U.S. Manufacturing Sinks.
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In This Issue.

* Currencies & metals rally on weak U.S. ISM.

* But dollar rallies back in the overnight markets.

* China deals with Capital Inflows.

* RIP Deacon Jones.

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

U.S. Manufacturing Sinks.

Good day. And a Tom Terrific Tuesday to you! What a difference a day makes. They tell me it's only 24 hours! HA! I'll get to that in just a minute, but first I want to take the people at the top of the food chain with my beloved Cardinals to the woodshed. I came to find out yesterday, that the Cardinals leaders knew the game on Friday was getting cancelled at least ½-hour before they told the people in the stands. 1/2-hour earlier, would have put me and tens of thousands of people at home, inside, and safe from the devastating storms that ripped through the area Friday night. What were they thinking? They put me and my beautiful bride, my darling daughter, Dawn, Jerry and grandkids in harm's way, so they could sell a few more concessions? Shame on you!

OK. Now that I've gotten that off my chest we can get to the regular programming. Well, what a difference a day makes, only 24 hours. Yes, when I packed up to leave yesterday, the currencies and metals were taking liberties with the dollar. The Aussie dollar (A$) had gained nearly 2-cents, and the euro was knocking on the door to 1.31, and Gold was up $25! The dollar was on the run and getting chased by the Big Dog and all the little dogs. Why? Ahhh grasshopper, it was a case of more weak data that sent the dollar to the woodshed. Here's the skinny on the data.

Well. for once the regional manufacturing reports DID give us an indication of the national manufacturing report! May's ISM Manufacturing Index fell below 50 to 49. It was expected to rise to 51, and failed to do so. This is yet another piece of data that has failed to meet expectations on the downside this month. and the list just keeps growing. Sure a slip below 50 one month isn't exactly something to hang your hat on that the economy is faltering. But. Let's for fun go back to January of this year. And just like every year since 2005, we began the year with high hopes, like the ant trying move that rubber tree plant, that this was going to be the year that the economy stood on its own. The ISM for January was 53.1, and for February it was 54.2. And then the rug was pulled from under the sector.

So, the markets reacted in a way that was in line with reacting to fundamentals, and long time readers know that whenever the markets react in line with fundamentals, that makes me happy! The markets saw this drop in manufacturing in the U.S. as a HUGE reason why the Fed Heads are NOT going to be able to taper off Quantitative Easing (QE) or their zero interest rate policy (ZIRP). And all those trades to buy dollars that were put on when the markets allowed the Fed Heads to pull the wool over their eyes, were reversed. With vengeance!

So. I come in this morning, expecting to see more rot on the dollar's vine exposed, only to see the dollar reversing the losses it took yesterday following the weak ISM report. Huh? Why? Didn't the fundamentals tell the markets that the Fed Heads won't be able to taper off QE? Yes, they did. but apparently, that old lack of an attention span for traders is back! The A$ has given back 1-cent, and the euro is down slightly as I write. And Gold is down $7. So, the dollar hasn't totally reversed its losses from yesterday, but has pushed back for sure!

The Reserve Bank of Australia (RBA) met last night. That kind of sprung up on me. But, the RBA left rates unchanged, and said, "the stance of monetary policy remained appropriate for the time being." Which is their explanation as to why rates were left unchanged, but what about going forward? Inquiring minds need to know! Well, the easing bias remained in place, so it will be up to the data to determine whether or not rates go lower from here, or remain steady Eddie. I guess the markets believe that Australia's data is not going to be anything exciting going forward, and that has led them to sell the A$ to the tune of down 1-cent this morning.

I saw that China had allowed a nice-sized appreciation of the renminbi / yuan overnight. That stronger move in the currency was followed up by some words from the People's Bank of China (PBOC) Gov. Zhou who said that "The central bank will not intentionally depreciate the renminbi / yuan to boost competitiveness." Capital Flows into China continue to be strong. and last night I was reading some research on China and read something that makes abundant sense to me. Here's the skinny.

