The Year Of The Dragon.
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In This Issue.

* Currencies hold gains and range trade.

* China to print another manufacturing weakening?

* The beginning of stabilization?

* Hands in the cookie jar.

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

The Year Of The Dragon.

Good day. And a Happy Friday to one and all! It just might turn out to be a Fantastico Friday, as tonight is our "office holiday party". Yes, we decided to postpone it, since December is so frantic for everyone. But then, postponing it, may have deep sixed it, as we are expected to get an ice storm here this afternoon! Oh well. the well made plans of mice and men.

Speaking of well made plans of mice and men. What looked like a workable situation for Greece and private creditors, has taken a turn that has the euro vulnerable again this morning. It's not as if the situation is unworkable, it's just that they are struggling to come to an agreement, and since it's not as smooth as Jiffy, then the Chicken Littles come out of the crowds. But then, quite frankly, I have been surprised by the strength the euro has displayed this week. The euro has, always shown resiliency, but, as I've said a couple of times now this year. I wouldn't be surprised to see it fall to 1.18, and then rebound to 1.40. But, we have 49 more weeks to go in 2012, there's a lot of give and take here, so buckle up, yes, that's right click-it, or ticket.

One of the worst performing currencies overnight is the Chinese renminbi. The Chinese have weakened the renminbi in response to some weak manufacturing data. For the 3rd consecutive month, it looks like China's manufacturing index will weaken according to HSBC. In addition, the Chinese Central Bank injected funds into the banking system last night, which tells me that another reduction of the reserve requirements is on the way, which is like a rate cut for banks.

I had an advisor guy send me a note yesterday, telling me how wrong I am about China, and that their whole system is about to collapse. I tell you this, so that you see I don't just write about stuff that agrees with what I say! However, in this case, I'll just point to the scoreboard, and point out that economists have been saying this same thing for over 3 years. and there's been no collapse yet. And that's because I don't think the Chinese will allow that to happen. Remember, they are still at the root, a communist country, and they control the purse strings.

The Chinese Lunar New Year, The Year of the Dragon, will begin on Monday, January 23. Last year was the year of the rabbit, which was supposed to signal peacefulness and recuperation, failed miserably at that, eh? So, if we had all that volatility and craziness in the year of the Rabbit, imagine what the Year of the Dragon holds for us! YIKES!

But then, I told you right out of the starters blocks this year would even more volatile than last, so we have that going for us!

The price of Oil slipped back below $100 yesterday, and the thoughts of the Canadian dollar / loonie had of climbing back to parity, were wiped out. To show you just how strong the pull on the loonie that Oil has. Yesterday, we saw that Canadian manufacturing sales rose a solid 2.0% in November, rebounding nicely from the -.6% drop in October. One would think that this kind of strong data would have underpinned the loonie, as it climbed well into the 99-cent handle, but then the price of Oil slipped, and so did the loonie.

So. with the Bank of Canada (BOC) experiencing a bout of "bunker mentality", (I've explained this before) keeping the dust covers on any rate hikes, Oil is the only crutch for the loonie. So, if you believe that the price of Oil is going to slip further, then loonies won't be your bag. But, if you think Oil is going to go higher and higher, then loonies are your bag!

On a sidebar. last May, at the EverBank / Sovereign Society Global Currency Summit Conference, one of the speakers there, and I won't name names, said that the price of Oil was going to plummet to $45. So. you see, people have all kinds of ideas about the price of Oil. I just say that, should all things remain as is, the demand for Oil will continue to increase. And we all know what demand does to the price of an asset. (except when we talking about the price manipulators in Gold & Silver!) However, should the center not hold in Europe, and they crash and burn, one of China's main markets (they export more to the Eurozone than the U.S.) would be gone, and the whole global thing unravels. Then demand will have already circled the bowl.

And then another thing that will weigh in on the Oil price direction. what's going on with Iran. I told you yesterday that I just finished the book by Jim Rickards, Currency Wars. Well, then my friend, Dennis, sent me a note from Jim Rickards, who says. "The war with Iran has begun"

OK. I'm not going to talk about whether we should go to war with Iran or not. my point here is that any type of problem like that is going to weigh in on the price of Oil.

Another asset that a problem like that is going to weigh in on is the price of Gold (& Silver). I say that, and then look over at one the 4 screens I have on my desk, and I see that Gold is down $11 this morning. So, apparently, the war is still a thought. Whew!

OK.. enough of that! See how things just get in my head, and the next thing you know, I'm typing them!

The Aussie dollar (A$) held the $1.04 level most of the day yesterday, slipping below it briefly a couple of times throughout the trading session. Barring any unforeseen craziness in the currencies this morning. The A$ is set to post its 5th weekly gain VS the U.S. dollar. The Eurozone problems, which on the outside would seem to be far removed from the goings on in Australia, continue to dictate how well or badly the A$ performs. But, like I've said here, and in the monthly newsletter (A Review & Focus), I truly believe the Eurozone will stabilize a bit in 2012, and with the A$ posting 5 consecutive weeks of gains VS the dollar, one would think that the Eurozone stabilization just might be beginning.

But then the struggles of Greece this week and their ability to work a deal with private creditors could throw these baby steps of stabilization into reverse in a heartbeat! So. once again with the well made plans of mice and men.

