Not Their Job!

Good day… It’s a Tremendous Thursday! Well… I may have jumped the gun last week when I said that it looked like the carry trade was unwinding. Japanese Finance Minister OMI said it had “unwound”… Yen (JPY) had rallied like there was no tomorrow, and the high yielders were getting taken to the woodshed… But a funny thing happened on the way to the “unwinding party”… It got cancelled!

I don’t need no stinkin’ Internet to tell me the carry trade is back on the books. Simply look at how yen has lost ground, and the high yielders – kiwi (NZD), krona (SEK), rand (ZAR), and even Aussie dollars (AUD) – have all rallied once again.

Let me tell you something though… If you have profits in these high yielders and your CD’s are coming due, you might want to take advantage of this latest round of carry trades driving the high yielders higher. This could be the last hurrah… Or… Maybe it isn’t.

Shoot Rudy, as long as the markets know the Fed is their White Knight, why not go back to the well, and say risk aversion be damned! I had better stop there… No wait! I’m not going to stop there… I’ve had to respond to quite a few emails that didn’t like what I said about the Fed the other day. Here’s my response…

The Fed’s job is to keep a lid on inflation, and maintaining an environment for healthy employment – which if they did this, they would be providing to us… Price stability! It is not, and I repeat, not their job to bail out Wall Street, every time they get greedy and overexposed… And with regard to injecting liquidity, my long time friend and colleague, Ed Bonawitz sent me his thoughts…

“When the Fed steps in to pump more money into our leaking system, the problem hasn’t been fixed! Put another way, you break your arm and the doctor gives you a pain killer, you no longer hurt, is your arm all better?”

A long time reader sent me a note last night, and I verified it… There were four major banks that borrowed from the discount window on Friday. They happen to be the top four banks with regards to the amount of derivatives they have on their books. In case you’re keeping score at home, they are: Bank of America, Citi, JPMorgan Chase, and Wachovia. They all borrowed $500 million each, for whatever reason. Probably something symbolic, eh?

So… The currencies have rebounded except the usual funding currencies used for the carry trade – Japanese yen and Swiss francs (CHF). The euro has rallied to the upper reaches of the 1.35 handle… And pound sterling (GBP) is back to “2”. With sterling, the markets have come back to the rate hike talk. The markets sure are fickle aren’t they? Just a week ago, the markets claimed there would be no rat hike, and sterling got sold like funnel cakes at a state fair.

But now? Well… I guess they’ve forgotten that stance! So… Onward and upward for pound sterling, eh?

You know… I never wavered from my thoughts that the euro would be 1.45 and sterling 2.10, when the selling began about 10 days ago… Hmmm, come to think of it, right about the time that I took back the writing of the Pfennig everyday! UGH!

Anyway… What I’m trying to say here, is simply that the fundamentals for the dollar remain awful, and the currencies are the beneficiaries of that scenario… But the currencies had run so hard and so high this spring and early summer, that they needed a “pause for the cause”… And they got it! I told you all not to panic.

OK… Lots of new things happening in the mortgage meltdown so let’s get to them!

On Wednesday, Lehman Brothers Holdings Inc. closed its “subprime” mortgage business, laying off 1,200 workers. The total layoffs for the mortgage sector have now surpassed 40,000! UGH!

And it was reported last night that Bank of America made a $2 billion investment into Countrywide, the largest mortgage company in the United States. If converted to stock, $2 billion would make BOA the largest stockholder of Countrywide… Hmmmm…

Before I go on… I’ve received a ton of emails requesting me to explain EverBank’s position with regard to subprime loans, considering that EverBank is the largest privately held mortgage company in the country. Well… I asked my long time friend, and Big Boss, Frank Trotter this question… NOW PAY ATTENTION… This is important! So with no further adieu… Hereeeeeee’s Frank!

“Many people have asked about EverBank in the context of the happenings in the markets over the past several weeks. I would like to take this opportunity to make a couple of clear statements for customers and market watchers:

“EverBank is a diversified financial services company engaged in retail and commercial banking, investments, and the production and servicing of mortgages. We have a balanced revenue stream that does not depend either solely or substantially on any one line of business. EverBank is in a strong capital and liquidity position. Results through second quarter this year include an ROE of 16%, and a capital raise in June that enhanced our already strongly capitalized position. EverBank does not originate or own sub-prime mortgages. EverBank is rated “Green Three Star” by Veribanc, and “Superior” by IDC. It has been and is the practice of EverBank not to seek additional return by taking on substantial credit risk; we have a conservative portfolio and are proud of the performance history of our high quality assets.”

OK… Back to me! That was great! My thanks to the Big Boss, Frank, for setting he record straight!

Currencies today: A$ .8180, kiwi .7160, C$ .9495, euro 1.3590, sterling 2, Swiss .8290, ISK 64.10, rand 7.23, krone 5.8625, SEK 6.8910, forint 189, zloty 2.8150, koruna 20.4150, yen 116.70, baht 32.50, sing 1.52, HKD 7.8130, INR 41, China 7.5860, pesos 11, Silver $12.05, and Gold… $673

That’s it for today… The HOT weather has returned to St. Louis, it is HOT, HOT, HOT! About as hot as our Albert Pujols, who has hit a home run in five straight games! WOW! Of course I just gave him bad luck probably by mentioning the streak. Well… I’ve got to get going; my little buddy is not getting up so easily for school today. Better get him going before he’s late! Have a Tremendous Thursday!

Chuck Butler
August 23, 2007

The Daily Reckoning