You Won't Believe Who Had a Failed Auction!
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In This Issue.

* A failed auction, and no it wasn't the U.S.!

* Euro gets slammed.

* Global growth hopes fade.

* More Accommodation in store for us?

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

You Won't Believe Who Had a Failed Auction!

Good day. And a Wonderful Wednesday to you! Tomorrow is Thanksgiving, so in keeping with the tradition I started years ago on the day before Thanksgiving. here's Adam Sandler to start your day.

Turkey for me, Turkey for you, Let's eat the turkey, In my big brown shoe Love to eat the turkey, At the table, I once saw a movie, With Betty Grable And the song goes on. but now that you're in the mood, we'll go on to the task at hand. More Thanksgiving stuff in the Big Finish, so don't despair!

What's interesting to me this morning, is that, when I went back to the archives to pull out that Thanksgiving message, I noticed that the first line of the "meat" of the letter, talked about dollar strength, and how it was so strong. WOW! Is this an annual thing? As we head to year-end, does the dollar rebound? Well, it did last year, and it sure is doing it this year too! But beyond that, I would say these two years are the exception. But then there's this dollar strength to talk about this morning, eh?

Well. right out of the starters blocks this morning, we have news from German that's not good. In fact it's downright awful. No it's not a weak data print. And it's not more Eurozone downgrades. What it is, is something I've had nightmares about happening here in the U.S.! Ok, with no further beating around the bush. Germany failed to get sufficient bids at their auction this morning for 10-year bunds. 35% of the maximum sales target of 6 Billion euros went unsold! Uh-oh! What's the problem? Ahhh grasshopper. Germany was attempting to auction these bunds at 1.98%... The markets simply said, "we need a higher yield to buy".

This is just the beginning, folks. the bond vigilantes they are called. They demand higher yields, when a country gets too lose with their debt, and have to issue more and more. Now, one has to wonder why the bond vigilantes haven't gone after U.S. Treasuries, or even U.K. Gilts (their treasuries) for that matter. Hmmm. But, the problem today is all about Germany's inability to sell debt at 1.98%, so, they'll have to come back to the markets with a higher yield. And the news of this failed auction, which is what it is, has hammered the euro into the ground.

The poor euro, got hung out on a line, and beaten for Germany's failed auction. It was so surprising that Germany, of all countries, had a failed auction, and that amount of surprise is being taken out on the euro. But. think about this for a minute. It remains to be seen what the yield is that will be the key to selling these bunds. But if it doesn't get too out of hand, it could very well be a reason to go back into euros for investors when the yield rises, for the yield differential that the Eurozone currently holds over the U.S. and Japan, would widen. The key here is that it doesn't get too out of hand. Like say, Italy & Spain, that keep fighting the 7% yield bug. They may be able to deal with 7% yields now, but eventually that ability will fade.

I mentioned above that I have had nightmares about a failed auction here in the U.S. and we've actually probably had a few in the past couple of years, but only technically, for the Fed finds a way to buy up the unsold bonds before the paint dries on the auction. So. you can see what damage it does to a currency, when a country's auction fails.

And the difference here is that the European Central Bank (ECB) didn't step in to buy the failed piece of bunds. are they right to do that? Or. are we in a "time that fundamentals forgot"? and a central bank needs to do everything to keep the markets happy? Well. I do believe that we have been in a "time that fundamentals forgot" since 2008, but, I'm still not signed up on the roster of those that believe a Central Bank should be like the Fed. or the Bank of England, as long as we're calling out Central Banks that have done everything to keep the markets happy.

Speaking of the Fed. Their FOMC meeting minutes printed yesterday. And I've got something on that in the TTWT section of the letter today. The thing that I want to talk about here is something that I've been thinking long and hard about. And that is. I think they are missing the point with their willingness to expand their balance sheet with more mortgage backed bonds. The point is this. if banks didn't want them, what makes them so attractive to you?

This balance sheet explosion of the Fed's is very troubling to me, folks. and then when you see the TTWT, you'll be scratching your heads, and wondering just what is on the minds of the Fed Heads.

OK.. Enough of that! I see where Sweden's Riksbank (central bank) issued a communiqué that said they will go back to cutting interest rates if the Eurozone sovereign debt problem persists. Well, then you may as well take the dust covers off the rate cut machine! And soon, all the euphoria that was in the world that surrounded global growth, and countries raising interest rates in concert with their growth, will be gone!

