Blood in the streets.....
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In This Issue..

* Red ink flows...    
* Japan suggests diversification for their reserves...          
* Commodity currencies rebound...                            
* Data galore for the rest of the week...                                                           

And Now... Today's Pfennig!

Blood in the streets.....

Good day... Chuck had a late night down at the ballpark watching the home run derby, so he asked me to take the helm of the Pfennig this morning.  I'm going to try to get this one out a bit earlier than I did last Friday, so I'll get right to it.

The biggest news to hit the markets yesterday was the Treasury Department's report that the deficit in June totaled $94.3 billion.  This monthly deficit pushed the deficit for the fiscal year to over $1 trillion dollars for the first time, and we still have another quarter to go until the fiscal year ends in September.  It comes as no surprise to readers that the deficit is above $1 trillion, but what is a bit unnerving is the speed at which the red ink is flowing. 

According to the Treasury department's report, spending in June surged 37 percent to $309.7 billion while revenue fell 17 percent to $215.4 billion.  June is typically a good month for revenues, and the reported deficit was the first since 1991.  Individual and corporate tax receipts are falling while unemployment continues to rise.  But the revenue picture isn't nearly as bad as the other side of the ledger.  The administration is just starting to ramp up the spending from the $787 billion stimulus package President Obama signed into law in February.  And as Chuck has reported, the administration has already started to lay the groundwork for another big stimulus package. 

Congress seems to be turning a blind eye to the deficit, why let some red ink keep them from accomplishing all they set out to do?  Just this morning, the day after we surpassed the $1 trillion deficit mark for the first time, the democrats have unveiled their long awaited health care reform.  The program, by most estimates will add another $1 trillion to the deficit over the next several years.  Sure, I think we all would like to see an improvement on the current health care system, but what a time to try and shove it through congress!  I'm sure you will start to hear a chorus of 'deficits don't matter' by the media; as they try to convince all of us that these new programs are just too important to let a little thing like red ink keep them from passing.    

But deficits do matter!  Other than the fact that someone is eventually going to have to pay all of this debt off, financing this shortfall is going to continue to get more difficult.  Interest rates will certainly rise from their current low levels, and for the fiscal year to date, the interest expense on the government's outstanding debt was $320.7 billion.  As rates rise, this interest component will also rise, chewing up a larger percentage of our overall spending.  Rising interest payments will continue to push out spending for other, more productive programs and force either a reduction in government services, or a dramatic increase in government revenues.  Look out for some dramatic tax increases!

The huge deficit continues to worry our foreign investors, who have thus far financed all of our free wheeling spending.  China, Russia, and some of the oil rich Arab states have all expressed their concerns regarding the security of US debt and the stability of the US$.  Japan's opposition party, leading in polls ahead of next month's election, is the latest country to question the long term viability of the US$ as the global reserve currency.  Japanese investors are the biggest foreign holders of US Treasuries after China, so the talk of diversification away from the US$ could have a big impact on the currency markets.  "In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing," said the opposition party's finance minister in an interview.  "Many countries are starting to diversify their reserves." 

The biggest currency gainers vs. the US$ yesterday were the commodity currencies of the Canadian dollar, Brazilian real, New Zealand dollar, and the Australian dollar.  Yesterday Chuck let everyone know he had finally put the finishing touches on our latest index cd.  It just so happens that the new index combines three of these top performers.  The new index CD, named the Global Power Shift Index is a combination of the Australian dollar, Canadian dollar, Brazilian real, and the Norwegian krone.  Chuck designed this new index CD to take advantage of commodity price increases which are bound to occur as the global economy starts to recover.  Call the desk for more information on this newest addition to our stable of offerings.

The Australian dollar got a boost from the business sentiment which turned positive in June for the first time since December of 2007.  This should help convince the central bank to keep interest rates stable as the Australian economy starts to show signs of a recovery.  The kiwi also got a boost as Reserve Bank Governor Alan Bollard said "Early signs of a global recovery have now emerged."  Rates in New Zealand will likely remain stable as the commodity driven economies turn the corner.

Today and tomorrow will bring us a plethora of data, with PPI, Advance Retail sales, Business Inventories, and the ABC consumer confidence numbers today followed by the release of the CPI numbers, Empire manufacturing, Industrial production, Capacity utilization, and the minutes of the June 24 FOMC meeting to be released tomorrow.  Thursday we will get the weekly jobs data along with the TIC flows and Philadelphia Fed index.  We will close the week out on Friday with news on the US housing market with the release of Housing starts and Building permits.  All of this data could bring some excitement to the currency markets, which have settled into a fairly stable summer trading pattern. 

Currencies today 7/14/09: A$ .7878, kiwi .6336, C$ .8742, euro 1.3983, sterling 1.6317, Swiss .9227, rand 8.1989, krone 6.4653, SEK 7.8388, forint 197.26, zloty 3.1216, koruna 18.6183, yen 93.14, sing 1.4590, HKD 7.7505, INR 48.84, China 6.8328, pesos 13.654, BRL 1.9782, dollar index 79.97, Oil $61.10, 10-year 3.45%, Silver $12.935, and Gold... $926.19

That's it for today...The home town favorites, Albert Pujols and Ryan Howard couldn't quite get it done at the derby last night, but it sure looked like everyone had a great time.  Three of the guys on the desk went down to the derby last night, and I actually saw both Mike Meyer and Tim Smith in the right field bleachers scrambling for one of Cecil Fielder's 16 homers.  My wife and I were lucky enough to get invited to tonight's game by a good friend.  I've heard we will have to  be heading down a bit earlier than normal with President Obama in town to throw out the first pitch.  Should be a great time; I just hope the rain holds off.  Should turn out to be a Terrific Tuesday!  Let's go National League!!
Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 07-14-2009 10:05 AM by Chuck Butler