Roller Coaster

Good day… And a Wonderful Wednesday to you! What a crazy ride on the currency roller coaster yesterday! Yes, my arms and legs were in the vehicle at all times, but that didn’t stop me from getting whipped around! Roller Coaster, oohh, oohh, oohh, Roller Coaster of love…

To start the day, we saw retail sales here for December fall a larger than expected amount. Let’s look at the scorecard… Retail sales fell 0.4% overall and 0.4% ex-autos. The weakness was broad-based, with declines in electronics, building materials, gas stations, clothing, sporting goods, and department stores. And to add insult to injury…  Last month’s readings were revised lower!

Then we saw wholesale inflation numbers – as measured (and very badly by the way) by PPI – fall… That’s right, there’s some more garbage that needs to be taken out! The accountants are telling us that there was no pipeline inflation increase in December.

So… This PPI data, and the sluggish retail sales data greases the tracks for an out of meeting rate cut by the Fed. Oh… And not that I win any awards or anything, but I’m certain that you heard about the out-of-meeting rate cut from Pfennig first. The reason I bring that up is that I’m hearing all kinds of people talk about it now. I wonder where they got the idea? Could they be… Nah… I doubt they are all Pfennig Readers!

I was on a Denver radio station yesterday, and I told their audience that I believe the Fed will cut 50 BPS this week at their out-of-meeting rate cut, and then come back to the table at their regularly scheduled event, the last week of the month, and cut 25 BPS then! I heard the collective gasp on their airwaves!

Anyway… All this led to a very strong currency rally, only to see the trap door spring on the rally mid-morning. What were once some lofty levels, soon turned south. I searched and searched for a reason, but there was nothing to be found. So… Turning on my years of experience with currencies, I said… This must be: A.) Profit taking, B.) Technical correction or C.) Selling to get money to pay for margin calls.

Yes, those dreaded margin calls, which must be flying off the desks of margin clerks these days… Stocks sold off 200 points from the get go… And I then looked at the Dow Jones Industrial Average, and in the last two months, it is off about 1,000 points, from 13,500 to 12,500… OUCH!

Did I ever tell you that long ago in a far away galaxy, I worked as a margin clerk, and eventually the margin manager? We used to have to call people when extra margin was needed and I hated those calls. I had a margin clerk that worked for me that once called a dentist, and told him that his account had a huge cavity, and needed to be filled immediately or he’d have to pull it. We all laughed hysterically, but the poor dentist didn’t think it was so funny. Oh well, I digress… That was a very long time ago… I was 100 lbs lighter, had a full head of hair, and thought that job was the cat’s meow!

OK… Back to the present… It’s sounding more and more like President Bush will announce a stimulus package for the economy at his State of The Union address next week. That’s all fine and dandy, but this is all beginning to remind me of Japan, in the ’90s. Their government kept coming up with one stimulus package after another, only to fall deeper into their decade long funk. Could the United States be headed into the same type of funk? I would have to think that the growth engine in the U.S. would keep us from that, but Japan didn’t have the debt that we have going against us, nor did they have the housing and collateralized debt obligation/credit default swaps meltdown, nor were they fighting a war… YIKES!

Adding to that thought… Did you hear about the size of the loss at Citgroup? Almost $10 billion in the fourth quarter! That loss included an $18.1 billion write-down in the value of its investment portfolio… And we all know where those losses came from, don’t we?! The bad news for stockholders of Citgroup was that the dividend was cut 41%… And in a case of who do you believe? The Citigroup bank executives told us not that long ago that the dividend would not be cut!

Once again, a foreign sovereign wealth fund has come to the aid of a U.S. bank. This time $12.5 billion for a cash infusion to Citgroup came from Singapore, and other global investors.

Now… That could be the reason the dollar rallied on Tuesday… But I have to see proof. I am from Missouri, and I have to be shown!

The brokerage that owns a bull, received a cash infusion too. They received $6.6 billion from The Korean Investment Corp., Kuwait Investment Authority, and Mizuho Corporate Bank. Merrill still hasn’t announced their fourth quarter losses/write-downs… But judging from the fact that they announced a cash infusion first, I expect the losses to be huge!

