King Henry Was Wrong Again!

Good day… And a Terrific Tuesday to you! Well… Guess who was wrong AGAIN! That’s right, King Henry Paulson, he of the U.S. Treasury Secretary throne. He told the world on Friday, that the bailout package was a “done deal”… And he told us again on Sunday that it was a “done deal”. The markets rejoiced, the stock jockeys danced in the streets, the karma flowed and all the stars were in alignment. And then… A not-so-funny thing happened on the way to the forum…

King Henry’s men revolted, and the bailout package did NOT have the votes to pass it, and the “done deal” was “undone”! Once again this man has led investors down the wrong path. I’ve documented the wrong statements by this man in the past year, and still, investors hang on every word by King Henry. When will they ever learn? When, will, they, ev-er learn?

The Dow posted its biggest one-day point drop ever… 777 points… It wasn’t the biggest percentage drop in one day ever – that belongs to the Crash of October 1987 – but still, that was enormous! There needed to be a tourniquet to stop the bleeding, and not one was given to the stock market. The S&P 500 suffered too…

And… Was the bailout package the “only” reason stocks dropped like a rock? Difficult to say… But let me say this so you can hear me now and listen to me later… Even in the face of the other bailout plans (remember Bear Stearns, Fannie & Freddie, AIG, the mortgage bill?) stocks had a difficult time putting together a rally that would last a couple of days. There’s an underlying problem here folks… And if you ask me (and I know you didn’t, but you’ll get my answer anyway!), I think it’s the recession we’re in, but no one wants to admit it. We’re so deep into a recession that the NBER doesn’t know their way out, much less call it for what it is!

I had a reader chastising me because his currencies aren’t going through the roof. Hmmmm… Let’s look around the bar room, and take stock of what’s going on here. Currencies are performing better than stocks… Bonds… Mutual funds… Housing… Commodities… I wonder where it would have been better to have your money? I’m sure there’s somewhere… So while, for the most part, currencies may be down… They are still outperforming most other investments!

OK… I had to get that off my chest! So… As I left you yesterday, the dollar was rallying… But that rally was stopped in its tracks early in the U.S. session, as it looked as though the votes would not count up in favor of a bailout package passing. The rally by the euro (EUR) and other currencies was strong for about an hour, and then range trading set in. However, as I turn on the currency screens this morning, they are back to trading in yesterday’s clothes, with the dollar swinging the hammer again.

Some of the euro’s problem in maintaining a well bid rally the last few days is the rot that’s being found in European Banks. As I said yesterday, I thought the Fortis problem wasn’t going to be a one and done, but I thought the rot on the vine wouldn’t be as bad as in the United States. Well, this morning there’s another one: Dexia…

The Big Boss, Frank Trotter, sent me a story he found that was quite interesting, where the German Finance Minister was interviewed regarding the financial meltdown. This was a great story, and I can’t give you all of it, but I’ve put in the highlights… Here we go!

“SPIEGEL spoke with German Finance Minister Peer Steinbrück about the roots of the US credit disaster, whether Germany is in grave danger and what the future has in store for world banking.

“Steinbrück: We are experiencing the most severe financial crisis in decades, although one should be careful about historic comparisons with 1929. One thing is clear: After this crisis, the world will no longer be the same. The financial architecture will change globally.

“SPIEGEL: And is the United States completely to blame?

“Steinbrück: The source and focus of the problems are clearly in the United States. There are many causes. After 9/11, a great deal of cheap money was tossed into the market. Apparently some of that money went to people with poor creditworthiness. This led to the growth of the real estate bubble. The banks embarked on a race over profit margins. Then speculation spun completely out of control…

“SPIEGEL: The German government is unwilling to participate in America’s $700 billion bailout package. Is this your final word?

“Steinbrück: I see neither the need for nor the possibility of taking on the responsibility for American banks. Besides, our situation is more robust.”

So… There you go… Some statements from the German Finance Minister, who did say at one point regarding the AIG bailout… “We were all staring into the abyss”.

Long time friend and colleague, Ed Bonawitz, sent this note to me yesterday… “Given today’s events in Washington and on Wall St.; the winner of the presidential election will probably ask for a re-count!”

Funny, yes… But oh-so-true! The bailout package, if passed, was going to leave a lot of important decisions in the hands of the next president. I can’t imagine why anyone would want that job!

Looks like the Senate will try to revive the bailout package, after watching the carnage in stocks yesterday.

