More Stimulus on the Way?

Well, yesterday’s trading theme played out pretty well, and by day’s end, it had been quite the Turnaround Tuesday! Now, we have to see what’s in store for us today, as the last couple of weeks have seen the Wednesday trading quite the opposite of Tuesday’s trading! Strange trading pattern don’t you agree?

Overnight, the euro (EUR) climbed as high as 1.4140, only to sit at the cusp of 1.41 as I begin to write this morning. Of course 1.41 certainly looks a lot different from the 1.35-1.40 range we’ve seen in recent days. But then, we’ve seen these probes above 1.40 before, only to end with the euro falling back to the 1.35-1.40 range again.

I would imagine that the thing weighing heavily on the euro to bring it back to 1.41 and now a little below that figure is the news that the European Central Bank (ECB) had allocated €300 billion in 12 month funds for liquidity. I think any sell off from this is strictly a knee-jerk reaction to the announcement. But when the dust settles and the traders/investors realize that €300 billion is far less than the numbers that were rumored (some as high as €1 trillion), this knee-jerk reaction will slow.

One of these times it will shake the cobwebs off, and proceed to either move higher, or lower than the established range. For now, I would have to think that given the sentiment in the market that’s growing toward anger with the U.S. deficit spending tactics, the move would look to go higher. But, who knows? I can only look at things from a fundamentals viewpoint and from 17 years experience trading currencies.

Once the euro got going, or the Big Dog got off the porch, the other currencies (little dogs) were also on the rise versus the dollar… And commodities, after spending Monday circling the bowl, came back with a vengeance! And we all know that when the commodities rally, so do the commodity currencies of Aussie (AUD), kiwi (NZD), Canada (CAD), Brazil (BRL), and South Africa (ZAR)!

Speaking of Brazil… Recall when I told you that this currency can give you whiplash? The volatile, wild swings in the currency are enough to make someone request oxygen! So, after a day (Monday) that saw the Brazilian real move back above “2,” it posted the best performance of any currency on earth, on Tuesday!

Brazil’s real had its biggest gain in more than a month, as commodities rallied, and… The currency also bounced back after investors “overreacted” yesterday to speculation that the central bank would intervene to keep the real at “2”…  The real gained 2.7%, the best performer in the world and its biggest gain since May 4, to 1.9794 per U.S. dollar.

The real has gained 17% this year, the best performance among the 16 most-traded currencies, as commodities rallied.

One thing that helped the commodities rally yesterday was the fact that it finally “occurred” to traders and investors that the Fed’s FOMC meets today, and will probably signal that interest rates will be held to near zero in the U.S. for the rest of the year.

Now… Why would that be a feather in commodities’ hat? Ahhh, grasshopper… You have to remember that the underlying fear in the markets is that the Fed will NOT be pro-active in removing their stimulus when inflation begins to knock at the door… And making a statement that interest rates will remain near zero for the rest of the year, simply makes those fears even stronger… And what will people flock to when inflation is racing toward double digits?… Commodities.

Of course, tomorrow will be a different story should the Fed not make an interest statement like that!

I just can’t see them doing anything but trying to calm the markets’ fears about inflation, while keeping rates “steady Eddie.” You all know that I’m not a fan of the Fed… I just don’t see how an entity, whose main job is to protect the value of our currency, could keep their job, given the fact that the dollar has lost over 90% of its value since they took over! I mean, the Fed is NOT a government agency, folks… It’s supposed to be an independent entity… But now, it’s got its hands in all kinds of things that aren’t on their job description, and they are in cahoots with the U.S. Treasury, and before we know it they will be regulating all the banks and financial institutions… All, from doing such a good job at protecting the value of the dollar! I shake my head in disgust… And I should NOT be the only one doing so!

So… While I’m on my soapbox, ranting at the Fed and the people making the decisions… Big Ben Bernanke is up for reappointment… I think the thing I would like to see from Big Ben before I would reappoint him is for Big Ben to come out and say… “I’m in favor of Ron Paul’s bill to audit the Fed” Now, that would cause me to fall out of my chair from the shock of disbelief!

Speaking of the bill to “audit the Fed,” I believe every voting citizen should contact their representative and let them know you support the bill to “audit the Fed.”

And… While I’m up here on the soapbox, I might as well get this rant off my chest too… I think we’re in for yet another stimulus package… Yesterday, during a press conference the president was asked about that very thing, and his reply was not a resounding “NO”… It was a “not yet.”

Now you know me… I said after the first $150 billion in the spring of 2008, that there would be more… And I said after the $787 billion this past winter, that there would be more… And does a “not yet” from the government that loves to spend money, give you a warm and fuzzy that there won’t be another one? I didn’t think so!

Yesterday, the data cupboard gave us Existing Home Sales data… For the second consecutive month, sales of previously owned homes in the U.S. increased, but the improvement was less than expected, further fueling fears of a slow, weak recovery for the economy as a whole… And the most important thing from the report is that the Home Sales were driven by two things… A drop in home prices… (The median price for an existing home last month was $173,000, down 16.8% from $207,900 in May 2008.) And… The low mortgage rates that existed up until about 3 weeks ago… Mortgage rates have climbed back above 5% (remember when we thought that was a low rate?) and the message that I’m getting is that mortgage lending is drying up once again… Most of the lending had centered on re-fi’s anyway, not home sales.

Hey! Remember earlier this month when the Jobs Jamboree number printed and everyone (except those that knew better because of the BLS) was celebrating? Well… I saw a piece on Reuters last night that caught my attention… Mass layoffs – at least 50 job losses by a single employer – grew to 2,933 last month, from April’s 2,712, the U.S. Labor Department reported. That is practically a tie with March’s figure, which set a record. Hmmm… That certainly paints a different picture of the labor market than the BLS Jobs Jamboree, now doesn’t it?

The data cupboard will also give us the latest readings on durable goods (don’t expect miracles here!) new home sales (no miracles here either!) and then the FOMC… The U.S. Treasury will also be auctioning $37 billion of 5-year Notes today… Good luck!

Down in New Zealand… Consumer confidence surprised to the upside, and is helping to boost the kiwi performance this morning… These are “index” numbers so they probably don’t make much sense on the outside… Just look at them as “better”… New Zealand consumer confidence rose to an 18 month high in second quarter from 96.0 to 106.  Optimism about near-term prospects improved from -57 to -28.

And finally… Gold and silver have taken some tough shots to their respective mid-sections this week… I even said to Chris Gaffney yesterday… “Silver sure is tempting below $14, isn’t it?” I’m reminded of an old saying we use to have on the margin desk in my early years in the brokerage business… Just input the asset and price to make this saying work… For instance, we’ll use silver… “Hey! If you liked silver enough to buy it at $15, you’ll love it at $13.98!”

Of course, I personally don’t expect gold and silver to remain at these bargain basement prices for too long, but then that’s just my opinion, and according to the legal beagles, I have to say that I could be wrong!

The Daily Reckoning