An Accord Is Reached, Now The Heavy Lifting Begins!
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In This Issue.

* Currencies remain in a tight range.

* ECB cuts 25 Basis Points.

* Eurozone Summit begins.

* Chinese inflation slows!

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

An Accord Is Reached, Now The Heavy Lifting Begins!

Good day. And a Happy Friday to one and all! Well, the start of the Eurozone Summit has begun, and it's what the markets have been waiting for all week. There's some news out already regarding their plan that, if, the Eurozone leaders are able to pull a rabbit out of their hat, then this could turn to a Fantastico Friday for the risk assets. But whether the risk assets have a Fantastico Friday or not, it's not going to stop me from having one!

So. The European Central Bank (ECB) and its new president, did indeed cut rates yesterday, but did keep it to 25 Basis Points (1/4%). And what happened to the euro? Well. it rallied. albeit briefly. There's so much to talk about here, so I'm going to jump right in with both feet. are you ready to go?

It's not a liquidity thing in the Eurozone, given that 6 Central Banks around the world, coordinated to give loans in dollars to Eurozone banks last week. Add to that the ECB cutting interest rates, and the ECB announcing that they would make 3-year loans to banks, and lowered reserve ratios. It's not a liquidity thing, folks. It's a stability thing!

After doing these things, which were all under their umbrella of things the ECB could do. the euro rallied. and in the blink of an eye, the single unit rallied to 1.3450, and the Aussie dollar (A$) was trading above $1.03 again! But then the down side part of this roller coaster ride began.

ECB President, Draghi, then informed the markets that the ECB was not going to be buying bonds. It's not in the ECB's mandate to do that. (of course it's not in their mandate to cut interest rates when inflation is higher than their ceiling target, thus reducing price stability, but that didn't stop them from doing so!) And the euro's gains were wiped out completely, and it began to take on water! And with the euro taking on water, all the other currencies followed suit. And while everyone was ready to lose their lunches from the steep ride on the downside of the roller coaster, people began talking about France getting a 2-notch downgrade, instead of just 1!

Here's the deal folks. if the Eurozone leaders want the ECB to be the lender of last resort, and buy bonds, then the Eurozone leaders have to go back the member countries and get them to sign an amendment to the treaty. Imagine how long that's going to take!

OK. that was yesterday. this morning, Eurozone leaders announced that they had added 200 Billion euros to their EFSF (The European Financial Stability Fund), and that they had tightened anti-deficit rules. ECB President, Draghi, hailed the accord saying, "It's a very good outcome for euro-area members and it's going to be the basis for a good fiscal compact and more disciplined economic policy in euro-are countries."

The agreement wasn't agreeable with the U.K. and Sweden, and the Czech Republic, but was agreeable by all the members of the euro. Remember, folks. The European Union contains 27 members, of which 17 belong to the euro. on a side-bar. before greed, and someone or some entity showed the likes of Greece and Portugal how to hide debt, I used to tell people that the euro would have 25 members by 2015. That sure looks like a long shot now, eh?

The Eurozone as it currently stands has a GDP that equals that of the U.S., they both account for 20% of the Global GDP. And here's where I lose it when the markets don't treat the Eurozone members like "states". Because that's what they are. now. So. when they talk about Greece, it's like talking about Kentucky. because on a percentage basis they both contribute the same to the whole entity of either the Eurozone, or the U.S..

But. nevertheless, we carry on. And. the good news this morning, is that the markets seem to, right now anyway, like the accord. But, I think there's so much to do still, that the Eurozone leaders can't stop here. They've put the carrot out there, now they have to figure out how to grab it before it goes bad.

With the selling of the euro going on yesterday mid-morning on, we also saw Gold get taken to the woodshed. You know, I'm always saying that to my simple way of thinking, Gold should be going higher when things get to looking bleak in the Eurozone, because if euro goes down in flames, the dollar will get hurt too, and what's left? Gold. But, I finally figured out, see I told you I had a simple mind, just what's going on. Gold have become an offset to the dollar, like euros. So, if the dollar is seeing strength, not only is the euro at risk, but so too is Gold.

The folks over at reported yesterday that central banks from the U.S., & U.K. sold Gold, thus added to Gold's woes yesterday. I have a problem with this news. if it's true, and I have no reason to believe it isn't, then Central Banks were manipulating the price of Gold. No wonder the bullion banks that everyone knows who I'm talking about, that regularly manipulate the price of Gold, never get their hands slapped!

So. with the euro turning around this morning on the new of the accord, Gold too is stronger. But all this euphoria in the currency could very well be shaken to the core later today. Remember, S&P gave a warning the other day, and I'm not sure right now, if this accord is enough to keep the wolf (S&P) at the door. We could see downgrades of the AAA Eurozone members later today. Or, maybe it's too soon, and S&P will have to see what happens next.

And. with all this hub-bub about the accord, I thought it best to detail the main points. so here goes:

. A commitment by member states to run structural budget deficits no larger than 0.5% of GDP, with this commitment written into national constitutions along with "automatic correction mechanisms". The timescale for compliance is not specified, but will be determined by the European Commission. (EC)

. Automatic "consequences" (unspecified) if the Excessive Deficit Procedure limit of 3% of GDP is breached and greater budget oversight by the EC. More detailed proposals on fiscal integration to follow in March 2012.

. Acceleration of the establishment of the ESM, bringing forward implementation to July 2012 from July 2013.

. "Reassessment" of the EUR500bn ceiling on the EFSF/ESM in March 2012 and a change to qualified majority voting from mutual agreement (subject to Finnish approval).

. Additional resources for the IMF of up to EUR200bn through bilateral loans (confirmation within 10 days).

