Throwing Cold Water On A Hot Market.
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In This Issue.

* Currency rally gets slapped back down.

* Eurozone leaders put a 1 week timeline on their plan.

* The CFTC meets this week.

* Annual Budget Deficit hits $1.3 Trillion!

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

Throwing Cold Water On A Hot Market.

Good day. And a Marvelous Monday to you! National League Champions! My beloved St. Louis Cardinals won the National League Championship Series with last night's victory. We had a good time outside yesterday, enjoying the warm weather. I had some pork steaks and turkey breasts smoking all day, the smells in the backyard were incredible!

The smells coming from France this morning are also aromatic, to the risk takers that is, because the G-20 Finance Ministers seem to have come to an agreement on funding for future problems. and an idea to build the fund at the IMF was shot down, which is a good thing, folks.

So, last night, the risk takers decided to take the euro higher. When I came in this morning, the euro had reached 1.3914, but has since backed off of that figure. the risk assets got cold water thrown on it by German officials, that I'll talk about in minute. but first.

You know, as an asset recovers, each step forward is followed by one back. That is until all the trades that have been on the books to sell at a certain price have been executed. This is the current pattern for the euro. The only problem here is that I just can't get my arms around a full-blown euro rally right now. The problems of the Eurozone peripheral countries has not been corrected. Are they taking steps to correct them? Yes. and if the markets want to give the euro credit for taking steps to correct the problems, so be it. But, is sure doesn't look like the euro is on terra firma to me. not right now.

So, overnight, the markets must have loved the fact that the Cardinals are National League Champions, because they really rallied, taking the Aussie dollar (A$) over $1.03, kiwi past 80-cents, and the loonie to 99-cents. Gold is also up about $8 this morning. So, the dollar is not on anyone's "buy" list this morning.

As I looked over the markets before beginning to write this morning, I noticed that the 10-year Treasury continues to lose ground, with the yield going to 2.28% this morning. Remember as the yield on a bond goes up, the price goes down. I saw 2.28%, and thought. that's real proof in the pudding that the risk aversion campers have crawled back into the woodwork, and all the "fringe" players, that shuffle from risk taker to risk aversion, are selling their Treasuries and going back into risk assets.

But there's more to this story than that. And a story on the Bloomberg caught my eye. "The Federal Reserve said its holdings of U.S. Government debt on behalf of central bankers and institutional investors outside America has plunged $76.5 Billion in the last seven weeks, the most since 2007. The writer then went on to try and explain this plunge on Central Banks needing funds to intervene in the currency markets, and getting those funds by selling their Treasuries. Ok. maybe some of this is that. but the majority here is the fact that while things in Europe aren't better yet, at least they're on the road to correction, and the U.S. hasn't even found the road yet!

Either way. selling begets more selling. And once an asset is seen as losing value, like the 10-year Treasury has in the past 3 weeks, the momentum for more selling is in place. However, there's that old circuit breaker out there. It seems that every time the 10-year Treasury begins to take a ride on the slippery slope, "someone begins to buy it" thus stopping the slide.

Well. fundamentals are still not present in the markets, and that was never so more evident than on Friday, when U.S. Retail Sales for September grew 1.1%, beating the forecast of .7% increase. Now, in the days of fundamentals, the dollar would be bought with a report that strong. But. in today's mentally misguided world of traders, the dollar was sold and the risk assets rallied like, when the Cardinals blew up the Brewers starting pitcher in the first inning last night!

So. mark one up for the U.S. economy. Retail Sales were strong in September, which should have been that way in August for the back -to-school sales. It will be interesting to watch this going forward, to see if this was a one-off report.

We also saw that the U. of Michigan Consumer Confidence Index for the first two weeks of October, showed a plunge in the index number from 59.4 to 57.5, (60.2 was expected!), and before we close the data cupboard's doors on last week's data. The final Monthly Budget Statement for fiscal year 2011 printed at $64.6 Billion, bringing the annual Budget Deficit to $1.3 Trillion!!!!! That's $1.3 Trillion that will be added to our National Debt. Which if you recall, this past summer was a point contention. has everyone forgotten the pain already? $1.3 Trillion per year? And we just go on our happy ways? I shake my head in disgust.

I remember a few years ago, when I would bang on the previous administration for their $500 Billion deficits. I long for the days of "just" $500 Billion deficits! But this $1.3 Trillion stuff has got to go, folks. it has got to go! We cannot continue on this path.

And another thing that has got to go, is the ability for bullion banks to hold short positions, which they never have to deliver. The Commodities, Futures Trading Commission (CFTC) will meet this week and vote on a measure to limit the size of positions taken by commodity traders. Given the track record of the CFTC, whatever they come up with will be watered down from what it should be. The need a shot of intestinal fortitude to stand up to the Big Boys that hold these short positions in Gold & Silver. But, I afraid that the "shot" won't make it to them in time.. But, you never know, right? The CFTC could surprise me and everyone else that knows the short positions are a farce, and a free market can't exist with them as is, and do the "right thing".