The Japanese yen (JPY) pushed the envelope versus the dollar yesterday, and while stocks were circling the bowl, yen was in favor. This is a classic example of risk trades, like the carry trade, getting unwound during times like this… And when carry trades get unwound, the Japanese yen rallies. I would think that we should expect more of this… But then, I’ve thought that for almost a year now. Last November, speaking at the New Orleans Investment Conference, I emphasized that I expected risk events to be in play in 2008, and that would unwind carry trades. This was repeated in February at the Orlando Money Show, and every speaking engagement since.

Yesterday… Personal Income and Spending data was a little skewed, but here it is anyway… Personal Income for August “jumped” 0.5%, gaining back some of July’s -0.6% loss. Personal Spending failed to rise, and July’s number was revised down.

Personal Income is still volatile due to the stimulus checks, etc. but the spending figures are encouraging and disheartening at the same time. Encouraging because maybe, we, as Americans, have stopped spending what we don’t have or shouldn’t be buying… But disheartening, because consumer spending makes up a huge chunk of GDP… Without consumer spending, economic growth is left with Government spending… That’s no way to grow an economy!

Today, we’ll see the color of July’s S&P CaseShiller Home Price Index, which is expected to continue its fall. The Chicago Purchasing Manager Index (Manufacturing) will show a weaker print… And Consumer Confidence for this month is expected to weaken… Shoot Rudy, this data should fall through the trap door of falsely supported data! We’ll have to see if the markets pay attention to the data today… I kind of think they will continue to be focused on the bailout package.

Gold sure shot up yesterday, gaining $30 and going back over $900… But that was short-lived. The shiny metal has given back $15 in the London market this morning. Profit taking? I would certainly think that has something to do with it. I just keep coming back to the conversations I hear on the desk every day from our metals traders, Kristin and Jen. They can’t find coins or bars in gold or silver anywhere! There’s a shortage folks… And there’s no price adjustment in gold or silver going on! This has all the makings of the PPT keeping the prices low.

I know, I don’t like thinking that this isn’t a “free market” any more than the next guy… But that’s exactly what’s going on, eh? There’s no such thing as a shortage, it’s merely in need of a price adjustment… And if there’s no price adjustment, then it’s being held down artificially… But by whom? There’s only one choice… The Plunge Protection Team (PPT).

This is no solace to gold and silver holders. They want their holdings to rise in value in a free market environment! Our free market, as we know it, may be the thing going into the abyss in my opinion. Think about what’s happened since March… And then tell me if you think this is a free market… Or one that is controlled by the government.

OK, I’ll get down from my soapbox now… Just think a little about that today, OK? Wow! I can really get off on tangents, eh?

So… Wachovia actually went to the highest bidder – Citicorp. Yesterday morning, the Wall Street Journal was reporting that Wells Fargo was the “winner”… Well, that fell through, and Citicorp came riding in on the white horse, buying up Wachovia’s banking operations. I wonder what happens to the old St. Louis Brokerage, A.G. Edwards, that was purchased by Wachovia last year? I know people that work at the brokerage, so this hits home a bit.

The dollar has gained another 1/2-cent versus the euro since I’ve been here this morning, so this is getting ugly. Something has to turn this around and get this ship headed in the right direction again!

And… Finally… Don’t look for this to be reflected at your gas station any time soon… But the price of oil has fallen below $100!

Currencies today 9/30/08: A$ .8065, kiwi .6760, C$ .9550, euro 1.4325, sterling 1.7990, Swiss .9080, ISK 102.20, rand 8.30, krone 5.80, SEK 6.8325, forint 169.60, zloty 2.3780, koruna 17.22, yen 104.90, baht 33.88, sing 1.4290, HKD 7.77, INR 45.97, China 6.8460, pesos 11, BRL 1.9630, dollar index 78.20, Oil $98.89, Silver $12.92, and Gold… $894

That’s it for today… Fall weather is here! Well… Not cold weather, but cooler anyway. I’m not a fan of cold weather, and I know that cool weather leads to cold weather! UGH! Oh well, just enjoy the sunny days! I have a feeling that this winter is going to be a doozy, too! UGH! Maybe I can schedule time at the home office in Jacksonville! My little buddy, Alex, made the jazz ensemble (guitar) at his school. I’m impressed! Sometimes I think that guitar is attached to him, as he rarely puts it down at home. That’s how I was at his age too, but I played outside on the porch, as we didn’t run the one-room air conditioner very often! My older sister, Barb, told me the other day that she now reads the Pfennig! I always figured my siblings didn’t have a clue as to what it was that I did; I guess now the secret is out! Anyway… Time to go… Hope your Tuesday is Terrific!

Chuck Butler
September 30, 2008