Stalemate continues on US debt ceiling.
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In This Issue.

* The stalemate continues in the US...

* Swiss Franc hits a record...

* Homegrown terrorist rocks Norway...

* Gold benefits from uncertainty...

And, Now, Today's Pfennig For Your Thoughts!

Stalemate continues on US debt ceiling.

Good day. And welcome to the last week of July. I don't know about the rest of you, but this month has certainly flown by for yours truly. I'm sure the days are moving a bit too fast for President Obama and the Congress, as the deadline for a US default is just 8 days away. No progress was made over the weekend, and from the Sunday morning news show rhetoric; it sounds like the two sides are actually slipping further away from an agreement.

As expected, progress on deficit reduction through spending cuts and tax overhaul was derailed by politics. President Obama and Senator Harry Reid would like to pass a multi-year plan raising the debt ceiling by $2.4 trillion which would be enough to maintain government spending through the 2012 elections. But House Speaker John Boehner and his fellow republicans can smell blood in the water, and are only willing to approve a relatively small $1 trillion dollar increase which would force another round of debate on spending cuts next year.

Boehner says he is done talking with the White House, and will now 'begin conversations with the leaders of the Senate in an effort to find a path forward.' Sounds like this story will continue to dominate the news screens for the rest of the week, with both sides grandstanding to make their points. It will certainly be interesting to see how the markets react. So far they have been 'cautiously optimistic' that an agreement will be reached.

Most analysts are still expecting some sort of agreement prior to August 2nd, and I couldn't find anyone from the major banks/brokers who thought a US default would occur. And I agree. President Obama will not let the US default on its debt (although as Chuck suggested last week we probably have already technically defaulted).

The dollar is drifting down a bit this morning, and will probably be a bit volatile this week as negotiations ebb and flow. From all indications, a shorter term plan is what I think we will end up with, to the detriment of the US$. The dollar will likely rise at the first sign of an agreement, but if the deal is seen as a temporary fix, any dollar rally would likely be quickly reversed. Markets just don't like uncertainty, and would prefer this can be kicked further down the road rather than have it pop back up sometime next year.

One benefactor of the continuing stalemate is the Swiss franc which gained over 2 percent vs. the US$ to hit a record high in European trading. Investors continue to look for a stable place to park cash, and the Swiss franc has long been viewed as a safe haven currency. The possibility of a default in the US, combined with the continuing sovereign debt problems in the Euro-peripheral currencies has the long term stability of the franc looking rather attractive.

The franc is the best performing currency of 2011, appreciating an amazing 16.32% vs. the US$. In the past 3 months the CHF has moved up 9.63% vs. the greenback, just beating the New Zealand dollar which is up 8.26% in the same period. And the long term charts certainly seem to back up these investor's views, as the franc has held its value vs. the US$ better than any other major currency. Since February of 1989 the Swiss franc has risen 93.4% vs. the US$; dramatically better than any other currency. Second place is the Japanese yen which was up 62.2% not even close to the performance of the franc.

As you all know, Chuck is headed out west to Vancouver this week, beginning his three week cris-cross of North America. Before heading out the door, he sent me the following note to share with all of you:

Well, folks. looks I was wrong about Canadian inflation. I won't be wrong about it being the trump card as the determining factor on a rate hike by the Bank of Canada. And all those trades I told you about on Friday that had taken on positions ahead of the report, thinking it would show strong inflation, that would result in a rate hike next month, and a strong Canadian dollar / loonie. Canadian inflation printed weaker at -.7% for June. ending up at 1.3%...

Now. either they've figured out how to keep rising Oil prices from being included in their inflation figures, or they've torn a page out of the U.S.'s book on hedonic adjustments, because this number makes no sense to me whatsoever!

So. if the loonie was rising on the thought of a strong inflation report, I guess I don't have to tell you that with the weak inflation number the loonie got sold. UGH!

But.. having said all that. Canadian Retail Sales also printed on Friday. and. rose .1% in May, VS expectations to have fallen -.3%... So, it wasn't all bad for the loonie on Friday. but, still. the CPI "won the day".

As I make some notes on Friday before I leave, the U.S. debt deadlock is still a deadlock.. .maybe it will have been unlocked this past weekend. But if it hasn't, I still want to make everyone understand that to me, raising the debt ceiling is not an option. Unfortunately, I'm sure that in the end, it will be raised. and those spending cuts? Oh, did I tell you this little ditty? Those $3 Trillion in cuts over 10 years are on "projected spending". So, net, net. there's no change!

