Questions continue regarding the Cyprus bank rescue...
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In This Issue.

* Investors continue to worry about the Cyprus bank rescue...

* King wants more stimulus for the UK economy...

* Yen gets back to its downward spiral...

* Gold sees some buying on fear...

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

Questions continue regarding the Cyprus bank rescue...

Good day... It was all about the little island of Cyprus yesterday, with international investors seeking shelter from what at times appeared to be the beginning of another round of the never-ending European debt crisis. But by the end of the day it appeared the EU policy makers would take a softer stance, and perhaps an 'alternative' solution could be found for the island's banking woes. At least some of the focus will shift back over to the US today as we get a first look at housing data for the month of February. Housing starts are expected to have posted good gains, with an even larger increase expected in the more forward looking Building Permits data. Good US housing data would go a long way to help calm the markets but the focus will quickly shift back over the pond to Europe as the bank holiday in Cyprus is extended.

It looks like depositors in Cyprus banks may get a reprieve from the levy which was announced over the weekend. Cypriot President Nicos Anastasiades called German Chancellor Angela Merkel yesterday to warn her that he would probably not be able to win passage of the levy in his parliament. Merkel apparently told Mr. Anastasiades that he needs to negotiate with the 'Troika' and that it was not her decision to make. But the Cypriot President knows who wears the pants in Europe, and Merkel is the one he needs to convince in order to get some concessions from the group of rescuers. The vote was supposed to occur today, but most believe it will now be delayed while policy makers work to find an alternative way to raise 5.8 billion euros in exchange for a 10 billion euro bank bailout. The one day bank holiday was extended to the end of the week in order to try and buy the leaders some additional time.

The bank levy of 6.9% of deposits under 100k and 9.9% of those accounts over that amount is basically a tax on depositors which will be used to shore up the banking system. The Cypriot banks have attracted numerous 'questionable' deposits from Russian businessmen, with assets in the banks equal to over 7 times the GDP of the small Island nation. EU policy makers now seem willing to relax the levy on the smaller depositors while ratcheting up the fees for the larger accounts in order to arrive at the same 5.8 billion euros.

As was the case with the origins of the Euro debt crisis, the rescue package being presented to Cyprus is very small in the bigger picture of the EU. But investors are worried that precedence could be set with this new tax on deposits, and a bank 'run' could quickly spread to banks on Europe's mainland. For now the negotiations seem to have calmed the markets, and the euro is holding steady in the mid $1.29's.

BOE Governor Mervyn King believes more stimulus is needed to support Britian's economy. King continues to look for ways to keep the UK economy from slipping into a third recession in five years, and has decided to ignore inflation which has stayed above the 2% target for 38 straight months. In recent interviews, King suggested he would like to see the pound decline further and has voted to increase the bond buying of QE. The markets will probably give the BOE what they desire; a weaker pound sterling.

With a relative calm returning to the markets, the Japanese yen got back to weakening vs. the US$. The yen had appreciated vs. most other currencies as investors moved money out of 'risk' assets and back into the safe havens of the yen and US$. But with a break in the euro crisis saw investors moving back out of the yen as they predict even more aggressive stimulus moves by the Bank of Japan. Analysts at JP Morgan and Barclays both released reports yesterday predicting the BOJ will release additional stimulus into the Japanese economy as early as the next policy meeting in April. The BOJ Governor will step down today, clearing the way for the newly elected Haruhiko Kuroda who has pledged to do whatever it takes to combat deflation which has gripped Japan for over a decade.

The New Zealand dollar fell for a second day after Finance Minister English reiterated his thoughts that the kiwi remains overvalued. English has been working hard to try and 'jawbone' the kiwi lower suggesting "There may be a correction in valuation with the exchange rate when the US economy is clearly picking up, and there are signs of that now." As I wrote yesterday, English and the other policy makers in New Zealand have a real problem with the value of the kiwi as they would like to lower rates to try and drop the currency's value, but doing that risks inflating a housing bubble. So for now they have decided to just try to talk the value of the kiwi lower, and their efforts were helped a bit by the euro crisis and the 'risk off' day which resulted. But inflation is beginning to pick up, and the words of the New Zealand Finance Minister won't be able to counter the flow of funds once international investors regain confidence in the global recovery. Even English has to admit there really isn't much he can do about the appreciation of the kiwi since the value is driven to a large extent by QE in other parts of the globe. "We don't really have a way of influencing the valuation." The kiwi should remain well supported on these dips which could be looked at as buying opportunities.

Finance officials on the other side of the Tasmin Sea aren't as concerned about their currency's value. The Australian dollar traded near a 5 week high yesterday after central bank Deputy Governor Philip Lowe defended the higher exchange level of the Aussie dollar. Minutes from the Reserve Bank of Australia's March 5 meeting were released overnight and stated there are signs the Australian economy is finally responding to the lower interest rates. Commenting on the minutes, Deputy Lowe suggested the higher exchange rate and savings levels will help to stabilize the economy. The higher Aussie exchange rate has helped contain inflation which was at risk of rising during the big mining industry boom the country has been through recently. Lowe's comments suggest the RBA is satisfied with the progress they see in the economy, and will likely keep things right where they are at their next meeting on April 2nd. This is good news for holders of the AUD$.

