Cyprus is open for business...
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In This Issue.

* Europe sets the tone

* More housing numbers

* Italian bonds

* Sweden still shining

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

Cyprus is open for business...

Good day.and welcome to Thursday morning. The finish line for this week is finally in sight and it can't get here soon enough. It's been a busy week, to say the least, for the markets as well as the trade desk here at EverBank. I guess time flies when you're having fun, but his back and forth movement looks more like a ping pong match than anything else. Since the market sentiment changes as often as the dinner special at your favorite restaurant, I've at least had something to talk about for the most part.

The tone was already set yesterday during the European trading session and there wasn't anything to stand in its way, so the Cyprus and related debt problems ruled the roost. As I mentioned yesterday, it was a quiet day for US economic data. The weekly mortgage app numbers showed a pickup from the previous week, but nobody really cares about that report so we can skip right over it. So, that leaves us with the February pending home sales to pull apart and inspect. On the surface, the results didn't turn out as well as originally estimated.

There were fewer contracts signed to buy previously owned homes in February as the figure fell 0.4% compared to January. The current index still remains near a several year high, but we did see a tapering effect last month. I saw a couple of explanations for the February fall which included tighter supply and lending criteria. It looks like those who can't satisfy the still fairly stringent terms, of which the down payment seems to be causing the most difficulty, aren't getting approved. In other words, we might see a prospective buyer, who can't come up with the 20% down payment or whatever sum satisfies the current standards, get turned away.

Conversely, those who have sufficient access to credit are seeing a more limited supply in the market than was the case several months ago. As I touched on yesterday, the recent rise in property prices may encourage those on the fence to put their home on the market in the upcoming spring/summer selling season. I found this interesting. According to the National Association of Realtors, homes priced at least $500k have led the percentage gains in activity. In fact, that segment increased 10.2% year over year in February, compared to a 12.8% loss on those priced below $100k and a 6.8% gain on those priced between $100k and $250k.

Anyway, just thought I would share that bit of info. Traditionally speaking, pending home sales are seen as a leading indicator since it counts the contract signing ahead of the actual transaction, which closings are usually 30 to 60 days out. I heard someone on the radio say that only new construction can assist in relieving the inventory shortage with a rise of 50% needed to alleviate the situation. I get the whole if you build it, they will come scenario but let's be realistic here. There is plenty of real estate that currently exists, so I don't see where ramping up new construction by 50% is going to solve the issue.

How many people are still upside down on their homes and basically landlocked. I'm sure there is still a fair number of those who can't sell their home even if they wanted without first coming up with a good chunk of change. Sales of existing homes accounted for 93% of the housing market last year. Anyway, today will mark the last data prints until next week. Since its Thursday, we get the usual jobless numbers but we're supposed to see some associated revisions. Also, the final revision to 4th quarter GDP will be out first thing, so let's see if we get anything that forgot to get counted.

Aside from the housing numbers, we saw several regional Fed presidents offer some thoughts, but nothing that rocked any boats. The majority of the members are still in favor of the Fed's bond buying program and most see no reason to scale things down. We've only seen a handful highlight potential risks associated with balance sheet expansion that seems to have no end. The bigger it becomes, the more difficult it will be to unwind in a smooth and timely manner. Since policy makers are usually late to the game, my concern remains that the plug doesn't get pulled until it's too late.

As I mentioned earlier and moving on to Europe, the damage had been done before the US trading session even began. The Italian bond auction really stirred the hornets' nest and got traders moving around. It wasn't a failed auction by any means, but demand came in lower than in the past, so that sent yields higher. Remember, higher yields make it more difficult to service the debt, i.e. bonds, so runaway yields can really put these peripheral nations in a bind. Anyway, yields increased to the highest levels this year but no resolution to their election does not help the situation.

We also saw an economic confidence report for the eurozone in March fall more than forecast as the collective economy is expected to remain in negative territory at least until the second half of the year. The Spanish government also announced that its budget deficit last year will be more than originally forecast, which at this point they say is 6.98% of GDP. Spanish officials and the EU aren't seeing eye to eye on how taxes are accounted. I think this illustrates the point I was making about yields. The Spanish interest liability increased 15% last year, and the cost of debt servicing accounted for 30% of tax revenue.

All eyes will be firmly fixed on Cyprus as banks re-open today. Policy makers definitely have their hands full with trying to manage several things at one time. Their main goal is to prevent the flight of money out of banks and ultimately out of the country. This is a unique scenario as account holders have no incentive to keep funds in Cypriot banks when they can hold the same euros elsewhere that doesn't contain the same risk. In other words, the euro is the euro no matter if it's held in Cyprus or in Germany.

The government limited daily withdrawals to 300 euros, restricted out of country transfers, banned check cashing, and prohibited the breaking of CDs all in an effort to prevent a run on banks. These control measures will be kept under a microscope and constantly monitored. Again, why would you voluntarily keep money in Cyprus. These same concerns were raised in the other bailout countries, but the ECB has a vested interest in this whole thing because they will be the ones throwing more money at the problem if we see some serious dysfunction. Depending how this goes, I wouldn't be surprised to see those calling for the euro collapse to start coming out of the woodwork.

