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In This Issue..

* The winner is... Deflation!

* Trading theme in place...

* RBA cuts rates 75 BPS!

* Manufacturing collapses!

And Now... Today's Pfennig!

Election Day!

Good day... And a Terrific Tuesday to you! It's Election Day! One more day of all that he said, she said, no I didn't, yes you did, aggravating election advertising! That's it! We're finally finished with all of it! Thank Goodness it's Election Day! TGIED!

This will be the end of another of the things that's keeping the fundamentals in the back of the classroom. All we'll have left is the credit squeeze... Unfortunately though I feel like we're going to have to live with that one for some time to come! There are signs that things are loosening up, but it's a far cry from what should be considered as "normal" in the lending arena! As long as the credit squeeze remains in place and on the minds of traders & investors everywhere, we're stuck with the Trading Theme of 2008... Well, let's see, it didn't come into play until late July, so it should be called the Trading Theme of late 2008 and 2009.

That's right folks... When I first saw this all unfolding in July and August, I told you in this letter that this dollar strength could very well last through the elections and through to year-end... That was before the rot on the vine was exposed in September and October... Now, I fear that this will be the Trading Theme for most of 2009 too... As the Credit squeeze continues to hang over the markets like the Sword of Damocles. And... Someone told me that in 6 out of the last 7 elections, regardless of whether the Democrats or Republicans won, the dollar rallied in the 6 months following the election. So.... That takes us into 2009, with the Trading Theme and credit market squeeze... It all adds up...

And as long as I'm going down this road of bad news... I have come to a conclusion that the deflation wolf has won... For months I wrote about how inflation was winning but the deflation wolf was always at the door... Well... After viewing the landscape of falling stock prices, falling commodity prices, and falling home prices, I have to think that inflation is no longer the king of the hill... Deflation is all around us folks... The only things you don't see falling are Consumer prices and bond prices... But those bond prices are sure to fall given the glut of Treasury issuance coming down the pipeline... And Consumer prices? Well, if Consumer Spending keeps falling off the cliff, then you can expect Consumer Prices to fall too...

But inflation isn't going away... And in my opinion, it will hide out on the other side of this deflationary period... And at first it will look much like 1976 all over... 1976 was a great year, right Christine? But it wasn't a great year for stagflation...

So... What does this mean for the currencies and precious metals? I don't think it spells a Happy Days while the deflation is going on... But... On the other side of the deflation, it could very well spell rallies in currencies and metals that will be huge! You see, the Trading Theme remains in place for most of 2009, as we work through the deflation... And then as the Trading Theme is removed slowly, inch by inch, step by step, there will be an unwinding of "Safe Haven" trades (read U.S. Treasuries) and the race to the bottom for the dollar will be on...

That's how I see it from my seat here on the Trading Desk in St. Louis Mo. Home of the 10-time World Champion St. Louis Cardinals! It's not a pretty picture, near term, that I'm painting this morning, but even an artist paints some ugly pictures now and then... I know of one, no never mind, no need to go into that.

OK... You've been very patient, waiting for the update in currencies... So, here we go!

The currencies played the Trading Theme to a "T" once again yesterday... When I left you yesterday morning, the euro was trading 1.2845... But then, more deep, dark, dangerous data printed for the U.S. and the dollar slapped down the single unit and every other currency that got in its path. The data came in the form of the latest reading of Manufacturing in the U.S. The ISM Index fell from 43.5 to 38.9, a low since September 1982! OMG! For the new kids to class, the ISM Index draws a line in the sand at a 50 level... Any number above 50 equals expansion... Any number below 50 equals contraction... We haven't seen manufacturing contract at this level since September 1982... And the NBER still hasn't put the "recession sign" on the economy's door? Geez Louise, what do these guys need to prove to them that we're so deep in recession right now?

So... With that bad data in the books... The dollar rallied and pushed the single unit to below 1.27 for most of the day... We're seeing some recovery this morning, and the euro has popped back up above 1.27... This morning, they are reporting from Europe that borrowing costs (LIBOR) have fallen a bit, thus loosening the purse strings... Recall, this was another of the things knocking the stuffing out of the euro and other currencies, as Financial Institutions in Europe stopped borrowing in LIBOR because the rate had gotten totally out of control on the high side. Instead, the Financial Institutions used the currency swaps market, selling their reserve currency (read euro) to raise the capital needed as reserves against the toxic waste they had on their books...

It was my assumption when hearing about this change to currency swaps to generate cash, that this would come crumbling down once LIBOR got back to what would be considered a "fair rate" for borrowing, and the swaps would get unwound, meaning the currency sold in the swap would be re-purchased. It will be interesting to see if this plays out, even with the Trading Theme in place.

The Reserve Bank of Australia (RBA) cut interest rates last night by a larger margin than I expected... I had thought the RBA would cut 50 BPS... Instead, the RBA followed up last month's 100 BPS cut, with a 75 BPS cut! WOW! They aren't messing around, eh? Before you skip down to the Currency roundup to see what the A$ is doing after a 75-BPS rate cut, no need... The A$ has rallied since the rate cut news! Talk about perverse! Currencies these days are just strange... Well, I guess it's not the "currency" but the Currency Trader! But, who am I to look a gift horse in the mouth? The A$ is rallied...

The Canadian dollar / loonie rallied last night too... Hmmm... I'm sitting here thinking about these rallies and started humming the great song by the Who... Won't Get Fooled Again! For I know that the Trading Theme is in play... Yes, it's the Same Old Song... Ahhh the Four Tops too!

So, one down, two more to go... That is Central Bank rate cuts this week... Still to come... The Bank of England (BOE) and the European Central Bank (ECB)... The performance of the A$ after the rate cut is promising for these two currencies; pound sterling and euros respectively... But remember the Who!

Recall last week, when I was talking about having the fear that the Bank of Japan's (BOJ) Ministry of Finance would intervene to stem the yen's rise... Well, unless they're lying... And we have no reason to believe they are... The BOJ announced last night that there was no currency intervention last week... Hmmm... Just wondering why then, did yen fall from 92 to 99? I doubt the rate cut on Friday had anything to do with it... Must have been all the jawboning...

Well, that, and... The fact that as things in the credit markets loosen up a bit, those cocky Carry Traders get back on their feet... And we all know that Carry Trades to yen are like kryptonite to Superman!

The data cupboard is pretty bare today, with only September Factory Orders on the docket, which are expected to drop -.8%... And Fed Head Fisher, will be speaking in Texas on economic challenges in Texas... Fed Head Fisher is always good for a quote... But this is election day, and most likely he will be a forgotten man today.

I'll finish up today and head to the Big Finish right after I tell you about this little ditty that the Wall Street Journal reported this morning... "The Treasury Department is considering using more of its $700 billion rescue fund to buy stakes in a broad range of financial companies, not just banks and insurers. In focus are companies that provide financing to the broad economy, including bond insurers and specialty finance firms such as General Electric's GE Capital unit, CIT Group and others."

Hmmm... Is it not bad enough that now these finance companies are going to get bail out money too? But... What's with the "others"? I sure hope they mean "other" finance companies, and not just "others" that need a bail out... Like, say, Joe's Bar and Grill! YIKES! The Treasury Dept is out of control folks, and there's no reining them in now... We've given them too much rope! UGH!

Currencies today 11/4/08: A$ .6875, kiwi .60, C$ .8525, euro 1.2785, sterling 1.5865, Swiss .8565, ISK (no live quote), rand 9.8910, krone 6.6950, SEK 7.73, forint 202.90, zloty 2.77, koruna 18.915, yen 99.50, baht 34.90, sing 1.4740, HKD 7.75, INR 47.72, China 6.8360, pesos 12.70, BRL 2.1410, dollar index 85.77, Oil $63.85, Silver $10, and Gold... $737.40

That's it for today... My beautiful bride just called to tell me the lines at the polling place are out the door and down the street! Don't let that keep you from exercising your right to vote today! And if you don't think it matters... Think again, I'm living proof that every vote counts, as I once lost my re-election vote for alderman in my little river city, by 1 stinking vote! Jen brought me in a small bag of my fave candy bar, Almond Joys, yesterday... I don't eat chocolate anymore, but had to have one, just for old time's sake... Love that coconut! Happy Birthday to Walter Cronkite, who's 92 today! WOW! Chris Gaffney is off to Washington D.C. today for the D.C. Money Show. I won't be going with him, as I will be traveling 3 of the next 5 weekends. The Big Boss, Frank Trotter will be speaking in Cancun later this week... So, we're everywhere, we're everywhere! Time to go... Make sure you vote today! And have a Terrific Tuesday, and Election Day!

Chuck Butler


EverBank World Markets



Posted 11-04-2008 8:58 AM by Chuck Butler