Tragedy in Connecticut...
Daily Pfennig

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In This Issue.

* Say a prayer for the families in CT...

* CPI gives a green light to the FED...

* Japanese elections send the yen lower...

* Bond investors ignore the rating agencies...

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

Tragedy in Connecticut...

Good day. I will start today's Pfennig with a moment of silence and encourage all of you to say a quick prayer for the families effected by Friday's horrific event. . . . . . . There is absolutely nothing that can be said other than my thoughts and prayers go out to the parents and loved ones who lost their lives Friday morning. This is certainly a crazy world in which we live in, and each minute of every day is a gift from god. Life is short, live it to the fullest!

The currency markets were fairly flat on Friday, with the dollar slipping a bit in morning trading but staying within a tight range. The drop was caused by a larger than expected drop in consumer prices here in the US during the month of November. The CPI report showed prices fell .3% during November compared to an expected drop of .2%. The YOY figures showed prices rose 1.8% vs. November of last year, just .1% less than economists projections. A drop in energy prices is what pushed the overall prices down, and the core (Ex Food and Energy) numbers showed prices actually increased .1% last month. Currency traders took the dollar lower on this data as inflation doesn't seem to be presenting any barrier to the Fed's unlimited stimulus plans.

The Euro moved higher on Friday after EU finance ministers agreed to put the ECB in charge of all euro-area lenders. A single European bank supervisor was one of the items pushed by German leaders, and most believe that it is another necessary step to help avoid future debt problems. Placing all of the European banks under one set of rules and one regulator should help restore confidence in the banking system and it will also enable the new rescue fund to provide direct bailouts to these banks.

The news helped to make the euro one of the best performing currencies vs. the US$ on Friday with a gain of .69%; as I mentioned earlier the overall market was pretty flat. On the other side of the ledger, the Japanese yen was one of the worst performers on Friday, losing .20% vs. the dollar. The traders were focused on the Japanese elections which occurred over the weekend. As expected, Japan's Liberal Democratic Party led by Shinzo Abe won easily. The win is going to be seen by Abe as a mandate to act on his campaign promises to get the Japanese economy growing again. His plan is to double Japan's inflation goal from 1 to 2% and to provide unlimited easing in order to try and stimulate economic growth. Abe is wanting to throw all caution to the wind, and will push the Bank of Japan to allow additional monetary expansion.

Japan's currency has fallen over 5% in the past month as it became apparent that Abe would win. Currency investors are worried that these expansionary policies and 'forced' inflation will lead to drop in the value of the Japanese yen. Sound familiar? While Bernanke and his compatriots at the Fed haven't been as vocal as Abe on wanting inflation, I would definitely watch how the markets treat the Japanese yen over the next few weeks as the policies Abe will put into place are similar to those being contemplated by our own central bank.

The only currency which performed worse than the Japanese yen on Friday was the Canadian dollar which lost ground vs. the US$ after a week factory sales number. Statistics Canada said factory manufacturing sales declined 1.4% in October, the biggest decline since January. The fall was not large (as I have indicated, the currency markets were pretty flat) and was probably more of a easing of an overbought position. Currency traders were probably ready to take some of their profits in the loonie off the table, and the data presented them with a good opportunity to do just that. The Canadian dollar still ended the week with a slight gain vs. the US$.

Moving back over to the US, Friday's tragedy has taken the focus of the media away from the debt crisis, which may actually be good for the negotiations. The glare of the media sometimes has a blinding effect on politicians, keeping them from seeing what lies ahead. With all of the attention shifted to the tragic events in CT, there has apparently been some progress on the fiscal cliff negotiations. Republican leaders have put tax increases for the wealthiest back on the table, and this weekend agreed to push the debt limit debate out another year. Now it is the President's turn to identify some spending cuts to bring back to the negotiating table.

As I mentioned in yesterday's Pfennig and Pfriends, I expect a compromise to be reached during the final week of this year, but this compromise will not present any 'real' solution to our debt problem. Our leaders in Washington have realized the simplest way to pay down the debt is to simply print more dollars. This 'strategy' (if you can call it that) will work as long as investors continue to accept the US$ as the globe's reserve currency and buy our debt. The big problem will occur if/when foreign investors finally decide to reduce their dollar holdings, or if / when a substitute global currency emerges.

