Mike Mayo Letter Spooks the Markets

Good day… And a Terrific Tuesday to you! OK… I’ll get to Opening Day in the Big Finish; but first and foremost, I need to tell you about a guy that really threw a cat among the pigeons yesterday, causing a BIG scare and sell-off of risk assets – currencies that is…

His name is Mike Mayo, and he used to work at Deutsche Bank, and now is a banking analyst at Caylon Securities… And, brother, can he ever move a market! To make a long story short… Mr. Mayo basically said yesterday in a report that “Bank Loan Losses Will Exceed Depression Levels”… So, all that James Brown, feeling good, that went on last week with the G20 singing, “everything is beautiful”, all went down the drain after Mr. Mayo spoke.

The Wall Street Journal printed the following…. “One reason why [Mayo] believes the banks will face more pressure is because the legacy loans they hold on their balance sheets have not been marked to market – he estimates the marks at about 98 cents on the dollar, a much higher estimate than what others would come up with.

“‘We see more downside with government programs regarding those bank stocks with more traditional banking since this business – aside from when involving an acquisition – is not marked to market,’ he writes.

“As a result, he believes the government’s help will either result in rosier-than-expected projections that allow the banks to maintain their unwanted assets on their balance sheets, or hammer them with demands for more capital, which will ‘hurt traditional banking more.’”

I want to make perfectly clear that Mr. Mayo isn’t talking about banks that did things right (like EverBank!) and didn’t get caught up in the “fee income mania” that the money center banks did…. The currencies got caught up in the tidal wave of risk assets being sold. The euro (EUR), which on Sunday night was 1.35 when I wrote yesterday morning, traded all the way down to 1.3365 at the end of the day. And in the overnight market saw even more selling back down to 1.3275.

Of course the news this morning that the recession in the Eurozone is deepening… And that the Reserve Bank of Australia (RBA) decided to come back to the rate cut table, and cut 25 BPS, or 0.25% from their internal rate of, making it the lowest its been in 49 years!

You may recall that the RBA had skipped coming to the rate cut table at their last meeting, and there was hope that they had completed their rate cut courses at the table… Apparently not! The good news for the Aussie dollar (AUD) is that the 0.25% is less than some traders were thinking the RBA might cut, so the Aussie dollar has been able to hold off the major selling.

While I’m “down under”… A reader asked me my opinion on the New Zealand dollar/kiwi (NZD)… Well, my opinion hasn’t changed… New Zealand has too much debt, period. Yes, when the high yielders were rallying during March, kiwi was right there among them… But, as soon as you see any move toward risk aversion, kiwi gets hammered more than Aussie dollars…

OK, back to the Eurozone and their deepening recession… An unexpected downward revision to Eurozone fourth quarter GDP put additional pressure on the euro. Final data showed GDP contracting 1.6% in the fourth quarter. But… Just like I keep saying over and over again, their problems aren’t as bad as ours!

I hear people on the speaking circuit point to Ireland and the fact that this country might default… Look! It’s just like here in the United States. Ireland is a “state” of the European Union, just like California is a state of the U.S.A. And someone is going to tell me that Ireland’s problems are on the same scale as California’s? Let me remind you that California was once – and probably still is – a top ten economy in the world!

These euro bashers also point to the Eastern European banking problems… And at one time I too feared what might come of this… But… When you hear stuff like what Reuters reported yesterday from the European Central Bank’s (ECB) minister, Nowotny, you have to think about changing your mind… Reuters had this headline “ECB’S NOWOTNY SAYS NOT ECB’S JOB TO INTERVENE TO SUPPORT E.EUROPE CURRENCIES”.

OK… I don’t want to get into a “you know what” contest with the euro bashers… Just wanted to make my opinions clear on the subject… I look at it like this… As long as there are people on the other side of the fence, it makes for a great trading market! You wouldn’t want everyone on the same side of the fence.

So, in the cat and mouse game that goes on with currencies when risk is taken off the table… The Japanese yen (JPY) rallied… It’s been this way for months now, no reason for it to change now!

Gold, certainly has taken it on the chin lately, falling back below $900 the other day, and struggling to maintain a bid… The shiny metal has caught a bid in the overnight markets showing a nice $9 gain… But, you know those wild swings in gold could wipe that out in a NY minute… And then again, it could add to those gains in a NY minute also… The good news, though, is that it did catch a bid this morning.

Have you seen the price of oil falling again? Yes, Jed Clampett’s bubbling crude, black gold, Texas Tea, has fallen back to $50.50… When the price of oil weakens, it adds pressure to the “petrol currencies”… And our fave there is Norway (NOK)… The krone – called the “safest currency in the world” by Time last month – has lots of price determinates, but the biggest is the price of oil… So, those lofty levels the krone was enjoying yesterday morning, have backed off… But hey! Doesn’t that mean it gives a buyer a cheaper level to buy? Of course it does, Sherlock!

And speaking of currencies influenced by oil… The Canadian dollar/loonie (CAD) is also in that basket… And as long as oil is as cheap as it is (compared to last year), the loonie will struggle… It’s a currency that likes to get “juiced” by energy prices… And with oil down, and natural gas down… The loonie doesn’t get to party like it’s 1999!

The Mayo letter really spooked the markets yesterday, and we saw them slip back into the trading theme of last year for the day… Remember? Whenever the deepest, darkest, most dangerous data printed for the U.S. economy, the dollar was rewarded… Sort of like a Twilight Zone episode… It’s so strange, but it was true… Let’s hope this trip to the Twilight Zone is but a brief stay…

Currencies today 4/7/09: A$ .7090, kiwi .5770, C$ .8025, euro 1.3265, sterling 1.4650, Swiss .8730, rand 9.1470, krone 6.6525, SEK 8.2215, forint 223.50, zloty 3.3770, koruna 20.0425, yen 100, sing 1.5130, HKD 7.7510, INR 50.02, China 6.8365, pesos 13.77, BRL 2.2225, dollar index 85.38, Oil $50.50, Silver $12.27, and Gold… $880.76

That’s it for today… Well… Opening Day in St. Louis was freezing cold, with snow flurries flying around. But… I got to watch the game with my little buddy, Alex, and see the procession of cars carrying my beloved Cardinals into the stadium. The Cardinals lost the game in the 9th, a problem they experienced about 31 times last year! Let’s hope it’s not a sign for this year! UGH! I also spent some time with my good friend, Rick, before the game, so that was fun… So… Back in the saddle now for a few weeks… This will feel good – not as good as it felt to sit on the balcony facing the ocean on Singer Island for 3 weeks, but… Good… I tell you though, and I go through this every year after vacation, each year, I get closer to retirement I can feel it in my bones! I can still write in retirement! OK… So Mother Nature was not kind to us for our Opening Day… No biggie, I think it was Nature’s Way of telling us something’s wrong! Playing baseball in 38-degree weather is wrong! Oh! Congrats to North Carolina on their NCAA Basketball Championship win last night, while I was watching 24! They were led by a kid from Missouri! OK… I’m out of stuff here, so I’ll get to the pile of papers on my desk… I hope you have a Terrific Tuesday!

The Daily Reckoning