Fundamentals Return!
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In This Issue.

* Currencies attempt to recover.

* 10-year Treasury recovers.

* Canada's jobs data is strong!

* $136 Billion more stimulus for Japan.

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

Fundamentals Return!

Good day. And a Marvelous Monday to you! The first Monday of the year! The NFL playoffs this past weekend didn't exactly have me riveted to my seat, as the games weren't very exciting. (except if your team won!) The NHL has decided to salvage ½ of their season, and will begin games soon. I've complained about the lack of hockey this winter, so, this was welcomed news to hear. And so it goes for the first weekend of 2013.

On Friday morning, I told you about the dollar rally that was kicked off by a stupid statement in the FOMC meeting minutes about ending Quantitative Easing (QE) in 2013. Recall that I said it was stupid for the markets to have reacted they way they did, for the FOMC didn't say "when in 2013!" they could continue with QE until 12/31 and it would still be 2013! And I think that calmer heads began to pop up and prevail on Friday, as the ugliness of the morning, didn't last all day. Friday's, end of day, price action in the currencies and metals wasn't good, but at least it wasn't as bad as earlier in the day!

You can watch the 10-year Treasury most of the time to get the pulse on what the Fed is up to. On Friday morning I told you that the 10-yr Treasury yield had risen to 1.96%... A little later that morning, I was talking to the Big Boss, Frank Trotter, and I said, "you watch, I think the Fed will be in to buy, for they can't have the 10-year' yield breaking through 2%". And guess what? Or better yet, guess where the 10-year yield is this morning? Back down to 1.90%...

So. Friday's claims by some pundits that the rise in yields would remove the need to own risk assets, turned out to be exactly what I thought, and said it would be. a lot of nothing! Could it still occur? Sure it could. But not in my opinion. not now. Shoot Rudy, I don't think I have to remind you all that The Fed has said they will leave interest rates near zero for a long time still, The Fed is still buying $85 Billion in bonds to stimulate the economy and keep interest rates down for a reason. The economy is walking on eggshells.

OK. speaking of economies. Ty Keough sent me some data that I thought was very good at illustrating a point that I've been making. and that is the relative calm that is spreading in the Eurozone. For instance. did you know that Greece, Ireland, Portugal and Spain all reported current account surpluses in late 2012. To me, I see nothing but more relative calm from news like this. The head of Economic research at UBS told CNBC that "The euro breakup call has been proved entirely wrong. The economy is recovering. European imbalances have been reduced massively, half of the GDP of Europe is now in countries which are able to stabilize their debt-to-GDP ratio."

Does this mean the euro or Eurozone are out of the woods? Hardly! It just means that things are looking up and for once the light at the end of the tunnel for the Eurozone isn't an oncoming train!

The Jobs Jamboree on Friday turned out to be OK. not great, just OK. and I guess that's better than a negative report. The Bureau of Labor Statistics (BLS) said that 154,000 jobs were created in December (152K was forecast).. The Unemployment rate ticked higher though to 7.8% (from 7.7%). So. the report was OK. nothing more, nothing less. certainly not the stuff that strong economies drive. And with the Fed's new "tying of interest rates to the unemployment rate" tells us that interest rates aren't going anywhere for now!

So, the winners and losers from Friday though the overnight trading last night, are wide spread. and I was telling a dealer friend on Friday, that I've been writing about the divergence that's returning to the markets. Which means the Risk On, Risk Off Days of explaining what's going on are ending. Because you may have days when the Aussie dollar (A$) rallies and the euro or yen get sold. Or days when stocks go up but currencies go down, or days when Gold gets sold but Oil and the euro rally. So. once again, we'll get back to fundamentals for valuations. I LOVE IT! We're not "all-in" on this yet, so there will be days that we revert, but for the most part, fundamentals are returning. YAHOO!

For instance. this morning, the euro has lost about 1/4-cent, but the A$ is stronger, and the Canadian dollar / loonie is stronger on news that Canadian employment jumped by 39,000 in December (only 5,000 was expected) with the unemployment rate falling to 7.1% from 7.2%... And the "real good news" is that the Average Hourly Wages for full-time workers were 2.5% higher than in 2011. Now that's the kind of news that screams strong fundamentals, and that a currency should be rewarded. and so it was!

The A$ is rallying on the news that the price of Iron ore is rallying to the highest level since October 2011! This is just another illustration of what I've been telling you about the Chinese economy. The Chinese economy is recovering and with that is their renewed demand in raw materials. if the demand for iron ore wasn't strong, the price wouldn't be hitting its highest level in over a year!

So, see. it's much easier to explain why a currency is going up or down in a day when their movements are tied to fundamentals, and not if the markets' think it's a Risk On or Risk Off Day!

