meeting this morning to discuss rates… I would think it is almost inevitable that the BOE would leave rates unchanged. This has been the prevalent thought in the markets for a week now, and has led to the pound sterling (GBP) making a very auspicious rally to 1.5170! What I think the BOE needs to do now is to sit down with the markets and tell them what direction their quantitative easing (QE) is going. Will they limit the purchases, or increase them, etc… Not that any QE is good, but to be honest and transparent with the markets would be a step in the right direction for a central bank!

Yesterday, Norway’s Norges Bank lowered their internal rate 50 BPS to and internal rate of 1.5%. I was hoping they would only cut 25 BPS, but… This has all the makings of “the last rate cut”… You know, one big blow out to end the summer… Or… A star burns brightest right before it burns out… But, I now believe this will be the last cut in Norway…

Recall many moons ago I called this a “race to zero” regarding central banks around the world cutting interest rates? Well… It certainly has panned out that way, eh?

Have you ever heard of the book, The Black Swan? The author Nassim Nicholas Taleb describes his theory of “Black Swan” as a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations. Obviously we’ve had a few “Black Swans” in the past two years, eh? Anyway, the thing I’m going for here is that Mr. Taleb was speaking at a conference yesterday, and had this to say about commodities and gold… “The global economy is heading into a big deflation though the risks of inflation are increasing as governments print more money. Gold and copper may rally massively as a result.”

Speaking of gold… It has rallied the past two days, but could be just waiting in the wings for confirmation of two things… 1. The bank stress tests don’t show major problems… And 2. The Jobs Jamboree does show falling job losses. Silver has really gotten on the rally tracks too, outperforming gold the past two days! Silver is back above $14… And that’s good news. That is unless you’ve dilly-dallied your days away, and not taken advantage of the cheaper prices that have been available for some time now!

No word from the BOE or ECB, so I’ll just head to the Big Finish now… No wait! The BOE’s decision just flashed across the screens… Let’s see here… Oh, the BOE left rates unchanged (as expected, see above), and they announced that they will increase the size of their asset purchase program (quantitative easing) by 50 billion sterling to 125 billion sterling. Well… Let’s see here, the pound sterling is taking on some water after this announcement, as it should! Too bad for the sterling rally… But increasing QE is not healthy for a currency!

The ECB decision will come in about 45 minutes… I’ll be well on my way to figuring out my currency positions and trades needed by then… So, I’ll just go to the Big Finish now, for real this time!

Currencies today 5/7/09: A$ .7565, kiwi .5935, C$ .8575, euro 1.3330, sterling 1.5085, Swiss .88, rand 8.3440, krone 6.4875, SEK 7.8525, forint 208.75, zloty 3.2325, koruna 19.9250, yen 99.20, sing 1.4675, HKD 7.75, INR 49.27, China 6.8215, pesos 13, BRL 2.1130, dollar index 84, Oil $57.91, Silver $14.11, and Gold… $921.30

That’s it for today… How about that! They found that three-year old boy that’s been missing here in Missouri! YAHOO! I see where the Somali pirates have seized another ship… This time it’s a Dutch ship. We’re all fans of “old school pirates” on the desk here, but NOT these new pirates! My little buddy Alex had a late game last night, but the game was suspended in the third inning because of fog. Sometimes living near a river has its good points, as I was able to get to bed at a decent hour! Of course, those “good times” get wiped out when the river floods, as it looks like it’s getting ready to do, after all the rain we’ve received, and will receive in the next week… UGH! I’m glad that we’re not going to do the multi-city FX tour this year. That was just a tad taxing on me. Tomorrow’s the jobs Jamboree, so start getting ready for that! OK… I’ve got to get this out of here, and get to work; I’m going to the day game today! Of course, you didn’t think I would miss a day game would you?

The Daily Reckoning