Manufacturing Hits the Skids

Good day…Whew! What a week! First our email server crashes to earth and burns, then I succumb to the “rainforest flu” of which I can personally say will knock the stuffing out of you! I call it the “rainforest flu” because I think that’s where my beautiful bride came in contact with it. She had it first, and then me! That’s the last time I let her go traipsing off into the rainforest again!

So things around here, email-wise are on the mend, as well as your Pfennig writer. I’ve still got that head cold, and the combination of head cold and “rainforest flu” really hit off big time with me – NOT! But, as I said, I’m on the mend. I’ve been sleeping a lot, so I have to see if the Big Boss, Frank Trotter, will allow me to have my noon to four nap today. Probably not…so I’ll just suck it up and play ball, as the old ball coach used to say.

Well, what do we have here? A currency rally that began late last week has continued this week. It’s not a “raging” currency rally, just a slow depreciation that looks as though it may finally return to the underlying weak dollar trend. There is one currency that has not rallied, and I’ll talk about the loonie in a minute, but first…

Yesterday, the ISM Manufacturing Index printed for October, and showed some real rot on the manufacturing vine. Recall that this index is the heartbeat of the manufacturing sector, and any number above 50 represents an expansion of manufacturing, and any number below the line drawn in the sand at 50, represents contraction. The index has been falling steadily since hitting an index number of 57.3 in April, and October’s number fell right in line with the trend by posting a 51.2. This was much lower than the “experts” forecasted, and really socked it to the dollar.

The manufacturers can point a finger at the dolts that keep propping up the dollar for one of the reasons their sector is falling. All last month I talked about the currencies trading within a range with a bias toward a stronger dollar. That trend has been going on since May…and look what it’s done to the manufacturing sector. The last time the dollar was being sold like this was April, and what did I say above? The manufacturing index’s high was in April.

On the other side of the “pond”, the Eurozone manufacturing index printed a larger than expected rise to 57 in October. Do you see the difference a trending stronger currency could make in the manufacturing sector? The dollar has been stronger since May, and manufacturing has hit the skids, while the euro has trended softer since May, and manufacturing there is strong.

This strong manufacturing in the Eurozone, along with continued excess money supply, will be the keys to another rate hike by the ECB in December. Until then, expect the big boys of the ECB to be out in full force, with hawkish statements to reinforce their position with the markets. This should underpin the euro, and allow it to gain further, should the dollar truly return to the weak dollar trend.

The ECB is meeting today as I write. I obviously don’t believe they will change rates today, since I said I thought they would do so in December…so, just look for hawkish words from ECB President, Claude Trichet.

OK…now the loonie. Yesterday, Chris mentioned that the taxation on Canadian Trusts had changed, causing weakness in the loonie. I just wanted to add my thoughts on that. These Canadian Trusts have been big time moneymakers for holders over the last six years, as the prices of oil and gas rose, along with the Canadian dollar. The Trusts have special taxation, and that appeals to many investors. However, on Tuesday, Jim Flaherty, Minister of Finance announced simple, but dramatic changes to the Trust Sector. Effectively, in 2011, trusts will be taxed like corporations.

This is causing panic among owners of the Trusts who were marketed to foreign investors, thus the sell of in the loonie. However, you know me; I like looking under the stones. And I have to say that when all the dust settles, these trusts may be at bargain basement prices, while owning some very nice assets (oil, gas, raw materials). So when the dust settles, you may want to look at these trusts.

Last night, Japan’s top currency guru, and Vice-Finance Minister, Watanabe, said, “there’s no reason for the yen to weaken as the world’s second largest economy is expanding.” This comes at a time when the yen has put together a strong run versus the dollar. So for once Japanese officials are talking up the yen. Could it be a sign of changed times? Maybe…but we are dealing with the Japanese, so who knows. Only the shadow…

In Switzerland, inflation data printed this morning, and fell to 0.3% from 0.8% in September. I was questioning the will of the Swiss National Bank (SNB) to continue raising rates before the inflation data printed this morning…now I’ve really got to question whether the SNB will raise rates on December 14 (their next meeting). Right now, I’ve got to say they won’t.

Today, we’ll see U.S. data that consists of Productivity, Weekly Initial Jobless Claims and Factory Orders…not much in the way of market movers, although Productivity normally raises an eyebrow or two, and Factory Orders are expected to rebound from recent weakness.

Currencies today: A$ .7735, kiwi .6740, C$ .8825, euro 1.2770, sterling 1.9095, Swiss .8030, ISK 67.50, rand 7.43, krone 6.4680, SEK 7.20, forint 204.05, zloty 3.03, koruna 21.98, yen 116.90, baht 36.65, sing 1.5610, HKD 7.7777, INR 44.89, China 7.8730, pesos 10.82, dollar index 85.35, Silver $12.41, and Gold… $616.70

That’s it for today…World Series Champions! How about those Cardinals? I was unable to talk about this earlier this week, but what a sweet surprise for Cardinal fans! I just keep thinking, “World Series Champions.” I’m not digging it in on anyone; I’m just enjoying this, as these are my beloved Cardinals! OK…I’ll stop now. Glad to be back today. Have a great Thursday!

Chuck Butler
November 2, 2006

The Daily Reckoning