Chuck is hopefully sleeping in a bit this morning, but sent me the following yesterday to share with all of you this morning: The latest reports from the IMM Positions of last week show that the net U.S. dollar (USD) short positions really grew! And the main beneficiaries of those short dollar positions were what the markets call the "dollar bloc" (Aussie, Canada, New Zealand). In fact Aussie dollar long positions grew to a record level! But then, so did Mexican pesos... Now sure what everyone is all lathered up about regarding pesos, given the history, that apparently the young-guns don't know about, and have failed to read up about... I had to remind some of the young-guns the other day about when Mexico decided to move the decimal point on their currency valuation... Any way... I always find these IMM Positions to be interesting and reflecting on what we're seeing in the spot currency markets each day... the thing to always keep in mind here is that these futures positions can change in a heartbeat... So, just use this info as "additional fodder" for your decisions...

Thanks for the insight Chuck, we certainly appreciate it! As Chuck mentioned, the Aussie dollar long positions have grown to a record level, and the value of the AUD certainly reflects this. The Aussie dollar rose to the strongest in 19 months vs. the Japanese yen but actually move a bit lower vs. the US$ over the weekend. The RBA will be releasing the minutes from their meeting earlier this month when interest rates were reduced, and investors will be looking for any indications that more rate moves are likely. Neither Chuck nor I expected the rate cut, and we now expect Australian rates to remain in place into next year. The RBA just cut rates a bit earlier than we expected.

Today we will get the Empire Manufacturing numbers along with the TIC flows which is an indication of just how confident foreign investors are in the US economy. Tomorrow we will get the Current Account balance for 3rd quarter and the NAHB housing market index. Wednesday will bring more housing data and Thursday we get 3rd quarter GDP along with the weekly jobs numbers. And Friday (the end of the world according to some) has an unusually large amount of data with Personal Income and spending along with the Durable Goods numbers for November.

And then there was this. Neither Chuck and I have been fans of the rating agencies, as both of us feel they are typically 'late to the game' with their credit adjustments. All of the rating agencies certainly took a hit to their credibility with the subprime meltdown and euro-area bond crisis. This morning I found an article on Bloomberg which indicates bond investors seem to agree with our skepticism of these rating agencies. According to Bloomberg, "Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of the 32 upgrades, downgrades and changes in credit outlook. .. This year, investors ignored 56 percent of Moody's rating and outlook changes and 50 percent of those by S&P." Apparently fixed income investors are relying more and more on their own research, and depending less on the rating of the issue they are purchasing. This, in my opinion, is a good thing! Investors should always do their own due diligence, and should never depend simply on a rating by a firm which was paid by the bond issuer rate it.

To recap. The currency markets were flat on Friday, with the dollar drifting lower in early trading. Japanese elections over the weekend pushed the yen lower as a win for Abe and his LDP party assure further stimulus measures in Japan. No solution for the debt crisis, but negotiations seem to be taking a better turn (that is if you want to see the can kicked further down the road). The Canadian dollar dropped, but the selloff was likely due to an overbought level rather than a change in sentiment. And Chuck shared the IMM Position data which indicates the Aussie dollar is a favorite among currency investors.

Currencies today 12/17/12. American Style: A$ $1.0539, kiwi .8439, C$ $1.0128, euro 1.3157, sterling 1.6204, Swiss $1.0893. European Style: rand 8.5624, krone 5.6024, SEK 6.6482, forint 218.29, zloty 3.1060, koruna 19.173, RUB 30.8211, yen 83.74, sing 1.2206, HKD 7.7501, INR 54.855, China 6.2370, pesos 12.782, BRL 2.0877, Dollar Index 79.576, Oil $86.67, 10-year 1.72%, Silver $32.235 and Gold $1,692.60.

That's it for today. Happy Birthday to Jennifer McLean who is turning XX today! No, I won't do that to Jennifer, but I will let you know that I have been working with Jennifer for nearly 20 years now, so you can do the math (Jenn did start working at a young age!). I spent most of yesterday over at my mom's who hosted us for an early Christmas dinner. I went over a bit early to watch the Rams game with mom who is an avid fan. Unfortunately our Rams weren't able to stop the NFL's leading rusher who put an end to any hopes of a wild card for our home town team. After the game we had a great time exchanging presents and enjoyed an amazing dinner which she had prepared. The evening took on a bit more meaning after the tragic events of last Friday. The holiday season can get very busy and I admit to not being too excited about being 'dragged' to family events at times in the past. But I realize I am very lucky to have so many family members live close by, and I am looking forward to each of the many holiday gatherings which I will be attending over the upcoming holiday season. Life is sometimes too short, make sure you give your loved ones a hug today. Thanks for reading the Pfennig, and hopefully we will all have a Magnificent Monday to start off the week.

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 12-17-2012 11:38 AM by Chuck Butler
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