I had a reader ask me to comment on the price of Gold, as I haven't mentioned the metals recently. I thought Tim Smith did a fantastic job of discussing gold in this Sunday's edition (how about that picture of the rainbow over our building? That was not photo shopped - and the rainbow ended up being a double). But I will certainly oblige the reader and give you a quick update on the metals markets this morning. Gold jumped to a two week high yesterday, moving above $1,600 for the first time since the beginning of March. The European debt crisis and resulting 'risk off' day caused investors to seek out gold as a safe haven. The metals have stabilized again, as investor's fears have subsided a bit; but gold has held on to the $1,600 handle. Silver and Platinum also moved higher yesterday but have a ways to go to make up for the losses both have sustained in the past 30 days. Gold is now flat in the past month, but the price of Silver is down 2.32% and Platinum is down 6.85%. I guess one way to look at it is that Platinum and to a lesser extent Silver present better buying opportunities at their current levels.

Then there was this... I get a lot of information forwarded my way on a daily basis. Jamie Hogan, my friend and co-worker in our Wealth Management area forwarded me an email compiled by John S. Wilson, CFA, Managing Director of Raymond James. In the email Mr. Wilson recalls some comments a strategist made at a seminar about a year ago. I read these comments and just had to share them with you:

In light of some recent comments from politicians that we don't have a spending problem, we have a revenue problem; it might be worth sharing some stats with you that I haven't brought up for a while.

- The US has added $5.5 trillion to our deficit in the last four years.

- Some politicians postulate and bloviate that all we need to do is raise taxes on the wealthy to fix our problems.

- Just for grins, let's define 'wealthy' as everyone with a household income over $100,000, the top 13% of our earners.

- Let's not raise their taxes to 50% or 60%, let's raise them to 100% and confiscate everything they make.

- We would raise an additional $700 billion in tax revenue. (remember, we've added $5.5 trillion to our deficit in just the last four years, which equals $1.4 trillion/year.

- So, if we confiscate through taxes all income of those making $100,000 or more, we will still be adding roughly $700 billion annually to our deficit at the rate we have been going. And, we only get to do this once before everyone affected decides to move to Chile.

Now tell me we don't have a spending problem. End of arithmetic lesson. Notice I didn't say algebra, I'll be satisfied if Congress can just master arithmetic.

Chris again. Unbelievable isn't it? I thought so too, so I dug a bit into the numbers. According to the IRS, the top 10% of all individual taxpayers had an AGI of 3.856 trillion in 2010. So a 100% tax rate on these top earners would raise just under 4 trillion dollars, not the 700 billion suggested above. These top earners did pay a total of 721 billion at the current tax rates (that is where the confusion came in). So the numbers aren't exactly correct, but they still make a very dramatic point, we can't simply tax our way out of our problems. We have to attach spending also!

To recap. The Banks in Cyprus extended their holiday in order to try and give policy makers more time. The euro seems to have stabilized just below $1.30. BOE Governor King wants more stimulus which isn't good news for holders of the sterling. The Kiwi fell after Finance Minister English said it remains overvalued, but officials in Australia think the strength of the Aussie dollar is a good thing for their economy. And Gold moved higher yesterday after investors sought a haven from renewed worries about the European banks.

Currencies today 3/19/13. American Style: A$ $1.0376, kiwi .8234, C$ $.97736, euro 1.2947, sterling 1.5126, Swiss $1.0585. European Style: rand 9.2167, krone 5.8050, SEK 6.4412, forint 235.61, zloty 3.2063, koruna 19.7665, RUB 30.84, yen 95.30, sing 1.2498, HKD 7.7608, INR 54.375, China 6.2158, pesos 12.422, BRL 1.9827, Dollar Index 82.666, Oil $93.91, 10-year 1.94%, Silver $28.86, Gold $1,603.83, and Platinum $1,576.25.

That's it for today. Another busy day on the desk yesterday, and thank goodness we had most of the crew back to work. Christine and Chuck were the only two missing from the desk yesterday, and our little Christine is back to work today so we are just about at full capacity again! We all drew our 'teams' for our March Madness bracket - we don't spend the time to try and predict winners but instead just draw the name of a team out of a cow-butt (long story there). I got a number 16 seed (play in), a number 15 seed Albany, and #5 Wisconsin. Not much hope of winning it all, but it will still be fun! The sun is out! It seems like we haven't seen the sun in weeks, but we have a bright blue sky and the sun is streaming in so this will hopefully shape up to be a great day. Thanks for reading the Pfennig, and I hope you all go out and have a Terrific Tuesday!!

Chris Gaffney, CFA
Vice President
EverBank World Markets

Posted 03-19-2013 12:50 PM by Chuck Butler
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