Tell It Like It Is

Good day… And a Tremendous Thursday to you! Well… I hit the wall yesterday. The mother hens at the office kept telling me I was working too long, and they finally were proven correct. I went home and slept… The body is a wonderful thing, in that it tells you when to rest… You just need to listen!

OK… While I was bailing on everyone here yesterday, the currencies were coming back strong… Let me take you back to yesterday morning, after I hit the send button and drove to work, the euro (EUR) came ever so close to losing the 1.47 handle… Housing starts pumped life into the euro, and then… Fed Head Kohn let the horse out of the barn.

Let’s start with the latest snapshot of the housing meltdown… Existing home sales in October fell 1.2% to an annualized 4.97 million units. The fall was greater than what was expected, and points to more rot on the housing vine. Oh, and September’s negative 8% drop was revised even further downward.

So, after this print, we had the currencies inching back… But then the horse and the barn come into play. After listening to two Fed Heads on Tuesday tell us interest rates were fine, and all was well… Fed Head Kohn spoke and went against the company line… I call this… Telling it like it is!

Federal Reserve Vice Chairman Donald Kohn said market “turbulence” may reduce credit to businesses and consumers, reinforcing investors’ expectations that the central bank will cut interest rates again next month.

“The degree of deterioration that has happened over the last couple of weeks is not something that I personally anticipated,” Kohn said in response to a question following a speech to the Council on Foreign Relations in New York. “We are going to have to take a look at” the stress in credit markets “when we meet in a couple of weeks,” he said.

Then… To follow that bomb shell by Kohn… The Fed’s Beige Book printed… And here’s where I get to pound my chest and say… “See! I told you so!”

The Beige Book (for once) had a more pessimistic assessment of the economy… At least compared to their previous assessments! They “deduced” that the economy continued to expand but at a slower rate. The report painted a bleak picture for retail sales, and the Christmas shopping season.

After Kohn… And the Beige Book… The markets quickly came to the thought that interest are going lower, despite the Two Fed Heads on Tuesday. And… The Fed will cut rates on December 11th. Nothing’s new from my viewpoint… I said three months ago that the Fed would cut three times this year… And three times next year. Now… I’ll say that the next three meetings will see a rate cut from the Fed.

So… Coming 180 degrees in the circle, the euro and other currencies that had seen selling earlier, were back to the levels from the day before… A one day blue light special if you will! Except for the funding currencies of the carry trade.

Completing the circle, the euro fell back to below 1.48 in the Asian trading session, as all this hoopla regarding rate cuts in the United States and stocks dancing in the streets have foreign investors all lathered up to buy dollar assets again. Not bonds… Stocks…

I could really get on my soap box and rail here regarding this latest scenario, but it makes no difference if I do or not… I yell at the walls, and no one listens… I throw things, and no one listens… But I will say this to get your juices flowing… These stock people are a little bit on the strange side to get all lathered up by a rate cuts. I mean, don’t they see the Big Picture? The central bank is cutting rates because there is an economic SLOW DOWN, which means corporate profits will suffer… But, don’t let that fundamental idea get in the way of a stock rally, eh?

Yes, with the rate cut expectations back on the table, the risk takers were back on top of the world, which means yen (JPY) and francs (CHF) are sold, while the high yielders win back some lost ground. I know… We’ve had three trading days this week, and we’ve had two days of carry trades being taken off and one day of carry trades being put back on… Back and forth.

Pound sterling (GBP) touched 2.08 yesterday, first time that’s happened in a while. Since hitting 2.10 about a month ago, pound sterling has seen some tough days… And with interest rates most likely heading lower here, that made some sense… But now, we’re all the way back to 2.08. Like I said a couple of weeks ago, when sterling first started to sell off because of a rate outlook… Just because the Bank of England cuts rates, doesn’t mean sterling loses its positive rate differential to the dollar.

In Germany this morning, German unemployment fell to the lowest level in 14 years this month. For those of you keeping score at home, that marks 22 months of declines for unemployment in the Eurozone’s largest economy.

Oh, and this little ditty… Bank of America says the euro will never be the next world’s reserve currency. Well, I hate to argue… No. Wait. I love to argue… but I have a memo to send to BOA… Dear Bank of America, I hate to be the one to tell you this, but you aren’t even close to be in charge of this decision… This decision will be made by the likes of China, or the oil producing countries. If they decide the euro will be the reserve currency, it will be… No ifs, ands, or buts…

I’ll step down from the soap box now…

Here’s some more rot on the housing/mortgage meltdown. U.S. foreclosures nearly doubled in October from the same month last year. A total of 224,451 foreclosure filings were reported in October, up 94% in a year… And up 2% from September’s figure that we all thought was already bad enough, 223,538.

But don’t let something like this get in the way of a stock rally, eh? Don’t go there, Chuck… Stay calm… And just hit the return key to start a new thought.

Whew! That was a close one! I almost went off on a tangent there, but I’m back!

I’ve noticed lately when putting in the currency levels on the currency round up that India’s rupee (INR) has been getting soft… So… I did some research last night… And it looks like the economy has paid attention to the rate hikes by the central bank, and has begun to slow down. The third quarter growth was 8.7% (still pretty darn good, eh?), which was down from the previous quarter’s gain of 9.3%.

So, if this trend continues, one would think that the Indian Central Bank’s rate hike cycle had come to an end, which will shake some speculators out of the currency, thus softening the rupee. I’m would be very surprised to see it get much softer though… Just a thought from my view in the cheap seats. Now… Onto the Big Finish!

Currencies today: A$ .8940, kiwi .7720, C$ 1.0165, euro 1.4740, sterling 2.0625, Swiss .8940, ISK 61.50, rand 6.8920, krone 5.4930, SEK 6.3650, forint 172.83, zloty 2.4725, koruna 17.96, yen 110, baht 30.80, sing 1.4490, HKD 7.7880, INR 39.79, China 7.3815, pesos 10.95, BRL 1.79, dollar index 75.56, Oil $94.44, Silver $14.63, and Gold… $813.80

That’s it for today… Pretty strange day yesterday… One could have easily been whipsawed if they were a “trader”, and not long term diversification investors like us! My taste buds went into hibernation yesterday right at lunch… It was weird, I could taste my breakfast, but not my lunch… So here we go, I have 10 more days in this phase of the cancer medicine to go, these are the toughest days… I’m beginning to see the Christmas decorations going up around the neighborhood, everything looks so cool this time of year… So… It’s time to head to work, hopefully the people there aren’t too mad at me for bailing on them yesterday… Have a Tremendous Thursday!

Chuck Butler
November 29, 2007

The Daily Reckoning