And here's the skinny on the ESM and EFSF. The EFSF was created as the precursor of the ESM (European Stability Mechanism). The EFSF was funded to take care of problems now, and the ESM was scheduled to take over in 2013. And was funded with 700 Billion euros, and have a lending capacity of 500 Billion euros. And the funds in the EFSF were not to be added to those in the ESM.

Apparently, the Eurozone leaders now want to: 1. Move the ESM effective date to July 2012 from 2013. And 2. Reassess the 500 Billion euros lending capacity cap.

They are going to need every last euro they can scrape up.. So, if they can get all to agree to this, it could be very important going forward.

Remember last summer, when the debt ceiling here in the U.S. was 24/7? And how negative everything got? Well. that's what's happening in the overseas markets with regard to the negativity in the Eurozone carrying over to other markets.

At one point yesterday morning, the Aussie dollar (A$) was trading over $1.03. and an hour later it was trading below $1.02!

I had a reader from the U.K. send me a note yesterday, and asked me why I seldom talked about pound sterling. WOW! I thought. I guess I hadn't talked about sterling in a long time. I guess I have written them off with the dollar, for their economies are in a similar funk, and their central banks are cut from the same cloth, with their bond buying, quantitative easing, and ultra-low interest rates. But, that's no excuse. pound sterling is one of the "major currencies" and was the first to be traded over the telephone lines that were stretched across the Atlantic Ocean, thus giving it the knick-name, "Cable". Young currency traders don't use that any longer, just like they don't use "loonies" for Canadian dollars. They have no imagination, I guess.

So. I'll say this about Cable.. it sure has been resilient, but the price chart on this currency looks like the silhouette of a roller coaster ride at Six Flags. And. I'm not liking what I'm hearing about what the U.K. demanded at the Eurozone Summit. more on that next week.

OK. onto other things. Well, inflation in China slowed again last month. This time the move was larger and really has people thinking that tightening measures could begin to get reversed. I don't know about that, because this inflation nut was a tough one to crack for the Chinese. and now that they have inflation on the run, I don't think they'll want to back off, just yet.

For those of you keeping score at home, Chinese inflation rose 4.2% in November from a year earlier, and was sharply slower than the 5.5% rise year-to-year in October. This now makes 3 consecutive months of slowing inflation in China..

You all know where I stand on the Chinese economy. When it seemed that every economist in the world was saying China's economy was going to collapse, I was out on the limb saying that it would "moderate" but not collapse. Well, I'm here now to tell you that I continue to see the Chinese economy moderating further in 2012, but slowly, and this should allow further gains in the renminbi during 2012. But again, with the Eurozone problems hanging over everyone like the Sword of Damocles, forecasts are at risk of being terribly wrong, should things get worse in the Eurozone.

And I'm not talking about a Greek default. that's been 94% priced in for 3 months now. I'm talking about the problems spreading to a country like France. And getting back to China before we head to the Big Finish. Look for the Chinese to lower reserve requirements first, as their way of loosening the grip on monetary policy, instead of rate cuts.

Then there was this. Did you watch the proceedings on the Hill yesterday, with lawmakers asking questions of Jon Corzine, you know the former CEO of MF Global. in from of Corzine, was a name card that read: The Honorable Jon Corzine. Ok. I know that respect is paid to former Governors and Senators like he is, but I'm sure that people that have seen loads of money and savings and trades disappear at MF Global aren't thinking he's so "honorable".

And we also have the fact that he's the former head of Goldman Sachs. enough said, right? But really gets my goat here is that no one grilled him. no one asked tough questions. it was as if, the lawmakers said, "hey, be soft on him, he's one of us". OK, I'm sure that didn't happen, but if you listened to the questioning, you had to be thinking something was up! Again. I just shake my head in disgust.

To recap. Up, down, up, down. an extreme roller coaster ride for sure is what these markets have been lately. EC President Draghi did cut rates, but threw the ball back in the Eurozone leaders court, regarding bond buying. The Eurozone leaders announced an accord that was hailed by Draghi, but I don't think it will be enough to keep S&P from cutting the AAA ratings of the Eurozone members. And China's inflation slowed for a 3rd Consecutive month in November. the moderation of their economy continues.

Currencies today: 12/9/11. American Style: A$ $1.0170, kiwi .7715, C$ .9805, euro 1.3405, sterling 1.57, Swiss $ 1.0860, . European Style: rand 8.2080, krone 5.7325, SEK 6.7325, forint 227.95, zloty 3.3645, koruna 18.9785, RUB 31.43, yen 77.65, sing 1.2950, HKD 7.7790, INR 52, China 6.3640, pesos 13.63, BRL 1.8055, Dollar Index 78.53, Oil $98.41, 10-year 2.01%, Silver $32.10, and Gold. $1,722.10. and as always on Friday, it's time to take a peek at the debt clock here in the U.S. click here:

That's it for today. What a nice party last night. Each year, The Big Boss Frank Trotter, and former Mark Twainers, Chris Lissner and John Dubinsky, host a get together of mostly old Mark Twainers. It's been 14 years since Mark Twain Bank was sold, and the people spread out all over the place, so it's great to get together once a year. It's that time of year again. When we receive food gifts from vendors and dealer relationships. It's always goodies. cookies, cakes, candy. stuff I need to eat like I need a hole in my head! It's another reason I get out of here before Christmas so I'm not tempted! My beloved Missouri Tigers will be playing in the Independence Bowl on Dec. 26th, which also happens to be the birthday of my beautiful bride! And with that. go out and have a Fantastico Friday!

Chuck Butler


EverBank World Markets



Posted 12-09-2011 9:19 AM by Chuck Butler
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