Here we go again...
Daily Pfennig

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In This Issue..

* Here we go again...

* US numbers show further slowdown...

* Norway cuts rates...

* Switzerland moves to shore up UBS...

And Now... Today's Pfennig!

Here we go again...

Good day...The dollar rallied and the equity markets plunged yesterday as investors again pulled their money away from the markets. As we have seen over the past several weeks, when investors get worried about the state of the global economy, they rush back into cash, and in the world of cash the US$ is still king. Chuck has been talking about this trading pattern during his FX University presentations, and I'll start this morning's Pfennig off with his thoughts from Philadelphia, where he is hosting another day of FXU:

"Here we go again!

The recession trap door gets sprung under the stock market, and things begin to look really bad in the U.S. again, and guess what? The dollar rallies... This just plays the trading theme over and over again... And Yen? It's back below 100! Risk gets taken out, and whatever carry trades that were brave enough to go back on after Monday, have been wiped out! Wiped out like the rally in Aussie dollars, which had rallied to +70-cents after Monday... And lost 5-cents today...

I'm afraid that the latest plan to give banks billions of dollars in exchange for partial ownership so that they will take the funds and loan them out to get the economy going and the credit markets unlocked is being exposed for the fraud that it is!

So, the Gov. is going to give Billions to the banks... What guarantee does the Gov't have that the banks will use the funds to loan out? None! Nada! Nothing! And... If anyone has stopped for just one minute to think about the Gov't having their hands in the bank's cookie jar, well... They know that this is something that will fail the economy and I am dead serious about that folks... It's bad for the economy, and will fail the economy!

Do we as investors and Capitalists want Gov't. ownership in banks? Did anyone ask us? Because had they asked me I would have said NO! Do we want the Gov't. determining what banks win or lose? Do we want Gov't. directing banks on who they make loans to? Can't you see members of Congress pushing to get loans in their home voting districts? And, once the Gov't is in the door, banks will NOT be able to turn their backs on them, for fear of the Gov't. pulling out the rug on the bailout!"

As Chuck mentions, the recession trap door was sprung on the stock market yesterday after retail sales numbers were released here in the US. Consumer spending, which comprises more than two thirds of the US economy, is faltering even as gas prices are falling. Retail sales dropped in September by 1.2%, the third consecutive month of a decrease. This is the first time we have had three consecutive months of declining sales since comparable records began in 1992. A pullback in consumer spending and a slowdown in consumer credit is something which has been needed, but it won't be good for the US economy.

Other data released yesterday also indicated the US recession will deepen before we see a turnaround. The volatile Empire manufacturing data for October fell a whopping 24.6. This number has been very volatile in the past, but it is an indicator of how the manufacturing sector in the NY area is doing. This drop put the index at a record low as the global credit freeze prompted businesses to pull back. Every component, other than prices, was negative for the month.

The Fed also released their Beige book yesterday afternoon, but with the news channels concentrating on the last Presidential debates, most investors probably didn't get to hear the Fed's take on the current economic conditions. Reports from all twelve Federal Reserve Districts indicated economic activity weakened in September, with several districts noting that their contacts had become much more pessimistic about the economic outlook. Labor market conditions weakened in most Districts. The only bright spot in the report was that cost pressures on prices had eased a bit, although a number of Districts noted that the costs of energy, raw materials, food, and transportation remain elevated and margins are tight. No real surprises here, just a confirmation of what we have been saying all along, the US is slipping further into a recession with no bottom in sight.

Today we will get additional data which will continue to show the weakness of the US economy. Consumer prices are expected to show a small increase, even after a fall in commodities and oil. The weekly jobless numbers are expected to show another 470,000 people filed for unemployment last week. The effects of the deepening credit crisis on the economy will cause the unemployment rate to keep rising for another year, and will likely reach 7.3% by the end of 2009. The rate was 6.1% last month, matching a five year high. Industrial production will also be reported this morning, and is expected show a drop of nearly one percent in September following last months 1.1% decline. The back to back drop in output at factories, mines and utilities would be the biggest since 1990. As I said earlier, none of this data will be positive for the markets or the US economy.

