The Dollar "Trading Theme" Returns

Good day… And a Happy Friday to one and all! I’m going to go out on a limb and say it will be a Fantastico Friday! I don’t know why, it’s cold and rainy here, and we’re supposed to get snow tonight… But Shoot, Rudy, why not? Every day is a blessing, and Fridays are special! At least in my book!

Well… Chris left me a note last night about the day’s happenings, as I was “out of touch” all day. So… I guess it would be best to let Chris give us the recap on yesterday, eh? Here’s Chris…

“The big news on the day was the durable goods orders, which came in even worse than expected. The dollar had lost ground versus most of the currencies up until the durable goods number came in. The bad data for the United States sent the dollar back up as investors headed back to the ‘safe haven’ of U.S. Treasuries. Initial jobless claims also came in well above expectations with continuing claims climbing over 5 million for the first time ever. Continuing claims have only climbed above 4.5 million twice since the data has been recorded. They hit 4.6 million in May of 1975 and again in October of 1982. These peaks were very short lived as they came at the height of these two recessions. The problem with today’s numbers is that we are still at the beginning stages of our recession and the jobs numbers look to only get worse.

“The new home sales data also continued to disappoint with the month on month number dropping 10.2%. According to White House National Economic Council Director Lawrence Summers, ‘The US is caught in a vicious cycle where economic and financial weaknesses are feeding on each other’. Obama’s first budget request anticipates that the government will run a deficit totaling $1.75 trillion in the fiscal year ending Sept 30. This is equivalent to 12 % of GDP (assuming we don’t have a further dramatic drop in GDP or an increase in deficit spending, both of which are likely). The administration is only projecting a drop of 1.2% for the U.S. economy this year, followed by growth of 3.2% in 2010. Sounds like a pretty rosy picture given the recent economic data!! Obama’s predictions are much more optimistic than those of most economists’ who are predicting a 2% contraction this year and growth of 1.8% in 2010. Tomorrow we will see just how realistic these optimistic growth predictions are, with the release of fourth quarter GDP along with several other pieces of data.

“I’m putting my money on worse-than-expected growth, and higher-than-anticipated deficits and unemployment for the next two years. Some may call me a bear, but I prefer the word ‘realist’.”

Thanks to Chris for getting my Friday going for me!

Yes, it certainly sounded as though the trading theme that had a tight grip on the currencies in the last quarter of 2008 certainly had a hand in yesterday’s move, eh? The data in the United States was awful, absolutely awful… And whenever it looks the darkest, and most dangerous in the United States, the flight to safety (read Treasuries) kicks into gear, and the dollar rallies…

Big news this morning from Europe, as The World Bank, the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) announced that they would provide $24.5 billion euros ($31 billion dollars worth) to help the European banks and businesses cope with the global financial meltdown.

Let me recap this for you, in case you missed class the week that I discussed it every day… East European nations are struggling to refinance loans that have gone bad on them, and in today’s world of a credit crisis, there’s no chance that they can get the refinancing done, and that word spread through Europe two weeks ago, inflicting major pain on the euro (EUR).

While $24.5 billion euros sounds like a lot… I’m afraid it is but a drop in a bucket to what will be needed in the end. But… It’s a start! And you’ve got to start somewhere, eh?

The news hasn’t helped the euro though, as the single unit remains offered… But then, the U.S. investors haven’t wiped the sleep out of their eyes yet… Maybe after they see the news, the euro can catch a bird in its sails… Maybe…

My long-time colleague and friend, Ed Bonawitz, sent me a link to a story that was originally printed in the Wall Street Journal regarding Citigroup. It seems there are some problems, and not little ones, that would kick in if the U.S. government does go ahead and take a 40% stake in the bank.

The problems center around the fact that Citi is in 100 countries… And… With a 40% stake in Citi taken by the government it could kick in some “fallout” around the world. For instance… let’s consider Citi’s stake in Banamex – Mexico’s 2nd largest bank by assets. According to a Mexican law, any institution that is more than 10%-owned by a foreign government cannot run a bank in the country. This has sparked concerns that Citi may be required to curtail some or all of its stake in the bank, a unit which has been called “a crown jewel” of Citi’s operations.

Now… Multiply those problems times 100…

In a “sign of the times”… Denver’s Rocky Mountain News will publish its final edition today, and the Hearst Corp. said that it might close the San Francisco Chronicle unless it can quickly slash costs. Four newspaper owners have filed for bankruptcy protection since December: Tribune Co., owner of the Chicago Tribune and the Los Angeles Times; the closely held Star Tribune paper in Minneapolis; the parent company of the Philadelphia Inquirer and the Philadelphia Daily News; and New Haven Register owner Journal Register Co. And finally, last week I told the boys and girls on the desk that a Sunday edition of the NY Times was now worth more than the stock of the company… At least that’s what I read!