China and Brazil have renewed their currency swap agreement, which allows them to remove dollars from the terms of transactions between the two countries. So, Brazil can sell oil to China without having to use U.S. dollars to settle the transaction. The first time I read about these currency swap agreements I saw them for what they truly were. and told you! These agreements are to lessen the role of the dollar. China has signed these agreements with a medium list of countries, and continues to look for more countries that no longer want to be saddled with depreciating dollars in their reserves! Australia and Japan signed last year. And there are still rumors of the Arab countries signing an agreement with China. Should that happen, then the dollar's relevancy in the world will have taken a HUGE blow!

OK.. so there I was on Sunday morning, sipping some coffee, and taking my last bite of the scrumptious egg casserole I had prepared that morning, when a story in my local paper's business section caught my eye... The title of this story was: For Peace Of Mind, Spread The Risk... OK! now I'm interested to see what this is all about... but, as I suspected before I read one word of the story, not one investment adviser that was interviewed about how they would, in their minds, diversify investors' portfolios, talked about currencies... or Gold/ Silver / Platinum... Only one, even mentioned in passing that an investor might want to allocate some money to commodities... of course, he didn't say which ones...

This is the battle that I have fought for a long time now.. The battle to make investment advisers accept currencies and precious metals as asset classes that should be used when properly diversifying an investment portfolio.. Why do these investment advisers refuse to include these two asset classes? Because they don't: 1. understand them 2. takes away from their mutual fund commissions 3. their brokerage doesn't allow these asset classes in accounts... So, if they have to do all this work to get their accounts properly diversified... forgetaboutit! And so.... I'm out here, by my lonesome, battling to get investment advisers to understand that there's more to diversification than stocks, bonds, and mutual funds! And it looks as though I've got a tough row to hoe, given this story in my local paper... UGH!

Did you see what St. Louis Fed President, James Bullard said on CNBC last Friday? When it was stated that "it is easy for you to say, you have a lot of dollars to spend; you get to print them" Bullard replied, "Ahhh- indeed we do". the Fed Heads have been out in force since the printing of the FOMC meeting minutes that caused the big hub-bub in the markets on Friday. The Fed Heads are making certain that the markets know that the Fed Heads believe that the economy is weak and in need of QE!

And then we have the Japanese doing everything they've already not done, to weaken the yen, inject inflation, and revive the economy. They've played this game for almost 2 decades now. The latest is a demand by new Japanese PM, Abe, to inflate the economy, and he will introduce a $136 Billion stimulus. I'm shaking my head in disgust. but. weaken the yen, he will get his wish, soon enough.

Then There Was This. the story I found on Bloomberg plays well with the thoughts I have for the euro and the Eurozone. So. here you go! "Futures traders reversed bets that the euro will decline against the dollar, wagering for the first time since August 2011 that the shared currency will gain, figures from the Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop, so-called net longs, was 5,126 on Jan. 1, compared with net shorts of 2,549 a week earlier. The figures reflect holdings in currency-futures contracts at the Chicago Mercantile Exchange as of Tuesday.

The euro halted a two-year losing streak versus the greenback in 2012 as European Central Bank President Mario Draghi's commitment to backstop the shared currency stymied the debt-contagion threat. The shared currency rose 1.8 percent in 2012, after sliding almost 10 percent during the prior two years, aided by a 2.6 percent gain in the fourth quarter.

To recap. The currency & metals selloff on Friday morning, pared back a bit as the day went on, and the 10-year Treasury yield gained back to 1.90% (it had been as high as 1.96%) The risk assets continue to move away from the Risk On / Risk Off trading and back to fundamentals. The Jobs Jamboree in the U.S. was just OK. Canada's job data was very strong, and Japan is going to announce a $136 Billion stimulus.

Currencies today 1/7/13. American Style: A$ $1.05, kiwi .8355, C$ $1.0135, euro 1.3035, sterling 1.6065, Swiss $1.0785, .. European Style : rand 8.6065, krone 5.6075, SEK 6.53, forint 223.85, zloty 3.1610, koruna 19.5795, RUB 30.41, yen 87.75, sing 1.2295, HKD 7.7510, INR 55.22, China 6.2295, pesos 12.74, BRL 2.03, Dollar Index 80.59, Oil $92.72, 10-year 1.90%, Silver $30.23, and Gold. $1.656.30

That's it for today. Well. 625 NHL games were cancelled but at least the remainder of the season will get played. I received a few notes on our Sunday Pfennig & Pfriends video, that the "link didn't work". Make certain you are viewing the whole email, and have accepted downloads and pictures, when you do, you'll see a video box with Frank, Chris and Chuck. Hope that helps. Last Friday, I was remiss in not mentioning that it was my dad's birthday. He's been gone since 1995, but not forgotten. He would have been 88 this year. Next week I'll be on hiatus in S. Florida for the week. Chris and Mike will have the conn on the Pfennig, as I get away from the cold weather for a few days! And I hope your weekend was grand. Thanks for reading the Pfennig, now go out and make this a Marvelous Monday!

Chuck Butler


EverBank World Markets



Posted 01-07-2013 10:57 AM by Chuck Butler