But recent trading patterns have shown that negative numbers here in the US have caused an increase in the value of the greenback, so I don't expect a big move down for the dollar after these releases. Recently, investors have begun to move money back into cash, staying away from making investments anywhere. This is reflected by the drops in the value of gold, silver, and the equity markets. Investors are simply moving money into their FDIC insured bank accounts and are also buying up short term US treasury securities. Risk is again a bad word in investing, so the roller coaster of the carry trades are back off again.

These reversals, along with a drop in commodity prices caused a major sell off in the Aussie and New Zealand dollars yesterday. But this morning investors are moving back into these two currencies and their prices are again climbing back up. In fact, the commodity currencies of AUD$, NZD$, CAD$ and the South African rand are the four best performing currencies during the past 24 hours. This is somewhat of a surprise, as the price of the commodities which these four countries produce are down. Oil is trading below $73 this morning, and silver has dropped below its two year low.

The drop in the price of oil has combined with a cut in interest rates to deliver a one-two punch to the Norwegian krone overnight. Norway's krone fell to its lowest level since the beginning of 2007 vs. the US$ after Norges Bank reduced the deposit rate by half a percentage point. The central bank is now more concerned about growth as the fall in the price of oil has reduced inflationary pressures. Norges bank pushed forward the Oct. 29 meeting after central banks including the ECB and Sweden's Riksbank reduced borrowing costs by a half percentage point on Oct. 8. Norway's economy, will grow 1.1% next year, 1.3% in 2010, and 2.8% in 2011 according to the central bank. These estimates are slightly lower than their previous forecasts. Norway continues to have some of the best underlying economic fundamentals of any of the European nations, and these fundamentals should eventually rally the krone vs. the currencies of weaker economies (the US).

Another of the stronger European nations, Switzerland, announced it would inject capital into UBS in order to shore up their balance sheet. UBS will get 6 billion Swiss francs from the govt. and put as much as $60 billion of risky assets into a fund backed by the central bank. Switzerland is the last of the world's financial centers to pour cash into ailing financial institutions. The Swiss franc continues to be one of only 3 currencies which are up vs. the US$ on a year to date basis. The franc should be a core part of investors currency diversification, as it is still seen as a safe haven currency for investors looking to shelter their portfolios from the global crisis.

A currency which we rarely talk about is the Hungarian forint, which plunged yesterday on investor concern the eastern European country may be the next to be engulfed by the crisis that is roiling global markets. Some commercial banks this week suspended foreign currency loans and demand on the government bond market has dried up. The European Central Bank said it will lend as much as 5 billion euros to the Hungarian central bank to help revive the local credit market. Investors should look at this as a warning shot and re-evaluate if they want to continue holding this currency, as it could become the next Icelandic krona.

Speaking of Iceland, the central bank announced yesterday that it will begin conducting daily krona auctions to 'facilitate international trade.' The bank is trying to restore some sort of order to the currency markets, which had been divided between an onshore market where the govt. was trying to hold the currency to a peg vs. the Euro and an offshore market where currency trades were getting done at a huge discount to the 'onshore' price. This new daily auction will hopefully bring the two markets closer together, and raise the price we are able to get for maturing Icelandic krona CDs.

Currencies today 10/16/08: A$ .6752, kiwi .6100, C$ .8418, euro 1.3516, sterling 1.7266, Swiss .8855, ISK 260.0, rand 10.175, krone 6.4868, SEK 7.3862, forint 196.93, zloty 2.6535, koruna 18.392, yen 100.50, baht 34.27, sing 1.4806, HKD 7.7555, INR 48.85, China 6.8298, pesos 13.3958, BRL 2.2263, dollar index 82.19, Oil $72.69, Silver $10.005, and Gold... $832.20

That's it for today...A bit slower on the desk yesterday, as investors seem to becoming numb to all of the market volatility. My legs are finally starting to feel a bit better after Sunday's marathon. I can actually walk down stairs without much pain! I swore this was my last marathon after waking up in pain on Tuesday morning, but with the legs feeling better I am thinking about running again. Maybe I'll just concentrate on the triathlons next year, the cross training is much easier on my aging body. The sun is coming up outside, and it looks like it is going to be a Tub Thumpin Thursday!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 10-16-2008 9:07 AM by Chuck Butler