If I were a betting man, I would bet a Krispy Kreme to a dollar that the Greek things gets all buttoned up this weekend or early Monday ahead of next week's ECOFIN (Eurozone Finance Ministers) meeting.

Someone asked me yesterday if I had any thoughts on the weakness seen recently in the Japanese yen. I replied. Eurozone stability, removes the need for the so-called safe haven of yen. Same reason we've seen some weakness in Gold the past two days.

I was gone for a few minutes as I had to stop and sing along with one of my all time fave songs. Every Time I Think of You by the Babys. Now that one will get your blood flowing on a cold winter morning!

And here's something to think about before I get to the data and then the Big Finish. The Sovereign Debt Crisis of the Eurozone hasn't caused a panic of capital flight from the region. According to JPMorgan Chase, the Eurozone saw a net portfolio inflows number of 2.4 Billion euros during November.

Knowing this data now, tells the guys at JPMorgan Chase that the euro's decline in November wasn't due strictly to outright selling of the euro, but instead by investors selling euros to hedge their positions. I find that knowing that investors didn't rush out of the currency and instead saw net positive flows into the region as a very good sign.

OK. The Stupid CPI data printed yesterday, and showed we had no inflation in December. and that the Year on Year inflation increased 3%... Hmmm. I had this argument, well not an argument, a disagreement with one of my fave economists about CPI. I just don't understand why the Fed uses this data. it has been so cooked and massaged for years now that no one even recognizes it. Here's an example of what I'm talking about. Do the CPI people even take into consideration that while a box of cereal costs the same today as last year, the actual size of the box of cereal has decreased? So you get less for the price. There's a laundry list of things wrong with CPI, folks. But, the Fed uses it. doesn't that tell you something? HA!

The Initial Jobless Claims, which were revised upward to 402,000 the previous week, saw only 352,000 claims filed (or so they say), last week. That's the lowest number in about the time it takes to go through high school! I would say college, but so many kids, mine included decided to stretch it out to 5 years. That's Ok. they got a good education, and have good jobs, doing what they wanted to do, not many kids can say that.

Ok. I got off on a tangent there, eh? So. maybe the jobs data is about to get better? I'm from Missouri, you'll have to show me.

The Philly Fed Index (Business outlook pulse) was much weaker than expected in December. The Index printed at 7.3, when 10.3 was expected.

And today, we get Existing Home Sales, which are expected to be good, given the reduced prices.

Then there was this. I realized too late yesterday morning, that I had really left a huge piece out of the Pfennig. UGH! You see, sometimes, I get a chance in the afternoon, or evening to read, and put down some thoughts on the activities of the day. That way, I don't forget the next day. But then I forgot to go back and get my notes! UGH! So. here's what I was going to say yesterday, but am saying it today!

Don't look now. but the U.S. Treasury is dipping into the Federal pension fund in an attempt to make an end run around the debt limit. Hmmm. Well. we shouldn't be too alarmed by this. The last thing the Gov't wants in an election year is another debt ceiling debacle like we had last summer. So by dipping into the pension fund, the Gov't is able to keep from hitting the ceiling. Now. this isn't the first time the Gov't has done this, the fund has seen the Gov't's hands in the cookie jar 6 times in the past 20 years.

And this isn't the only fund that is seeing the Gov't tap to avoid the debt ceiling. This is all creative accounting, eh? I know the pensions get paid back, with borrowed dollars when the debt ceiling is raised. But what happens one day, when the debt ceiling can't get raised? Uh-Oh!

To recap. the currencies remained bid yesterday throughout most of the trading session, and have carried over to this morning. The A$ could be posting a 5th week of gains VS the dollar, and Japanese yen has weakened a bit on the feeling that a so-called safe haven currency is no longer needed. Manufacturing could be posting another month of weakness in China, and the Chinese respond by weakening the renminbi by a large margin.

Currencies today 1/20/12. American Style: A$ $1.0415, kiwi .8030, C$ .9865, euro 1.2905, sterling 1.5475, Swiss $1.0690, . European Style: rand 7.9635, krone 5.9345, SEK 6.7995, forint 235.90, zloty 3.3420, koruna 19.69, RUB 31.33, yen 77.15, sing 1.2765, HKD 7.7620, INR 50.34, China 6.3350, pesos 13.26, BRL 1.7655, Dollar Index 80.29, Oil $99.68, 10-year 1.98%, Silver $30.37, and Gold. $1,646.55. and our Friday tradition of looking at the debt clock is here:

That's it for today. I must have been pretty wordy this morning, as it's time to get this out the door, and I'm just getting here! Not much going on at the Butler House, no wrestling tournaments for Alex, and the grandkids are all fine. So. it will be a weekend of watching my beloved Missouri Tigers play basketball at #3 ranked Baylor, and the NFC and AFC championship games. I'll get started on the next book in my stack of books to read, and get ready for my annual physical on Monday. That's just one doctor. I go to another one for his annual physical and so on. But as long as they all smile and say, see you next year, I'm good! And with that, I thank you for reading the Pfennig, and Hope you have a Fantastico Friday!

Chuck Butler


EverBank World Markets



Posted 01-20-2012 10:55 AM by Chuck Butler
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