The Time to Buy is Now

Good day… Wow! The dollar continued to trade off against just about everything yesterday. We hit new highs on the euro (EUR), pound sterling (GBP), and Chinese renminbi (CNY) while both the New Zealand (NZD) and Australian dollars (AUD) traded at 20- and 16-year highs respectively. The currency markets continue to come around to our way of thinking; and even Fed Head Bernanke seems to be starting to come back to reality.

But one of the problems with the currencies hitting new highs is that investors never want to buy something that is at its top. I have spoken to several investors who have called into the desk with questions on what they should be buying. When I give them my opinion that the euro, pound, Aussie dollar, and Canadian dollar all look good, they come back with, “But those currencies are trading at their highs, shouldn’t we wait for a pull back?”. Sure, you can wait, but for how long? The first business card I ever had was for a commercial real estate firm where I worked during college. On the back side of the card was a picture of a very old man with the saying, “A young man who waited for the price of real estate to come down”. We look at the fundamentals of the economies, and suggest currencies that continue to have positive fundamentals and good long-term trends.

The trends right now are with the currencies and against the U.S. dollar! You can’t deny it. Just pull up charts of any of these currencies and you will see that the trend is still in place. There is plenty more appreciation left in these investments. And the fundamentals, which we feel are much more important than the charts, still support further dollar weakness. Sure, the pound sterling is at $2.05, the euro has traded up to $1.38, and the Aussie dollar is close to $0.90, but the central banks of these countries remain vigilant against the threat of further inflation. Interest rates in these countries will continue to move up, while rates in the United States will stay unchanged. These currencies still have a way to go.

I wish Chuck was here on the desk to witness this tremendous move in the currencies. He always gets everyone pumped up as the currencies hit new highs. But he is certainly keeping track of the markets from his easy chair and forwarded me the following last night:

“Did you see that June housing permits plummeted to a new cyclical low of 1406K, a new low since 1997, taking the year on year rate down to -25.2%? While I was reading this data report I began singing an old Chubby Checker song…

Jack be limbo, Jack be quick
Jack go under limbo stick
All around the limbo clock
Hey, let’s do the limbo rock

“Asking the question… How low can housing go?

“Then – after my recollections of doing the limbo as a kid to that song began to fade – I read this… ‘A slowdown in the U.S. housing market and losses in mortgage-linked bonds will lead the Federal Reserve to cut interest rates, said Paul McCulley, a bond fund manager at Pacific Investment Management Co.

“‘”The recession we have in the housing market is going to be a very long, protracted affair,” McCulley said in an interview from Pimco’s office in Newport Beach, California. “That’s going to lead the average consumer to recognize that he needs to save more out of current income, which is going to weaken consumption in the economy.”‘

“Of course, that’s not what the Fed Heads keep telling us. But you may recall some time ago, I used the comparison of a dog not smelling his mess, to the Fed not smelling their mess! And the more they open their collective mouths… They prove me sooooooooo right!

“Under the Heading of ‘What’s He Smoking Now?’ comes this story that came across my lap top yesterday… ‘Core inflation should edge down a bit over the next year and a half, as inflation expectations remain contained, energy prices flatten out and pressures from the labor and product market diminish, Federal Reserve board chairman Ben Bernanke said Wednesday.’

“Big Ben… Attempting to keep us ‘feeling good’ while the walls come tumbling down, crumbling, down…”

Yes, Mr. Bernanke is trying to calm the markets and explain away the inflation threats while minimizing the effects of the housing slowdown. But some of his words in testimony suggest he may be slowly coming back to reality. In delivering his semiannual report to Congress yesterday, he presented trimmed forecasts for growth this year and next because of the prolonged housing recession. At the same time, he said the “predominant” concern is that inflation won’t recede as forecast. Just what we have been saying for the past few months!!

The problem is that the Fed can’t do anything to combat either of these problems. They are going to have to just sit on the sidelines and let the U.S. economy steer itself. I feel Bernanke knows this, and is just trying to put as positive a spin as possible on the current situation. He continues to try and convince the markets that the economy is “right where he wants it” instead of “out of control and there is nothing we can do about it”. Hey, the stock jockeys sure seem convinced by his feel-good attitude; maybe a strong equity market will pull us through (not!!).

Yesterday’s data confirms our opinions on the U.S. economy. CPI showed that inflation is creeping up, while the housing numbers showed further weakness. Today we will see the weekly jobs data along with the leading indicators and Philly Fed index. The real market mover out of these three is the index of leading U.S. economic indicators. These indicators will likely show a drop of 0.1% in June after last month’s 0.3% increase. This index points to the direction of the economy over the next three to six months. The index has been down in three of the first five months of the year. The Fed yesterday predicted that the economy would grow 2.25% to 2.5% in the fourth quarter, down from a range of 2.5% to 3% issued in February. Look for these estimates to continue to fall as the Fed comes back from fairytale land.

Growth in China sure isn’t slowing. China’s economy grew the fastest pace in 12 years in the second quarter and inflation surged, prompting speculation that the government will raise interest rates and push the currency higher to cool growth. GDP expanded 11.9% from a year earlier, exceeding all estimates. Inflation climbed to 4.4% in June, the fastest since September 2004, breaching the central bank’s 3% target for a fourth month. The Chinese will have to allow an acceleration in the appreciation of the renminbi in order to combat the combination of rising inflation and double digit growth. Glenn Maguire, chief Asian economist at Societe Generale SA, believes the Chinese will make a dramatic revaluation; “The prospect of a one-off revaluation, which the market hasn’t factored in, is quite possible. They may move 2.5 to 3.5% overnight, rather than persisting with this gradualist appreciation.” But I don’t agree with Mr. Maguire. In my opinion, the Chinese government will continue with a steady appreciation of the renminbi instead of hitting the markets with an overnight jump. I do believe the appreciation will be allowed to accelerate slightly, but they want to give their economy time to adjust instead of shocking the exporters with a sudden move.

This double-digit growth in China continues to support the commodity markets and the currencies of those who supply these raw materials. New Zealand, Australia, and even Canada have positioned themselves as important suppliers to China. These currencies will continue to perform well as demand stays high.

The kiwi is also being helped by some of the highest interest rates in the developed world, and recent reports show these rates aren’t likely to move down for some time. New Zealand consumer spending on debit, credit and store cards increased in June, signaling these record-high interest rates aren’t curbing domestic demand. Reserve Bank Governor Alan Bollard may have to raise rates again next week to cool this consumer demand. Most economists surveyed by Bloomberg news now expect a quarter point increase next week. Look for even more strength in the kiwi.

Currencies today: A$ .8791, kiwi .7933, C$ .9577, euro 1.3817, sterling 2.0486, Swiss .8331, ISK 59.39, rand 6.8740, krone 5.7174, SEK 6.6421, forint 177.82, zloty 2.7156, koruna 20.4606, yen 122.05, sing 1.5128, HKD 7.8205, INR 40.3475, China 7.5635, pesos 10.7111, dollar index 80.36, Silver $13.28, and Gold… $673.47

That’s it for today… The Cardinals finally pulled one out last night, but continue to just limp along. I am going over to visit Chuck tonight and I’m bringing his favorite pizza! It will just be the two of us, as his son Alex has a swim meet, and my wife and son are driving down to visit my daughter at camp. I’m looking forward to catching up with him and will give you all a quick update on his recovery. Hope everyone has a great Thursday!!

Chuck Butler — July 19, 2007