Losses Keep Piling On

Good day… And a Happy Friday to one and all! I’m running late today. I was up most of the night with stomach problems, and overslept this morning. This is my last day of my 4-week treatment, so maybe by this time next week I’ll be able to feel normal again. But, it’s a Friday! And… I’ll be gone the next three-weeks! First to Vancouver, where I’ll still write the Pfennig each day, but then on vacation, and on to San Francisco… I’ll be back in the saddle on August 11th.

Well… We had a range bound day in the currencies yesterday, with a bias to buy dollars, as the markets breathed a sigh of relief at JP Morgan’s second quarter earnings. JP Morgan beat the estimates, but the thing I don’t get is why there was dancing in the streets when those earnings were 53% below those a year ago. So, good for them for beating the estimates, but 53% below last year, I would certainly think it would have raised a few eyebrows. In fact, JP Morgan head man, Jamie Dimon said, “Our expectation is for the economic environment to continue to be weak – and to likely get weaker – and for the capital markets to remain under stress. We remain conscious that since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer.”

OK… So, the bias was to buy dollars, those people will be rue the day they bought dollars, as these credit woes keep piling up. Of course, that’s just my opinion, and I could be wrong. (The legal beagles will smile when they see that!) For instance, The Wall Street Journal reported that our friends over at the brokerage that owns a bull reported a second quarter loss of $4.65 billion. “Already clobbered by subprime-related write-downs of more than $30 billion in the previous three quarters ended in March, Merrill took an additional $9.7 billion hit in the second quarter.”

This morning, Citigroup posted a second quarter loss of $2.12 billion. These losses just keep mounting, and sooner or later the pressure on the dollar will be tremendous… That is unless someone can invent a hoola-hoop, or something like that, for the mortgage bonds that were created and now show huge losses. Oh… And the small amount of data in the data cupboard today will leave the markets to shuffle through all these earnings reports… Weak reports by some large companies yesterday afternoon, has left stocks in a precarious position today… But after the rot last week, stocks have rebounded, and that rebound can be seen in the poor performances of Japanese yen (JPY) and Swiss francs (CHF) this week, after hitting some lofty levels late last week.

European Central Bank (ECB) President, Trichet, is quoted this morning as saying Eurozone economic growth will stall in the second quarter that just ended… That hasn’t helped the euro (EUR) any… But if it’s the truth, why not say it?

And in the United Kingdom, where the pound (GBP) was trading at $2 most of the week, there are thoughts that the Bank of England (BOE) is about to engage in additional measures to boost borrowing, thus blowing through the debt limit. Those thoughts have the pound trading lower.

I saw this and thought I just had to print it in the Pfennig! What am I talking about? Ahhh grasshopper, I’m talking about this little measuring stick… Check this out!

So… You think oil is expensive? Well, when you measure other things in “barrels” like oil is priced, then you get this picture…

U.S light sweet crude……………..$130brl

Coca Cola……………………….$126brl
Perrier Water……………………$300brl
Starbucks latte………………….$954brl
Ben & Jerry’s ice cream…………$1,609brl
Tabasco sauce………………….$6,155brl
Chanel No 5………………..$1,666,560brl

Speaking of oil prices… They sure have backed off this week, eh? But haven’t we seen these pullbacks in oil several times in the past five years? Yes, we have! Is this just another one? I would have to think so… It’s not like there were any oil discoveries that will add supply… And its not like things in China or India have slowed their appetite for demand. Sure, demand in the United States has seen some weakening, but you have to remember, the SUV. The SUV had become the “auto of choice” for Americans. We have a major highway that runs past our office (not now because it’s closed due to construction), and when we would look out the window for more than a minute you could see that SUV’s would outnumber regular cars by a huge margin.

So… What I’m getting at here is it’s not like SUV owners are going out and trading their SUVs for Toyota Priuses or something like that! So… Demand might weaken in the United States on price and the fact that we’re in a recession, but it’s not going to fall off a cliff!

Anyway… The oil price going down has made it difficult for gold to rally this week. After looking like it would get back to $1,000 late last week, gold has fallen from $985 to $957… So… If you believe that the oil price pullback is just another in the line of pullbacks, and that oil will eventually head higher once again, then these gold prices look like bargains, eh?

Time to head to the Big Finish… Much shorter and sweeter this morning, I’m beat!

Currencies today 7/18/08: A$ .9720, kiwi .7640, C$ .9945, euro 1.5840, sterling 1.9949, Swiss .9775, ISK 79.05, rand 7.5550, krone 5.0850, SEK 5.9670, forint 144.55, zloty 2.0320, koruna 14.57, yen 106.70, baht 33.33, sing 1.3535, HKD 7.7980, INR 42.78, China 6.8165, pesos 10.22, BRL 1.5980, dollar index 72.15, Oil $131.34, Silver $18.36, and Gold… $957.65

That’s it for today… I put the finishing touches on the August Review & Focus last night… Sometimes I feel like I write more stuff than the law allows! A very tough week for yours truly, but it has come to an end. I made it through again! I’m excited about going back to Vancouver, although I’m not excited about the lines coming into the country and going out of it! UGH! But once there, Vancouver is absolutely beautiful! And then… Another of my fave cities… San Francisco! In September, I’m going to take part in what’s called FX University, and their “currency tours”. I will be in Seattle, San Diego, Dallas, Philadelphia, Chicago, and my hometown of St. Louis. One day, in and out with a traveling group of currency professionals, educating investors that sign up for the seminars. I’ll have more on all this in a separate Pfennig in a week or two… Until then… Have a Happy Friday!

Chuck Butler
July 18, 2008

The Daily Reckoning