Jim Dandy To The Rescue

Good day… And a Terrific Tuesday to you! Well… Monday was interesting in that there was a bias to buy dollars throughout the day. The only data was that weird and very volatile Empire Manufacturing Index which soared versus a forecast of slowing down. The euro (EUR) did remain above 1.42 on the day, so it wasn’t a complete sell off.

Late yesterday there was an announcement by three large banks that they are going to shore up the commercial paper market. Sort of like, Jim Dandy to the rescue! Go, Jim Dandy, go! Here’s the skinny… The nation’s three largest banks said Monday they will team up to buy tens of billions of dollars in investments that lost value after global credit markets seized up last August.

The plan is designed to inject more confidence into the market, and increase investor appetite for the short-term debt known as commercial paper. The market for commercial paper, which is crucial for companies to fund short-term borrowing needs, locked up this summer.

I find this announcement to be interesting in that one of the Banks – Citigroup – also announced they were posting a third quarter profit that was 57% less than the previous quarter. OUCH! I know I don’t have to tell you that these losses were generated by subprime loan operations… But there! I did anyway! So… Anyway, the Big 3 are Citibank, Bank of America, and JP Morgan Chase.

Now, let me explain just how important all this corporate credit is. U.S. corporate credit and the credit derivatives have become a HUGE piece of the U.S. deficit financing. Inflows to corporate credit derivatives had averaged about $45 billion. But in August when the credit crunch began, the inflows dropped to $4 billion. There has been a lock-down on issuance of corporate credit derivatives, which also includes commercial paper. So… Put this under another problem for the dollar in the deficit-financing arena.

If the United States is not going to see close to $50 billion each month in foreign inflows, because of lack of product, or lack of confidence in the whole process, which is what happened with stocks back during the corporate accounting games, then the dollar’s chances of keeping the euro from going to 1.50 are slim and none… And slim left town!

So… Maybe the Big 3, can shore up that whole process, and get some confidence in foreign investors again. If not… The dollar’s in trouble folks. I’ve said this before, and in every interview I do, I make certain that the interviewer knows I feel that the difficulty of financing the current account deficit, which now requires $3 billion a day in foreign financing, is going to pose the greatest threat to any thought of a dollar recovery.

So, now we not only have a threat to the financing of the total amount, but a component is missing!

OK… Meanwhile back at the ranch… Somehow… Even knowing all of this, or maybe they don’t know because they don’t read the Pfennig, investors are buying dollars. Strange days indeed, so peculiar Momma!

Down under… The Aussie dollar (AUD) saw some very strong selling/profit taking, as it fell from the high 90-cent handle to below 90-cents. Kiwi (NZD) also saw profit taking that intensified after their CPI printed and showed a drop to 1.8% from the previous reading of 2%. I believe there were some “one-offs” included in this report, which I believe still shows some strong inflationary undertones. I think these two got hung up in some carry trade unwinding. I’ll have more on that thought later…

Did you see the statement by the IMF yesterday regarding the dollar? I was shocked to see it! But the IMF said that the dollar remains overvalued… That should be positive for the currencies and gold.

The price of oil reached $85 yesterday… And overnight it has jumped up to $88! OUCH! The geo-political tensions between Turkey and Iraq remain on red alert, and that, added to all the other fundamentals, is driving oil prices higher, and higher. In fact, I’m reminded of an old Jethro Tull song (this will make the Big Boss happy), “Old Charlie stole the handle, and the train it won’t stop going, no way to slow down…”

Can you believe that just about two weeks ago, when the price of oil retreated from the record level at that time of $82, that pundits were out talking about that being the “peak price”? I warned you then that oil prices had a history of hitting a record, then retreating, only to then take out that record on the next move up. At least that’s been the history since we started the commodity bull market about seven years ago.

