US Retail Sales Disappoint

It’s all about the dollar, right now… And of course, in September I told you that the perfect storm was building for dollar strength, so this comes as no surprise… What does surprise me, though, is the myopic view of debt that the markets’ participants have taken… It’s as if all the debt in the world belongs to the Eurozone, and the US has a picture-perfect balance sheet…

Which leads me to believe that this dollar strength is nothing more than a bear market rally, and not an end to the weak dollar trend, which began because of a fundamental reason (rising debt), and won’t end until that fundamental reason has been reversed, or is at least on the way to being reversed. So… Like I told you in September… Batten down the hatches, and keep an eye on buying opportunities to pick up some additional diversification at cheaper prices…

Those who don’t believe in any of this will panic, and sell… OK… They obviously haven’t been through a period of dollar strength or a bear market rally before… Let’s see… There was 2005… And then there was late 2008 through early 2009, and then there was even the run on the euro (EUR) in 2010 when it fell to 1.18… But, eventually, the ball comes back to the US’s court… and when it does, risk aversion goes out the window, and is wrapped in yesterday’s newspaper!

So… Having said all that… The euro today is hanging onto 1.30 by the skin of its teeth… Italy held a bond auction today, and at first, the auction went off just fine… But then a turnaround in bond markets left a mark on the euro. I wouldn’t be surprised to see the euro drop to the low 1.20’s in the coming year, before the focus shifts back to the US. I read a story last night that expressed the writer’s view that he believed that Germany would leave the euro, leaving the Eurozone members to deal with their debt problems on their own… Of course, in my opinion, Holland, Austria, and a couple of little guys would also leave with Germany if that were to happen… Hmmm… While the writer was convincing in this view that Germany will leave the euro… I have to say I still don’t believe any members will leave the euro…

But if that did happen, I couldn’t imagine how large the flows would be from euro to Deutsche Mark! But, don’t get your hopes up… Like I said, I don’t believe this will happen… But then, I do always reserve the right to change my mind in the future!

The US Fed left rates unchanged yesterday (no surprise there!), and in their statement following the rate announcement, the Fed Heads suggested that they were seeing signs of modest economic expansion. But maintained that there were “significant downside risks”… They did mention the elevated unemployment rate as one of those downside risks, along with the Eurozone problems. So… All-in-all, pretty much as I said it would go, eh?

Yesterday, US retail sales printed, and for one of the very few times since I introduced the BHI 10 years ago, it led me to believe retail sales would be strong, and they were not only not strong, but they were basically weak, only gaining 0.2% in November! Hey! I thought those Black Friday sales were of record numbers? Do you remember what I said following the reports of record Black Friday Sales? Well… Here’s what I said on November on November 29, right here in the Pfennig… “I’ll make a bet here… I’ll bet a dollar to a Krispy Kreme that when all the dust settles on the holiday shopping, that the euphoria that swelled from the announcement of Friday’s numbers will bomb out…”

Sure looks that way to me! Yes… The stores may have had record numbers of items leaving their shelves, but the steep discounts that were needed to move the items, left the total sales figures down…

OK, enough of that… All the currencies — and I do mean “all the currencies” — including Renminbi (CNY) and gold, are taking on water this morning. The Aussie dollar (AUD) has fallen below parity again, and the Swiss franc (CHF) is at the lowest level versus the dollar it’s been since February (10 months ago!)… Japanese yen (JPY) is just a shade weaker this morning, but weaker nonetheless. So, even the safe havens of francs and yen aren’t trading alongside the dollar any longer… So… This would qualify as a Risk Off Day… Gold is weaker again, and US stocks took one on the chin again yesterday…

Boy are those people going to be disappointed come summer of 2012… In my opinion, that is… I could be wrong… I know long time readers get tired of me saying that, as you know all too well that this is just my opinion… But… I’ve got to keep the legal beagles happy, folks… Of course the legal beagles don’t like it when I call them “legal beagles” and that they make me adhere to rules… Oh well… I think I just broke about a dozen of their rules!

Don’t be surprised if the price of oil begins to ratchet up… Think about this… The Fed Heads mentioned yesterday that they are seeing signs of economic expansion… (I don’t truly believe there is an expansion, but as long as something is perceived to be, it will be…) And in the coming election year, there will be more upbeat talk about the economy in an effort to get re-elected… Well, whether there is improved economic expansion or not, if every time you turn on the TV some political ad is telling you there is expansion, you’ll start to believe it… And with the perception of US economic expansion in place, the price of oil will rise…

I would think the oil producers of Norway, Canada, Russia, Brazil, and even Mexico and the UK would be underpinned by a rise in the price of oil as we get into 2012…

Speaking of Norway… The Norges Bank (Norway’s central bank) will meet today, and will probably cut their interest rate. The European Central Bank (ECB) has already cut twice, so, I expect that the Norges Bank will cut today… And… Given the market reaction to rate cuts recently, we could see a bump in the krone (NOK) after the rate announcement… But not much more.

OK… I said yesterday that the Sing dollar (SGD) had gotten ahead of itself… I didn’t say that, now that it has come back in line with the renminbi, it was still overpriced… In fact, the currency is now ready to move in tandem with the renminbi… Don’t know why someone thought I said that Sing dollars were overpriced, now…

To recap… The euro is hanging on to the 1.30 level by the skin of its teeth, this morning, as Italy’s bond auction went well at first and then fizzled out… The Aussie dollar is below parity again, and even the Chinese renminbi, yen and francs are weaker versus the dollar today. US retail sales were very weak at 0.2% in November… what happened to those record Black Friday Sales? Gold is getting sold again… And if you missed class yesterday, the gold selling is by dollar bugs who think that if the dollar is going to be strong they don’t need gold… I truly believe they will rue the day they thought that.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning