Retail sales disappoint even more…
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In This Issue..

* Retail sales disappoint....
* Chuck's views on the Lone Prop...
* Waiting on the ECB...
* Emerging market currencies sell off...

And Now... Today's Pfennig!

Retail sales disappoint..

Good day... The big news yesterday was the retail sales numbers, which fell twice as much as expected.  Chuck predicted a tough Christmas season, and the BHI was right again.  Sales dropped 2.7 percent according to yesterday's report from the Commerce Department.  The falling home prices, rising job losses, and tighter credit have all combined to finally force US consumers to adjust their spending habits.  No matter how low retailers slashed prices during the recent Christmas season, US consumers just weren't buying.  The economy is forcing consumers to wean themselves off of the dangerous drug of easy credit.  In spite of Bernanke and Paulson's attempts to get consumers borrowing and spending again, the economic slowdown is forcing the US consumers to reign in their spending.  But while this change in consumer habits is good for the longer term economic health of the US, it only serves to drive the economy even further into recession over the short term.

And the bad economic data just keeps rolling in.  U.S. foreclosure filings spiked by more than 81% in 2008, a record, according to a report released Thursday, and they're up 225% compared with 2006.  The total foreclosure filings in 2008 topped 3 million and showed no signs of slowing down in spite of the efforts of both the government and banking industry to slow them down.  Foreclosure filings actually accelerated in the 2nd half of the year, increasing 17% in December over November of 2008. 

The Fed gave us a glimpse of their view on the markets yesterday with the release of their Beige Book.  Nothing in the report was a surprise, as respondents from the 12 Fed districts portrayed a gloomy economic scene.  The report suggests the Fed may need to implement further measures to restore credit markets.  The Fed districts reported more job losses, hiring freezes, and reduced hours.  The New York district reported that 'substantial' job reductions have yet to show up in payrolls data.  Doesn't sound good for the US economy in 2009. 

Today we will continue to get negative news on the US economy with the release of Producer Prices and the weekly jobs numbers.  Producer prices will bbe down and initial jobless claims will probably top 500k.  We will also get the very volatile Empire Manufacturing and Philadelphia Fed numbers showing further rot on the manufacturing vine.

The dollar actually rallied with these numbers, as investors turned back to it as a 'safe haven'.  This move is similar to the moves we saw in the latter half of 2008 as the dollar rallied in the face of poor US economic data.  Chuck sent me his thoughts on this latest 'safe haven rally' and wanted me to share them with you all:

"Reuters reported Wednesday night that the U.S. is close to extending Billions of more aid to Bank of America... Citigroup, as reported yesterday, is selling off units to raise capital... I wonder if Big Ben Bernanke and Hank Paulson drink more than 7 cups of coffee a day... Researchers show that drinking more than 7 cups of coffee a day may trigger delusions...

What does the rot on the vine at BOA and Citi have in common with delusions? Well... I think that Big Ben and King Henry are drinking more than 7 cups of coffee a day, if they believe their "stimulus" / TARP is going to get these two ginormous banks back on terra firma!

Remember the Lone Ranger? Remember a couple of years ago, when the dollar was propped up by Fed rate increases, and the tax amnesty for U.S. Corporations doing business overseas? Those props were pulled away one at a time, and for the next 2 1/2 years the green/peachback fell flat on its face... Well, it came up with another prop this summer... However, this time... There's only one prop... The Lone Prop, I'm going to call it from here on out... It's called the "Safe Haven" prop... And it has done the dollar well since July...

But just like in early December when I smelled a Santa rally to year end, and it happened... I'm seeing chinks in the dollar's Lone Prop's armor... The Fed has just about run the course of things it can do to get this economic engine revved up again, to no avail... And just like I said a couple of weeks ago, Paulson and Bernanke are like the King's men, who tried to put Humpty Dumpty back together again! Their stimulus plans, their money supply injections, their guarantees on debt, their taking over the Commercial Paper biz, to their putting their hands in bank's cookie jars... Nothing has worked... And why? Because, it's not nature's way to interfere! One of my all time fave songs, by Spirit (Randy California) called, "It's Nature's Way"... It's nature's way of telling, something's wrong... It's nature's way of telling you in a song.... It's nature's way of receiving you... It's nature's way of retrieving you... It's nature's way of telling something's wrong...

It's obvious they were singing about something else... But I would say if sung today, it would be sung to the economy... One of these days, these mental giants will figure out to leave well enough alone, and let markets take their course... But that's not happening now, and I'm sure it's not going to happen any time soon, given the news that President-elect Obama wants control of the remaining $250 Billion in TARP money, and then wants to push through a stimulus package that will be anywhere between $800 Billion and $1 Trillion as soon as he takes office!"

Chuck is pretty amazing, he had another tough day at the doctor's office yesterday, but still found the time to send me his thoughts on this recent move by the dollar.

The Euro sold off a bit yesterday as currency traders were waiting on the ECB which will likely cut 50 basis points this morning.  Some actually began predicting a 75 basis point cut, but the noise on the street is confirming a 1/2% cut.  But the markets will focus more closely on the press conference following the rate announcement.  Many are expecting the ECB to signal more cuts are on the horizon, but I disagree.  The leaders of the ECB have a hawkish tilt, and Trichet has continued to illustrate his desire to not follow the US Fed's ZIRP (Zero Interest Rate Policy).  A 50 basis point move would put interest rates at the lowest levels since 1999, and a further move would be unprecedented.  Trichet said last month that there is a limit on how far the ECB can cut rates and will likely push for a pause after today's cut. 

But recent data out of Europe shows their economy continues to contract, and inflation is being held down so Trichet will face mounting pressure to drop rates further.  If Trichet can hold the line, the euro will likely benefit vs. the US$.  The euro rose 10 percent vs. the dollar in December, after Trichet said he wouldn't be trapped with borrowing costs too low.  The European economy is slowing, but will likely be able to weather the financial tsunami better than the US. 

The emerging market currencies of Brazil and South Africa slid yesterday with 'risk aversion' back in vogue.  The Brazilian real sold off to a two week low on concern over a further deterioration of the US economy.  The South African rand sold off in concert with a drop in the price of gold and commodities.  The higher yielding currencies of New Zealand and Australia also fell vs. the US$ as investors turned back toward the 'safe haven' of the US$.  But don't expect this dollar strength to last, as this lone prop of 'safe haven' will be kicked out from under the dollar.

On to the currency wrap up:

Currencies today 1/15/09: A$ .6632, kiwi .5379, C$ .8033, euro 1.3170, sterling 1.4602, Swiss .8928, rand 10.1408, krone 7.2099, SEK 8.3956, forint 212.64, zloty 3.2109, koruna 20.6965, yen 89.11, sing 1.4957, HKD 7.7598, INR 49.0175, China 6.8365, pesos 14.1862, BRL 2.3841, dollar index 84.253, Oil $37.80, Silver $10.50, and Gold... 812.35

That's it for today... I see where the ECB did cut 50 basis points, which was widely expected.  I can look forward to another full day of meetings on the new computer system we are looking to install later this year.  I'll be heading out to Colorado tomorrow for a 'guy's weekend' of skiing.  Hope everyone has a Terrific Thursday!!

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 01-15-2009 10:16 AM by Chuck Butler