Chris again, this is why we never try to predict data, or call short term market moves. The numbers sometimes just don't make sense. I have more to share with you on the Canadian statistics in today's 'Then there was this'.

The Norwegian Krone slumped in early morning trading after the home grown terrorist attacks. Apparently the same sick person was responsible for both the bombing and shooting rampage which rocked the northern European nation. The stories of the survivors of the shooting rampage were chilling, and my thoughts and prayers certainly go out to all of those affected.

The Norwegian krone has long been a favorite of the desk, and I would look at any sell-off as an excellent buying opportunity. These attacks will not have any lasting impact on the government or economy of Norway, both of which are very strong and stable. Norway has excellent fundamentals backing its currency, and should be seen as another 'safe haven' in the volatile global markets.

The precious metals had a very good weekend, and gold shot through the $1,600 level to reach another record high. Chuck has long called gold the 'uncertainty hedge' and uncertainty is definitely one of the best description of the current markets! Debt problems in the US and Europe continue to shed light on the fragility of fiat currencies. Paper money is just that, paper. People are finally starting to question these IOUs as the credibility of the countries who are issuing them continues to slide. Precious metals have always been the alternative for these fiat currencies, and Gold is again becoming one of the top alternatives for those seeking safety from all of the debt problems. Gold is up 14% this year, and is heading for an 11th straight annual gain. And even if the US reaches a debt agreement this week, our AAA rating is certainly going to remain under pressure. Any downgrade of the US would certainly seem to push more investors into 'real' assets, and precious metals should continue to see nice returns.

Then there was this. I saw a story scroll across the Bloomberg screen this morning which raised my temperature (and that is the last thing I needed in this sauna of an office!). KPMG has discovered that Canada's statistics agency made economic data available to distributors before the official publication time for more than six years. "KPMG reported that the early release of up to 59 seconds had been occurring for more than six years," a summary of the report published on a Canadian website today said. The agency stopped the practice in November, after being alerted by Bloomberg News. According to the report, the statistics were disseminated to a handful of distributors who were licensed to publish the data. For some unknown reason, the Stat Can's IT department pushed the data to a couple of distributors 59 seconds early.

Now I'm not really into all of the conspiracy theories which are constantly drifting through the online chat rooms; but government statistics, and their control is one area I have always questioned. The folks who got the data early have said they didn't do anything with it until the official release time, but who's to say someone didn't pick up a cell phone and pass the data along to a friend? Sometimes certain dealers or banks seem to have an 'inside view' of the numbers, and a story like this feeds the fire of conspiracy theories.

And on a final note, a reader sent this to Chuck last Friday, and we all just loved it on the desk. Lending still more money to Greece and raising the US debt ceiling to avoid financial crisis is no different than increasing the blood-alcohol-threshold number in order to eliminate drunk drivers.

Well said!

To recap. The US debt ceiling deadline is fast approaching, and the two parties don't look like they are willing to compromise. The markets aren't too worried yet, but this story will definitely dominated the week's news. The safe haven of Swiss Francs is looking attractive to investors, as the CHF hit a new high. Our prayers go out to the people of Norway after a homegrown terrorist attack. Gold is back at an all time high, as investors are flocking back to what Chuck has labeled the 'uncertainty' hedge.

Currencies today 7/25/11. American Style: A$ $1.0824, kiwi .8645, C$ $1.0549, euro 1.4371, sterling 1.6278, Swiss $1.2451. European Style: rand 6.7894, krone 5.4055, SEK 6.3404, forint 187.51, zloty 2.7896, koruna 16.9810, RUB 27.71, yen 78.20, sing 1.2070, HKD 7.7916, INR 44.405, China 6.4448, pesos 11.67, BRL 1.5519, dollar index 74.09, Oil $98.79, 10-year 2.99%, Silver $40.84, and Gold. $1,617.80

That's it for today. The Cards let one slip away yesterday, but still took 2 of 3 from the Pirates over the weekend. They return home to test out the new 'turf' which was installed following the big U2 concert last week. Hopefully the sod in the stadium looks better than my back yard. The new sod my son and his friends laid down last month is looking pretty rough. I've been throwing plenty of water at it, but this excessive heat which has gripped the Midwest has been hard on my yard. Chuck will be escaping from our triple digit temps this morning as he heads west to Vancouver. He warned about writing the Pfennig from the office on Monday mornings, and I see what he is talking about, as I am breaking a sweat typing this. Time to get the week started, thanks to everyone for reading the Pfennig. Have a Marvelous Monday!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 07-25-2011 12:18 PM by Chuck Butler