The analyst came to the conclusion that because of the Huge Capital Flows into China, the PBOC HAD to continue to accommodate the appreciation of the currency because if they don't then the PBOC will be forced to intervene in the market, and take on huge amounts of foreign exchange reserves. And we all know that China's foreign exchange reserves are already more than they need. But for those of you keeping score at home, China's total FX reserves are in dollar terms, $3.44 Trillion. Of which, a ton of that total is represented by dollars. You know, that China just has to be happier than a lark knowing that. NOT!

Fed Head Williams spoke yesterday, and called for a tapering off of QE. That's all nice, and tidy, but, come on Mr. Williams. What does Big Ben think? He's the straw that stirs the drink. I told you yesterday that we'll see several Fed Heads speak this week, yesterday it was Williams, and today, Fed Heads, Raskin, George, and Fisher will all speak at different venues. Raskin on Employment in Washington, George on the economy, and Fisher on Monetary Policy. All these guys will eventually be asked about QE, and all will spew out their opinions, but in the end, it matters not what they think, unless they agree with Big Ben Bernanke.

So, yesterday, the U.S. ISM fell below 50. and that sent the dollar for a ride on the slippery slope. Today, the U.S. data cupboard only has the U.S. Trade Deficit for April, which is expected to bounce higher than the March deficit of $38.8 Billion. Traders and investment analysts have become Comfortably Numb on these deficit numbers. So, it won't make much difference if the Trade Deficit widens or narrows today. I'm sure it will widen though. And IT IS still a Big Deal to me!

I told you earlier in the letter, that Gold was down $7. Well, make that $11 now. I was searching for some news on Gold's downward move this morning, after gaining a huge chunk yesterday, and I came across the same old stuff. You know, the stuff about how equities are taking the crown away from Gold, and there's no need for Gold any longer, with the stock market going hog wild. I would say, that whoever writes that stuff must be lighting up. Light up, everybody. Gold's no longer needed! Of course I'm being facetious here.

Gold may be on every stock-jockey's s-list right now. but that doesn't mean it's not of any use any longer. My friend, and writer, par-excellence, David Galland, wrote about Gold this past week in his letter. If you don't get it, you should check it out at: www.caseyresearch.com

For those of you that don't have the time to go visit David's letter, his three reasons with tons of information about each reason, are: 1. Opposition to Austerity 2. Declining Gold Production, and 3. Physical Demand

I'm going to speak to you about one of these reasons. The Opposition to Austerity. When I was in Las Vegas last month, I spoke about this with hopes that it would not come to fruition. What I'm talking about here is the Eurozone's Austerity, which is working, but now becoming an "evil thing" among some Eurozone leaders. Why would they mess with something that's working? Sure, the Eurozone's economy is slow, and that is expected to happen given the austerity measures put in place to help the countries that had forgotten what fiscal conservatism was. But, now that the calls for a break-up of the Eurozone, the collapse of the euro, and overall devastation for the Eurozone, isn't going to happen, some of the leaders are wanting to ease up on the austerity measures. I shake my head in disgust. They had it all working for them, and like I keep telling people, that in 3 to 5 years, all this debt, bad times, and a bleak future will be put behind them, and the euro will be a currency that everyone adores once again.

So. hopefully, the smart people in the Eurozone can make these leaders that want to water down their austerity measures, see the light. For I saw the Eurozone in 3-5 years being the poster child and blueprint for the U.S. to use to help them straighten out their deficit spending, and get on with debt reduction. I know that's all wishful thinking, but. it's better than thinking of what's going to happen if we don't do something soon.

Before I head to the Big Finish. yesterday I told you about how Goldman Sachs had come out with a call to sell Treasuries, that the bond bubble was about to pop. Well, get this message from Bank of America. "Risks of a bond crash are high". And that "Investors should sell U.S. Treasuries and buy bank stocks because bonds may be headed for a crash" And then Bank of America's chief investment strategist, Michael Hartnett, had this to say. "It's hard to believe that the greatest bond bull market will end without some bloodshed."

OK. I guess more Big names are jumping on my bandwagon that the next bubble to pop will be bonds.

And in a follow up from yesterday. It wasn't 5 minutes after I hit the send button on the Pfennig yesterday that I saw a note on the screens about the S. African mining leader getting shot. I had just spent a lot of space on the S. African rand, and its troubles. But, the rand has rallied the past two days, so that just proves that even a blind squirrel can find an acorn..

