NFPS Disappoints Big Time!

Good day. And a Happy Friday to one and all! A Father’s Day weekend to boot! I’ll have more thoughts on Dad’s Day later. For now, we need to touch on the poor showing in the NFSP and industrial production. In addition, we’ve got comments from Big Ben Bernanke to review. Sounds like a fun filled Friday Pfennig!

Front and center, I’ll tell you that the currencies have recovered a bit, but we’re still range trading. I really can’t believe the dollar bears didn’t hit the streets with everything they had when the Net Foreign Security Purchases (NFSP) for April printed yesterday. The NFSP came in at a measly $47.6 billion. Ouch! That should have left a big mark! This attraction of foreign investment is far below the $60-70 billion that is needed to finance the current account deficit and foreign direct investment flows.

The thing that really rings a loud bell for me in this data is the fact that there was a renewed reliance on foreign central banks to finance the deficit. Individual investor interest in equities disappeared! Uh-Oh, Spaghetti O’s! This data was so dollar negative, and yet, all we saw was about a 1/2-cent gain by the euro.

Not only were aggregate capital inflows inadequate to cover the recent trend in the current account, I’m seriously worried about next month’s data. Recall that in April (where the NFSP data was taken) the S&P 500 was still positive on the year. In May, it fell by a huge margin, thus could it be that in May the foreign equity investors that were left were scared away?

Even Big Ben Bernanke decided to talk about the NFSP in a round about way, and the dollar bears still sat on their hands. Big Ben said, “Current level of borrowing to finance U.S. Current Account Gap cannot continue indefinitely.” No Duh!

Let me repeat something that I tell all the audiences that have the heart to sit and listen to me for 40 minutes at a time (poor souls!): This goes back to the crowd that continues to tell investors that “Deficits Don’t Matter.” Well, to date, it may not have mattered unless you count the loss of purchasing power in the dollar over the last 35 years. However, (and I heard my friend John Mauldin use this line, so I borrowed it from him) the “Deficits Don’t Matter” crowd remind me of a man that jumps from the top of the Empire State Building, as he flies past the 52nd floor, he says, “So far, so good!”

U.S. industrial production data for May, printed at -0.1%, and capacity utilization slipped, too. I think these are very good indicators that economic growth in the second half of this year is going too slow. And if the economy begins to teeter, how will foreign investors look at investing here then?

Big Ben Bernanke brought some “afternoon delight” to the stock markets yesterday with his watered-down comments on inflation. These were not the same tough words that come from his mouth last month. Don’t tell me, we’ve got a wishy-washy Fed Chairman? Geez, Louise, I don’t envy the position that Big Ben is in, with what Big Al Greenspan left him. But, where’s that Paul Volcker fist-pounding constant message?

OH, don’t get me started! Hey, this was great, I had a long-time reader send me a note yesterday, wondering why I didn’t use a song to describe the fact that “Mr. Yen” had the same thought process regarding Japanese yen that I do. She said, “Me and Mr. Yen, Mr. Yen, we’ve got a thing…Going on. We both know that it’s right, and yen will be out of sight!” HAHAHAHA! Great stuff!

OK. Sorry, when a reader takes that much time to send me something that brings a smile to my face, I’ve got to talk about it!

Today, we’ll see the first quarter current account deficit. How timely is that? Yesterday, we saw data on the financing of this deficit! Maybe this is what the dollar bears are waiting for – to get confirmation of the rot on the vine.

We’ll also see the University of Michigan consumer confidence for the first two weeks of June. For some reason unbeknownst to me, this data seems to catch the market’s attention. So, we have to watch for it and carry on.

Did you see the news story on China yesterday? It seems that the Chinese government is going to make another run at slowing the economy. This reminds me of Japan in the 90’s. It is the Mirror Image, of course, but just as Japan brought stimulus package after stimulus package to spur their economy with no result, China continues to try and curb growth using money supply and lending limits. So far, no luck! And for renminbi investors, let’s hope it doesn’t gain any traction! You want to see economic growth continue to put pressure on the Chinese government to relax controls on the renminbi to allow it the chance to help in the fight against inflation that came as a result of all the growth!

Gold came back a bit yesterday, rising $14 throughout the day, and another $5.52 overnight. That’s not even half of the $41 loss it took in one day last week, but it’s a step in the right direction for sure! It certainly looks as though the selling of commodities has ended, and maybe…just maybe – you never know -commodities can get back on the rally tracks!

Currencies today: A$ .7430, kiwi .6235, C$ .8980, euro 1.2665, sterling 1.8550, Swiss .8980, ISK 74.92, rand 6.88, krone 6.20, forint 214.55, zloty 3.20, koruna 22.40, yen 114.80, baht 38.33, sing 1.5880, INR 45.87, China 8.002, pesos 11.37, dollar index 85.74, silver $10.33, and gold $582.12

That’s it for today. I spent the whole day yesterday in meetings off the desk, so I had some catching up to do last night and this morning! Friday is Father’s Day. If you’re lucky enough to still have your father to hug, please do so! I wish I still had mine to hug! But it’s a happy day, as my children will be there to help celebrate. The kids, smoking barbeque pit, and a cold beverage will make my day! Hope your Father’s Day is grand! Have a great Friday and Father’s Day weekend!

Chuck Butler
June 16, 2006

The Daily Reckoning