Profit Taking Dominates the Day

Good day… And a Terrific Tuesday to you! In keeping with Pfennig tradition, I begin each July with words from one of my fave bands of the ’70 s, Uriah Heep… There I was on a July morning… (I could go on, but you get the point.)

Well, the profit taking that I talked about yesterday continued for most of the morning yesterday, causing the euro (EUR) to fall from the 1.5810 level I saw when I turned on the screens, to the low 1.57 area. It had to be profit taking because why would anyone buy dollars versus euros as a long time investment, with the dynamic duo of the Jobs Jamboree and an ECB rate decision staring the dollar bulls right in the face this week.

The single unit has pushed back higher overnight to 1.5775, as I look at the currency screens. The European Central Bank (ECB) meets on Thursday this week, and although most of the markets’ participants in the United States will be dreaming of barbequed ribs and fireworks, they will stop to see the ECB raise rates. But the most important part will be ECB President Trichet’s press conference following the rate hike. It will be important for Trichet to remain hawkish or else the profit takers will quickly swallow up the rate hike, which means the euro won’t get much love from the higher rates.

Trichet received an arrow for his rate hike quiver this morning as German unemployment for June fell to a 16-year low. This tells me – and should tell you, the barber, and the guy down on the corner selling bakery pretzels – that Germany is resisting the global slowdown so far. Germany is the Eurozone’s largest economy, so this report carries a lot of weight with Trichet and the other ECB ministers. Annual growth in Germany remains above that of the United States, and the employment picture is healthier than here in the U.S., too.

I just saw a new story flash across the screen that sent shivers down my spine. It said, “Israel is ready to strike Iran”. Please, someone tell me that I was dreaming, having a nightmare…

OK… That ought to get oil prices moving higher again. Double UGH!

There’s been a ton of talk, finally, about inflation. I’ve been banging the drum for some time about the rising inflation pressures here in the United States. Now, we have people writing about inflation not being a problem any longer… What? Inflation is nefarious; there’s just no two ways about it! Inflation is an errant sheep-biting dewberry! So…let’s not lose focus on inflation folks.

My friend, David Galland, recently printed a link of Shakespearean insults… As you can tell I used one above! It is comical! And if you’re looking for a way to insult someone and have them scratch their head… See here.

OK… Just in the past 30 minutes the euro has broken higher to 1.58 again. Let’s hope the NY Boys took their all of their profits yesterday and will leave this rally alone! The euro could revisit its previous high of 1.60 again, but I just can’t see it going higher than that, unless all hell breaks loose in the U.S. economy. Then… Who knows how high it could go?

Eli Broad, the billionaire investor, says that the “U.S. economy is in the worst period of his adult life and that a housing market recovery remains several years away.”

I agree… The ’70 s were pretty rotten in my memory, except for the music, (pre-disco)… Even the clothes were pretty bad… But at least as a country we were still a creditor nation, and we as individuals were “savers”. The money and credit creation machines hadn’t even been thought of yet! We were fighting a war… Same as now… Inflation was everywhere… Same as now… There are lots of similarities to that rotten decade, with the deficit problem and credit problem sticking out like sore thumbs as differences.

Japan’s Tankan report, which measures the pulse of the economy, slipped further in the last quarter, but fell less than expected. That’s a good thing for yen (JPY)… And there was some data in the Tankan that indicated the Japanese economy is doing better than the United States. I doubt this does anything to urge the Bank of Japan to move rates higher though… So… In the end… It’s a wash as far as rate expectations.

But, as I said, it’s a good thing for the yen. And once again today, it is trading with a 105 handle. When the profit taking began yesterday, yen was the first to slip… Which shows me that it’s not on terra firma one iota!