For What It's Worth. Today's piece comes from MarketWatch and is about the short positions in Silver. I thought the article was pretty good, and here's a snippet from it.

"Now, from a pure trader's perspective, there's an interesting phenomenon taking place in silver. We've noticed recently that the Commitment of Traders report, or COT, in silver continues to signal that there is no real risk of an impending washout in the price of the metal going forward.

As of May 14, the "net long" position of speculators in silver was just 3,785 contracts. That's extremely low by historical measures, although not nearly as low as the -2,497 net longs we saw prior to that April plunge. The current net longs are about 10 times below the net long high of nearly 36,500 set in November.

On the short side, the COT reveals that the last time the number of "contracts sold short" was at current levels for more than just a week or two was in July 2012. Yes, there was a spike in short positions during that April decline, but now the shorts are back to their July levels.

The high number of short contracts, and the corresponding levels of net longs, we witnessed in July 2012 pretty much marked the low in silver for 2012. Interestingly, within eight weeks of the high mark in the shorts, silver prices rose some 30%.

Of course, we don't know if this can happen again, but from a historical perspective, when the silver market gets this short, the chances of a continued decline are quite small. And while we did see a decline in silver prices in April despite the high level of shorts, that anomalous decline was more the result of a mass race to the exits in the precious metals space, along with a breakdown below previously held support levels.

Finally, ask yourself this question: When it comes to silver, who is left to sell?"

Chuck again. Pretty interesting, eh? Yes, there's something happening here, what it is isn't exactly clear.

To recap. The U.S. ISM Manufacturing Index printed very weak yesterday, and with the index falling below 50, to 49, the dollar was sent to the woodshed. The A$ gained nearly 2-cents and the euro was knocking (we need to ask Jen to say that!) on the door of 1.31. But the traders' attention spans couldn't hold that currency and metals rally, and the dollar is reversing those losses this morning. The Chinese renminbi is about the only currency to book strong gains VS the dollar in the overnight markets.

Currencies today 6/4/13. American Style: A$ .9680, kiwi .8040, C$ .9695, euro 1.3090, sterling 1.5305, Swiss $1.0570, . European Style: rand 9.6730, krone 5.8085, SEK 6.5485, forint 222.80, zloty 3.2355, koruna 19.6555, RUB 31.86, yen 100.05, sing 1.2520, HKD 7.7615, INR 56.42, China 6.1735, pesos 12.70, BRL 2.1235, Dollar Index 82.67, Oil $92.90, 10-year 2.13%, Silver $22.51, and Gold. $1,399.45

That's it for today. I heard this morning that David Deacon Jones, the "Secretary of Defense" has died. He was a member of the Rams' Fearsome Foursome of the late 60's.

It was a beautiful, but chilly for this time of year, evening last night. I sat outside with a neighbor friend watching my beloved Cardinals play baseball. Little Delaney Grace came out and showed us some of her dancing moves. She's so darn cute! Thanks to all who sent along notes telling me to keep doing what I'm doing. I got a kick out of a note I received yesterday, the sender wanted to know why I was not at the Bilderberg Conference. "Seems you all at EverBank have a unique insight into the world today". WOW! Now that's high praise! So. thank you! I hope you all enjoyed the Big Boss, Frank Trotter's Sunday Pfennig. Frank is an excellent writer, and I tell him all the time that he's welcome to write the Pfennig, the Review & Focus, or anything else I write!

Speaking of Frank's writing. here's a short message from the Big Boss: It's great to get to see clients and friends as we travel around the country and the world. This time Frank Trotter will be hosting a reception in Phoenix on June 20th joined by Infinity Banking Director Jack Stapleton, members of our local mortgage team, and others. If you are in the area and want to be included check out the information on our Google Plus posting at https://plus.google.com/u/0/events/c7qg0toce84q3tjctsofkiqq318. Keep and eye on us by "following" on Google Plus at https://plus.google.com/u/0/+everbank/about.

OK. Mike's here, time to go. I hope you have a Tom Terrific Tuesday!

Chuck Butler


EverBank World Markets



Posted 06-04-2013 11:49 AM by Chuck Butler
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