High yeilders continue to rally...
Daily Pfennig

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In This Issue..

* High yeilders continue to rally...
* Quantitative easing drives the markets...
* Inventories to drive inflation...
* Happy Birthday Chuck...

And Now... Today's Pfennig!

High yeilders continue to rally...

Good day... I'm back from a long vacation with the family down in Florida, I had a great time but it actually feels good to get back to work.  But before I get started this morning, I want to compliment Mike on what a fantastic job he did on the Pfennigs while Chuck and I were in Florida.  Mike jumped right in and cranked out some great information, setting the bar rather high for me.  We have a busy week ahead of us, so better get right to it.

Currency investors continued to pull out of the dollar and move funds back into higher yielding currencies on Friday.  The best performing currencies on Friday were the higher yielding commodity based currencies of Australia, New Zealand, and South Africa.  Investors were eager to move money back into the higher interest rates available in these currencies as markets began to stabilize.  With the Feds announcement last week that it will buy $300 billion of US government bonds, deflation is now a thing of the past.  This purchase by the Fed monetizes the debt, basically pumping the cash directly into the markets.  It is the most inflationary action the Fed can take, Bernanke has now put the printing presses in high gear.  With deflation no longer a worry, commodity currencies have begun to look attractive again. 

The Norwegian Krone was one of the top performers last week with investors looking to move funds back into this country which should benefit from the rising inflation.  With oil moving back up, investors began to move back into the Norwegian Krone.  But the Norwegian Krone has more than just oil going for it.  Norway has solid economic fundamentals and a fully funded pension system, two of the main reasons it continues to be a currency which should be in everyone's portfolio. 

Quantitative easing is what drove the currency markets at the end of last week, as Federal Reserve Chairman Ben Bernanke continues to try and drive down interest rates here in the US.  As Mike wrote last week, Bernanke continues to do everything he can to drive interest rates down.  

Today US Treasury Secretary Timothy Geithner will announce details of his plan to buy up to $1 trillion dollars worth of toxic assets from the banks who own them.  His plan is to form a private/public joint venture to bid on these toxic mortgage assets, creating a 'market' for them and getting them off of bank's balance sheets.  His hope is that with these assets removed, the banks will be able to start lending again.  "By providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets,"  Geithner said in an op-ed piece published in today's Wall Street Journal.  "The ability to sell assets to this fund will make it easier for banks to raise private capital." 

But I still question just how effective his plan will be.  After all, many of the same guys who decided to buy these toxic assets are still running these banks.  Will private capital rush back into these banks whose management made these incredibly bad investment decisions?  And removing the toxic assets from bank's balance sheets won't help the housing market, so homeowners who are upside down in their home loans still aren't going to qualify for new loans. 

But Bernanke is going to try his best to 'manufacture' a refinance boom; hoping to help homeowners pull any equity left in their homes back out and get them to start spending again.  But with home prices falling in the double digits across most of the nation, homeowners who are refinancing don't have much equity left in their homes.  The ATM which was the American Home has run out of cash.  And doesn't Bernanke realize that this is exactly what put us into this mess?  Trying to hold down interest rates at abnormally low levels sure doesn't sound like an intelligent way to get us back out of this mess. 

I spoke to a reporter from the WSJ last week regarding what both Chuck and Mike wrote about the decline in inventories and the inflationary impact these declines could have.  I guess my quotes hit the edit room floor, as nothing ever showed up in print, but I read another story over the weekend regarding these inventories.  The story said the news about global manufacturing was so bad, it might actually be good.  You see, inventories serve as a cushion between demand and production.   The theory is that with inventories down, as the recovery begins, there will be immediate demand on manufacturers to crank up production. 

But as I pointed out to the Wall Street Journal reporter, production will undoubtedly lag demand.  While many plants are sitting idle, some of the companies who operated them are now out of business.  And those manufacturers who were smart enough to weather this economic storm are going to wait to make sure demand is here to stay before ramping up production again.  Also, the record unemployment means many of the workers who will be needed to ramp up this production will have to be re-hired.  Some will be able to walk right back into their old positions, but many will have to be trained.  Also, the supply chain for raw materials and the shipment of finished goods will take time to get back to normal.  All of these delays in production meeting demand will be inflationary, as more consumers will be chasing fewer goods on the shelves.  So while I agree that the low inventory levels could allow manufacturing to recover more quickly, they also increase the likelihood of a jump in inflation as the recovery begins.  

China helped to ease pressure on the US Treasuries after a Top Foreign-Exchange official said they will continue to purchase US Treasuries.  "Treasuries form an important element of China's investment strategy for its foreign currency reserves," Hu Xiaolian said at a briefing today.  "We will continue this practice".  The announcement was undoubtedly aimed at stabilizing the US Treasury market, which faced selling pressure after Premier Wen Jiabal said he was "worried" about the safety of US Treasuries last week.  As we have repeatedly warned our readers, the US is dependent on China's continued purchasing of our Treasuries.  Without Chinese buying, rates here in the US would move up, and the currency would drop dramatically.  While the pressure may be off for the short term, China will undoubtedly look to continue to reduce their purchases of US assets, and continue to diversify their reserves.  

China isn't the only country which will be looking to diversify their currency reserves out of the dollar.  Chuck spotted the following story on Reuter's over the weekend, and sent it to me to include in the Pfennig.  It calls into question the status of the US$ as the world's reserve currency:

'A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.

"It is a good moment to move to a shared reserve currency," he said.

Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.

Some analysts said news of the U.N. panel's recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.'

While we don't necessarily believe this move will happen overnight, I agree that countries will be looking to diversify their reserves.

It was Chuck's birthday yesterday, and he asked me to share the following paragraph with all of his readers:

Well, I'm sending this along to Chris on Sunday night. It's my birthday today... And I got to spend my day in the beautiful Florida sun, watching my beloved Cardinals play baseball, with my little buddy Alex, and my beautiful bride. My older kids went home on Saturday. All I'll add is that birthdays didn't used to mean too much to me, except when I was 16, and 21... But after my scare of almost 2 years ago, these birthdays mean so much more to me now, and to get to spend them the way I did today, I can only say, that I have been blessed. I thank you dear reader for another year, and will leave you with some words that my long time friend, Ed Bonawitz sent me today... "Remember, a birthday is Nature's way of telling you to eat more cake."

Currencies today 3/23/2009: A$ .6988, kiwi .5676, C$ .8105, euro 1.3642, sterling 1.4588, Swiss .8882, rand 9.4566, krone 6.3181, SEK 8.0676, forint 222.56, zloty 3.3463, koruna 19.601, yen 96.38, sing 1.5098, HKD 7.7502, INR 50.42, China 6.8332, pesos 14.083, BRL 2.27, dollar index 83.325, Oil $52.50, Silver $13.86, and Gold... 951.63

That's it for today... What a birthday present the Mizzou Tigers gave Chuck yesterday, hanging on to make it to the Sweet 16 for the first time in several years.  I also want to congratulate my alma mater's basketball team, the Washington University Bears, as they repeated as NCAA Division 3 Men's basketball champions.  The head coach, Mark Edwards, was my fraternity's faculty advisor during my undergraduate years at Wash. U and it is great to see his team so successful.  The lady bears also made it to the finals but came up just short.  Christine just came in and told me it is Chachi's birthday, so Happy Birthday to you Chachi!!  Hope everyone has a Marvelous Monday!!

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 03-23-2009 8:47 AM by Chuck Butler
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