Yesterday, the Chicago PMI (manufacturing index) surprised on the upside, but was offset by a weaker Milwaukee performance. Today, we’ll see the ISM, national pulse of manufacturing, which should remain below the line in the sand, 50 number. Below 50 indicates contraction… And that’s where manufacturing has been for months now, which is what initially led me to believe we were in a recession, even though most economists still don’t consider this to be a recession. I still say that when the dust settles and all the cards have been played, the National Board of Economic Research (NBER), the people that decide when we WERE in a recession, will confirm my claims. That’s the sad part of the deal though… The NBER tells us about recessions after we’ve experienced them! Great! That’s sort of like having someone tell you that you have a hatchet in your forehead… No duh!

The Reserve Bank of Australia (RBA) met last night, and left rates unchanged, as most thought they would for now, but did cast a shadow over the Aussie dollar (AUD), when they said that the 17-year economic expansion was showing signs of slowing. Yeah, you think having rates at these high levels for so long has any thing to do with that, RBA? No biggie, as far as I’m concerned though. Australia gets its economic que from China and the rest of Asia… And as long as China continues to post huge economic gains, the Aussie economy will continue to post strong numbers as well. Those strong numbers will keep interest rates high, and the Aussie dollar pointed in the right direction.

Did you see that Brazil announced yesterday that they thought they could double their oil output after discovering a new reserve? I’ve said it before, and I’ll say it again… Brazil seems to have it all going on right now. We’ve seen this type of hype over a country and its economy, etc. before… So, I’ll temper my statements… But, if you’re looking for something that has yield, and feels like a party is going on all the time… That’s Brazil. If that scares you… Then stay away!

Pound sterling (GBP) hit $2 overnight! This is amazing to me! This currency was all but left for dead, after the Bank of England (BOE) said they were beginning a rate cut cycle, and then made the first cut. But things change, and inflation raised its ugly, errant sheep-biting dewberry head, and suddenly the rate cuts were put on hold. Now, the talk is that the BOE might have to come back and reverse that rate cut… And voila! We have pound sterling back to $2! Who would’ve thunk it?

Yesterday… I mentioned that the tax stimulus checks would be taxed next year… And I was wrong. I was not the recipient of a check, or the letter from the IRS that accompanied the check that explained the non-taxation status… So I apologize for that error.

And there is more bad news for the U.S. economy… Yesterday, Chrysler announced that they were going to shut down the mini-van plant in my little river town. That’s a ton of jobs that will be gone…

And speaking of my little river town… Years ago, I was an elected official of that town… And I fought for diversification of our revenues, which at the time was dominated by the Chrysler plant. My town is now ready for this loss of revenue, not that it will like it! But diversification! See… It’s the key not only in your investment portfolio, but with city revenues!

OK… Time to get moving toward the Big Finish… I’m listening to the radio and there’s an ad that says… “This book will show you how SAVERS ARE LOSERS”… What? OMG! When will all this stuff stop? That ad was followed by a guy telling people that even people with “less than good credit” can get a mortgage loan. I thought that had all stopped?

Currencies today 7/1/08: A$ .9570, kiwi .7615, C$ .9855, euro 1.58, sterling 1.9975, Swiss .9850, ISK 79.63, rand 7.90, krone 5.0625, SEK 5.9830, forint 149.15, zloty 2.1275, koruna 15.11, yen 105.35, baht 33.49, sing 1.3590, HKD 7.7980, INR 43.29, China 6.8562, pesos 10.33, BRL 1.6025, dollar index 72.18, Oil $142.40, Silver $17.54, and Gold… $930.72

That’s it for today… Don’t forget all, you Rocky Mountain people; I’ll be on the KRCN Denver radio show at 8:20 CT this morning. It’s only 5 minutes, but I’ll try my best to get all my biggest points across. Let’s see, Fed bashing, Fed bashing and Fed bashing… That should do it! HA! I got home late yesterday afternoon, sat down in my recliner, fell asleep and didn’t wake up till it was bed time! I guess the meds are kicking in now… Oh boy! Can’t wait for the Olympics this year… I really enjoy those competitions. I hear that China is trying to remove the smog before the Olympics begin, by only letting people drive their cars on alternate days. Oh well… The organizers should have thought of that before they picked China! So… Welcome to July! I hope you have a Terrific Tuesday!

Chuck Butler
July 1, 2008

The Daily Reckoning