Speaking of newspapers… I had a nice interview with the Pittsburgh-Post Gazette on Wednesday afternoon. The writer wanted to know why there was a sudden mass move to buy gold… Well… That’s like throwing me a slightly arched softball when I was younger… You would find in the next field after I was finished taking my swing at it!

But… I told him a lot of stuff… Things that I tell you all the time… But the writer was especially interested in the thought that gold no longer has competition from deposit rates. Since countries all over the world are lowering interest rates – albeit, some faster than others – deposit rates are pretty darn low… And with gold being a non-interest bearing investment, the deposit rates no longer hold a hammer over the shiny metal!

And… As I look at the screens this morning, and see gold trading at $946, I think to myself… Well! That’s a $50 discount to earlier this week! But… Now it seems a chartist believes that gold has put in a double top, and is set to retrace 50% of its gain since October, which would take it back to $850. I tell you this, so you know what the chartist believes he sees right now… But me? Hmmm… I guess it could happen, anything can happen these days. But… And there should be a drum roll here… If that should happen, gold will have formed a stronger base at $850 to slingshot it back to $1,000 and beyond… That’s my story and I’m sticking to it!

So… After looking at the screens for the gold price, I noticed that collateral damage across the board, which the trading theme caused yesterday by pushing the dollar higher. It would be difficult to find a currency that gained versus the dollar yesterday.

It’s awful looking out there, folks… Shoot, Rudy, even Mexican pesos (MXN) are trading with an ugly looking 15 handle! And Japanese yen (JPY) – which we used to be able to count on every day to be the Lone Ranger versus the dollar – is now on the back side of their rally days. And Chinese renminbi (CNY)? Stuck in the mud… There’s no better way to describe what’s going on with renminbi.

Well… The data cupboard, which wasn’t so kind to the U.S. economy yesterday, yields more bad news today, I’m afraid. We’ll see the latest revision to fourth quarter 2008 GDP, which is supposed to take us to -5.4% from -3.8%. I said all along that fourth quarter GDP would be -5%, so maybe this one gets us there, and I can pat myself on the back… HA! We’ll also see The Chicago Purchasing Manager’s Index (manufacturing), and the U. of Michigan Consumer Confidence.

So… If the trading theme comes back into play today, we’ll head into the weekend with the dollar swinging a mighty hammer once again. No currencies will want to step in front of that dollar bus.

It’s the end of February, and if you are a long time Pfennig reader you know that I get all physced out about March. As March brings about my annual trek to Florida for spring training (and warmth, of course)… This year, instead of going and coming back for a day or two, I’m going to remain in Florida from March 11th to April 1st. I’ll be speaking at the Investment U. conference at the end of the month in St. Petersburg, but other than that, I’ll be in and around Jupiter… And no… I’m not going to Jupiter to get more stupider! HA! So, now I just have to get through 11 more days, of this freaky weather here in St. Louis!

Currencies today 2/27/09: A$ .6440, kiwi .5025, C$ .7935, euro 1.2660, sterling 1.42, Swiss .8515, rand 9.9220, krone 7, SEK 9.04, forint 235.40, zloty 3.70, koruna 22.14, yen 97.60, sing 1.5470, HKD 7.7540, INR 51.10, China 6.84, pesos 15.07, BRL 2.3450, dollar index 88.26, Oil $44.26, Silver $13.21, and Gold… $948.40

That’s it for today… I spent another eventful day at the Siteman Cancer Center yesterday. At one point in the day, I actually thought that I would get to leave there without them inflicting pain on my eye for once… But, I was mistaken… Badly! OUCH! Wednesday, I had lunch with my oldest friend in the world. Robin and I have been friends since kindergarten. He’s a successful lawyer, helping people. Not the kind that people usually despise! Tomorrow is my older sister’s birthday… Happy Birthday, Barb! Barbara just began reading the Pfennig about 3 or 4 months ago. In fact, all my sisters now at least receive it. They always wondered what the heck I did for a living! Now, I need to convert my two brothers! A big win for the Blues last night, as they move within 3 points of the playoffs. And how about those loveable Missouri Tigers? A BIG win on Wednesday night. Next up for the Tigers is BIG BAD Kansas… That will be a tough one on the road. OK… I hope everyone gets to enjoy this Friday and the weekend… Get out and have a Fantastico Friday!

The Daily Reckoning