So… I keep coming back to my thoughts on why the euro got sold yesterday leading to other currency weakness across the board. You know… Sometimes you just have to put it down as “noise”, and move on… Because once the dust settles on this week, the world’s investors are going to see that the problems in the United States far outweigh the general weakness in Euroland, and that U.S. interest rates will fall faster than those overseas.

If you remember back to my CNBC debacle on 12/31, I told them just that… Rate in Europe will go down in 2008, but at a delayed and much slower pace than in the United States.

Gold got sold off too yesterday… But shoot Rudy, it has been on such a run… It was just two months ago I was waving the flag of gold going over $800… Now two months later it hits $900? Go Crazy folks… Go Crazy!

For you non-St. Louis crowd folks… That’s a famous line by our deceased by dearly beloved radio announcer for the St. Louis Cardinals, Jack Buck. Ozzie Smith had just hit his first home run left-handed to win a playoff game, and Jack Buck exclaimed… Go Crazy folks… Go Crazy! I sure do miss hearing his voice on the radio.

But it looks like we’re in a profit taking mode for the shiny metal at this point, which is fine, and is what I was getting at above… It moved from $800 to $900 without seeing profit taking. Another thing weighing on gold right now is the lower price of oil.

Oil has really backed off this week due to the prospects of a U.S. recession… But as I’ve said over and over again this dance is gonna be a drag… No wait! As I’ve said over and over again for the past six years… This is simply profit taking and technical stuff, the demand for oil by countries that we never had to bid against before, India and China is still strong… And that should underpin the price of oil.

Today, we see the trumped up consumer price inflation (CPI) data for December. I’m telling you now so you can listen to me later… The government will print a CPI number that shows declining inflation. Trust me on this, they think we all just fell of the turnip truck!

We will also see industrial production and one of my faves, capacity utilization… Neither of which will give the dollar any reason to believe… I almost broke into Rod Stewart there… I must be getting old!

With all this risk being taken out of the markets right now… Everyone loves yen (JPY)! Of course they should also be loving the Swiss franc (CHF), which is heading to parity with the dollar. In my opinion of course… (Don’t want those nasty grams coming my way if Swiss falls short!)

Swissie, by the way, is sailing on uncharted waters versus the dollar these days… That’s right record levels! It’s almost 92-cents this morning! WOW! And the thing I see here is that I don’t believe this new found glory for risk aversion is going to be taken out of the markets any time soon. That’s right… That’s my story and I’m sticking to it!

All this risk aversion isn’t going to help the emerging markets currencies, like South African rand (ZAR), and Icelandic krona (ISK), so look for weakness there. The good news is that the undervalued currencies of yen and francs are finally seeing the light of day!

Speaking of undervalued currencies… The Chinese renminbi (CNY) has started the year in fine fashion, already gaining 1% versus the dollar in the first 15 days of trading this year!

And finally… Standard Chartered PLC is reporting that the Arab Central Banks are considering a “coordinated” revaluation versus the dollar, to help them with their inflation problem, if the dollar continues to weaken. Well, if that’s the case, then I suggest you rev up the revaluation engine and get started!

Currencies today: A$ .8780, kiwi .7690, C$ .9760, euro 1.48, sterling 1.9570, Swiss .9185, ISK 65.11, rand 6.9280, krone 5.3780, SEK 6.3730, forint 172.66, zloty 2.43, koruna 17.61, yen 106, baht 29.72, sing 1.4280, HKD 7.7970, INR 39.27, China 7.2310, pesos 10.97, BRL 1.7520, dollar index 75.64, Oil $90.80, Silver $15.80, and Gold… $882.80

That’s it for today… Maybe the Fed comes in today… Maybe not. If CPI is as trumped up as I believe it will be, then look for the Fed to come in today. Winter has returned to St. Louis… I tell you this… I’m not long for this cold weather; I absolutely dislike it to the bone! It’s a month before I head to Orlando for the World Money Show, which I hope you’ll attend! Isn’t someone having a conference where it’s warm? Come on! Oh well, I’ll just bundle up, grin and bear it. At least I don’t live where it’s really cold, all the time! On that note… I’ll head to work, and hope everyone has a Wonderful Wednesday!

Chuck Butler
January 16, 2008

The Daily Reckoning