The poster child country for global growth, Australia, is seeing their interest rates get cut, and the A$ get slashed. You know. I have lost my zeal for global growth, which is going to hurt the BRIC countries the most. But I haven't lost my zeal for Asian growth. And, IF (notice the Big IF), the Asian countries truly have developed domestic demand and markets, this is the only place we'll see growth in the next few years.

And that, is good news for Australia, for Australia is so close to all the Asian countries. But, until it's proven that Asia can withstand a Western Slowdown, the Aussie dollar (A$) is going to suffer. But, for those that are willing to take a bet on Asian growth, they'll use the selling of A$'s as an opportunity to buy more, and a cheaper price!

The news is spotty this morning, in that, there's not a whole lot of it to sift through. Yesterday afternoon, after coming home from a doctor appointment, I read a story about how the IMF had introduced a program to help Europe's stronger economies facing risk from the sovereign debt crisis. The euro rallied on this news, and as I looked at the overall landscape of the currencies, things looked a little better.

But that was before this morning's news of the failed auction! Speaking of an auction and something that really speaks to what I was talking about earlier. The Fed auctioned $35 Billion in 5-year notes yesterday at a yields of .937%... OOOOHHHHH. where do I get my hands on some of those? Do you really think that in the next 5 years, that interest rates aren't going to be going up? What are these people thinking, buying these bonds? Oh well. move along, these aren't the droid you're looking for.

China printed a manufacturing index report last night, which continues to show that the Chinese economy is slowing. but not collapsing, as many have said for over two years now. The Chinese manufacturing index fell to a 48 figure, which represents contraction (anything below 50). This is the first time since March of 2009, that the index was this low. I would say, that we should look for clues that the Chinese Gov't is directing funds to correct this slowdown. that's what they did in 2008, and it worked.

The U.S. data cupboard is chock-full-o-data this morning. We start the day with Durable Goods Orders for October, which will be weak. That is followed by two of my faves. Personal Income and Spending. Then comes the Weekly Initial Jobless Claims since tomorrow is a Holiday. And then we get the U of Michigan Confidence report for the first two weeks of November.

After your head stops spinning from all the data prints this morning, one thing will be certain. that things aren't as rosy in this "2nd half of the year", as the Fed Heads kept telling us would be the case earlier this year.

Then there was this. from Bloomberg. "Some Federal Reserve policy makers said the central bank should consider easing policy further, according to minutes of their Nov. 1-2 meeting. A few members indicated that they believed the economic outlook might warrant additional policy accommodation. "

Chuck again.. Hmmm. well. it sure does sound like there's more "accommodation" in whatever form that is, on its way to us, eh?

To recap. The euro is getting slammed this morning, after a brief rally yesterday afternoon, when the IMF announced a new plan. But the rally was short-lived when German saw their auction of 10-year bunds fail this morning! 35% of the auction went unsold, which indicates to Chuck that Germany is going to have to raise the yields they are willing to pay on the bunds to get them sold. The euro is getting slammed and bringing all the risk assets with it.

Currencies today 11/23/11. American Style: A$ .9740, kiwi .7425, C$ .9595, euro 1.3390, sterling 1.5585, Swiss $1.0885, . European Style: rand 8.4450, krone 5.83, SEK 6.8850, forint 231.30, zloty 3.3360, koruna 19.1355, RUB 31.03, yen 77.20, sing 1.3070, HKD 7.7930, INR 52.37, China 6.3577, pesos 14.05, BRL 1.8350, dollar index 78.77, Oil $96.24, 10-year 1.93%, Silver $31.67, and Gold. $1,691.90

That's it for today. Chris is going to pick up the conn on the Pfennig for Friday, and no I won't be out shopping. I'll be at home with my feet up watching football! Saturday is the possible last Big rivalry game between my beloved Missouri Tigers and Kansas (KU doesn't want to play us any more). And we will also celebrate the 1st birthday of Everett, the EverBaby! I just call him E, or buddy. or bud. Little Delaney Grace was so darn cute in her pilgrim hat yesterday. I had "a feast" with her at her school, and then the kids all sang to us. and with that. I think I'll give you my usual Thanksgiving poem, and hope you have a Wonderful Wednesday and a very Happy Thanksgiving. We all have a lot to be thankful for, my list would go on, and on. so I won't bore you with it!







Happy Thanksgiving to one and all!

Chuck Butler


EverBank World Markets



Posted 11-23-2011 11:15 AM by Chuck Butler
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