Tomorrow, or actually tonight for us, The Chinese will print their latest GDP report. And once again, they will cause those that claimed a collapse for China's economy 2 years ago, to chew off more of their shoes! I believe we'll see China print a 3rd QTR GDP report of more than 9%... And if we want to take the old thought that you believe 1/2 of what China says, that would be a 4.5% GDP, which is still stronger than any industrialized country.

Should China's GDP remain as strong as I suspect, it will be a very good indicator that China is still the engine of global growth in the absence of the U.S. who is mired in the mud of an economy that barely has a pulse.

Ok. back to the euro, and the G-20 meeting last weekend. The Eurozone leaders promised to have a final plan in place by next weekend, and that satisfied everyone for a while, with the euro moving higher, as I mentioned above.. But then the backing off began, after a German Gov't official, said that "dreams that the Eurozone crisis will be solved next Monday cannot be met." And then that statement was followed by German Finance Minister, Schaeuble, when he said that, "the October 23rd Summit would not present an ultimate solution for the Eurozone debt crisis."

So. back to the drawing board for Eurozone leaders. And the euro falls to 1.3775. bringing the A$ below $1.03 etc. Just when you think the green lights all the way downtown have been turned on for an asset, whack! After the love is gone, used to be right is wrong.

That's a great song by Earth, Wind & Fire. and it seems appropriate there.

And then in Canada. The Bank of Canada is due to release its Business Outlook / Senior Loan Officer Surveys today. These reports are very important and play a big part into the Bank of Canada (BOC) decision on the direction of interest rates. The markets have dropped their call for a rate cut from 62% to 32% (their betting on whether a rate cut takes place), and I still believe they are barking up the wrong tree. The recent strength of the labor market, should be enough to tell the BOC that rates don't need to be cut.

I just don't think the BOC needs to be thinking about a rate cut right now.. They have turned the economy around, employment growth is good, and this week they'll see the latest CPI (consumer inflation) report, which is forecast to remain above 3%...

Then there was this. from the Economist. regarding the Bill that the Senate passed last week to punish Chinese exports. "If it gets through the U.S. House and makes it to President Barack Obama's desk, a Senate bill that would pressure China to stop manipulating the Yuan's value should be vetoed, according to The Economist. China's account surplus has fallen by two-thirds since 2007, and the yuan has appreciated 7% against the U.S. dollar since June 2010. "Meanwhile America's trade deficit has narrowed, and manufacturing employment has stopped falling," the magazine notes. "All this means the yuan is far less undervalued than it was a few years ago -- if at all"

Chuck again. Sound much like the stuff I keep talking about regarding this legislation. But, I would question their final thought of the renminbi being undervalued "if at all". And remember, when the Economist calls the Chinese currency the "yuan" they are talking about the renminbi, but since yuan is the slang name for renminbi, and it's easier to say and spell, they use yuan instead of renminbi! HA!

To recap. The G-20 meeting brought about a nice currency rally last night, that has been turned around after some damaging comments by German officials on their negative outlook for an ultimate solution being hammered out this weekend by Eurozone leaders. U.S. Retail Sales were strong in September, but U. of Michigan Confidence report fell for the first two weeks of October. The CFTC meets this week to vote on a limit for bullion banks to hold short positions. I doubt it has teeth though.

Currencies today 10/17/11. American Style: A$ $1.0270, kiwi .7995, C$ .9875, euro 1.3775, sterling 1.5735, Swiss $1.1145, . European Style: rand 7.9050, krone 5.6155, SEK 6.6335, forint 213, zloty 3.1166, koruna 17.9615, RUB 30.80, yen 77.25, sing 1.2645, HKD 7.7760, INR 48.95, China 6.3696, pesos 13.25, BRL 1.7445, dollar index 76.99, Oil $85.44, 10-year 2.28%, Silver $32.13, and Gold. $1,682.25

That's it for today. NL Champs! WOW! I have to say that I'm surprised at the team's resiliency, given how I thought they had given up after being swept by the Dodgers at home, in August. Now, they will play the Texas Rangers. My old friend, John Mauldin used to have an office that opened up to the Rangers ball field. I watched a game from there once before. But he doesn't office there any longer. UGH! For if he did, I would be calling him today, for an invite back to his office. to discuss the markets of course! HA! I have tickets for Game 1, and 7. Hopefully the Cardinals will have won the series before it goes to a Game 7! I lasted about as long as the starting pitchers last night, so I can't wait to go home today and watch it. And with that, let's get this week started on the right foot, by making this a Marvelous Monday!

Chuck Butler


EverBank World Markets



Posted 10-17-2011 10:57 AM by Chuck Butler