Fed Chairman Big Ben Bernanke spoke at a dinner meeting in NY last night, and once again has turned 180 degrees from his earlier messages about the housing meltdown. Let’s listen in to hear what he had to say… “The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year”, Big Ben said. He went on to say… “Part of the reason that we have some confidence in inflation remaining well controlled, is we expect to see the economy growing more slowly at the end of this year, and early next year.” Hmmm…

I’m surprised the dollar didn’t get taken to the woodshed on these comments, as I believe the Fed Chairman is admitting an economic slowdown, and if you read between the lines, he’s also hinting at further rate cuts.

This rise in oil prices, and the associated inflation pressures they bring, is EXACTLY what the ECB has been scared of, and have kept interest rates moving up, that is, until the August meltdown of credit. I’ve said all along that the European Central Bank (ECB) would keep rates higher because of oil prices adding to inflation. ECB President Trichet spoke last night, and once again gave no indication that he or the ECB is uncomfortable with the strong euro. I’m seeing euros trade down below 1.42 again this morning… Looks like it’s buying time again, not crying time.

Oh, and one more thing regarding the euro… German investor confidence as measured by the think tank ZEW, surprised the markets this morning by remaining unchanged. The “experts” had forecast a further decline in confidence from last month’s drop. This is huge for the euro.

The carry trades have been getting some cold water thrown on them by the recent weakness in the U.S. stock market. The market’s appetite for risk is now associated with stock performance. I find that a little strange… But it is what it is, and gives us a definite barometer to use. If stocks are getting sold sharply, we can figure on carry trades being unwound. And, the cold water has pretty much turned to a hammer overnight… The carry trades are getting hammered! As with all movements in the carry trade before, we have to wait to see if this carries through. My guess at this point is that it won’t… Not now. But then, I’ve been saying for some time that I believed stocks were overvalued.

And if the carry trades are getting hammered… Guess which currency is getting bought? Ahhh, you’ve learned well, grasshopper… Japanese yen (JPY)!

The Bank of Canada (BOC) holds their interest rate meeting today… While I don’t expect the BOC to move rates now, I wouldn’t be surprised to hear some very hawkish statements from the new BOC Governor, given the recent data, that I’ve chronicled here. A strong labor market, rising inflation, commodity prices soaring, and good solid strength in the economy. I know the BOC doesn’t want to make the Canadian dollar (CAD) look even more attractive than it already is, but they have to follow the footsteps of the United Kingdom, Australia, New Zealand, and even the ECB, and raise interest rates to fight inflation, all the while knowing that it will cause an increase in the currency.

You may ask yourself, “But why wouldn’t they want the loonie to be more attractive?” Ahhh grasshopper… The more attractive it is, the more investors want to take it out on a date! Seriously though, the more attractive it is, the more it is bought, and the more it is bought, the more it increases in price… And, that has become a bug-a-boo for the Canadian Governor and BOC. The strong loonie has caused the trade surplus to narrow. However, I think they worry too much; the price rises of commodities should offset the slower exports.

So, in the end… If the BOC talks tough, they will make the loonie more attractive anyway, in my opinion… So, they may as well go ahead and raise rates! That’s my story and I’m sticking to it!

Currencies today: A$ .8890, kiwi .7460, C$ 1.0225, euro 1.4160, sterling 2.0340, Swiss .8445, ISK 60.90, rand 6.8950, krone 5.4050, SEK 6.4690, forint 177.28, zloty 2.6290, koruna 19.4430, yen 116.70, baht 31.41, sing 1.4670, HKD 7.7530, INR 39.36, China 7.5180, pesos 10.80, BRL 1.8140, dollar index 78.25, Oil $87.73, Silver $13.78, and Gold… $764.50

That’s it for today… Quite a downward move by those high-yielders when the carry trades get unwound, eh? Imagine, there’s no carry, it isn’t hard to do… STOP IT! Another visit to the doctor yesterday, now they have my blood too thin! Better not shave this morning, HA! Yesterday, I forgot to mention that my darling granddaughter, Delaney Grace, came to visit on Saturday, and she had on a Missouri Tiger cheerleader outfit… What a Cutie! I have a new fave program, and it’s called, “Chuck”! Go figure! Anyway… I hope you have a Terrific Tuesday!

Chuck Butler
October 16, 2007

The Daily Reckoning