Stop Your Whining!

Good day… And a Terrific Tuesday to you! Well… The Fed out-of-meeting rate cut didn’t materialize yesterday, and so, as the morning went along, so did the 1.49 level in euros (EUR)… But don’t fret! Euros only fell back to 1.4865 on the day. And let’s be clear about this… 1.4865 is a long way from the levels it was heading last week!

Chris Gaffney told me yesterday, after reading the Pfennig that he had heard on the radio show “squawk box” that the Fed would probably wait until Wednesday or Thursday. Shoot Rudy, if people are scheduling their out of meeting rate cut, where’s the surprise?  The Fed Heads oughtta just go ahead set ’em and forget ’em!

And… I know I “see things” sometimes at the early hour of the morning (some say middle of the night!) that I write the Pfennig, but I know I saw the economic calendar list December retail sales to print yesterday. But later in the morning, when I dug myself out of a hole, I looked to see what damage was done, and lo and behold, the calendar said that December retail sales would print on Tuesday. UGH! There I was all lathered up, with my fancy green checked shirt that all the girls like, only to be stood up! UGH!

Did you see where IBM is projecting profits to be up and that led to a stock market rally yesterday? Well… I thought to myself, “This doesn’t sound right to me.” But would the media ever stop to ask these questions? Heck no! It’s a “feel good story”; let’s run with it! But after further review, the play as called on the field is being reversed! Well… Not really, but I couldn’t pass that up! What I’m trying to get at is this… IBM’s profits were goosed by the currency moves of its global sales. If you take out the currency component, IBM’s sales increased 4%, not the 10% for revenues expected.

So… Even big old IBM, can make some money in the currency markets!

Actually, I don’t know why I just went through all that… I doubt anyone even cares that I did that sleuth work!

Did anyone else hear the whining coming from Europe yesterday? I did! France’s European Affairs Minister (I wonder if he handled Sarkozy’s deal?), Jouyet, was whining that “they can’t live with a euro at this level with three other currencies which are weak.”

But Mr. Jouyet’s words were shot down by ECB officials, and then his whining was erased by hawkish words threatening action if inflation pressures persist. HA! I’ll see your whining and raise you a rate hike!

I really was very busy yesterday, and didn’t get out of the office until almost seven last night. My beautiful bride, reminded me with a gentle… SO MUCH FOR SLOWING DOWN! OK, it was just a crazy day. I’ll make up for it the rest of the week! But the reason I tell you this isn’t for sympathy. Well maybe… But not much… But to tell you why today’s Pfennig is short-n-sweet… Because I didn’t have time to do any research yesterday!

Anyway… retail sales is the Big Kahuna today, and as I told you yesterday, it’s expected to be disappointing. I’m still trying to figure out how the BHI (Butler Household Index) is off this month, as I saw tons of shopping bags, and deliveries coming in the front door.

There was another writer drinking the Kool-Aid yesterday on Reuters. The writer believes, that the dollar will recover in 2008, driven by a recovery in the economy. OK… I don’t get it… What part of Big Ben’s speech last week didn’t get understood? Big Ben gave the markets the wink and nod that rates are getting cut big time going forward, because the economy is such a mess. Well, if you think the economy is going to turn on a dime once we cut rates, you’ve got another thing coming!

It’s going to take most of this year, at least, to dress the wounds and let them heal from the slashing the economy took from the subprime, and subsequent collateralized debt obligations, and collateralized debt swaps meltdown. We’ll see it this week, just how deep the cuts are, so be prepared for a “slasher” movie if you will.

My friend, John Mauldin, in his weekly, “Out Of The Box” newsletter printed an article from Bill Gross, the “bond king” from PIMCO yesterday. Let’s see what Bill Gross has to say about what he calls a Pyramid Scheme. This is just an excerpt, but it ties in to my thought on the slashing the economy will take. Here’s Bill Gross…

“While the exact amount of reserves supporting the Bank of Shadows is undeterminable, let’s go back to the $45 trillion BIS estimate of outstanding CDS for more insight. If total investment grade and junk bond defaults approach historical norms of 1¼% in 2008 (Moody’s and S&P forecast something close) then $500 billion of these default contracts will be triggered resulting in losses of $250 billion or more to the “protection selling” party once recoveries are inserted into the equation. To put that number in perspective, many street estimates ascribe similar losses to subprime mortgages, a derivative category substantially distinct from CDS insurance. Of course, “buyers of protection” will be on the other “winning” side, but the point is that as capital gains and capital losses slosh from one side of the shadow system’s boat to the other, casualties and shipwrecks are the inevitable consequence. Goldman Sachs wins? Fine, but the losers in many cases will not be back for a return match. Much like casinos depend upon a constant stream of willing gamblers believing that this is their day, so too does Wall Street. But a trillion dollars of SIVs with their asset-backed commercial paper may be a dinosaur relic of yesterday’s shadow system. They will likely not be back. And the New Century mortgage originators? The Bear Stearns hedge funds? The chastened Freddie Macs and Fannie Maes, and all of the banks and investment banks requiring fresh capital through the sale of stock? They’ll be back but not in risk taking, fighting form. Throw in an embarrassed regulatory network consisting of the Fed and Congressional watchdogs asleep at their post, but are now more than willing to display their prowess, and you have a recipe for credit contraction, a run on the shadow banking system that would give Mr. Stewart shivers aplenty. The unfairly “Ben Stein pilloried” Jan Hatzius of Goldman Sachs estimates that mortgage related losses of $200-400 billion alone might lead to a pullback of $2 trillion of aggregate lending. Even if this occurs gradually, he writes, “The drag on economic activity could be substantial.” Add to that my $250 billion loss estimate from CDS, as well as prospective losses in commercial real estate and credit cards in 2008 and you have a recipe for a contraction in credit leading to a recession.”

(To read the entire piece, click here.)

OK… Not so short-n-sweet after all… But then if it wasn’t for Bill Gross… Anyway, the part gets started today with retail sales for December… Are you ready? Yes, I’m ready…

Before we head to the Big Finish, German investor confidence just printed and the results are not the stuff to wave flags over. German investor confidence fell to its lowest level in 15 years, according to the think tank ZEW. This data has caused a bit of selling in the euro this morning… Not too much at this time… But some. The markets are holding breath waiting for retail sales in the United States later.

Currencies today: A$.8998, kiwi .7895, C$ .9835, euro 1.4860, sterling 1.9650, Swiss .9160, ISK 63.90, rand 6.7430, krone 5.2750, SEK 6.4150, forint 170.53, zloty 2.40, koruna 17.39, Yen 107.50, baht 29.76, sing 1.4280, HKD 7.7970, INR 39.27, China 7.24, pesos 10.90, BRL 1.7320, dollar index 75.56, Oil $93.61, Silver $16.49, and Gold… $907.70 (we saw some profit taking in gold yesterday, and why not?!)

That’s it for today… An absolutely crazy day on the trading desk yesterday; I don’t think I’ve ever seen anything that compares to that! The people on the desk were great! No matter how many calls backed up in the queue, we handled them all professionally… Good show! Now, we have people out off the desk for the remainder of the week, this is going to be interesting! So, if you call, and you’re on hold, please be patient and ready with your customer number when we get to you. Time to go… The more I try, the behinder, I get it seems! I hope you have a Terrific Tuesday!

Chuck Butler
January 15, 2008