Moving on to the currency market, the dollar obviously was on top with all of the euro drama unfolding. The currencies yesterday were virtually identical when I compared their levels as I was heading out the door last night to those when I first fired up the screens. Since we didn't have any market moving data in the US, currency traders were content leaving things alone until they get a better idea of how Cyprus will unfold. It was another range bound day, with the only currency in positive territory being the Brazilian real.

Holding the real takes an iron stomach as the central bank and government seem to be right around the corner constantly plotting something. This time, they intervened in the currency market to halt the daily declines that we saw all week long. It was just over two weeks ago they stepped in to weaken the currency from closing in on a one year high. Fitch said today that a continued and more prolonged slowdown in Brazil combined with an expansionary fiscal stance may hinder government debt reduction. They currently rate Brazil at two notches just above investment grade.

The Swedish krone couldn't escape the gravitational pull of the euro even though a consumer confidence report exceeded expectations. Retail sales also beat forecasts in February, so the better economic data as of late continues to justify the calls that interest rates will remain on hold for the rest of the year. Unfortunately, the list of countries taking steps to devalue their currency or those who are on the verge of additional expansionary policy is very long, so any nation bucking the trend will get some positive press.

All of the other currencies were within 0.50% losses on the day. Gold ended the day in positive territory as it was able to climb out of its hole in early trading. With all of the stuff going on, gold should be trading much higher, but it is what it is. Speaking of gold and metals, I found the following yesterday that I wanted to share.

I was reading the 5 Min. Forecast from the folks over at Agora, and I saw that EverBank got the following mention: "Nice to know of this option," a reader writes of EverBank's gold IRA offering. "Question? I read to hold up to, say, 15% of your portfolio in gold/metals. If you're investing for wealth preservation, why wouldn't I pump that number up?" The 5 responded with: Nothing's stopping you; everyone's mileage will vary. Our Byron King says at least 10%, more if it helps you sleep at night. Marc Faber says 20%." So, as you can see, we're not the only ones banging on the diversification drum.

They also provided some interesting points about the impending crisis in the student loan market. In January and February alone, banks wrote off $3 billion in student debt, according to figures out yesterday from the credit reporting firm Equifax, which is a 36% increase from a year ago. Of the 40 million student borrowers out there, 17% are more than 90 days in arrears, according to a New York Fed report last month. The cost of earning a bachelor's degree has grown 5.2% per year, every year for the last decade, says the government's Consumer Financial Protection Bureau.

"By some measures," says The Wall Street Journal, "nearly half of employed college graduates are in jobs that don't traditionally require a college degree." And they're liable to stay stuck there, if a new paper from the National Bureau of Economic Research is to be believed. It suggests that demand for college-level occupations peaked as a share of the workforce way back in 2000. Yet the supply of graduates kept growing in the decade that followed. It's Mike again. The 5 is a good, quick read so if you haven't yet, check it out

As I came in this morning, I was expecting to see a continuation of the dollar strength from yesterday, but we're seeing a relative calm so far this morning. In fact, the euro is up slightly and trading just over 1.28. The capital controls in Cyprus are expected to be in place for 7 day, but they did serve the purpose on day one. Transfers abroad are limited to 5,000 euros per month, but the goal of policy makers is to lift restrictions as soon as possible. We'll see what direction the US trading session will take us, but investors have been on the sidelines so far this morning.

Then there was this. According to an article in the Wall Street Journal, unemployment sends food stamp use to a record high. Participants in the Supplemental Nutrition Assistance Program are still increasing, despite the end of the recession and signs that economic recovery is gathering momentum. As of December, a record 47.8 million Americans were receiving food stamps, a 70% increase compared with 2008.

To recap.The trading tone for the day was set in the European trading session and didn't waver as the day progressed. It was a quiet day for US economic data, but February pending home sales declined just a bit. Lack of supply and tight lending standards are to blame according to the experts. The Italian bond auction results came in lower than anticipated so yields were on the rise. We also saw a eurozone confidence report come in lower than expected, so the euro was sold. All eyes will be on Cyprus today as banks re-open and restrictions are put in place. Why would anyone keep money on deposit in Cyprus voluntarily. The Brazilian real strengthened on central bank intervention and Sweden continues to paint a brighter picture.

Currencies today 3/28/13. American Style: A$ $1.0420, kiwi .8374, C$ $.9843, euro 1.2802, sterling 1.5134, Swiss $1.0490. European Style: rand 9.2269, krone 5.8624, SEK 6.5211, forint 237.99, zloty 3.2703, koruna 20.1350, RUB 31.0083, yen 94.19, sing 1.2418, HKD 7.7641, INR 54.2750, China 6.2742, pesos 12.3429, BRL 2.0110, Dollar Index 83.11, Oil $96.76, 10-year 1.85%, Silver $28.70, Gold $1,602.50, and Platinum $1,583.00.

That's it for today.The Sweet 16 starts tonight so hopefully your team has made the cut so far. Unfortunately, the Missouri Tigers couldn't put together a win for the second year in a row, but at least SLU made it interesting. I still have a couple of dogs in the hunt as far as my bracket is concerned, so I'll have to take solace with that fact. Other than that, it's all work and no play for me as we finish out the week. I hit the snooze button an extra time of two this morning so I need to get the show on the road. Until tomorrow, Have a Great Day!

Mike Meyer
Assistant Vice President
EverBank World Markets

Posted 03-28-2013 11:53 AM by Chuck Butler